[House Report 105-220]
[From the U.S. Government Publishing Office]
105th Congress Report
1st Session HOUSE OF REPRESENTATIVES 105-220
_______________________________________________________________________
TAXPAYER RELIEF ACT OF 1997
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CONFERENCE REPORT
to accompany
H.R. 2014
July 30, 1997.--Ordered to be printed
105th Congress Report
1st Session HOUSE OF REPRESENTATIVES 105-220
_______________________________________________________________________
TAXPAYER RELIEF ACT OF 1997
----------
CONFERENCE REPORT
to accompany
H.R. 2014
July 30, 1997.--Ordered to be printed
----------
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1997
C O N T E N T S
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Page
I. CHILD AND DEPENDENT CARE TAX CREDIT; HEALTH CARE FOR CHILDREN. 330
A. Child Tax Credit (sec. 101 (a), (c), and (d) of the House
bill and sec. 101 of the Senate amendment)................. 330
B. Expand Definition of High-Risk Individuals With Respect to
Tax-Exempt State-Sponsored Organizations Providing Health
Coverage (sec. 101(b) of the House bill)................... 334
C. Indexing of the Dependent Care Credit; Phase Out for High-
Income Taxpayers (sec. 102 of the House bill).............. 335
D. Tax Credit for Employer Expenses for Child Care Facilities
(sec. 103 of the Senate amendment)......................... 336
E. Expansion of Coordinated Enforcement Efforts Between the
Internal Revenue Service and the Health and Human Services
Office of Child Support Enforcement (sec. 104 of the Senate
amendment)................................................. 337
F. Penalty-Free Withdrawals From IRAs for Adoption Expenses
(sec. 105 of the Senate amendment)......................... 338
II. EDUCATION TAX INCENTIVES..................................... 339
A. Tax Benefits Relating to Education Expenses............... 339
1. HOPE tax credit and Lifetime Learning tax credit for
higher education tuition expenses (sec. 201 of the
House bill)............................................ 339
2. Tax treatment of qualified State tuition programs and
education IRAs; exclusion for certain distributions
from education IRAs used to pay qualified higher
education expenses (secs. 202 (a), (b), and (d) and
211-212 of the House bill and secs. 211-213 of the
Senate amendment)...................................... 348
3. Phase out qualified tuition reduction exclusion (sec.
202(c) of the House bill).............................. 365
4. Deduction for student loan interest (sec. 202 of the
Senate amendment)...................................... 366
5. Penalty-free withdrawals from IRAs for higher
education expenses (sec. 203 of the House bill and sec.
203 of the Senate amendment)........................... 368
6. Tax credit for expenses for education which
supplements elementary and secondary education (sec.
204 of the House bill)................................. 369
7. Certain teacher education expenses not subject to 2-
percent floor on miscellaneous itemized deductions
(sec. 224 of the Senate amendment)..................... 370
B. Other Education-Related Tax Provisions.................... 371
1. Extension of exclusion for employer-provided
educational assistance (sec. 221 of the House bill and
sec. 221 of the Senate amendment)...................... 371
2. Modification of $150 million limit on qualified
501(c)(3) bonds other than hospital bonds (sec. 222 of
the House bill and sec. 222 of the Senate amendment)... 372
3. Enhanced deduction for corporate contributions of
computer technology and equipment (sec. 223 of the
House bill)............................................ 373
4. Expansion of arbitrage rebate exception for certain
bonds (sec. 223 of the Senate amendment)............... 374
5. Treatment of cancellation of certain student loans
(sec. 224 of the House bill and sec. 225 of the Senate
amendment)............................................. 375
6. Tax credit for holders of qualified zone academy bonds 376
III. SAVINGS AND INVESTMENT TAX INCENTIVES....................... 378
A. Individual Retirement Arrangements........................ 378
1. Increase deductible IRA phase-out range and modify
active participant rule (sec. 301 of the Senate
amendment)............................................. 378
2. Tax-free nondeductible IRAs (sec. 301 of the House
bill and sec. 302 of the Senate amendment)............. 379
3. Modifications to early withdrawal tax (sec. 301 of the
House bill and sec. 303 of the Senate amendment)....... 381
4. IRA investments in coins and bullion (sec. 304 of the
Senate amendment)...................................... 381
B. Capital Gains Provisions.................................. 382
1. Maximum rate of tax on net capital gains of
individuals (sec. 311 of the House bill and sec. 311 of
the Senate amendment).................................. 382
2. Small business stock (sec. 311 of the House bill and
secs. 312-313 of the Senate amendment)................. 383
3. Indexing of certain assets for purposes of determining
gain (sec. 312 of the House bill)...................... 385
4. Exclusion of gain from sale of principal residence
(sec. 313 of the House bill and sec. 314 of the Senate
amendment)............................................. 386
5. Corporate capital gains (sec. 321 of the House bill).. 387
IV. ALTERNATIVE MINIMUM TAX PROVISIONS........................... 389
A. Increase Exemption Amount Applicable to Individual
Alternative Minimum Tax (sec. 401 of the House bill and
sec. 102 of the Senate amendment).......................... 389
B. Repeal Alternative Minimum Tax for Small Businesses and
Repeal the Depreciation Adjustment (secs. 402-403 of the
House bill and secs. 55-56 of the Senate amendment)........ 390
C. Repeal AMT Installment Method Adjustment for Famers (sec.
404 of the House bill and sec. 732 of the Senate amendment) 391
V. ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS.......... 393
A. Estate and Gift Tax Provisions............................ 393
1. Increase in estate and gift tax unified credit (sec.
501(a) of the House bill and sec. 401(a) of the Senate
amendment)............................................. 393
2. Indexing of certain other estate and gift tax
provisions (sec. 501(b)-(e) of the House bill and sec.
401(b)-(e) of the Senate amendment).................... 394
3. Estate tax exclusion for qualified family-owned
businesses (sec. 402 of the Senate amendment).......... 395
4. Reduction in estate tax for certain land subject to
permanent conservation easement (sec. 403 of the Senate
amendment)............................................. 401
5. Installment payments of estate tax attributable to
closely held businesses (secs. 502-503 of the House
bill and (secs. 404-405 of the Senate amendment)....... 403
6. Estate tax recapture from cash leases of specially-
valued property (sec. 504 of the House bill and sec.
406 of the Senate amendment)........................... 405
7. Clarify eligibility for extension of time for payment
of estate tax (sec. 505 of the House bill)............. 406
8. Gifts may not be revalued for estate tax purposes
after expiration of statute of limitations (sec. 506 of
the House bill)........................................ 407
9. Repeal of throwback rules applicable to domestic
trusts (sec. 507 of the House bill).................... 408
10. Unified credit of decedent increased by unified
credit of spouse used on split gift included in
decedent's gross estate (sec. 508 of the House bill)... 410
11. Reformation of defective bequests to spouse of
decedent (sec. 509 of the House bill).................. 411
B. Generation-Skipping Tax Provisions........................ 412
1. Severing of trusts holding property having an
inclusion ratio of greater than zero (sec. 511 of the
House bill)............................................ 412
2. Modification of generation-skipping transfer tax for
transfers to individuals with deceased parents (sec.
512 of the House bill and sec. 407 of the Senate
amendment)............................................. 413
VI. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS................. 415
A. Research Tax Credit (sec. 601 of the House bill and sec.
501 of the Senate amendment)............................... 415
B. Contributions of Stock to Private Foundations (sec. 602 of
the House bill and sec. 502 of the Senate amendment)....... 419
C. Work Opportunity Tax Credit (sec. 603 of the House bill
and sec. 503 of the Senate amendment)...................... 421
D. Orphan Drug Tax Credit (sec. 604 of the House bill and
sec. 504 of the Senate amendment).......................... 425
VII. DISTRICT OF COLUMBIA TAX INCENTIVES (secs. 701-702 of the
House bill and sec. 601 of the Senate amendment)............... 426
VIII. WELFARE-TO-WORK TAX CREDIT (sec. 801 of the House bill).... 440
IX. MISCELLANEOUS PROVISIONS..................................... 442
A. Excise Tax Provisions..................................... 442
1. Repeal excise tax on diesel fuel used in recreational
motorboats (sec. 901 of the House bill and sec. 701 of
the Senate amendment).................................. 442
2. Continued application of tax on imported recycled
Halon-1211 (sec. 902 of the House bill)................ 442
3. Transfer of General Fund highway fuels tax revenues to
the Highway Trust Fund (sec. 704 of the Senate
amendment)............................................. 443
4. Tax certain alternative fuels based on energy
equivalency to gasoline (sec. 705 of the Senate
amendment)............................................. 444
5. Extend and modify tax benefits for ethanol (sec. 605
of the House bill and sec. 707 of the Senate amendment) 445
6. Treat certain gasoline ``chain retailers'' as
wholesale distributors under the gasoline excise tax
refunds rules (sec. 904 of the House bill)............. 445
7. Exemption of electric and other clean-fuel motor
vehicles from luxury automobile classification (sec.
905 of the House bill)................................. 446
8. Reduce rate of alcohol excise tax on certain hard
ciders (sec. 703 of the Senate amendment).............. 447
9. Study feasibility of moving collection point for
distilled spirits excise tax (sec. 706 of the Senate
amendment)............................................. 448
10. Codify Treasury Department regulations regulating
wine labels (sec. 708 of the Senate amendment)......... 449
11. Uniform rate of excise tax on vaccines (sec. 903 of
the House bill and sec. 844 of the Senate amendment)... 449
B. Disaster Relief Provisions................................ 451
1. Authority to postpone certain tax-related deadlines by
reason of Presidentially declared disaster (sec. 921 of
the House bill)........................................ 451
2. Use of certain appraisals to establish amount of
disaster loss (sec. 922 of the House bill)............. 451
3. Treatment of livestock sold on account of weather-
related conditions (sec. 923 of the House bill and sec.
721 of the Senate amendment)........................... 452
4. Mortgage bond financing for residences located in
Presidentially declared disaster areas (sec. 924 of the
House bill and sec. 723 of the Senate amendment)....... 453
5. Rules relating to denial of earned income credit on
basis of disqualified income (sec. 722 of the Senate
amendment)............................................. 454
6. Penalty-free withdrawals from IRAs for disaster-
related expenses (sec. 724 of the Senate amendment).... 454
7. Elimination of 10-percent floor for casualty losses
resulting from Presidentially declared disaster (sec.
725 of the Senate amendment)........................... 455
8. Requirement to abate interest by reason of
Presidentially declared disaster (sec. 726 of the
Senate amendment)...................................... 456
C. Provisions Relating to Employment Taxes................... 456
1. Employment tax status of distributors of bakery
products (sec. 931 of the House bill................... 456
2. Clarification of standard to be used in determining
tax status of retail securities brokers (sec. 932 of
the House bill and sec. 779 of the Senate amendment)... 457
3. Clarification of exemption from self-employment tax
for certain termination payments received by former
insurance salesmen (sec. 933 of the House bill)........ 457
4. Safe harbor for independent contractors (sec. 934 of
the House bill)........................................ 459
5. Combined employment tax reporting demonstration
project (sec. 769 of the Senate amendment)............. 460
D. Provisions Relating to Small Businesses................... 461
1. Delay imposition of penalties for failure to make
payments electronically through EFTPS (sec. 941 of the
House bill and sec. 731 of the Senate amendment)....... 461
2. Home office deduction: clarification of definition of
principal place of business (sec. 942 of the House
bill).................................................. 463
3. Increase deduction for health insurance costs of self-
employed individuals (sec. 733 of the Senate amendment) 465
E. Other Provisions.......................................... 466
1. Shrinkage estimates for inventory accounting (sec. 951
of the House bill and sec. 1013 of the Senate
amendment)............................................. 466
2. Treatment of workmen's compensation lability under
rules for certain personal injury liability assignments
(sec. 952 of the House bill)........................... 468
3. Tax-exempt status for certain state workmen's
compensation act companies (sec. 953 of the House bill
and sec. 761 of the Senate amendments)................. 469
4. Election for 1987 partnerships to continue exception
from treatment of publicly traded partnerships as
corporations (sec. 954 of the House bill and sec. 762
of the Senate amendment)............................... 471
5. Exclusion from UBIT for certain corporate sponsorship
payments (sec. 955 of the House bill and sec. 763 of
the Senate amendment).................................. 473
6. Timeshare associations (sec. 956 of the House bill and
sec. 764 of the Senate amendments)..................... 476
7. Deferral of gain on certain sales of farm product
refiners and processors (sec. 958 of the House bill)... 478
8. Exception from real estate reporting requirements for
sales of principal residences (sec. 959 of the House
bill and secs. 314(c) and 601(d) of the Senate
amendment)............................................. 479
9. Increased deduction for business meals while operating
under Department of Transportation hours of service
limitations (sec. 960 of the House bill and sec. 765 of
the Senate amendment).................................. 480
10. Deductibility of meals provided for the convenience
of the employer and provided by remote seafood
processors (secs. 765 and 778 of the Senate amendment). 481
11. Deduction of traveling expenses while working away
from home on qualified construction projects (sec. 775
of the Senate amendment)............................... 483
12. Provide above-the-line-deduction for certain business
expenses (sec. 766 of the Senate amendment)............ 484
13. Increase in standard mileage rate for purposes of
computing charitable deduction (sec. 767 of the Senate
amendment)............................................. 484
14. Expensing of environmental remediation costs
(``brownfields'') (sec. 768 of the Senate amendment)... 485
15. Treatment of consolidation of certain mutual savings
bank life insurance departments (sec. 962 of the House
bill).................................................. 488
16. Offset of past-due, legally enforceable State tax
obligations against Federal overpayments (sec. 963 of
the House bill)........................................ 490
17. Modify limits on depreciation of luxury automobiles
for certain clean-burning fuel and electric vehicles
(sec. 964 of the House bill)........................... 491
18. Survivor benefits of public safety officers killed in
the line of duty (sec. 965 of the House bill and sec.
784 of the Senate amendment)........................... 492
19. Temporary suspension of income limitations on
percentage depletion for production from marginal wells
(sec. 966 of the House bill and sec. 772 of the Senate
amendment)............................................. 493
20. Extend production credit for electricity produced
from wind and ``closed loop'' biomass (sec. 771 of the
Senate amendment)...................................... 494
21. Modification of advance refunding rules for certain
tax-exempt bonds issued by the Virgin Islands (sec. 957
of the House bill)..................................... 494
22. Qualified small-issue bonds (sec. 770 of the Senate
amendment)............................................. 495
23. Treatment of bonds issued by the Federal Home Loan
Bank Board under the Federal guarantee rules (sec. 774
of the Senate amendment)............................... 496
24. Current refundings of certain bonds issued by Indian
Tribal governments (sec. 789 of the Senate amendment).. 496
25. Purchasing of receivables by tax-exempt hospital
cooperative service organizations (sec. 773 of the
Senate amendment)...................................... 497
26. Charitable contribution deduction for certain
expenses incurred in support of Native Alaskan
subsistence whaling (sec. 776 of the Senate amendment). 498
27. Designation of additional empowerment zones;
modification of empowerment zone and enterprise
community criteria (sec. 777 of the Senate amendment).. 499
28. Conducting of certain qualified games of chance not
treated as unrelated trade or business (sec. 783 of the
Senate amendment)...................................... 505
29. Exclusion from income of certain severance payments
(sec. 788(a) of the Senate amendment).................. 507
30. Special rule for thrift institutions that became
large banks (sec. 790 of the Senate amendment)......... 507
31. Income averaging for farmers (sec. 792 of the Senate
amendment)............................................. 508
32. Intercity Passenger Rail Fund; elective carryback of
existing net operating losses of the National Railroad
Passenger Corporation (Amtrak) (sec. 702 of the Senate
amendment)............................................. 509
X. REVENUE-INCREASE PROVISIONS................................... 512
A. Financial Products........................................ 512
1. Require recognition of gain on certain appreciated
positions in personal property (sec. 1001(a) of the
House bill and sec. 801(a) of the Senate amendment).... 512
2. Election of mark-to-market for securities traders and
for traders and dealers in commodities (sec. 1001(b) of
the House bill and sec. 801(b) of the Senate amendment) 515
3. Limitation on exception for investment companies under
section 351 (sec. 1002 of the House bill and sec. 802
of the Senate amendment)............................... 516
4. Disallowance of interest on indebtedness allocable to
tax-exempt obligations (sec. 1003 of the House bill)... 517
5. Gains and losses from certain terminations with
respect to property (sec. 1004 of the House bill and
sec. 803 of the Senate amendment)...................... 520
6. Determination of original issue discount where pooled
debt obligations subject to acceleration (sec. 1005 of
the House bill)........................................ 522
7. Deny interest deduction on certain debt instruments
(sec. 1006 of the House bill).......................... 523
B. Corporate Organizations and Reorganizations............... 524
1. Require gain recognition for certain extraordinary
dividends (sec. 1011 of the House bill and sec. 811 of
the Senate amendment).................................. 524
2. Require gain recognition on certain distributions of
controlled corporation stock (sec. 1012 of the House
bill and sec. 812 of the Senate amendment)............. 527
3. Reform tax treatment of certain corporate stock
transfers (sec. 1013 of the House bill and sec. 813 of
the Senate amendment).................................. 537
4. Modify holding period for dividends-received deduction
(sec. 1014 of the House bill and sec. 814 of the Senate
amendment)............................................. 538
C. Other Corporate Provisions................................ 539
1. Registration of confidential corporate tax shelters
and substantial understatement penalty (sec. 1021 of
the House bill and sec. 821 of the Senate amendment)... 539
2. Treat certain preferred stock as ``boot'' (sec. 1022
of the House bill and sec. 822 of the Senate amendment) 543
D. Administrative Provisions................................. 545
1. Reporting of certain payments made to attorneys (sec.
1031 of the House bill)................................ 545
2. Information reporting on persons receiving contract
payments from certain Federal agencies (sec. 1032 of
the House bill and sec. 831 of the Senate amendment)... 547
3. Disclosure of tax return information for
administration of certain veterans programs (sec. 1033
of the House bill and sec. 832 of the Senate amendment) 548
4. Establish IRS continuous levy and improve debt
collection............................................. 549
A. Continuous levy (sec. 1034 of the House bill and
sec. 834 of the Senate amendment).................. 549
B. Modifications of levy exemptions (secs. 1035-1036
of the House bill and secs. 835-836 of the Senate
amendment)......................................... 550
5. Consistency rule for beneficiaries of trusts and
estates (sec. 1037 of the House bill and sec. 833 of
the Senate amendment).................................. 551
E. Excise Tax Provisions..................................... 551
1. Extension and modification of Airport and Airway Trust
Fund excise taxes (sec. 1041 of the House bill and sec.
841 of the Senate amendment)........................... 551
2. Extend diesel fuel excise tax rules to kerosene (sec.
1042 of the House bill)................................ 556
3. Reinstate Leaking Underground Storage Tank Trust Fund
excise tax (sec. 1043 of the House bill and sec. 842 of
the Senate amendment).................................. 557
4. Application of communications excise tax to prepaid
telephone cards (sec. 1044 of the House bill and sec.
843 of the Senate amendment)........................... 557
5. Modify treatment of tires under the heavy vehicle
retail excise tax on trucks (sec. 1402 of the House
bill and sec. 845 of the Senate amendment)............. 559
6. Increase tobacco excise taxes (sec. 846 of the Senate
amendment)............................................. 560
F. Provisions Relating to Tax-Exempt Organizations........... 561
1. Extend UBIT rules to second-tier subsidiaries and
amend control test (sec. 1051 of the House bill and
sec. 851 of the Senate amendment)...................... 561
2. Limitation on increase in basis of property resulting
from sale by tax-exempt entity to related person (sec.
1052 of the House bill and sec. 852 of the Senate
amendment)............................................. 563
3. Reporting and proxy tax requirements for political and
lobbying expenditures of certain tax-exempt
organizations (sec. 1053 of the House bill)............ 564
4. Repeal grandfather rule with respect to pension
business of certain insurers (sec. 1054 of the House
bill and sec. 853 of the Senate amendment)............. 565
G. Foreign Provisions........................................ 567
1. Inclusion of income from notional principal contracts
and stock lending transactions under Subpart F (sec.
1171 of the House bill and sec. 861 of the Senate
amendment)............................................. 567
2. Restrict like-kind exchange rules for certain personal
property (sec 1172 of the House bill and sec. 862 of
the Senate amendment).................................. 568
3. Impose holding period requirement for claiming foreign
tax credits with respect to dividends (sec. 1173 of the
House bill and sec. 863 of the Senate amendment)....... 569
4. Penalties for failure to file disclosure of exemption
for income from the international operation of ships or
aircraft by foreign persons (sec. 1174 of the House
bill).................................................. 570
5. Limitation on treaty benefits for payments to hybrid
entities (sec. 1175 of the House bill and sec. 742 of
the Senate amendment).................................. 572
6. Interest on underpayments that are reduced by foreign
tax credit carrybacks (sec. 1176 of the House bill and
sec. 865 of the Senate amendment)...................... 575
7. Determination of period of limitations relating to
foreign tax credits (sec. 1177 of the House bill and
sec. 866 of the Senate amendment)...................... 576
8. Treatment of income from certain sales of inventory as
U.S. source (sec. 864 of the Senate amendment)......... 577
9. Modify foreign tax credit carryover rules (sec. 867 of
the Senate amendment).................................. 578
10. Repeal special exception to foreign tax credit
limitation for alternative minimum tax purposes (sec.
868 of the Senate amendment)........................... 578
H. Pension and Employee Benefit Provisions................... 579
1. Cashout of certain accrued benefits (sec. 917 of the
House bill and sec. 879 of the Senate amendment)....... 579
2. Election to receive taxable cash compensation in lieu
of nontaxable parking benefits (sec. 880 of the Senate
amendment)............................................. 580
3. Repeal of excess distribution and excess retirement
accumulation taxes (sec. 882 of the Senate amendment).. 581
4. Tax on prohibited transactions (sec. 884 of the Senate
amendment)............................................. 581
5. Basis recovery rules (sec. 885 of the Senate
amendment)............................................. 582
I. Other Revenue-Increase Provisions......................... 583
1. Phase out suspense accounts for certain large farm
corporations (sec. 1061 of the House bill and sec. 871
of the Senate amendment)............................... 583
2. Modify net operating loss carryback and carryforward
rules (sec. 1062 of the House bill and sec. 872 of the
Senate amendment)...................................... 584
3. Expand the limitations on deductibility of interest
and premiums with respect to life insurance, endowment,
and annuity contracts (sec. 1063 of the House bill and
sec. 873 of the Senate amendment)...................... 585
4. Allocation of basis of properties distributed to a
partner by a partnership (sec. 1064 of the House bill
and sec. 874 of the Senate amendment).................. 591
5. Treatment of inventory items of a partnership (sec.
1065 of the House bill and sec. 875 of the Senate
amendment)............................................. 593
6. Treatment of appreciated property contributed to a
partnership (sec. 1066 of the House bill).............. 594
7. Earned income credit compliance provisions (sec. 1067
of the House bill and sec. 5851 of the Senate amendment
to H.R. 2015).......................................... 596
a. Deny EIC eligibility for prior acts of
recklessness or fraud.............................. 597
b. Recertification required when taxpayer found to be
ineligible for EIC in past......................... 598
c. Due diligence requirements for paid preparers..... 599
d. Modify the definition of AGI used to phase out the
EIC................................................ 600
8. Eligibility for income forecast method (sec. 1068 of
the House bill and sec. 876 of the Senate amendment)... 601
9. Require taxpayers to include rental value of residence
in income without regard to period of rental (sec. 1069
of the House bill)..................................... 602
10. Modify the exception to the related-party rule of
section 1033 for individuals to only provide an
exception for de minimis amounts (sec. 1070 of the
House bill and sec. 877 of the Senate amendment)....... 603
11. Repeal of exception for certain sales by
manufacturers to dealers (sec. 1071 of the House bill
and sec. 878 of the Senate amendment).................. 603
12. Extension of Federal unemployment surtax (sec. 881 of
the Senate amendment).................................. 604
13. Treatment of charitable remainder trusts (sec. 883 of
the Senate amendment).................................. 605
14. Modify general business credit carryback and
carryforward rules (sec. 788(b) of the Senate
amendment)............................................. 608
15. Using Federal case registry of child support orders
for tax enforcement purposes........................... 609
16. Expanded SSA records for tax enforcement............. 609
17. Treatment of amounts received under the work
requirements of the Personal Responsibility and Work
Opportunity Act of 1996................................ 610
XI. FOREIGN TAX PROVISIONS....................................... 612
A. General Provisions........................................ 612
1. Simplify foreign tax credit limitation for individuals
(sec. 1103 of the House bill and sec. 901 of the Senate
amendment)............................................. 612
2. Simplify translation of foreign taxes (sec. 1104 of
the House bill and sec. 902 of the Senate amendment)... 613
3. Election to use simplified foreign tax credit
limitation for alternative minimum tax purposes (sec.
1105 of the House bill and sec. 903 of the Senate
amendment)............................................. 615
4. Simplify treatment of personal transactions in foreign
currency (sec. 1106 of the House bill and sec. 904 of
the Senate amendment).................................. 616
5. Simplify foreign tax credit limitation for dividends
from 10/50 companies (sec. 1107 of the House bill)..... 617
B. General Provisions Affecting Treatment of Controlled
Foreign Corporations (secs. 1111-1113 of the House bill and
secs. 911-913 of the Senate amendment)..................... 618
C. Modification of Passive Foreign Investment Company
Provisions to Eliminate Overlap With Subpart F, to Allow
Mark-to-Market Election, and to Require Measurement Based
on Value for PFIC Asset Test (secs. 1121-1123 of the House
bill and secs. 751-753 of the Senate amendment)............ 623
D. Simplify Formation and Operation of International Joint
Ventures (secs. 1131, 1141-1145, and 1151 of the House bill
and secs. 921, 931-935, and 941 of the Senate amendment)... 628
E. Modification of Reporting Threshold for Stock Ownership of
a Foreign Corporation (sec. 1146 of the House bill and sec.
936 of the Senate amendment)............................... 632
F. Other Foreign Simplification Provisions................... 633
1. Transition rules for certain trusts (sec. 1161 of the
House bill and sec. 951 of the Senate amendment)....... 633
2. Simplify stock and securities trading safe harbor
(sec. 1162 of the House bill and sec. 952 of the Senate
amendment)............................................. 633
3. Clarification of determination of foreign taxes deemed
paid (sec. 1178(a) of the House bill and sec. 953(a) of
the Senate amendment).................................. 633
4. Clarification of foreign tax credit limitation for
financial services income (sec. 1178(b) of the House
bill and sec. 953(b) of the Senate amendment).......... 635
G. Other Foreign Provisions.................................. 636
1. Eligibility of licenses of computer software for
foreign sales corporation benefits (sec. 1101 of the
House bill and sec. 741 of the Senate amendment)....... 636
2. Increase dollar limitation on section 911 exclusion
(sec. 1102 of the House bill).......................... 637
3. Treatment of certain securities positions under the
subpart F investment in U.S. property rules (sec. 743
of the Senate amendment)............................... 638
4. Exception from foreign personal holding company income
under subpart F for active financing income (sec. 744
of the Senate amendment)............................... 639
5. Treat service income of nonresident alien individuals
earned on foreign ships as foreign source income and
disregard the U.S. presence of such individuals (sec.
745 of the Senate amendment)........................... 645
XII. SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
BUSINESSES..................................................... 647
A. Provisions Relating to Individuals........................ 647
1. Modifications to standard deduction of dependents; AMT
treatment of certain minor children (sec. 1201 of the
House bill and sec. 1001 of the Senate amendment)...... 647
2. Increase de minimis threshold for estimated tax to
$1,000 for individuals (sec. 1202 of the House bill and
sec. 1002 of the Senate amendment)..................... 648
3. Optional methods for computing SECA tax combined (sec.
1203 of the House bill)................................ 649
4. Treatment of certain reimbursed expenses of rural
letter carrier's vehicles (sec. 1204 of the House bill
and sec. 1003 of the Senate amendment)................. 650
5. Travel expenses of Federal employees participating in
a Federal criminal investigation (sec. 1205 of the
House bill and sec. 1004 of the Senate amendment)...... 651
6. Payment of taxes by commercially acceptable means
(sec. 1206 of the House bill).......................... 652
B. Provisions Relating to Businesses Generally............... 655
1. Modifications to look-back method for long-term
contracts (sec. 1211 of the House bill and sec. 1011 of
the Senate amendment).................................. 655
2. Minimum tax treatment of certain property and casualty
insurance companies (sec. 1212 of the House bill and
sec. 1012 of the Senate amendment)..................... 657
3. Treatment of construction allowances provided to
lessees (sec. 961 of the House bill and sec. 1014 of
the Senate amendment).................................. 657
C. Partnership Simplification Provisions..................... 659
1. General provisions.................................... 659
a. Simplified flow-through for electing large
partnerships (sec. 1221 of the House bill and sec.
1021 of the Senate amendment)...................... 659
b. Simplified audit procedures for electing large
partnerships (sec. 1222 of the House bill and sec.
1022 of the Senate amendment)...................... 670
c. Due date for furnishing information to partners of
electing large partnerships (sec. 1223 of the House
bill and sec. 1023 of the Senate amendment)........ 674
d. Partnership returns required on magnetic media
(sec. 1224 of the House bill and sec. 1024 of the
Senate amendment).................................. 675
e. Treatment of partnership items of individual
retirement arrangements (sec. 1225 of the House
bill and sec. 1025 of the Senate amendment)........ 676
2. Other partnership audit rules......................... 677
a. Treatment of partnership items in deficiency
proceedings (sec. 1231 of the House bill and sec.
1031 of the Senate amendment)...................... 677
b. Partnership return to be determinative of audit
procedures to be followed (sec. 1232 of the House
bill and sec. 1032 of the Senate amendment)........ 679
c. Provisions relating to statute of limitations
(sec. 1233 of the House bill and sec. 1033 of the
Senate amendment).................................. 679
d. Expansion of small partnership exception (sec.
1234 of the House bill and sec. 1034 of the Senate
amendment)......................................... 682
e. Exclusion of partial settlements from 1-year
limitation on assessment (sec. 1235 of the House
bill and sec. 1035 of the Senate amendment)........ 682
f. Extension of time for filing a request for
administrative adjustment (sec. 1236 of the House
bill and sec. 1036 of the Senate amendment)........ 683
g. Availability of innocent spouse relief in context
of partnership proceedings (sec. 1237 of the House
bill and sec. 1037 of the Senate amendment)........ 684
h. Determination of penalties at partnership level
(sec. 1238 of the House bill and sec. 1038 of the
Senate amendment).................................. 685
i. Provisions relating to Tax Court jurisdiction
(sec. 1239 of the House bill and sec. 1039 of the
Senate amendment).................................. 685
j. Treatment of premature petitions filed by notice
partners or 5-percent groups (sec. 1240 of the
House bill and sec. 1040 of the Senate amendment).. 686
k. Bonds in case of appeals from certain proceedings
(sec. 1241 of the House bill and sec. 1041 of the
Senate amendment).................................. 686
l. Suspension of interest where delay in
computational adjustment resulting from certain
settlements (sec. 1242 of the House bill and sec.
1042 of the Senate amendment)...................... 687
m. Special rules for administrative adjustment
requests with respect to bad debts or worthless
securities (sec. 1243 of the House bill and sec.
1043 of the Senate amendment)...................... 688
3. Closing of partnership taxable year with respect to
deceased partner (sec. 1246 of the House bill and sec.
1046 of the Senate amendment).......................... 688
D. Modifications of Rules for Real Estate Investment Trusts
(secs. 1251-1263 of the House bill and secs. 1051-1063 of
the Senate amendment)...................................... 689
E. Repeal the ``Short-Short'' Test for Regulated Investment
Companies (sec. 1271 of the House bill and sec. 1071 of the
Senate amendment).......................................... 699
F. Taxpayer Protections...................................... 700
1. Provide reasonable cause exception for additional
penalties (sec. 1281 of the House bill and sec. 1081 of
the Senate amendment).................................. 700
2. Clarification of period for filing claims for refunds
(sec. 1282 of the House bill and sec. 1082 of the
Senate amendment)...................................... 700
3. Repeal of authority to disclose whether a prospective
juror has been audited (sec. 1283 of the House bill and
sec. 1083 of the Senate amendment)..................... 701
4. Clarify statute of limitations for items from pass-
through entities (sec. 1284 of the House bill and sec.
1084 of the Senate amendment).......................... 702
5. Awarding of administrative costs and attorneys fees
(sec. 1285 of the House bill).......................... 703
6. Prohibition on browsing (secs. 1286-1287 of the House
bill and secs. 1085-1086 of the Senate amendment)...... 704
XIII. ESTATE, GIFT, AND TRUST SIMPLIFICATION PROVISIONS.......... 706
1. Eliminate gift tax filing requirements for gifts to
charities (sec. 1301 of the House bill and secs. 1101
of the Senate amendment)............................... 706
2. Clarification of waiver of certain rights of recovery
(sec. 1302 of the House bill and sec. 1102 of the
Senate amendment)...................................... 707
3. Transitional rule under section 2056A (sec. 1303 of
the House bill and sec. 1103 of the Senate amendment).. 707
4. Clarifications relating to disclaimers (sec. 1304 of
the House bill)........................................ 708
5. Amend ``5 or 5 power'' (sec. 1305 of the House bill).. 709
6. Treatment of estate tax purposes of short-term
obligations held by nonresident aliens (sec. 1306 of
the House bill and sec. 1104 of the Senate amendment).. 710
7. Certain revocable trusts treated as part of estate
(sec. 1307 of the House bill).......................... 711
8. Distributions during first 65 days of taxable year of
estate (sec. 1308 of the House bill and sec. 1105 of
the Senate amendment).................................. 712
9. Separate share rules available to estates (sec. 1309
of the House bill and sec. 1106 of the Senate
amendment)............................................. 712
10. Executor of estate and beneficiaries treated as
related persons for disallowance of losses (sec. 1310
of the House bill and sec. 1107 of the Senate
amendment)............................................. 714
11. Limitation on taxable year of estates (sec. 1311 of
the House bill)........................................ 714
12. Simplified taxation of earnings of pre-need funeral
trusts (sec. 1312 of the House bill and sec. 1108 of
the Senate amendment).................................. 715
13. Adjustments for gifts within 3 years of decedent's
death (sec. 1313 of the House bill and sec. 1109 of the
Senate amendment....................................... 717
14. Clarify relationship between community property
rights and retirement benefits (sec. 1314 of the House
bill and sec. 1110 of the Senate amendment)............ 717
15. Treatment under qualified domestic trust rules of
forms of ownership which are not trusts (sec. 1315 of
the House bill and sec. 1111 of the Senate amendment).. 719
16. Opportunity to correct certain failures under section
2032A (sec. 1316 of the House bill and sec. 1112 of the
Senate amendment)...................................... 719
17. Authority to waive requirement of U.S. trustee for
qualified domestic trusts (sec. 1317 of the House bill
and sec. 1113 of the Senate amendment)................. 720
XIV. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS.............. 722
A. Excise Tax Simplification Provisions...................... 722
1. Increase de minimis limit for after-market
alternations subject to heavy truck and luxury
automobile excise taxes (sec. 1401 of the House bill
and sec. 1201 of the Senate amendment)................. 722
2. Simplification of excise taxes on distilled spirits,
wine, and beer (secs. 1411-1422 of the House bill and
secs. 1211-1222 of the Senate amendment)............... 723
3. Authority for Internal Revenue Service to grant
exemptions from excise tax registration requirements
(sec. 1431 of the House bill and sec. 1231 of the
Senate amendment)...................................... 725
4. Repeal of expired excise tax provisions (sec. 1432 of
the House bill and sec. 1232 of the Senate amendment).. 725
5. Modifications to the excise tax on arrows (sec. 1233
of the Senate amendment)............................... 726
6. Modifications to heavy highway vehicle retail excise
tax (sec. 1234 of the Senate amendment)................ 726
7. Treatment of skydiving flights as noncommercial
aviation (sec. 1235 of the Senate amendment)........... 727
8. Eliminate double taxation of certain aviation fuels
sold to producers by ``fixed base operators'' (sec.
1236 of the Senate amendment).......................... 728
B. Tax-Exempt Bond Provisions................................ 728
1. Repeal of $100,000 limitation on unspent proceeds
under 1-year exception from rebate (sec. 1441 of the
House bill and sec. 1241 of the Senate amendment)...... 729
2. Exception from rebate for earnings on bona fide debt
service fund under construction bond rules (sec. 1442
of the House bill and sec. 1242 of the Senate
amendment)............................................. 730
3. Repeal of debt service-based limitation on investment
in certain nonpurpose investments (sec. 1443 of the
House bill and sec. 1243 of the Senate amendment)...... 730
4. Repeal of expired provisions relating to student loan
bonds (sec. 1444 of the House bill and sec. 1244 of the
Senate amendment)...................................... 731
C. Tax Court Procedures...................................... 732
1. Overpayment determinations of Tax Court (sec. 1451 of
the House bill and sec. 1251 of the Senate amendment).. 732
2. Redetermination of interest pursuant to motion (sec.
1452 of the House bill and sec. 1252 of the Senate
amendment)............................................. 732
3. Application of net worth requirement for awards of
litigation costs (sec. 1453 of the House bill and sec.
1253 of the Senate amendment).......................... 733
4. Tax Court jurisdiction for determination of employment
status (sec. 1454 of the House bill and sec. 1254 of
the Senate amendment).................................. 734
D. Other Provisions.......................................... 735
1. Due date for first quarter estimated tax payments by
private foundations (sec. 1461 of the House bill and
sec. 1261 of the Senate amendment)..................... 735
2. Withholding of Commonwealth income taxes from wages of
Federal employees (sec. 1462 of the House bill and sec.
1262 of the Senate amendment).......................... 735
3. Certain notices disregarded under provision increasing
interest rate on large corporate underpayments (sec.
1463 of the House bill and sec. 1263 of the Senate
amendment)............................................. 736
XV. PENSION AND EMPLOYEE BENEFIT PROVISIONS...................... 738
A. Miscellaneous Provisions Relating to Pensions and Other
Benefits................................................... 738
1. Cash or deferred arrangements for irrigation and
drainage entities (sec. 911 of the House bill)......... 738
2. Permanent moratorium on application of
nondiscrimination rules to State and local governmental
plans (sec. 912 of the House bill and sec. 1308 of the
Senate amendment)...................................... 738
3. Treatment of certain disability payments to public
safety employees (sec. 913 of the House bill and sec.
785 of the Senate amendment)........................... 740
4. Portability of permissive service credit under
governmental pension plans (sec. 914 of the House bill) 740
5. Gratuitous transfers for the benefit of employees
(sec. 915 of the House bill)........................... 742
6. Treatment of certain transportation on noncommercially
operated aircraft as a fringe benefit (sec. 916 of the
House bill)............................................ 743
7. Clarification of certain rules relating to ESOPs of S
corporations (sec. 918 of the House bill and sec. 1309
of the Senate amendment)............................... 744
8. Repeal application of UBIT to ESOPs of S corporations
(sec. 716 of the Senate amendment)..................... 745
9. Treatment of multiemployer plans under section 415
(sec. 711 of the Senate amendment)..................... 746
10. Modification of partial termination rules (sec. 712
of the House amendment)................................ 746
11. Increase in full funding limit (sec. 713 of the
Senate amendment)...................................... 747
12. Spousal consent required for distributions from
section 401(k) plans (sec. 714 of the Senate amendment) 748
13. Contributions on behalf of a minister to a church
plan (sec. 715 of the Senate amendment)................ 749
14. Exclusion of ministers from discrimination testing of
certain non-church retirement plans (sec. 715 of the
Senate amendment)...................................... 749
15. Diversification in section 401(k) plan investments
(sec. 717 of the Senate amendments).................... 750
16. Removal of dollar limitation on benefit payments from
a defined benefit plan for police and fire employees
(sec. 786 of the Senate amendment)..................... 751
17. Church plan exception to prohibition on
discrimination against individuals based on health
status................................................. 752
18. Newborns' and mothers' health protection, mental
health parity.......................................... 753
B. Pension Simplification Provisions......................... 754
1. Matching contributions of self-employed individuals
not treated as elective deferrals (sec. 1301 of the
Senate amendment)...................................... 754
2. Contributions to IRAs through payroll deductions (sec.
1302 of the Senate amendment).......................... 755
3. Plans not disqualified merely by accepting rollover
contributions (sec. 1303 of the Senate amendment)...... 756
4. Modification of prohibition on assignment or
alienation (sec. 1304 of the Senate amendment)......... 756
5. Elimination of paperwork burdens on plans (sec. 1305
of the Senate amendment)............................... 757
6. Modification of section 403(b) exclusion allowance to
conform to section 415 modifications (sec. 1306 of the
Senate amendment)...................................... 758
7. New technologies in retirement plans (sec. 1307 of the
Senate amendment)...................................... 759
8. Modification of 10-percent tax on nondeductible
contributions (sec. 1310 of the Senate amendment)...... 760
9. Modify funding requirements for certain plans (sec.
1311 of the Senate amendment).......................... 760
10. Date for adoption of plan amendments................. 761
XVI. SENSE OF THE SENATE RESOLUTIONS............................. 763
A. Sense of the Senate Regarding Reform of the Internal
Revenue Code of 1986 (sec. 780 of the Senate amendment).... 763
B. Sense of the Senate Regarding Tax Treatment of Stock
options (sec. 781 of the Senate amendment)................. 763
C. Sense of the Senate Regarding Estate Taxes (sec. 782 of
the Senate amendments)..................................... 764
D. Sense of the Senate Regarding Who Should Benefit From Tax
Cuts (sec. 791 of the Senate amendment).................... 764
E. Sense of the Senate Regarding Self-Employment Taxes of
Limited Partners (sec. 734 of the Senate amendment)........ 765
XVII. TECHNICAL CORRECTIONS PROVISIONS........................... 766
XVIII. OTHER TAX PROVISION....................................... 768
A. Estimated Tax Requirements of Individuals for 1997 and
1998 (sec. 311(d) of the House bill)....................... 768
XIX. TRADE PROVISIONS............................................ 769
A. Extension of Duty-Free Treatment Under the Generalized
System of Preferences (sec. 971 of the House bill)......... 769
B. Temporary Suspension of Vessel Repair Duty (sec. 972 of
the House bill)............................................ 769
C. United States-Caribbean Basin Trade Partnership Act (secs.
981-988 of the House bill)................................. 770
XX. LIMITED TAX BENEFITS SUBJECT TO THE LINE ITEM VETO ACT....... 771
105th Congress Report
1st Session HOUSE OF REPRESENTATIVES 105-220
_______________________________________________________________________
TAXPAYER RELIEF ACT OF 1997
_______
July 30, 1997.--Ordered to be printed
_______________________________________________________________________
Mr. Archer, from the committee of conference, submitted the following
CONFERENCE REPORT
[To accompany H.R. 2014]
The committee of conference on the disagreeing votes of
the two Houses on the amendment of the Senate to the bill (H.R.
2014) to provide for reconciliation pursuant to subsections
(b)(2) and (d) of section 105 of the concurrent resolution on
the budget for fiscal year 1998, having met, after full and
free conference, have agreed to recommend and do recommend to
their respective Houses as follows:
That the House recede from its disagreement to the
amendment of the Senate and agree to the same with an amendment
as follows:
In lieu of the matter proposed to be inserted by the
Senate amendment, insert the following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Taxpayer
Relief Act of 1997''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a section
or other provision, the reference shall be considered to be
made to a section or other provision of the Internal Revenue
Code of 1986.
(c) Section 15 Not To Apply.--No amendment made by this Act
shall be treated as a change in a rate of tax for purposes of
section 15 of the Internal Revenue Code of 1986.
(d) Waiver of Estimated Tax Penalties.--No addition to tax
shall be made under section 6654 or 6655 of the Internal
Revenue Code of 1986 for any period before January 1, 1998, for
any payment the due date of which is before January 16, 1998,
with respect to any underpayment attributable to such period to
the extent such underpayment was created or increased by any
provision of this Act.
(e) Table of Contents.--The table of contents for this Act
is as follows:
Sec. 1. Short title; etc.
TITLE I--CHILD TAX CREDIT
Sec. 101. Child tax credit.
TITLE II--EDUCATION INCENTIVES
Subtitle A--Tax Benefits Relating to Education Expenses
Sec. 201. Hope and lifetime learning credits.
Sec. 202. Deduction for interest on education loans.
Sec. 203. Penalty-free withdrawals from individual retirement plans for
higher education expenses.
Subtitle B--Expanded Education Investment Savings Opportunities
Part I--Qualified Tuition Programs
Sec. 211. Modifications of qualified State tuition programs.
Part II--Education Individual Retirement Accounts
Sec. 213. Education individual retirement accounts.
Subtitle C--Other Education Initiatives
Sec. 221. Extension of exclusion for employer-provided educational
assistance.
Sec. 222. Repeal of limitation on qualified 501(c)(3) bonds other than
hospital bonds.
Sec. 223. Increase in arbitrage rebate exception for governmental bonds
used to finance education facilities.
Sec. 224. Contributions of computer technology and equipment for
elementary or secondary school purposes.
Sec. 225. Treatment of cancellation of certain student loans.
Sec. 226. Incentives for education zones.
TITLE III--SAVINGS AND INVESTMENT INCENTIVES
Subtitle A--Retirement Savings
Sec. 301. Restoration of IRA deduction for certain taxpayers.
Sec. 302. Establishment of nondeductible tax-free individual retirement
accounts.
Sec. 303. Distributions from certain plans may be used without penalty
to purchase first homes.
Sec. 304. Certain bullion not treated as collectibles.
Subtitle B--Capital Gains
Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Exemption from tax for gain on sale of principal residence.
Sec. 313. Rollover of gain from sale of qualified stock.
Sec. 314. Amount of net capital gain taken into account in computing
alternative tax on capital gains for corporations not to
exceed taxable income of the corporation.
TITLE IV--ALTERNATIVE MINIMUM TAX REFORM
Sec. 401. Exemption from alternative minimum tax for small corporations.
Sec. 402. Repeal of separate depreciation lives for minimum tax
purposes.
Sec. 403. Minimum tax not to apply to farmers' installment sales.
TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
Subtitle A--Estate and Gift Tax Provisions
Sec. 501. Cost-of-living adjustments relating to estate and gift tax
provisions.
Sec. 502. Family-owned business exclusion.
Sec. 503. Modifications to rate of interest on portion of estate tax
extended under section 6166.
Sec. 504. Extension of treatment of certain rents under section 2032A to
lineal descendants.
Sec. 505. Clarification of judicial review of eligibility for extension
of time for payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after
expiration of statute of limitations.
Sec. 507. Repeal of throwback rules applicable to certain domestic
trusts.
Sec. 508. Treatment of land subject to a qualified conservation
easement.
Subtitle B--Generation-Skipping Tax Provision
Sec. 511. Expansion of exception from generation-skipping transfer tax
for transfers to individuals with deceased parents.
TITLE VI--EXTENSIONS
Sec. 601. Research tax credit.
Sec. 602. Contributions of stock to private foundations.
Sec. 603. Work opportunity tax credit.
Sec. 604. Orphan drug tax credit.
TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA
Sec. 701. Tax incentives for revitalization of the District of Columbia.
TITLE VIII--WELFARE-TO-WORK INCENTIVES
Sec. 801. Incentives for employing long-term family assistance
recipients.
TITLE IX--MISCELLANEOUS PROVISIONS
Subtitle A--Provisions Relating to Excise Taxes
Sec. 901. General revenue portion of highway motor fuels taxes deposited
into Highway Trust Fund.
Sec. 902. Repeal of tax on diesel fuel used in recreational boats.
Sec. 903. Continued application of tax on imported recycled Halon-1211.
Sec. 904. Uniform rate of tax on vaccines.
Sec. 905. Operators of multiple gasoline retail outlets treated as
wholesale distributor for refund purposes.
Sec. 906. Exemption of electric and other clean-fuel motor vehicles from
luxury automobile classification.
Sec. 907. Rate of tax on certain special fuels determined on basis of
BTU equivalency with gasoline.
Sec. 908. Modification of tax treatment of hard cider.
Sec. 909. Study of feasibility of moving collection point for distilled
spirits excise tax.
Sec. 910. Clarification of authority to use semi-generic designations on
wine labels.
Subtitle B--Revisions Relating to Disasters
Sec. 911. Authority to postpone certain tax-related deadlines by reason
of presidentially declared disaster.
Sec. 912. Use of certain appraisals to establish amount of disaster
loss.
Sec. 913. Treatment of livestock sold on account of weather-related
conditions.
Sec. 914. Mortgage financing for residences located in disaster areas.
Sec. 915. Abatement of interest on underpayments by taxpayers in
presidentially declared disaster areas.
Subtitle C--Provisions Relating to Employment Taxes
Sec. 921. Clarification of standard to be used in determining employment
tax status of securities brokers.
Sec. 922. Clarification of exemption from self-employment tax for
certain termination payments received by former insurance
salesmen.
Subtitle D--Provisions Relating to Small Businesses
Sec. 931. Waiver of penalty through June 30, 1998, on small businesses
failing to make electronic fund transfers of taxes.
Sec. 932. Clarification of treatment of home office use for
administrative and management activities.
Sec. 933. Averaging of farm income over 3 years.
Sec. 934. Increase in deduction for health insurance costs of self-
employed individuals.
Sec. 935. Moratorium on certain regulations.
Subtitle E--Brownfields
Sec. 941. Expensing of environmental remediation costs.
Subtitle F--Empowerment Zones, Enterprise Communities, Brownfields, and
Community Development Financial Institutions
Chapter 1--Additional Empowerment Zones
Sec. 951. Additional empowerment zones.
Chapter 2--New Empowerment Zones
Sec. 952. Designation of new empowerment zones.
Sec. 953. Volume cap not to apply to enterprise zone facility bonds with
respect to new empowerment zones.
Sec. 954. Modification to eligibility criteria for designation of future
enterprise zones in Alaska or Hawaii.
Chapter 3--Treatment Of Empowerment Zones and Enterprise Communities
Sec. 955. Modifications to enterprise zone facility bond rules for all
empowerment zones and enterprise communities.
Sec. 956. Modifications to enterprise zone business definition for all
empowerment zones and enterprise communities.
Subtitle G--Other Provisions
Sec. 961. Use of estimates of shrinkage for inventory accounting.
Sec. 962. Assignment of workmen's compensation liability eligible for
exclusion relating to personal injury liability assignments.
Sec. 963. Tax-exempt status for certain State worker's compensation act
companies.
Sec. 964. Election for 1987 partnerships to continue exception from
treatment of publicly traded partnerships as corporations.
Sec. 965. Exclusion from unrelated business taxable income for certain
sponsorship payments.
Sec. 966. Associations of holders of timeshare interests to be taxed
like other homeowners associations.
Sec. 967. Additional advance refunding of certain Virgin Island bonds.
Sec. 968. Nonrecognition of gain on sale of stock to certain farmers'
cooperatives.
Sec. 969. Increased deductibility of business meal expenses for
individuals subject to Federal hours of service.
Sec. 970. Clarification of de minimis fringe benefit rules to no-charge
employee meals.
Sec. 971. Exemption of the incremental cost of a clean fuel vehicle from
the limits on depreciation for vehicles.
Sec. 972. Temporary suspension of taxable income limit on percentage
depletion for marginal production.
Sec. 973. Increase in standard mileage rate expense deduction for
charitable use of passenger automobile.
Sec. 974. Clarification of treatment of certain receivables purchased by
cooperative hospital service organizations.
Sec. 975. Deduction in computing adjusted gross income for expenses in
connection with service performed by certain officials.
Sec. 976. Combined employment tax reporting demonstration project.
Sec. 977. Elective carryback of existing carryovers of National Railroad
Passenger Corporation.
Subtitle H--Extension of Duty-Free Treatment Under Generalized System of
Preferences
Sec. 981. Generalized System of Preferences.
TITLE X--REVENUES
Subtitle A--Financial Products
Sec. 1001. Constructive sales treatment for appreciated financial
positions.
Sec. 1002. Limitation on exception for investment companies under
section 351.
Sec. 1003. Gains and losses from certain terminations with respect to
property.
Sec. 1004. Determination of original issue discount where pooled debt
obligations subject to acceleration.
Sec. 1005. Denial of interest deductions on certain debt instruments.
Subtitle B--Corporate Organizations and Reorganizations
Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions in connection
with acquisitions and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Certain preferred stock treated as boot.
Sec. 1015. Modification of holding period applicable to dividends
received deduction.
Subtitle C--Administrative Provisions
Sec. 1021. Reporting of certain payments made to attorneys.
Sec. 1022. Decrease of threshold for reporting payments to corporations
performing services for Federal agencies.
Sec. 1023. Disclosure of return information for administration of
certain veterans programs.
Sec. 1024. Continuous levy on certain payments.
Sec. 1025. Modification of levy exemption.
Sec. 1026. Confidentiality and disclosure of returns and return
information.
Sec. 1027. Returns of beneficiaries of estates and trusts required to
file returns consistent with estate or trust return or to
notify Secretary of inconsistency.
Sec. 1028. Registration and other provisions relating to confidential
corporate tax shelters.
Subtitle D--Excise and Employment Tax Provisions
Sec. 1031. Extension and modification of taxes funding Airport and
Airway Trust Fund; increased deposits into such Fund.
Sec. 1032. Kerosene taxed as diesel fuel.
Sec. 1033. Restoration of Leaking Underground Storage Tank Trust Fund
taxes.
Sec. 1034. Application of communications tax to prepaid telephone cards.
Sec. 1035. Extension of temporary unemployment tax.
Subtitle E--Provisions Relating to Tax-Exempt Entities
Sec. 1041. Expansion of look-thru rule for interest, annuities,
royalties, and rents derived by subsidiaries of tax-exempt
organizations.
Sec. 1042. Termination of certain exceptions from rules relating to
exempt organizations which provide commercial-type insurance.
Subtitle F--Foreign Provisions
Sec. 1051. Definition of foreign personal holding company income.
Sec. 1052. Personal property used predominantly in the United States
treated as not property of a like kind with respect to
property used predominantly outside the United States.
Sec. 1053. Holding period requirement for certain foreign taxes.
Sec. 1054. Denial of treaty benefits for certain payments through hybrid
entities.
Sec. 1055. Interest on underpayments not reduced by foreign tax credit
carrybacks.
Sec. 1056. Clarification of period of limitations on claim for credit or
refund attributable to foreign tax credit carryforward.
Sec. 1057. Repeal of exception to alternative minimum foreign tax credit
limit.
Subtitle G--Partnership Provisions
Sec. 1061. Allocation of basis among properties distributed by
partnership.
Sec. 1062. Repeal of requirement that inventory be substantially
appreciated with respect to sale or exchange of partnership
interest.
Sec. 1063. Extension of time for taxing precontribution gain.
Subtitle H--Pension Provisions
Sec. 1071. Pension accrued benefit distributable without consent
increased to $5,000.
Sec. 1072. Election to receive taxable cash compensation in lieu of
nontaxable parking benefits.
Sec. 1073. Repeal of excess distribution and excess retirement
accumulation tax.
Sec. 1074. Increase in tax on prohibited transactions.
Sec. 1075. Basis recovery rules for annuities over more than one life.
Subtitle I--Other Revenue Provisions
Sec. 1081. Termination of suspense accounts for family corporations
required to use accrual method of accounting.
Sec. 1082. Modification of taxable years to which net operating losses
may be carried.
Sec. 1083. Modifications to taxable years to which unused credits may be
carried.
Sec. 1084. Expansion of denial of deduction for certain amounts paid in
connection with insurance.
Sec. 1085. Improved enforcement of the application of the earned income
credit.
Sec. 1086. Limitation on property for which income forecast method may
be used.
Sec. 1087. Expansion of requirement that involuntarily converted
property be replaced with property acquired from an unrelated
person.
Sec. 1088. Treatment of exception from installment sales rules for sales
of property by a manufacturer to a dealer.
Sec. 1089. Limitations on charitable remainder trust eligibility for
certain trusts.
Sec. 1090. Expanded SSA records for tax enforcement.
Sec. 1091. Modification of estimated tax safe harbors.
TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS
Subtitle A--General Provisions
Sec. 1101. Certain individuals exempt from foreign tax credit
limitation.
Sec. 1102. Exchange rate used in translating foreign taxes.
Sec. 1103. Election to use simplified section 904 limitation for
alternative minimum tax.
Sec. 1104. Treatment of personal transactions by individuals under
foreign currency rules.
Sec. 1105. Foreign tax credit treatment of dividends from noncontrolled
section 902 corporations.
Subtitle B--Treatment of Controlled Foreign Corporations
Sec. 1111. Gain on certain stock sales by controlled foreign
corporations treated as dividends.
Sec. 1112. Miscellaneous modifications to subpart F.
Sec. 1113. Indirect foreign tax credit allowed for certain lower tier
companies.
Subtitle C--Treatment of Passive Foreign Investment Companies
Sec. 1121. United States shareholders of controlled foreign corporations
not subject to PFIC inclusion.
Sec. 1122. Election of mark to market for marketable stock in passive
foreign investment company.
Sec. 1123. Valuation of assets for passive foreign investment company
determination.
Sec. 1124. Effective date.
Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities
Sec. 1131. Repeal of excise tax on transfers to foreign entities;
recognition of gain on certain transfers to foreign trusts and
estates.
Subtitle E--Information Reporting
Sec. 1141. Clarification of application of return requirement to foreign
partnerships.
Sec. 1142. Controlled foreign partnerships subject to information
reporting comparable to information reporting for controlled
foreign corporations.
Sec. 1143. Modifications relating to returns required to be filed by
reason of changes in ownership interests in foreign
partnership.
Sec. 1144. Transfers of property to foreign partnerships subject to
information reporting comparable to information reporting for
such transfers to foreign corporations.
Sec. 1145. Extension of statute of limitations for foreign transfers.
Sec. 1146. Increase in filing thresholds for returns as to organization
of foreign corporations and acquisitions of stock in such
corporations.
Subtitle F--Determination of Foreign or Domestic Status of Partnerships
Sec. 1151. Determination of foreign or domestic status of partnerships.
Subtitle G--Other Simplification Provisions
Sec. 1161. Transition rule for certain trusts.
Sec. 1162. Repeal of stock and securities safe harbor requirement that
principal office be outside the United States.
Sec. 1163. Miscellaneous clarifications.
Subtitle H--Other Provisions
Sec. 1171. Treatment of computer software as FSC export property.
Sec. 1172. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1173. United States property not to include certain assets acquired
by dealers in ordinary course of trade or business.
Sec. 1174. Treatment of nonresident aliens engaged in international
transportation services.
Sec. 1175. Exemption for active financing income.
TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
BUSINESSES
Subtitle A--Provisions Relating to Individuals
Sec. 1201. Basic standard deduction and minimum tax exemption amount for
certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax
requirements.
Sec. 1203. Treatment of certain reimbursed expenses of rural mail
carriers.
Sec. 1204. Treatment of traveling expenses of certain Federal employees
engaged in criminal investigations.
Sec. 1205. Payment of tax by commercially acceptable means.
Subtitle B--Provisions Relating to Businesses Generally
Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty
insurance companies.
Sec. 1213. Qualified lessee construction allowances for short-term
leases.
Subtitle C--Simplification Relating to Electing Large Partnerships
Part I--General Provisions
Sec. 1221. Simplified flow-through for electing large partnerships.
Sec. 1222. Simplified audit procedures for electing large partnerships.
Sec. 1223. Due date for furnishing information to partners of electing
large partnerships.
Sec. 1224. Returns required on magnetic media.
Sec. 1225. Treatment of partnership items of individual retirement
accounts.
Sec. 1226. Effective date.
Part II--Provisions Related to TEFRA Partnership Proceedings
Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit procedures to
be followed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation on
assessment.
Sec. 1236. Extension of time for filing a request for administrative
adjustment.
Sec. 1237. Availability of innocent spouse relief in context of
partnership proceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice partners or
5-percent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational
adjustment resulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests with
respect to bad debts or worthless securities.
Part III--Provision Relating to Closing of Partnership Taxable Year With
Respect to Deceased Partner, Etc.
Sec. 1246. Closing of partnership taxable year with respect to deceased
partner, etc.
Subtitle D--Provisions Relating to Real Estate Investment Trusts
Sec. 1251. Clarification of limitation on maximum number of
shareholders.
Sec. 1252. De minimis rule for tenant services income.
Sec. 1253. Attribution rules applicable to stock ownership.
Sec. 1254. Credit for tax paid by REIT on retained capital gains.
Sec. 1255. Repeal of 30-percent gross income requirement.
Sec. 1256. Modification of earnings and profits rules for determining
whether REIT has earnings and profits from non-REIT year.
Sec. 1257. Treatment of foreclosure property.
Sec. 1258. Payments under hedging instruments.
Sec. 1259. Excess noncash income.
Sec. 1260. Prohibited transaction safe harbor.
Sec. 1261. Shared appreciation mortgages.
Sec. 1262. Wholly owned subsidiaries.
Sec. 1263. Effective date.
Subtitle E--Provisions Relating to Regulated Investment Companies
Sec. 1271. Repeal of 30-percent gross income limitation.
Subtitle F--Taxpayer Protections
Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective juror has
been audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.
TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES
Sec. 1301. Gifts to charities exempt from gift tax filing requirements.
Sec. 1302. Clarification of waiver of certain rights of recovery.
Sec. 1303. Transitional rule under section 2056A.
Sec. 1304. Treatment for estate tax purposes of short-term obligations
held by nonresident aliens.
Sec. 1305. Certain revocable trusts treated as part of estate.
Sec. 1306. Distributions during first 65 days of taxable year of estate.
Sec. 1307. Separate share rules available to estates.
Sec. 1308. Executor of estate and beneficiaries treated as related
persons for disallowance of losses, etc.
Sec. 1309. Treatment of funeral trusts.
Sec. 1310. Adjustments for gifts within 3 years of decedent's death.
Sec. 1311. Clarification of treatment of survivor annuities under
qualified terminable interest rules.
Sec. 1312. Treatment under qualified domestic trust rules of forms of
ownership which are not trusts.
Sec. 1313. Opportunity to correct certain failures under section 2032A.
Sec. 1314. Authority to waive requirement of United States trustee for
qualified domestic trusts.
TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, TAX-
EXEMPT BONDS, AND OTHER MATTERS
Subtitle A--Excise Tax Simplification
Part I--Excise Taxes on Heavy Trucks and Luxury Cars
Sec. 1401. Increase in de minimis limit for after-market alterations for
heavy trucks and luxury cars.
Sec. 1402. Credit for tire tax in lieu of exclusion of value of tires in
computing price.
Part II--Provisions Related to Distilled Spirits, Wines, and Beer
Sec. 1411. Credit or refund for imported bottled distilled spirits
returned to distilled spirits plant.
Sec. 1412. Authority to cancel or credit export bonds without submission
of records.
Sec. 1413. Repeal of required maintenance of records on premises of
distilled spirits plant.
Sec. 1414. Fermented material from any brewery may be received at a
distilled spirits plant.
Sec. 1415. Repeal of requirement for wholesale dealers in liquors to
post sign.
Sec. 1416. Refund of tax to wine returned to bond not limited to
unmerchantable wine.
Sec. 1417. Use of additional ameliorating material in certain wines.
Sec. 1418. Domestically produced beer may be withdrawn free of tax for
use of foreign embassies, legations, etc.
Sec. 1419. Beer may be withdrawn free of tax for destruction.
Sec. 1420. Authority to allow drawback on exported beer without
submission of records.
Sec. 1421. Transfer to brewery of beer imported in bulk without payment
of tax.
Sec. 1422. Transfer to bonded wine cellars of wine imported in bulk
without payment of tax.
Part III--Other Excise Tax Provisions
Sec. 1431. Authority to grant exemptions from registration requirements.
Sec. 1432. Repeal of expired provisions.
Sec. 1433. Simplification of imposition of excise tax on arrows.
Sec. 1434. Modifications to retail tax on heavy trucks.
Sec. 1435. Skydiving flights exempt from tax on transportation of
persons by air.
Sec. 1436. Allowance or credit of refund for tax-paid aviation fuel
purchased by registered producer of aviation fuel.
Subtitle B--Tax-Exempt Bond Provisions
Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under 1-
year exception from rebate.
Sec. 1442. Exception from rebate for earnings on bona fide debt service
fund under construction bond rules.
Sec. 1443. Repeal of debt service-based limitation on investment in
certain nonpurpose investments.
Sec. 1444. Repeal of expired provisions.
Sec. 1445. Effective date.
Subtitle C--Tax Court Procedures
Sec. 1451. Overpayment determinations of Tax Court.
Sec. 1452. Redetermination of interest pursuant to motion.
Sec. 1453. Application of net worth requirement for awards of litigation
costs.
Sec. 1454. Proceedings for determination of employment status.
Subtitle D--Other Provisions
Sec. 1461. Extension of due date of first quarter estimated tax payment
by private foundations.
Sec. 1462. Clarification of authority to withhold Puerto Rico income
taxes from salaries of Federal employees.
Sec. 1463. Certain notices disregarded under provision increasing
interest rate on large corporate underpayments.
TITLE XV--PENSIONS AND EMPLOYEE BENEFITS
Subtitle A--Simplification
Sec. 1501. Matching contributions of self-employed individuals not
treated as elective employer contributions.
Sec. 1502. Modification of prohibition of assignment or alienation.
Sec. 1503. Elimination of paperwork burdens on plans.
Sec. 1504. Modification of 403(b) exclusion allowance to conform to 415
modifications.
Sec. 1505. Extension of moratorium on application of certain
nondiscrimination rules to State and local governments.
Sec. 1506. Clarification of certain rules relating to employee stock
ownership plans of S corporations.
Sec. 1507. Modification of 10-percent tax for nondeductible
contributions.
Sec. 1508. Modification of funding requirements for certain plans.
Sec. 1509. Clarification of disqualification rules relating to
acceptance of rollover contributions.
Sec. 1510. New technologies in retirement plans.
Subtitle B--Other Provisions Relating to Pensions and Employee Benefits
Sec. 1521. Increase in current liability funding limit.
Sec. 1522. Special rules for church plans.
Sec. 1523. Repeal of application of unrelated business income tax to
ESOPs.
Sec. 1524. Diversification of section 401(k) plan investments.
Sec. 1525. Section 401(k) plans for certain irrigation and drainage
entities.
Sec. 1526. Portability of permissive service credit under governmental
pension plans.
Sec. 1527. Removal of dollar limitation on benefit payments from a
defined benefit plan maintained for certain police and fire
employees.
Sec. 1528. Survivor benefits for public safety officers killed in the
line of duty.
Sec. 1529. Treatment of certain disability benefits received by former
police officers or firefighters.
Sec. 1530. Gratuitous transfers for the benefit of employees.
Subtitle C--Provisions Relating to Certain Health Acts
Sec. 1531. Amendments to the Internal Revenue Code of 1986 to implement
the Newborns' and Mothers' Health Protection Act of 1996 and
the Mental Health Parity Act of 1996.
Sec. 1532. Special rules relating to church plans.
Subtitle D--Provisions Relating to Plan Amendments
Sec. 1541. Provisions relating to plan amendments.
TITLE XVI--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION
ACT OF 1996 AND OTHER LEGISLATION
Sec. 1600. Coordination with other titles.
Sec. 1601. Amendments related to Small Business Job Protection Act of
1996.
Sec. 1602. Amendments related to Health Insurance Portability and
Accountability Act of 1996.
Sec. 1603. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1604. Miscellaneous provisions.
TITLE XVII--IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM
VETO
Sec. 1701. Identification of limited tax benefits subject to line item
veto.
TITLE I--CHILD TAX CREDIT
SEC. 101. CHILD TAX CREDIT.
(a) In General.--Subpart A of part IV of subchapter A of
chapter 1 (relating to nonrefundable personal credits) is
amended by inserting after section 23 the following new
section:
``SEC. 24. CHILD TAX CREDIT.
``(a) Allowance of Credit.--There shall be allowed as a
credit against the tax imposed by this chapter for the taxable
year with respect to each qualifying child of the taxpayer an
amount equal to $500 ($400 in the case of taxable years
beginning in 1998).
``(b) Limitation Based on Adjusted Gross Income.--
``(1) In general.--The amount of the credit
allowable under subsection (a) shall be reduced (but
not below zero) by $50 for each $1,000 (or fraction
thereof) by which the taxpayer's modified adjusted
gross income exceeds the threshold amount. For purposes
of the preceding sentence, the term `modified adjusted
gross income' means adjusted gross income increased by
any amount excluded from gross income under section
911, 931, or 933.
``(2) Threshold amount.--For purposes of paragraph
(1), the term `threshold amount' means--
``(A) $110,000 in the case of a joint
return,
``(B) $75,000 in the case of an individual
who is not married, and
``(C) $55,000 in the case of a married
individual filing a separate return.
For purposes of this paragraph, marital status shall be
determined under section 7703.
``(c) Qualifying Child.--For purposes of this section--
``(1) In general.--The term `qualifying child'
means any individual if--
``(A) the taxpayer is allowed a deduction
under section 151 with respect to such
individual for the taxable year,
``(B) such individual has not attained the
age of 17 as of the close of the calendar year
in which the taxable year of the taxpayer
begins, and
``(C) such individual bears a relationship
to the taxpayer described in section
32(c)(3)(B).
``(2) Exception for certain noncitizens.--The term
`qualifying child' shall not include any individual who
would not be a dependent if the first sentence of
section 152(b)(3) were applied without regard to all
that follows `resident of the United States'.
``(d) Additional Credit for Families With 3 or More
Children.--
``(1) In general.--In the case of a taxpayer with 3
or more qualifying children for any taxable year, the
amount of the credit allowed under this section shall
be equal to the greater of--
``(A) the amount of the credit allowed
under this section (without regard to this
subsection and after application of the
limitation under section 26), or
``(B) the alternative credit amount
determined under paragraph (2).
``(2) Alternative credit amount.--For purposes of
this subsection, the alternative credit amount is the
amount of the credit which would be allowed under this
section if the limitation under paragraph (3) were
applied in lieu of the limitation under section 26.
``(3) Limitation.--The limitation under this
paragraph for any taxable year is the limitation under
section 26 (without regard to this subsection)--
``(A) increased by the taxpayer's social
security taxes for such taxable year, and
``(B) reduced by the sum of--
``(i) the credits allowed under
this part other than under subpart C or
this section, and
``(ii) the credit allowed under
section 32 without regard to subsection
(m) thereof.
``(4) Unused credit to be refundable.--If the
amount of the credit under paragraph (1)(B) exceeds the
amount of the credit under paragraph (1)(A), such
excess shall be treated as a credit to which subpart C
applies. The rule of section 32(h) shall apply to such
excess.
``(5) Social security taxes.--For purposes of
paragraph (3)--
``(A) In general.--The term `social
security taxes' means, with respect to any
taxpayer for any taxable year--
``(i) the amount of the taxes
imposed by sections 3101 and 3201(a) on
amounts received by the taxpayer during
the calendar year in which the taxable
year begins,
``(ii) 50 percent of the taxes
imposed by section 1401 on the self-
employment income of the taxpayer for
the taxable year, and
``(iii) 50 percent of the taxes
imposed by section 3211(a)(1) on
amounts received by the taxpayer during
the calendar year in which the taxable
year begins.
``(B) Coordination with special refund of
social security taxes.--The term `social
security taxes' shall not include any taxes to
the extent the taxpayer is entitled to a
special refund of such taxes under section
6413(c).
``(C) Special rule.--Any amounts paid
pursuant to an agreement under section 3121(l)
(relating to agreements entered into by
American employers with respect to foreign
affiliates) which are equivalent to the taxes
referred to in subparagraph (A)(i) shall be
treated as taxes referred to in such
subparagraph.
``(e) Identification Requirement.--No credit shall be
allowed under this section to a taxpayer with respect to any
qualifying child unless the taxpayer includes the name and
taxpayer identification number of such qualifying child on the
return of tax for the taxable year.
``(f) Taxable Year Must Be Full Taxable Year.--Except in
the case of a taxable year closed by reason of the death of the
taxpayer, no credit shall be allowable under this section in
the case of a taxable year covering a period of less than 12
months.''.
(b) Supplemental Credit.--Section 32 is amended by adding
at the end the following new subsection:
``(m) Supplemental Child Credit.--
``(1) In general.--In the case of a taxpayer with
respect to whom a credit is allowed under section 24
for the taxable year, there shall be allowed as a
credit under this section an amount equal to the
supplemental child credit (if any) determined for such
taxpayer for such taxable year under paragraph (2).
Such credit shall be in addition to the credit allowed
under subsection (a).
``(2) Supplemental child credit.--For purposes of
this subsection, the supplemental child credit is an
amount equal to the excess (if any) of--
``(A) the amount determined under section
24(d)(1)(A), over
``(B) the amount determined under section
24(d)(1)(B).
The amounts referred to in subparagraphs (A) and (B)
shall be determined as if section 24(d) applied to all
taxpayers.
``(3) Coordination with section 24.--The amount of
the credit under section 24 shall be reduced by the
amount of the credit allowed under this subsection.''
(c) High Risk Pools Permitted To Cover Spouses and
Dependents of High Risk Individuals.--Paragraph (26) of section
501(c) is amended by adding at the end the following flush
sentence:
``A spouse and any qualifying child (as defined in
section 24(c)) of an individual described in
subparagraph (B) (without regard to this sentence)
shall be treated as described in subparagraph (B).''.
(d) Conforming Amendments.--
(1) Section 1324(b)(2) of title 31, United States
Code, is amended by inserting before the period at the
end ``, or enacted by the Taxpayer Relief Act of
1997''.
(2) Paragraph (2) of section 6213(g) (relating to
the definition of mathematical or clerical errors) is
amended by striking ``and'' at the end of subparagraph
(G), by striking the period at the end of subparagraph
(H) and inserting ``, and'', and by inserting after
subparagraph (H) the following new subparagraph:
``(I) an omission of a correct TIN required
under section 24(e) (relating to child tax
credit) to be included on a return.''.
(3) The table of sections for subpart A of part IV
of subchapter A of chapter 1 is amended by inserting
after the item relating to section 23 the following new
item:
``Sec. 24. Child tax credit.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
TITLE II--EDUCATION INCENTIVES
Subtitle A--Tax Benefits Relating to Education Expenses
SEC. 201. HOPE AND LIFETIME LEARNING CREDITS.
(a) In General.--Subpart A of part IV of subchapter A of
chapter 1 (relating to nonrefundable personal credits) is
amended by inserting after section 25 the following new
section:
``SEC. 25A. HOPE AND LIFETIME LEARNING CREDITS.
``(a) Allowance of Credit.--In the case of an individual,
there shall be allowed as a credit against the tax imposed by
this chapter for the taxable year the amount equal to the sum
of--
``(1) the Hope Scholarship Credit, plus
``(2) the Lifetime Learning Credit.
``(b) Hope Scholarship Credit.--
``(1) Per student credit.--In the case of any
eligible student for whom an election is in effect
under this section for any taxable year, the Hope
Scholarship Credit is an amount equal to the sum of--
``(A) 100 percent of so much of the
qualified tuition and related expenses paid by
the taxpayer during the taxable year (for
education furnished to the eligible student
during any academic period beginning in such
taxable year) as does not exceed $1,000, plus
``(B) 50 percent of such expenses so paid
as exceeds $1,000 but does not exceed the
applicable limit.
``(2) Limitations applicable to hope scholarship
credit.--
``(A) Credit allowed only for 2 taxable
years.--An election to have this section apply
with respect to any eligible student for
purposes of the Hope Scholarship Credit under
subsection (a)(1) may not be made for any
taxable year if such an election (by the
taxpayer or any other individual) is in effect
with respect to such student for any 2 prior
taxable years.
``(B) Credit allowed for year only if
individual is at least \1/2\ time student for
portion of year.--The Hope Scholarship Credit
under subsection (a)(1) shall not be allowed
for a taxable year with respect to the
qualified tuition and related expenses of an
individual unless such individual is an
eligible student for at least one academic
period which begins during such year.
``(C) Credit allowed only for first 2 years
of postsecondary education.--The Hope
Scholarship Credit under subsection (a)(1)
shall not be allowed for a taxable year with
respect to the qualified tuition and related
expenses of an eligible student if the student
has completed (before the beginning of such
taxable year) the first 2 years of
postsecondary education at an eligible
educational institution.
``(D) Denial of credit if student convicted
of a felony drug offense.--The Hope Scholarship
Credit under subsection (a)(1) shall not be
allowed for qualified tuition and related
expenses for the enrollment or attendance of a
student for any academic period if such student
has been convicted of a Federal or State felony
offense consisting of the possession or
distribution of a controlled substance before
the end of the taxable year with or within
which such period ends.
``(3) Eligible student.--For purposes of this
subsection, the term `eligible student' means, with
respect to any academic period, a student who--
``(A) meets the requirements of section
484(a)(1) of the Higher Education Act of 1965
(20 U.S.C. 1091(a)(1)), as in effect on the
date of the enactment of this section, and
``(B) is carrying at least \1/2\ the normal
full-time work load for the course of study the
student is pursuing.
``(4) Applicable limit.--For purposes of paragraph
(1)(B), the applicable limit for any taxable year is an
amount equal to 2 times the dollar amount in effect
under paragraph (1)(A) for such taxable year.
``(c) Lifetime Learning Credit.--
``(1) Per taxpayer credit.--The Lifetime Learning
Credit for any taxpayer for any taxable year is an
amount equal to 20 percent of so much of the qualified
tuition and related expenses paid by the taxpayer
during the taxable year (for education furnished during
any academic period beginning in such taxable year) as
does not exceed $10,000 ($5,000 in the case of taxable
years beginning before January 1, 2003).
``(2) Special rules for determining expenses.--
``(A) Coordination with hope scholarship.--
The qualified tuition and related expenses with
respect to an individual who is an eligible
student for whom a Hope Scholarship Credit
under subsection (a)(1) is allowed for the
taxable year shall not be taken into account
under this subsection.
``(B) Expenses eligible for lifetime
learning credit.--For purposes of paragraph
(1), qualified tuition and related expenses
shall include expenses described in subsection
(f)(1) with respect to any course of
instruction at an eligible educational
institution to acquire or improve job skills of
the individual.
``(d) Limitation Based on Modified Adjusted Gross Income.--
``(1) In general.--The amount which would (but for
this subsection) be taken into account under subsection
(a) for the taxable year shall be reduced (but not
below zero) by the amount determined under paragraph
(2).
``(2) Amount of reduction.--The amount determined
under this paragraph is the amount which bears the same
ratio to the amount which would be so taken into
account as--
``(A) the excess of--
``(i) the taxpayer's modified
adjusted gross income for such taxable
year, over
``(ii) $40,000 ($80,000 in the case
of a joint return), bears to
``(B) $10,000 ($20,000 in the case of a
joint return).
``(3) Modified adjusted gross income.--The term
`modified adjusted gross income' means the adjusted
gross income of the taxpayer for the taxable year
increased by any amount excluded from gross income
under section 911, 931, or 933.
``(e) Election To Have Section Apply.--
``(1) In general.--No credit shall be allowed under
subsection (a) for a taxable year with respect to the
qualified tuition and related expenses of an individual
unless the taxpayer elects to have this section apply
with respect to such individual for such year.
``(2) Coordination with exclusions.--An election
under this subsection shall not take effect with
respect to an individual for any taxable year if any
portion of any distribution during such taxable year
from an education individual retirement account is
excluded from gross income under section 530(d)(2).
``(f) Definitions.--For purposes of this section--
``(1) Qualified tuition and related expenses.--
``(A) In general.--The term `qualified
tuition and related expenses' means tuition and
fees required for the enrollment or attendance
of--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any dependent of the
taxpayer with respect to whom the
taxpayer is allowed a deduction under
section 151,
at an eligible educational institution for
courses of instruction of such individual at
such institution.
``(B) Exception for education involving
sports, etc.--Such term does not include
expenses with respect to any course or other
education involving sports, games, or hobbies,
unless such course or other education is part
of the individual's degree program.
``(C) Exception for nonacademic fees.--Such
term does not include student activity fees,
athletic fees, insurance expenses, or other
expenses unrelated to an individual's academic
course of instruction.
``(2) Eligible educational institution.--The term
`eligible educational institution' means an
institution--
``(A) which is described in section 481 of
the Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on the date of the
enactment of this section, and
``(B) which is eligible to participate in a
program under title IV of such Act.
``(g) Special Rules.--
``(1) Identification requirement.--No credit shall
be allowed under subsection (a) to a taxpayer with
respect to the qualified tuition and related expenses
of an individual unless the taxpayer includes the name
and taxpayer identification number of such individual
on the return of tax for the taxable year.
``(2) Adjustment for certain scholarships, etc.--
The amount of qualified tuition and related expenses
otherwise taken into account under subsection (a) with
respect to an individual for an academic period shall
be reduced (before the application of subsections (b),
(c), and (d)) by the sum of any amounts paid for the
benefit of such individual which are allocable to such
period as--
``(A) a qualified scholarship which is
excludable from gross income under section 117,
``(B) an educational assistance allowance
under chapter 30, 31, 32, 34, or 35 of title
38, United States Code, or under chapter 1606
of title 10, United States Code, and
``(C) a payment (other than a gift,
bequest, devise, or inheritance within the
meaning of section 102(a)) for such
individual's educational expenses, or
attributable to such individual's enrollment at
an eligible educational institution, which is
excludable from gross income under any law of
the United States.
``(3) Treatment of expenses paid by dependent.--If
a deduction under section 151 with respect to an
individual is allowed to another taxpayer for a taxable
year beginning in the calendar year in which such
individual's taxable year begins--
``(A) no credit shall be allowed under
subsection (a) to such individual for such
individual's taxable year, and
``(B) qualified tuition and related
expenses paid by such individual during such
individual's taxable year shall be treated for
purposes of this section as paid by such other
taxpayer.
``(4) Treatment of certain prepayments.--If
qualified tuition and related expenses are paid by the
taxpayer during a taxable year for an academic period
which begins during the first 3 months following such
taxable year, such academic period shall be treated for
purposes of this section as beginning during such
taxable year.
``(5) Denial of double benefit.--No credit shall be
allowed under this section for any expense for which a
deduction is allowed under any other provision of this
chapter.
``(6) No credit for married individuals filing
separate returns.--If the taxpayer is a married
individual (within the meaning of section 7703), this
section shall apply only if the taxpayer and the
taxpayer's spouse file a joint return for the taxable
year.
``(7) Nonresident aliens.--If the taxpayer is a
nonresident alien individual for any portion of the
taxable year, this section shall apply only if such
individual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
``(h) Inflation Adjustments.--
``(1) Dollar limitation on amount of credit.--
``(A) In general.--In the case of a taxable
year beginning after 2001, each of the $1,000
amounts under subsection (b)(1) shall be
increased by an amount equal to--
``(i) such dollar amount,
multiplied by
``(ii) the cost-of-living
adjustment determined under section
1(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `calendar year 2000' for
`calendar year 1992' in subparagraph
(B) thereof.
``(B) Rounding.--If any amount as adjusted
under subparagraph (A) is not a multiple of
$1,000 such amount shall be rounded to the next
lowest multiple of $1,000.
``(2) Income limits.--
``(A) In general.--In the case of a taxable
year beginning after 2001, the $40,000 and
$80,000 amounts in subsection (d)(2) shall each
be increased by an amount equal to--
``(i) such dollar amount,
multiplied by
``(ii) the cost-of-living
adjustment determined under section
1(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `calendar year 2000' for
`calendar year 1992' in subparagraph
(B) thereof.
``(B) Rounding.--If any amount as adjusted
under subparagraph (A) is not a multiple of
$1,000, such amount shall be rounded to the
next lowest multiple of $1,000.
``(i) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry out
this section, including regulations providing for a recapture
of the credit allowed under this section in cases where there
is a refund in a subsequent taxable year of any amount which
was taken into account in determining the amount of such
credit.''.
(b) Extension of Procedures Applicable to Mathematical or
Clerical Errors.--Paragraph (2) of section 6213(g) (relating to
the definition of mathematical or clerical errors), as amended
by section 101, is amended by striking ``and'' at the end of
subparagraph (H), by striking the period at the end of
subparagraph (I) and inserting ``, and'', and by inserting
after subparagraph (I) the following new subparagraph:
``(J) an omission of a correct TIN required
under section 25A(g)(1) (relating to higher
education tuition and related expenses) to be
included on a return.''.
(c) Returns Relating to Tuition and Related Expenses.--
(1) In general.--Subpart B of part III of
subchapter A of chapter 61 (relating to information
concerning transactions with other persons) is amended
by inserting after section 6050R the following new
section:
``SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION AND RELATED
EXPENSES.
``(a) In General.--Any person--
``(1) which is an eligible educational institution
which receives payments for qualified tuition and
related expenses with respect to any individual for any
calendar year, or
``(2) which is engaged in a trade or business and
which, in the course of such trade or business, makes
payments during any calendar year to any individual
which constitute reimbursements or refunds (or similar
amounts) of qualified tuition and related expenses of
such individual,
shall make the return described in subsection (b) with respect
to the individual at such time as the Secretary may by
regulations prescribe.
``(b) Form and Manner of Returns.--A return is described in
this subsection if such return--
``(1) is in such form as the Secretary may
prescribe,
``(2) contains--
``(A) the name, address, and TIN of the
individual with respect to whom payments
described in subsection (a) were received from
(or were paid to),
``(B) the name, address, and TIN of any
individual certified by the individual
described in subparagraph (A) as the taxpayer
who will claim the individual as a dependent
for purposes of the deduction allowable under
section 151 for any taxable year ending with or
within the calendar year, and
``(C) the--
``(i) aggregate amount of payments
for qualified tuition and related
expenses received with respect to the
individual described in subparagraph
(A) during the calendar year, and
``(ii) aggregate amount of
reimbursements or refunds (or similar
amounts) paid to such individual during
the calendar year, and
``(D) such other information as the
Secretary may prescribe.
``(c) Application to Governmental Units.--For purposes of
this section--
``(1) a governmental unit or any agency or
instrumentality thereof shall be treated as a person,
and
``(2) any return required under subsection (a) by
such governmental entity shall be made by the officer
or employee appropriately designated for the purpose of
making such return.
``(d) Statements To Be Furnished to Individuals With
Respect to Whom Information Is Required.--Every person required
to make a return under subsection (a) shall furnish to each
individual whose name is required to be set forth in such
return under subparagraph (A) or (B) of subsection (b)(2) a
written statement showing--
``(1) the name, address, and phone number of the
information contact of the person required to make such
return, and
``(2) the aggregate amounts described in
subparagraph (C) of subsection (b)(2).
The written statement required under the preceding sentence
shall be furnished on or before January 31 of the year
following the calendar year for which the return under
subsection (a) was required to be made.
``(e) Definitions.--For purposes of this section, the terms
`eligible educational institution' and `qualified tuition and
related expenses' have the meanings given such terms by section
25A.
``(f) Returns Which Would Be Required To Be Made by 2 or
More Persons.--Except to the extent provided in regulations
prescribed by the Secretary, in the case of any amount received
by any person on behalf of another person, only the person
first receiving such amount shall be required to make the
return under subsection (a).
``(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions of
this section. No penalties shall be imposed under part II of
subchapter B of chapter 68 with respect to any return or
statement required under this section until such time as such
regulations are issued.''.
(2) Assessable penalties.--
(A) Subparagraph (B) of section 6724(d)(1)
(relating to definitions) is amended by
redesignating clauses (ix) through (xiv) as
clauses (x) through (xv), respectively, and by
inserting after clause (viii) the following new
clause:
``(ix) section 6050S (relating to
returns relating to payments for
qualified tuition and related
expenses),''.
(B) Paragraph (2) of section 6724(d) is
amended by striking ``or'' at the end of the
next to last subparagraph, by striking the
period at the end of the last subparagraph and
inserting ``, or'', and by adding at the end
the following new subparagraph:
``(Z) section 6050S(d) (relating to returns
relating to qualified tuition and related
expenses).''.
(3) Clerical amendment.--The table of sections for
subpart B of part III of subchapter A of chapter 61 is
amended by inserting after the item relating to section
6050R the following new item:
``Sec. 6050S. Returns relating to higher education tuition and
related expenses.''.
(d) Coordination With Section 135.--Subsection (d) of
section 135 is amended by redesignating paragraphs (2) and (3)
as paragraphs (3) and (4), respectively, and by inserting after
paragraph (1) the following new paragraph:
``(2) Coordination with higher education credit.--
The amount of the qualified higher education expenses
otherwise taken into account under subsection (a) with
respect to the education of an individual shall be
reduced (before the application of subsection (b)) by
the amount of such expenses which are taken into
account in determining the credit allowable to the
taxpayer or any other person under section 25A with
respect to such expenses.''.
(e) Clerical Amendment.--The table of sections for subpart
A of part IV of subchapter A of chapter 1 is amended by
inserting after the item relating to section 25 the following
new item:
``Sec. 25A. Higher education tuition and related expenses.''.
(f) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to expenses paid after December 31,
1997 (in taxable years ending after such date), for
education furnished in academic periods beginning after
such date.
(2) Lifetime learning credit.--Section 25A(a)(2) of
the Internal Revenue Code of 1986 shall apply to
expenses paid after June 30, 1998 (in taxable years
ending after such date), for education furnished in
academic periods beginning after such dates.
SEC. 202. DEDUCTION FOR INTEREST ON EDUCATION LOANS.
(a) In General.--Part VII of subchapter B of chapter 1
(relating to additional itemized deductions for individuals) is
amended by redesignating section 221 as section 222 and by
inserting after section 220 the following new section:
``SEC. 221. INTEREST ON EDUCATION LOANS.
``(a) Allowance of Deduction.--In the case of an
individual, there shall be allowed as a deduction for the
taxable year an amount equal to the interest paid by the
taxpayer during the taxable year on any qualified education
loan.
``(b) Maximum Deduction.--
``(1) In general.--Except as provided in paragraph
(2), the deduction allowed by subsection (a) for the
taxable year shall not exceed the amount determined in
accordance with the following table:
``In the case of taxable The dollar
years beginning in: amount is:
1998.......................................... $1,000
1999.......................................... $1,500
2000.......................................... $2,000
2001 or thereafter............................ $2,500.
``(2) Limitation based on modified adjusted gross
income.--
``(A) In general.--The amount which would
(but for this paragraph) be allowable as a
deduction under this section shall be reduced
(but not below zero) by the amount determined
under subparagraph (B).
``(B) Amount of reduction.--The amount
determined under this subparagraph is the
amount which bears the same ratio to the amount
which would be so taken into account as--
``(i) the excess of--
``(I) the taxpayer's
modified adjusted gross income
for such taxable year, over
``(II) $40,000 ($60,000 in
the case of a joint return),
bears to
``(ii) $15,000.
``(C) Modified adjusted gross income.--The
term `modified adjusted gross income' means
adjusted gross income determined--
``(i) without regard to this
section and sections 135, 137, 911,
931, and 933, and
``(ii) after application of
sections 86, 219, and 469.
For purposes of sections 86, 135, 137, 219, and
469, adjusted gross income shall be determined
without regard to the deduction allowed under
this section.
``(c) Dependents Not Eligible for Deduction.--No deduction
shall be allowed by this section to an individual for the
taxable year if a deduction under section 151 with respect to
such individual is allowed to another taxpayer for the taxable
year beginning in the calendar year in which such individual's
taxable year begins.
``(d) Limit on Period Deduction Allowed.--A deduction shall
be allowed under this section only with respect to interest
paid on any qualified education loan during the first 60 months
(whether or not consecutive) in which interest payments are
required. For purposes of this paragraph, any loan and all
refinancings of such loan shall be treated as 1 loan.
``(e) Definitions.--For purposes of this section--
``(1) Qualified education loan.--The term
`qualified education loan' means any indebtedness
incurred to pay qualified higher education expenses--
``(A) which are incurred on behalf of the
taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer as of the time the
indebtedness was incurred,
``(B) which are paid or incurred within a
reasonable period of time before or after the
indebtedness is incurred, and
``(C) which are attributable to education
furnished during a period during which the
recipient was an eligible student.
Such term includes indebtedness used to refinance
indebtedness which qualifies as a qualified education
loan. The term `qualified education loan' shall not
include any indebtedness owed to a person who is
related (within the meaning of section 267(b) or
707(b)(1)) to the taxpayer.
``(2) Qualified higher education expenses.--The
term `qualified higher education expenses' means the
cost of attendance (as defined in section 472 of the
Higher Education Act of 1965, 20 U.S.C. 1087ll, as in
effect on the day before the date of the enactment of
this Act) at an eligible educational institution,
reduced by the sum of--
``(A) the amount excluded from gross income
under section 127, 135, or 530 by reason of
such expenses, and
``(B) the amount of any scholarship,
allowance, or payment described in section
25A(g)(2).
For purposes of the preceding sentence, the term
`eligible educational institution' has the same meaning
given such term by section 25A(f)(2), except that such
term shall also include an institution conducting an
internship or residency program leading to a degree or
certificate awarded by an institution of higher
education, a hospital, or a health care facility which
offers postgraduate training.
``(3) Eligible student.--The term `eligible
student' has the meaning given such term by section
25A(b)(3).
``(4) Dependent.--The term `dependent' has the
meaning given such term by section 152.
``(f) Special Rules.--
``(1) Denial of double benefit.--No deduction shall
be allowed under this section for anyamount for which a
deduction is allowable under any other provision of this chapter.
``(2) Married couples must file joint return.--If
the taxpayer is married at the close of the taxable
year, the deduction shall be allowed under subsection
(a) only if the taxpayer and the taxpayer's spouse file
a joint return for the taxable year.
``(3) Marital status.--Marital status shall be
determined in accordance with section 7703.
``(g) Inflation Adjustments.--
``(1) In general.--In the case of a taxable year
beginning after 2002, the $40,000 and $60,000 amounts
in subsection (b)(2) shall each be increased by an
amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2001'
for `calendar year 1992' in subparagraph (B)
thereof.
``(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $5,000, such amount
shall be rounded to the next lowest multiple of
$5,000.''.
(b) Deduction Allowed Whether or Not Taxpayer Itemizes
Other Deductions.--Subsection (a) of section 62 is amended by
inserting after paragraph (16) the following new paragraph:
``(17) Interest on education loans.--The deduction
allowed by section 221.''.
(c) Reporting Requirement.--
(1) In general.--Section 6050S(a)(2) (relating to
returns relating to higher education tuition and
related expenses) is amended to read as follows:
``(2) which is engaged in a trade or business and
which, in the course of such trade or business--
``(A) makes payments during any calendar
year to any individual which constitutes
reimbursements or refunds (or similar amounts)
of qualified tuition and related expenses of
such individual, or
``(B) except as provided in regulations,
receives from any individual interest
aggregating $600 or more for any calendar year
on 1 or more qualified education loans,''.
(2) Information.--Section 6050S(b)(2) is amended--
(A) by inserting ``or interest'' after
``payments'' in subparagraph (A), and
(B) in subparagraph (C), by striking
``and'' at the end of clause (i), by inserting
``and'' at the end of clause (ii), and by
inserting after clause (ii) the following:
``(iii) aggregate amount of
interest received for the calendar year
from such individual,''.
(3) Definition.--Section 6050S(e) is amended by
inserting ``, and except as provided in regulations,
the term `qualified education loan' has the meaning
given such term by section 221(e)(1)'' after ``section
25A''.
(d) Clerical Amendment.--The table of sections for part VII
of subchapter B of chapter 1 is amended by striking the last
item and inserting the following new items:
``Sec. 221. Interest on education loans.
``Sec. 222. Cross reference.''.
(e) Effective Date.--The amendments made by this section
shall apply to any qualified education loan (as defined in
section 221(e)(1) of the Internal Revenue Code of 1986, as
added by this section) incurred on, before, or after the date
of the enactment of this Act, but only with respect to--
(1) any loan interest payment due and paid after
December 31, 1997, and
(2) the portion of the 60-month period referred to
in section 221(d) of the Internal Revenue Code of 1986
(as added by this section) after December 31, 1997.
SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT PLANS FOR
HIGHER EDUCATION EXPENSES.
(a) In General.--Paragraph (2) of section 72(t) (relating
to exceptions to 10-percent additional tax on early
distributions from qualified retirement plans) is amended by
adding at the end the following new subparagraph:
``(E) Distributions from individual
retirement plans for higher education
expenses.--Distributions to an individual from
an individual retirement plan to the extent
such distributions do not exceed the qualified
higher education expenses (as defined in
paragraph (7)) of the taxpayer for the taxable
year. Distributions shall not be taken into
account under the preceding sentence if such
distributions are described in subparagraph
(A), (C), or (D) or to the extent paragraph (1)
does not apply to such distributions by reason
of subparagraph (B).''.
(b) Definition.--Section 72(t) is amended by adding at the
end the following new paragraph:
``(7) Qualified higher education expenses.--For
purposes of paragraph (2)(E)--
``(A) In general.--The term `qualified
higher education expenses' means qualified
higher education expenses (as defined in
section 529(e)(3)) for education furnished to--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any child (as defined in
section 151(c)(3)) or grandchild of the
taxpayer or the taxpayer's spouse,
at an eligible educational institution (as
defined in section 529(e)(5)).
``(B) Coordination with other benefits.--
The amount of qualified higher education
expenses for any taxable year shall be reduced
as provided in section 25A(g)(2).''.
(c) Effective Date.--The amendments made by this section
shall apply to distributions after December 31, 1997, with
respect to expenses paid after such date (intaxable years
ending after such date), for education furnished in academic periods
beginning after such date.
Subtitle B--Expanded Education Investment Savings Opportunities
PART I--QUALIFIED TUITION PROGRAMS
SEC. 211. MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS.
(a) Qualified Higher Education Expenses To Include Room and
Board.--Paragraph (3) of section 529(e) (defining qualified
higher education expenses) is amended to read as follows:
``(3) Qualified higher education expenses.--
``(A) In general.--The term `qualified
higher education expenses' means tuition, fees,
books, supplies, and equipment required for the
enrollment or attendance of a designated
beneficiary at an eligible educational
institution.
``(B) Room and board included for students
under guaranteed plans who are at least half-
time.--
``(i) In general.--In the case of
an individual who is an eligible
student (as defined in section
25A(b)(3)) for any academic period,
such term shall also include reasonable
costs for such period (as determined
under the qualified State tuition
program) incurred by the designated
beneficiary for room and board while
attending such institution. For
purposes of subsection (b)(7), a
designated beneficiary shall be treated
as meeting the requirements of this
clause.
``(ii) Limitation.--The amount
treated as qualified higher education
expenses by reason of the preceding
sentence shall not exceed the minimum
amount (applicable to the student)
included for room and board for such
period in the cost of attendance (as
defined in section 472 of the Higher
Education Act of 1965, 20 U.S.C.
1087ll, as in effect on the date of the
enactment of this paragraph) for the
eligible educational institution for
such period.''
(b) Additional Modifications.--
(1) Member of family.--Paragraph (2) of section
529(e) (relating to other definitions and special
rules) is amended to read as follows:
``(2) Member of family.--The term `member of the
family' means--
``(A) an individual who bears a
relationship to another individual which is a
relationship described in paragraphs (1)
through (8) of section 152(a), and
``(B) the spouse of any individual
described in subparagraph (A).''.
(2) Eligible educational institution.--Section
529(e) is amended by adding at the end the following:
``(5) Eligible educational institution.--The term
`eligible educational institution' means an
institution--
``(A) which is described in section 481 of
the Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on the date of the
enactment of this paragraph, and
``(B) which is eligible to participate in a
program under title IV of such Act.''.
(3) Estate and gift tax treatment.--
(A) Gift tax treatment.--
(i) Paragraph (2) of section 529(c)
is amended to read as follows:
``(2) Gift tax treatment of contributions.--For
purposes of chapters 12 and 13--
``(A) In general.--Any contribution to a
qualified tuition program on behalf of any
designated beneficiary--
``(i) shall be treated as a
completed gift to such beneficiary
which is not a future interest in
property, and
``(ii) shall not be treated as a
qualified transfer under section
2503(e).
``(B) Treatment of excess contributions.--
If the aggregate amount of contributions
described in subparagraph (A) during the
calendar year by a donor exceeds the limitation
for such year under section 2503(b), such
aggregate amount shall, at the election of the
donor, be taken into account for purposes of
such section ratably over the 5-year period
beginning with such calendar year.''
(ii) Paragraph (5) of section
529(c) is amended to read as follows:
``(5) Other gift tax rules.--For purposes of
chapters 12 and 13--
``(A) Treatment of distributions.--Except
as provided in subparagraph (B), in no event
shall a distribution from a qualified tuition
program be treated as a taxable gift.
``(B) Treatment of designation of new
beneficiary.--The taxes imposed by chapters 12
and 13 shall apply to a transfer by reason of a
change in the designated beneficiary under the
program (or a rollover to the account of a new
beneficiary) only if the new beneficiary is a
generation below the generation of the old
beneficiary (determined in accordance with
section 2651).''.
(B) Estate tax treatment.--Paragraph (4) of
section 529(c) is amended to read as follows:
``(4) Estate tax treatment.--
``(A) In general.--No amount shall be
includible in the gross estate of any
individual for purposes of chapter 11 by reason
of an interest in a qualified tuition program.
``(B) Amounts includible in estate of
designated beneficiary in certain cases.--
Subparagraph (A) shall not apply to amounts
distributed on account of the death of a
beneficiary.
``(C) Amounts includible in estate of donor
making excess contributions.--In the case of a
donor who makes the election described in
paragraph (2)(B) and who dies before the close
of the 5-year period referred to in such
paragraph, notwithstanding subparagraph (A),
the gross estate of the donor shall include the
portion of such contributions properly
allocable to periods after the date of death of
the donor.''
(4) Prohibition against investment direction.--
Section 529(b)(5) is amended by inserting ``directly or
indirectly'' after ``may not''.
(c) Coordination With Education Savings Bond.--Section
135(c)(2) (defining qualified higher education expenses) is
amended by adding at the end the following:
``(C) Contributions to qualified state
tuition program.--Such term shall include any
contribution to a qualified State tuition
program (as defined in section 529) on behalf
of a designated beneficiary (as defined in such
section) who is an individual described in
subparagraph (A); but there shall be no
increase in the investment in the contract for
purposes of applying section 529(c)(3)(A) by
reason of any portion of such contributionwhich
is not includible in gross income by reason of this subparagraph.''.
(d) Clarification of Taxation of Distributions.--
Subparagraph (A) of section 529(c)(3) is amended by striking
``section 72'' and inserting ``section 72(b)''.
(e) Technical Amendments.--
(1)(A) The heading for part VIII of subchapter F of
chapter 1 is amended to read as follows:
``PART VIII--HIGHER EDUCATION SAVINGS ENTITIES''.
(B) The table of parts for subchapter F of chapter
1 is amended by striking the item relating to part VIII
and inserting:
``Part VIII. Higher education savings entities.''.
(2)(A) Section 529(d) is amended to read as
follows:
``(d) Reports.--Each officer or employee having control of
the qualified State tuition program or their designee shall
make such reports regarding such program to the Secretary and
to designated beneficiaries with respect to contributions,
distributions, and such other matters as the Secretary may
require. The reports required by this subsection shall be filed
at such time and in such manner and furnished to such
individuals at such time and in such manner as may be required
by the Secretary.''.
(B) Paragraph (2) of section 6693(a) (relating to
failure to provide reports on individual retirement
accounts or annuities) is amended by striking ``and''
at the end of subparagraph (A), by striking the period
at the end of subparagraph (B) and inserting ``, and'',
and by adding at the end the following new
subparagraph:
``(C) Section 529(d) (relating to qualified
State tuition programs).''.
(C) The section heading for section 6693 is amended
by striking ``INDIVIDUAL RETIREMENT'' and inserting
``CERTAIN TAX-FAVORED''.
(D) The item relating to section 6693 in the table
of sections for part I of subchapter B of chapter 68 is
amended by striking ``individual retirement'' and
inserting ``certain tax-favored''.
(f) Effective Dates.--
(1) In general.--Except as otherwise provided in
this subsection, the amendments made by this section
shall take effect on January 1, 1998.
(2) Expenses to include room and board.--The
amendment made by subsection (a) shall take effect as
if included in the amendments made by section 1806 of
the Small Business Job Protection Act of 1996.
(3) Eligible educational institution.--The
amendment made by subsection (b)(2) shall apply to
distributions after December 31, 1997, with respect to
expenses paid after such date (in taxable years ending
after such date), for education furnished in academic
periods beginning after such date.
(4) Coordination with education savings bonds.--The
amendment made by subsection (c) shall apply to taxable
years beginning after December 31, 1997.
(5) Estate and gift tax changes.--
(A) Gift tax changes.--Paragraphs (2) and
(5) of section 529(c) of the Internal Revenue
Code of 1986, as amended by this section, shall
apply to transfers (including designations of
new beneficiaries) made after the date of the
enactment of this Act.
(B) Estate tax changes.--Paragraph (4) of
such section 529(c) shall apply to estates of
decedents dying after June 8, 1997.
(6) Transition rule for pre-august 20, 1996
contracts.--In the case of any contract issued prior to
August 20, 1996, section 529(c)(3)(C) of the Internal
Revenue Code of 1986 shall be applied for taxable years
ending after August 20, 1996, without regard to the
requirement that a distribution be transferred to a
member of the family or the requirement that a change
in beneficiaries may be made only to a member of the
family.
PART II--EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS
SEC. 213. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.
(a) In General.--Part VIII of subchapter F of chapter 1
(relating to qualified State tuition programs) is amended by
adding at the end the following new section:
``SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.
``(a) General Rule.--An education individual retirement
account shall be exempt from taxation under this subtitle.
Notwithstanding the preceding sentence, the education
individual retirement account shall be subject to the taxes
imposed by section 511 (relating to imposition of tax on
unrelated business income of charitable organizations).
``(b) Definitions and Special Rules.--For purposes of this
section--
``(1) Education individual retirement account.--The
term `education individual retirement account' means a
trust created or organized in the United States
exclusively for the purpose of paying the qualified
higher education expenses of the designated beneficiary
of the trust (and designated as an education individual
retirement account at the time created or organized),
but only if the written governing instrument creating
the trust meets the following requirements:
``(A) No contribution will be accepted--
``(i) unless it is in cash,
``(ii) after the date on which such
beneficiary attains age 18, or
``(iii) except in the case of
rollover contributions, if such
contribution would result in aggregate
contributions for the taxable year
exceeding $500.
``(B) The trustee is a bank (as defined in
section 408(n)) or another person who
demonstrates to the satisfaction of the
Secretary that the manner in which that person
will administer the trust will be consistent
with the requirements of this section or who
has so demonstrated with respect to any
individual retirement plan.
``(C) No part of the trust assets will be
invested in life insurance contracts.
``(D) The assets of the trust shall not be
commingled with other property except in a
common trust fund or common investment fund.
``(E) Upon the death of the designated
beneficiary, any balance to the credit of the
beneficiary shall be distributed within 30 days
after the date of death to the estate of such
beneficiary.
``(2) Qualified higher education expenses.--
``(A) In general.--The term `qualified
higher education expenses' has the meaning
given such term by section 529(e)(3), reduced
as provided in section 25A(g)(2).
``(B) Qualified state tuition programs.--
Such term shall include amounts paid or
incurred to purchase tuition credits or
certificates, or to make contributions to an
account, under a qualified State tuition
program (as defined in section 529(b)) for the
benefit of the beneficiary of the account.
``(3) Eligible educational institution.--The term
`eligible educational institution' has the meaning
given such term by section 529(e)(5).
``(c) Reduction in Permitted Contributions Based on
Adjusted Gross Income.--
``(1) In general.--The maximum amount which a
contributor could otherwise make to an account under
this section shall be reduced by an amount which bears
the same ratio to such maximum amount as--
``(A) the excess of--
``(i) the contributor's modified
adjusted gross income for such taxable
year, over
``(ii) $95,000 ($150,000 in the
case of a joint return), bears to
``(B) $15,000 ($10,000 in the case of a
joint return).
``(2) Modified adjusted gross income.--For purposes
of paragraph (1), the term `modified adjusted gross
income' means the adjusted gross income of the taxpayer
for the taxable year increased by any amount excluded
from gross income under section 911, 931, or 933.
``(d) Tax Treatment of Distributions.--
``(1) In general.--Any distribution shall be
includible in the gross income of the distributee in
the manner as provided in section 72(b).
``(2) Distributions for qualified higher education
expenses.--
``(A) In general.--No amount shall be
includible in gross income under paragraph (1)
if the qualified higher education expenses of
the designated beneficiary during the taxable
year are not less than the aggregate
distributions during the taxable year.
``(B) Distributions in excess of
expenses.--If such aggregate distributions
exceed such expenses during the taxable year,
the amount otherwise includible in gross income
under paragraph (1) shall be reduced by the
amount which bears the same ratio to the amount
which would be includible in gross income under
paragraph (1) (without regard to this
subparagraph) as the qualified higher education
expenses bear to such aggregate distributions.
``(C) Election to waive exclusion.--A
taxpayer may elect to waive the application of
this paragraph for any taxable year.
``(3) Special rules for applying estate and gift
taxes with respect to account.--Rules similar to the
rules of paragraphs (2), (4), and (5) of section 529(c)
shall apply for purposes of this section.
``(4) Additional tax for distributions not used for
educational expenses.--
``(A) In general.--The tax imposed by this
chapter for any taxable year on any taxpayer
who receives a payment or distribution from an
education individual retirement account which
is includible in gross income shall be
increased by 10 percent of the amount which is
so includible.
``(B) Exceptions.--Subparagraph (A) shall
not apply if the payment or distribution is--
``(i) made to a beneficiary (or to
the estate of the designated
beneficiary) on or after the death of
the designated beneficiary,
``(ii) attributable to the
designated beneficiary's being disabled
(within the meaning of section
72(m)(7)), or
``(iii) made on account of a
scholarship, allowance, or payment
described in section 25A(g)(2) received
by the account holder to the extent the
amount of the payment or distribution
does not exceed the amount of the
scholarship, allowance, or payment.
``(C) Excess contributions returned before
due date of return.--Subparagraph (A) shall not
apply to the distribution of any contribution
made during a taxable year on behalf of a
designated beneficiary to the extent that such
contribution exceeds $500 if--
``(i) such distribution is received
on or before the day prescribed by law
(including extensions of time) for
filing such contributor's return for
such taxable year, and
``(ii) such distribution is
accompanied by the amount of net income
attributable to such excess
contribution.
Any net income described in clause (ii) shall
be included in gross income for the taxable
year in which such excess contribution was
made.
``(5) Rollover contributions.--Paragraph (1) shall
not apply to any amount paid or distributed from an
education individual retirement account to the extent
that the amount received is paid into another education
individual retirement account for the benefit of the
same beneficiary or a member of the family (within the
meaning of section 529(e)(2)) of such beneficiary not
later than the 60th day after the date of such payment
or distribution. The preceding sentence shall not apply
to any payment or distribution if it applied to any
prior payment or distribution during the 12-month
period ending on the date of the payment or
distribution.
``(6) Change in beneficiary.--Any change in the
beneficiary of an education individual retirement
account shall not be treated as a distribution for
purposes of paragraph (1) if the new beneficiary is a
member of the family (as so defined) of the old
beneficiary.
``(7) Special rules for death and divorce.--Rules
similar to the rules of paragraphs (7) and (8) of
section 220(f) shall apply.
``(e) Tax Treatment of Accounts.--Rules similar to the
rules of paragraphs (2) and (4) of section 408(e) shall apply
to any education individual retirement account.
``(f) Community Property Laws.--This section shall be
applied without regard to any community property laws.
``(g) Custodial Accounts.--For purposes of this section, a
custodial account shall be treated as a trust if the assets of
such account are held by a bank (as defined in section 408(n))
or another person who demonstrates, to the satisfaction of the
Secretary, that the manner in which he will administer the
account will be consistent with the requirements of this
section, and if the custodial account would, except for the
fact that it is not a trust, constitute an account described in
subsection (b)(1). For purposes of this title, in the case of a
custodial account treated as a trust by reason of the preceding
sentence, the custodian of such account shall be treated as the
trustee thereof.
``(h) Reports.--The trustee of an education individual
retirement account shall make such reports regarding such
account to the Secretary and to the beneficiary of the account
with respect to contributions, distributions, and such other
matters as the Secretary may require. The reports required by
this subsection shall be filed at such time and in such manner
and furnished to such individuals at such time and in such
manner as may be required.''.
(b) Tax on Prohibited Transactions.--
(1) In general.--Paragraph (1) of section 4975(e)
(relating to prohibited transactions) is amended by
striking ``or'' at the end of subparagraph (D), by
redesignating subparagraph (E) as subparagraph (F), and
by inserting after subparagraph (D) the following new
subparagraph:
``(E) an education individual retirement
account described in section 530, or''.
(2) Special rule.--Subsection (c) of section 4975
is amended by adding at the end of subsection (c) the
following new paragraph:
``(5) Special rule for education individual
retirement accounts.--An individual for whose benefit
an education individual retirement account is
established and any contributor to such account shall
be exempt from the tax imposed by this section with
respect to any transaction concerning such account
(which would otherwise be taxable under this section)
if section 530(d) applies with respect to such
transaction.''.
(c) Failure To Provide Reports on Education Individual
Retirement Accounts.--Paragraph (2) of section 6693(a)
(relating to failure to provide reports on individual
retirement accounts or annuities) is amended by striking
``and'' at the end of subparagraph (B), by striking the period
at the end of subparagraph (C) and inserting ``, and'', and by
adding at the end the following new subparagraph:
``(D) Section 530(h) (relating to education
individual retirement accounts).''.
(d) Tax on Excess Contributions.--
(1) In general.--Subsection (a) of section 4973 is
amended by striking ``or'' at the end of paragraph (2),
by adding ``or'' at the end of paragraph (3), and by
inserting after paragraph (3) the following new
paragraph:
``(4) an education individual retirement account
(as defined in section 530),''.
(2) Excess contributions defined.--Section 4973 is
amended by adding at the end the following new
subsection:
``(e) Excess Contributions to Education Individual
Retirement Accounts.--For purposes of this section--
``(1) In general.--In the case of education
individual retirement accounts maintained for the
benefit of any 1 beneficiary, the term `excess
contributions' means--
``(A) the amount by which the amount
contributed for the taxable year to such
accounts exceeds $500, and
``(B) any amount contributed to such
accounts for any taxable year if any amount is
contributed during such year to a qualified
State tuition program for the benefit of such
beneficiary.
``(2) Special rules.--For purposes of paragraph
(1), the following contributions shall not be taken
into account:
``(A) Any contribution which is distributed
out of the education individual retirement
account in a distribution to which section
530(d)(4)(C) applies.
``(B) Any contribution described in section
530(b)(2)(B) to a qualified State tuition
program.
``(C) Any rollover contribution.''.
(e) Technical Amendments.--
(1) Section 26(b)(2) is amended by redesignating
subparagraphs (E) through (P) as subparagraphs (F)
through (Q), respectively, and by inserting after
subparagraph (D) the following new subparagraph:
``(E) section 530(d)(3) (relating to
additional tax on certain distributions from
education individual retirement accounts),''.
(2) Subparagraph (C) of section 135(c)(2), as added
by the preceding section, is amended by inserting ``,
or to an education individual retirement account (as
defined in section 530) on behalf of an account
beneficiary,'' after ``(as defined in such section)''.
(3) The table of sections for part VIII of
subchapter F of chapter 1 is amended by adding at the
end the following new item:
``Sec. 530. Education individual retirement accounts.''.
(f) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
Subtitle C--Other Education Initiatives
SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL
ASSISTANCE.
(a) In General.--Subsection (d) of section 127 (relating to
educational assistance programs) is amended to read as follows:
``(d) Termination.--This section shall not apply to
expenses paid with respect to courses beginning after May 31,
2000.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1996.
SEC. 222. REPEAL OF LIMITATION ON QUALIFIED 501(C)(3) BONDS OTHER THAN
HOSPITAL BONDS.
Section 145(b) (relating to qualified 501(c)(3) bond) is
amended by adding at the end the following new paragraph:
``(5) Termination of limitation.--This subsection
shall not apply with respect to bonds issued after the
date of the enactment of this paragraph as part of an
issue 95 percent or more of the net proceeds of which
are to be used to finance capital expenditures incurred
after such date.''.
SEC. 223. INCREASE IN ARBITRAGE REBATE EXCEPTION FOR GOVERNMENTAL BONDS
USED TO FINANCE EDUCATION FACILITIES.
(a) In General.--Section 148(f)(4)(D) (relating to
exception for governmental units issuing $5,000,000 or less of
bonds) is amended by adding at the end the following new
clause:
``(vii) Increase in exception for
bonds financing public school capital
expenditures.--Each of the $5,000,000
amounts in the preceding provisions of
this subparagraph shall be increased by
the lesser of $5,000,000 or so much of
the aggregate face amount of the bonds
as are attributable to financing the
construction (within the meaning of
subparagraph (C)(iv)) of public school
facilities.''.
(b) Effective Date.--The amendments made by this section
shall apply to bonds issued after December 31, 1997.
SEC. 224. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT FOR
ELEMENTARY OR SECONDARY SCHOOL PURPOSES.
(a) Contributions of Computer Technology and Equipment for
Elementary or Secondary School Purposes.--Subsection (e) of
section 170 is amended by adding at the end the following new
paragraph:
``(6) Special rule for contributions of computer
technology and equipment for elementary or secondary
school purposes.--
``(A) Limit on reduction.--In the case of a
qualified elementary or secondary educational
contribution, the reduction under paragraph
(1)(A) shall be no greater than the amount
determined under paragraph (3)(B).
``(B) Qualified elementary or secondary
educational contribution.--For purposes of this
paragraph, the term `qualified elementary or
secondary educational contribution' means a
charitable contribution by a corporation of any
computer technology or equipment, but only if--
``(i) the contribution is to--
``(I) an educational
organization described in
subsection (b)(1)(A)(ii), or
``(II) an entity described
in section 501(c)(3) and exempt
from tax under section 501(a)
(other than an entity described
in subclause (I)) that is
organized primarily for
purposes of supporting
elementary and secondary
education,
``(ii) the contribution is made not
later than 2 years after the date the
taxpayer acquired the property (or in
the case of property constructed by the
taxpayer,the date the construction of
the property is substantially completed),
``(iii) the original use of the
property is by the donor or the donee,
``(iv) substantially all of the use
of the property by the donee is for use
within the United States for
educational purposes in any of the
grades K-12 that are related to the
purpose or function of the organization
or entity,
``(v) the property is not
transferred by the donee in exchange
for money, other property, or services,
except for shipping, installation and
transfer costs,
``(vi) the property will fit
productively into the entity's
education plan, and
``(vii) the entity's use and
disposition of the property will be in
accordance with the provisions of
clauses (iv) and (v).
``(C) Contribution to private foundation.--
A contribution by a corporation of any computer
technology or equipment to a private foundation
(as defined in section 509) shall be treated as
a qualified elementary or secondary educational
contribution for purposes of this paragraph
if--
``(i) the contribution to the
private foundation satisfies the
requirements of clauses (ii) and (v) of
subparagraph (B), and
``(ii) within 30 days after such
contribution, the private foundation--
``(I) contributes the
property to an entity described
in clause (i) of subparagraph
(B) that satisfies the
requirements of clauses (iv)
through (vii) of subparagraph
(B), and
``(II) notifies the donor
of such contribution.
``(D) Special rule relating to construction
of property.--For the purposes of this
paragraph, the rules of paragraph (4)(C) shall
apply.
``(E) Definitions.--For the purposes of
this paragraph--
``(i) Computer technology or
equipment.--The term `computer
technology or equipment' means computer
software (as defined by section
197(e)(3)(B)), computer or peripheral
equipment (as defined by section
168(i)(2)(B)), and fiber optic cable
related to computer use.
``(ii) Corporation.--The term
`corporation' has the meaning given to
such term by paragraph (4)(D).
``(F) Termination.--This paragraph shall
not apply to any contribution made during any
taxable year beginning after December 31,
1999.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 225. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.
(a) Certain Loans by Exempt Organizations.--
(1) In general.--Paragraph (2) of section 108(f)
(defining student loan) is amended by striking ``or''
at the end of subparagraph (B) and by striking
subparagraph (D) and inserting the following:
``(D) any educational organization
described in section 170(b)(1)(A)(ii) if such
loan is made--
``(i) pursuant to an agreement with
any entity described in subparagraph
(A), (B), or (C) under which the funds
from which the loan was made were
provided to such educational
organization, or
``(ii) pursuant to a program of
such educational organization which is
designed to encourage its students to
serve in occupations with unmet needs
or in areas with unmet needs and under
which the services provided by the
students (or former students) are for
or under the direction of a
governmental unit or an organization
described in section 501(c)(3) and
exempt from tax under section 501(a).
The term `student loan' includes any loan made by an
educational organization so described or by an
organization exempt from tax under section 501(a) to
refinance a loan meeting the requirements of the
preceding sentence.''.
(2) Exception for discharges on account of services
performed for certain lenders.--Subsection (f) of
section 108 is amended by adding at the end the
following new paragraph:
``(3) Exception for discharges on account of
services performed for certain lenders.--Paragraph (1)
shall not apply to the discharge of a loan made by an
organization described in paragraph (2)(D) (or by an
organization described in paragraph (2)(E) from funds
provided by an organization described in paragraph
(2)(D)) if the discharge is on account of services
performed for either such organization.''.
(b) Effective Date.--The amendments made by this section
shall apply to discharges of indebtedness after the date of the
enactment of this Act.
SEC. 226. INCENTIVES FOR EDUCATION ZONES.
(a) In General.--Subchapter U of chapter 1 (relating to
additional incentives for empowerment zones) is amended by
redesignating part IV as part V, by redesignating section 1397E
as section 1397F, and by inserting after part III the following
new part:
``PART IV--INCENTIVES FOR EDUCATION ZONES
``Sec. 1397E. Credit to holders of qualified zone academy
bonds.''
``SEC. 1397E. CREDIT TO HOLDERS OF QUALIFIED ZONE ACADEMY BONDS.
``(a) Allowance of Credit.--In the case of an eligible
taxpayer who holds a qualified zone academy bond on the credit
allowance date of such bond which occurs during the taxable
year, there shall be allowed as a credit against the tax
imposed by this chapter for such taxable year the amount
determined under subsection (b).
``(b) Amount of Credit.--
``(1) In general.--The amount of the credit
determined under this subsection with respect to any
qualified zone academy bond is the amount equal to the
product of--
``(A) the credit rate determined by the
Secretary under paragraph (2) for the month in
which such bond was issued, multiplied by
``(B) the face amount of the bond held by
the taxpayer on the credit allowance date.
``(2) Determination.--During each calendar month,
the Secretary shall determine a credit rate which shall
apply to bonds issued during the following calendar
month. The credit rate for any month is the percentage
which the Secretary estimates will permit the issuance
of qualified zone academy bonds without discount and
without interest cost to the issuer.
``(c) Limitation Based on Amount of Tax.--The credit
allowed under subsection (a) for any taxable year shall not
exceed the excess of--
``(1) the sum of the regular tax liability (as
defined in section 26(b)) plus the tax imposed by
section 55, over
``(2) the sum of the credits allowable under part
IV of subchapter A (other than subpart C thereof,
relating to refundable credits).
``(d) Qualified Zone Academy Bond.--For purposes of this
section--
``(1) In general.--The term `qualified zone academy
bond' means any bond issued as part of an issue if--
``(A) 95 percent or more of the proceeds of
such issue are to be used for a qualified
purpose with respect to a qualified zone
academy established by an eligible local
education agency,
``(B) the bond is issued by a State or
local government within the jurisdiction of
which such academy is located,
``(C) the issuer--
``(i) designates such bond for
purposes of this section,
``(ii) certifies that it has
written assurances that the private
business contribution requirement of
paragraph (2) will be met with respect
to such academy, and
``(iii) certifies that it has the
written approval of the eligible local
education agency for such bond
issuance, and
``(D) the term of each bond which is part
of such issue does not exceed the maximum term
permitted under paragraph (3).
``(2) Private business contribution requirement.--
``(A) In general.--For purposes of
paragraph (1), the private business
contribution requirement of this paragraph is
met with respect to any issue if the eligible
local education agency that established the
qualified zone academy has written commitments
from private entities to make qualified
contributions having a present value (as of the
date of issuance of the issue) of not less than
10 percent of the proceeds of the issue.
``(B) Qualified contributions.--For
purposes of subparagraph (A), the term
`qualified contribution' means any contribution
(of a type and quality acceptable to the
eligible local education agency) of--
``(i) equipment for use in the
qualified zone academy (including
state-of-the-art technology and
vocational equipment),
``(ii) technical assistance in
developing curriculum or in training
teachers in order to promote
appropriate market driven technology in
the classroom,
``(iii) services of employees as
volunteer mentors,
``(iv) internships, field trips, or
other educational opportunities outside
the academy for students, or
``(v) any other property or service
specified by the eligible local
education agency.
``(3) Term requirement.--During each calendar
month, the Secretary shall determine the maximum term
permitted under this paragraph for bonds issued during
the following calendar month. Such maximum term shall
be the term which the Secretary estimates will result
in the present value of the obligation to repay the
principal on the bond being equal to 50 percent of the
face amount of the bond. Such present value shall be
determined using as a discount rate the average annual
interest rate of tax-exempt obligations having a term
of 10 years or more which are issued during the month.
If the term as so determined is not a multiple of a
whole year, such term shall be rounded to the next
highest whole year.
``(4) Qualified zone academy.--
``(A) In general.--The term `qualified zone
academy' means any public school (or academic
program within a public school) which is
established by and operated under the
supervision of an eligible local education
agency to provide education or training below
the postsecondary level if--
``(i) such public school or program
(as the case may be) is designed in
cooperation with business to enhance
the academic curriculum, increase
graduation and employment rates, and
better prepare students for the rigors
of college and the increasingly complex
workforce,
``(ii) students in such public
school or program (as the case may be)
will be subject to the same academic
standards and assessments as other
students educated by the eligible local
education agency,
``(iii) the comprehensive education
plan of such public school or program
is approved by the eligible local
education agency, and
``(iv)(I) such public school is
located in an empowerment zone or
enterprise community (including any
such zone or community designated after
the date of the enactment of this
section), or
``(II) there is a reasonable
expectation (as of the date of issuance
of the bonds) that at least 35 percent
of the students attending such school
or participating in such program (as
the case may be) will be eligible for
free or reduced-cost lunches under the
school lunch program established under
the National School Lunch Act.
``(B) Eligible local education agency.--The
term `eligible local education agency' means
any local education agency as defined in
section 14101 of the Elementary and Secondary
Education Act of 1965.
``(5) Qualified purpose.--The term `qualified
purpose' means, with respect to any qualified zone
academy--
``(A) rehabilitating or repairing the
public school facility in which the academy is
established,
``(B) providing equipment for use at such
academy,
``(C) developing course materials for
education to be provided at such academy, and
``(D) training teachers and other school
personnel in such academy.
``(6) Eligible taxpayer.--The term `eligible
taxpayer' means--
``(A) a bank (within the meaning of section
581),
``(B) an insurance company to which
subchapter L applies, and
``(C) a corporation actively engaged in the
business of lending money.
``(e) Limitation on Amount of Bonds Designated.--
``(1) National limitation.--There is a national
zone academy bond limitation for each calendar year.
Such limitation is $400,000,000 for 1998 and 1999, and,
except as provided in paragraph (4), zero thereafter.
``(2) Allocation of limitation.--The national zone
academy bond limitation for a calendar year shall be
allocated by the Secretary among the States on the
basis of their respective populations of individuals
below the poverty line (as defined by the Office of
Management and Budget). The limitation amount allocated
to a State under the preceding sentence shall be
allocated by the State education agency to qualified
zone academies within such State.
``(3) Designation subject to limitation amount.--
The maximum aggregate face amount of bonds issued
during any calendar year which may be designated under
subsection (d)(1) with respect to any qualified zone
academy shall not exceed the limitation amount
allocated to such academy under paragraph (2) for such
calendar year.
``(4) Carryover of unused limitation.--If for any
calendar year--
``(A) the limitation amount for any State,
exceeds
``(B) the amount of bonds issued during
such year which are designated under subsection
(d)(1) with respect to qualified zone academies
within such State,
the limitation amount for such State for the following
calendar year shall be increased by the amount of such
excess.
``(f) Other Definitions.--For purposes of this section--
``(1) Credit allowance date.--The term `credit
allowance date' means, with respect to any issue, the
last day of the 1-year period beginning on the date of
issuance of such issue and the last day of each
successive 1-year period thereafter.
``(2) Bond.--The term `bond' includes any
obligation.
``(3) State.--The term `State' includes the
District of Columbia and any possession of the United
States.
``(g) Credit Included in Gross Income.--Gross income
includes the amount of the credit allowed to the taxpayer under
this section.''
(b) Conforming Amendments.--
(1) The table of parts for subchapter U of chapter
1 is amended by striking the last item and inserting
the following:
``Part IV. Incentives for education zones.
``Part V. Regulations.''
(2) The table of sections for part V, as so
redesignated, is amended to read as follows:
``Sec. 1397F. Regulations.''
(c) Effective Date.--The amendments made by this section
shall apply to obligations issued after December 31, 1997.
TITLE III--SAVINGS AND INVESTMENT INCENTIVES
Subtitle A--Retirement Savings
SEC. 301. RESTORATION OF IRA DEDUCTION FOR CERTAIN TAXPAYERS.
(a) Increase in Income Limits Applicable to Active
Participants.--
(1) In general.--Subparagraph (B) of section
219(g)(3) (relating to applicable dollar amount) is
amended to read as follows:
``(B) Applicable dollar amount.--The term
`applicable dollar amount' means the following:
``(i) In the case of a taxpayer
filing a joint return:
``For taxable years be- The applicable
ginning in: dollar amount is:
1998...................................................... $50,000
1999...................................................... $51,000
2000...................................................... $52,000
2001...................................................... $53,000
2002...................................................... $54,000
2003...................................................... $60,000
2004...................................................... $65,000
2005...................................................... $70,000
2006...................................................... $75,000
2007 and thereafter....................................... $80,000.
``(ii) In the case of any other
taxpayer (other than a married
individual filing a separate return):
``For taxable years be- The applicable
ginning in: dollar amount is:
1998...................................................... $30,000
1999...................................................... $31,000
2000...................................................... $32,000
2001...................................................... $33,000
2002...................................................... $34,000
2003...................................................... $40,000
2004...................................................... $45,000
2005 and thereafter....................................... $50,000.
``(iii) In the case of a married
individual filing a separate return,
zero.''.
(2) Increase in phase-out range for joint
returns.--Clause (ii) of section 219(g)(2)(A) is
amended by inserting ``($20,000 in the case of a joint
return for a taxable year beginning after December 31,
2006)''.
(b) Limitations for Active Participation Not Based on
Spouse's Participation.--Section 219(g) (relating to limitation
on deduction for active participants in certain pension plans)
is amended--
(1) by striking ``or the individual's spouse'' in
paragraph (1), and
(2) by adding at the end the following new
paragraph:
``(7) Special rule for certain spouses.--In the
case of an individual who is an active participant at
no time during any plan year ending with or within the
taxable year but whose spouse is an active participant
for any part of any such plan year--
``(A) the applicable dollar amount under
paragraph (3)(B)(i) with respect to the
taxpayer shall be $150,000, and
``(B) the amount applicable under paragraph
(2)(A)(ii) shall be $10,000.''
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 302. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE INDIVIDUAL RETIREMENT
ACCOUNTS.
(a) In General.--Subpart A of part I of subchapter D of
chapter 1 (relating to pension, profit-sharing, stock bonus
plans, etc.) is amended by inserting after section 408 the
following new section:
``SEC. 408A. ROTH IRAS.
``(a) General Rule.--Except as provided in this section, a
Roth IRA shall be treated for purposes of this title in the
same manner as an individual retirement plan.
``(b) Roth IRA.--For purposes of this title, the term `Roth
IRA' means an individual retirement plan (as defined in section
7701(a)(37)) which is designated (in such manner as the
Secretary may prescribe) at the time of establishment of the
plan as a Roth IRA. Such designation shall be made in such
manner as the Secretary may prescribe.
``(c) Treatment of Contributions.--
``(1) No deduction allowed.--No deduction shall be
allowed under section 219 for a contribution to a Roth
IRA.
``(2) Contribution limit.--The aggregate amount of
contributions for any taxable year to all Roth IRAs
maintained for the benefit of an individual shall not
exceed the excess (if any) of--
``(A) the maximum amount allowable as a
deduction under section 219 with respect to
such individual for such taxable year (computed
without regard to subsection (d)(1) or (g) of
such section), over
``(B) the aggregate amount of contributions
for such taxable year to all other individual
retirement plans (other than Roth IRAs)
maintained for the benefit of the individual.
``(3) Limits based on modified adjusted gross
income.--
``(A) Dollar limit.--The amount determined
under paragraph (2) for any taxable year shall
be reduced (but not below zero) by the amount
which bears the same ratio to such amount as--
``(i) the excess of--
``(I) the taxpayer's
adjusted gross income for such
taxable year, over
``(II) the applicable
dollar amount, bears to
``(ii) $15,000 ($10,000 in the case
of a joint return).
The rules of subparagraphs (B) and (C) of
section 219(g)(2) shall apply to any reduction
under this subparagraph.
``(B) Rollover from ira.--A taxpayer shall
not be allowed to make a qualified rollover
contribution to a Roth IRA from an individual
retirement plan other than a Roth IRA during
any taxable year if--
``(i) the taxpayer's adjusted gross
income for such taxable year exceeds
$100,000, or
``(ii) the taxpayer is a married
individual filing a separate return.
``(C) Definitions.--For purposes of this
paragraph--
``(i) adjusted gross income shall
be determined in the same manner as
under section 219(g)(3), except that
any amount included in gross income
under subsection (d)(3) shall not be
taken into account and the deduction
under section 219 shall be taken into
account, and
``(ii) the applicable dollar amount
is--
``(I) in the case of a
taxpayer filing a joint return,
$150,000,
``(II) in the case of any
other taxpayer (other than a
married individual filing a
separate return), $95,000, and
``(III) in the case of a
married individual filing a
separate return, zero.
``(D) Marital status.--Section 219(g)(4)
shall apply for purposes of this paragraph.
``(4) Contributions permitted after age 70\1/2\.--
Contributions to a Roth IRA may be made even after the
individual for whom the account is maintained has
attained age 70\1/2\.
``(5) Mandatory distribution rules not to apply
before death.--Notwithstanding subsections (a)(6) and
(b)(3) of section 408 (relating torequired
distributions), the following provisions shall not apply to any Roth
IRA:
``(A) Section 401(a)(9)(A).
``(B) The incidental death benefit
requirements of section 401(a).
``(6) Rollover contributions.--
``(A) In general.--No rollover contribution
may be made to a Roth IRA unless it is a
qualified rollover contribution.
``(B) Coordination with limit.--A qualified
rollover contribution shall not be taken into
account for purposes of paragraph (2).
``(7) Time when contributions made.--For purposes
of this section, the rule of section 219(f)(3) shall
apply.
``(d) Distribution Rules.--For purposes of this title--
``(1) General rules.--
``(A) Exclusions from gross income.--Any
qualified distribution from a Roth IRA shall
not be includible in gross income.
``(B) Nonqualified distributions.--In
applying section 72 to any distribution from a
Roth IRA which is not a qualified distribution,
such distribution shall be treated as made from
contributions to the Roth IRA to the extent
that such distribution, when added to all
previous distributions from the Roth IRA, does
not exceed the aggregate amount of
contributions to the Roth IRA.
``(2) Qualified distribution.--For purposes of this
subsection--
``(A) In general.--The term `qualified
distribution' means any payment or
distribution--
``(i) made on or after the date on
which the individual attains age 59\1/
2\,
``(ii) made to a beneficiary (or to
the estate of the individual) on or
after the death of the individual,
``(iii) attributable to the
individual's being disabled (within the
meaning of section 72(m)(7)), or
``(iv) which is a qualified special
purpose distribution.
``(B) Certain distributions within 5
years.--A payment or distribution shall not be
treated as a qualified distribution under
subparagraph (A) if--
``(i) it is made within the 5-
taxable year period beginning with the
1st taxable year for which the
individual made a contribution to a
Roth IRA (or such individual's spouse
made a contribution to a Roth IRA)
established for such individual, or
``(ii) in the case of a payment or
distribution properly allocable (as
determined in the manner prescribed by
the Secretary) to a qualified rollover
contribution from an individual
retirement plan other than a Roth IRA
(or income allocable thereto), it is
made within the 5-taxable year period
beginning with the taxable year in
which the rollover contribution was
made.
``(3) Rollovers from an ira other than a roth
ira.--
``(A) In general.--Notwithstanding section
408(d)(3), in the case of any distribution to
which this paragraph applies--
``(i) there shall be included in
gross income any amount which would be
includible were it not part of a
qualified rollover contribution,
``(ii) section 72(t) shall not
apply, and
``(iii) in the case of a
distribution before January 1, 1999,
any amount required to be included in
gross income by reason of this
paragraph shall be so included ratably
over the 4-taxable year period
beginning with the taxable year in
which the payment or distribution is
made.
``(B) Distributions to which paragraph
applies.--This paragraph shall apply to a
distribution from an individual retirement plan
(other than a Roth IRA) maintained for the
benefit of an individual which is contributed
to a Roth IRA maintained for the benefit of
such individual in a qualified rollover
contribution.
``(C) Conversions.--The conversion of an
individual retirement plan (other than a Roth
IRA) to a Roth IRA shall be treated for
purposes of this paragraph as a distribution to
which this paragraph applies.
``(D) Conversion of excess contributions.--
If, no later than the due date for filing the
return of tax for any taxable year (without
regard to extensions), an individual transfers,
from an individual retirement plan (other than
a Roth IRA), contributions for such taxable
year (and any earnings allocable thereto) to a
Roth IRA, no such amount shall be includible in
gross income to the extent no deduction was
allowed with respect to such amount.
``(E) Additional reporting requirements.--
Trustees of Roth IRAs, trustees of individual
retirement plans, or both, whichever is
appropriate, shall include such additional
information in reports required under section
408(i) as the Secretary may require to ensure
that amounts required to be included in gross
income under subparagraph (A) are so included.
``(4) Coordination with individual retirement
accounts.--Section 408(d)(2) shall be applied
separately with respect to Roth IRAs and other
individual retirement plans.
``(5) Qualified special purpose distribution.--For
purposes of this section, the term `qualified special
purpose distribution' means any distribution to which
subparagraph (F) of section 72(t)(2) applies.
``(e) Qualified Rollover Contribution.--For purposes of
this section, the term `qualified rollover contribution' means
a rollover contribution to a Roth IRAfrom another such account,
or from an individual retirement plan, but only if such rollover
contribution meets the requirements of section 408(d)(3). For purposes
of section 408(d)(3)(B), there shall be disregarded any qualified
rollover contribution from an individual retirement plan (other than a
Roth IRA) to a Roth IRA.''.
(b) Excess Contributions.--Section 4973(b), as amended by
title II, is amended by adding at the end the following new
subsection:
``(f) Excess Contributions to Roth IRAs.--For purposes of
this section, in the case of contributions to a Roth IRA
(within the meaning of section 408A(b)), the term `excess
contributions' means the sum of--
``(1) the excess (if any) of--
``(A) the amount contributed for the
taxable year to such accounts (other than a
qualified rollover contribution described in
section 408A(e)), over
``(B) the amount allowable as a
contribution under sections 408A (c)(2) and
(c)(3), and
``(2) the amount determined under this subsection
for the preceding taxable year, reduced by the sum of--
``(A) the distributions out of the accounts
for the taxable year, and
``(B) the excess (if any) of the maximum
amount allowable as a contribution under
sections 408A (c)(2) and (c)(3) for the taxable
year over the amount contributed to the
accounts for the taxable year.
For purposes of this subsection, any contribution which is
distributed from a Roth IRA in a distribution described in
section 408(d)(4) shall be treated as an amount not
contributed.''
(c) Spousal IRA.--Clause (ii) of section 219(c)(1)(B) is
amended to read as follows:
``(ii) the compensation includible
in the gross income of such
individual's spouse for the taxable
year reduced by--
``(I) the amount allowed as
a deduction under subsection
(a) to such spouse for such
taxable year, and
``(II) the amount of any
contribution on behalf of such
spouse to a Roth IRA under
section 408A for such taxable
year.''.
(d) Authority To Prescribe Necessary Reporting.--Section
408(i) is amended--
(1) by striking ``under regulations'', and
(2) by striking ``in such regulations'' each place
it appears.
(e) Conforming Amendment.--The table of sections for
subpart A of part I of subchapter D of chapter 1 is amended by
inserting after the item relating to section 408 the following
new item:
``Sec. 408A. Roth IRAs.''.
(f) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 303. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT PENALTY
TO PURCHASE FIRST HOMES.
(a) In General.--Paragraph (2) of section 72(t) (relating
to exceptions to 10-percent additional tax on early
distributions from qualified retirement plans), as amended by
section 203, is amended by adding at the end the following new
subparagraph:
``(F) Distributions from certain plans for
first home purchases.--Distributions to an
individual from an individual retirement plan
which are qualified first-time homebuyer
distributions (as defined in paragraph (8)).
Distributions shall not be taken into account
under the preceding sentence if such
distributions are described in subparagraph
(A),(C), (D), or (E) or to the extent paragraph
(1) does not apply to such distributions by reason of subparagraph
(B).''.
(b) Definitions.--Section 72(t), as amended by section 203,
is amended by adding at the end the following new paragraphs:
``(8) Qualified first-time homebuyer
distributions.--For purposes of paragraph (2)(F)--
``(A) In general.--The term `qualified
first-time homebuyer distribution' means any
payment or distribution received by an
individual to the extent such payment or
distribution is used by the individual before
the close of the 120th day after the day on
which such payment or distribution is received
to pay qualified acquisition costs with respect
to a principal residence of a first-time
homebuyer who is such individual, the spouse of
such individual, or any child, grandchild, or
ancestor of such individual or the individual's
spouse.
``(B) Lifetime dollar limitation.--The
aggregate amount of payments or distributions
received by an individual which may be treated
as qualified first-time homebuyer distributions
for any taxable year shall not exceed the
excess (if any) of--
``(i) $10,000, over
``(ii) the aggregate amounts
treated as qualified first-time
homebuyer distributions with respect to
such individual for all prior taxable
years.
``(C) Qualified acquisition costs.--For
purposes of this paragraph, the term `qualified
acquisition costs' means the costs of
acquiring, constructing, or reconstructing a
residence. Such term includes any usual or
reasonable settlement, financing, or other
closing costs.
``(D) First-time homebuyer; other
definitions.--For purposes of this paragraph--
``(i) First-time homebuyer.--The
term `first-time homebuyer' means any
individual if--
``(I) such individual (and
if married, such individual's
spouse) had no present
ownership interest in a
principal residence during the
2-year period ending on the
date of acquisition of the
principal residence to which
this paragraph applies, and
``(II) subsection (h) or
(k) of section 1034 (as in
effect on the day before the
date of the enactment of this
paragraph) did not suspend the
running of any period of time
specified in section 1034 (as
so in effect) with respect to
such individual on the day
before the date the
distribution is applied
pursuant to subparagraph (A).
``(ii) Principal residence.--The
term `principal residence' has the same
meaning as when used in section 121.
``(iii) Date of acquisition.--The
term `date of acquisition' means the
date--
``(I) on which a binding
contract to acquire the
principal residence to which
subparagraph (A) applies is
entered into, or
``(II) on which
construction or reconstruction
of such a principal residence
is commenced.
``(E) Special rule where delay in
acquisition.--If any distribution from any
individualretirement plan fails to meet the
requirements of subparagraph (A) solely by reason of a delay or
cancellation of the purchase or construction of the residence, the
amount of the distribution may be contributed to an individual
retirement plan as provided in section 408(d)(3)(A)(i) (determined by
substituting `120 days' for `60 days' in such section), except that--
``(i) section 408(d)(3)(B) shall
not be applied to such contribution,
and
``(ii) such amount shall not be
taken into account in determining
whether section 408(d)(3)(B) applies to
any other amount.''.
(c) Effective Date.--The amendments made by this section
shall apply to payments and distributions in taxable years
beginning after December 31, 1997.
SEC. 304. CERTAIN BULLION NOT TREATED AS COLLECTIBLES.
(a) In General.--Paragraph (3) of section 408(m) (relating
to exception for certain coins) is amended to read as follows:
``(3) Exception for certain coins and bullion.--For
purposes of this subsection, the term `collectible'
shall not include--
``(A) any coin which is--
``(i) a gold coin described in
paragraph (7), (8), (9), or (10) of
section 5112(a) of title 31, United
States Code,
``(ii) a silver coin described in
section 5112(e) of title 31, United
States Code,
``(iii) a platinum coin described
in section 5112(k) of title 31, United
States Code, or
``(iv) a coin issued under the laws
of any State, or
``(B) any gold, silver, platinum, or
palladium bullion of a fineness equal to or
exceeding the minimum fineness that a contract
market (as described in section 7 of the
Commodity Exchange Act, 7 U.S.C. 7) requires
for metals which may be delivered in
satisfaction of a regulated futures contract,
if such bullion is in the physical possession of a
trustee described under subsection (a) of this
section.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
Subtitle B--Capital Gains
SEC. 311. MAXIMUM CAPITAL GAINS RATES FOR INDIVIDUALS.
(a) In General.--Subsection (h) of section 1 (relating to
maximum capital gains rate) is amended to read as follows:
``(h) Maximum Capital Gains Rate.--
``(1) In general.--If a taxpayer has a net capital
gain for any taxable year, the tax imposed by this
section for such taxable year shall not exceed the sum
of--
``(A) a tax computed at the rates and in
the same manner as if this subsection had not
been enacted on the greater of--
``(i) taxable income reduced by the
net capital gain, or
``(ii) the lesser of--
``(I) the amount of taxable
income taxed at a rate below 28
percent, or
``(II) taxable income
reduced by the adjusted net
capital gain, plus
``(B) 25 percent of the excess (if any)
of--
``(i) the unrecaptured section 1250
gain (or, if less, the net capital
gain), over
``(ii) the excess (if any) of--
``(I) the sum of the amount
on which tax is determined
under subparagraph (A) plus the
net capital gain, over
``(II) taxable income, plus
``(C) 28 percent of the amount of taxable
income in excess of the sum of--
``(i) the adjusted net capital
gain, plus
``(ii) the sum of the amounts on
which tax is determined under
subparagraphs (A) and (B), plus
``(D) 10 percent of so much of the
taxpayer's adjusted net capital gain (or, if
less, taxable income) as does not exceed the
excess (if any) of--
``(i) the amount of taxable income
which would (without regard to this
paragraph) be taxed at a rate below 28
percent, over
``(ii) the taxable income reduced
by the adjusted net capital gain, plus
``(E) 20 percent of the taxpayer's adjusted
net capital gain (or, if less, taxable income)
in excess of the amount on which a tax is
determined under subparagraph (D).
``(2) Reduced capital gain rates for qualified 5-
year gain.--
``(A) Reduction in 10-percent rate.--In the
case of any taxable year beginning after
December 31, 2000, the rate under paragraph
(1)(D) shall be 8 percent with respect to so
much of the amount to which the 10-percent rate
would otherwise apply as does not exceed
qualified 5-year gain, and 10 percent with
respect to the remainder of such amount.
``(B) Reduction in 20-percent rate.--The
rate under paragraph (1)(E) shall be 18 percent
with respect to so much of the amount to which
the 20-percent rate would otherwise apply as
does not exceed the lesser of--
``(i) the excess of qualified 5-
year gain over the amount of such gain
taken into account under subparagraph
(A) of this paragraph, or
``(ii) the amount of qualified 5-
year gain (determined by taking into
account only property the holding
period for which begins after December
31, 2000),
and 20 percent with respect to the remainder of
such amount. For purposes of determining under
the preceding sentence whether the holding
period of property begins after December 31,
2000, the holding period of property acquired
pursuant to the exercise of an option (or other
right or obligation to acquire property) shall
include the period such option (or other right
or obligation) was held.
``(3) Net capital gain taken into account as
investment income.--For purposes of this subsection,
the net capital gain for any taxable year shall be
reduced (but not below zero) by the amount which the
taxpayer takes into account as investment income under
section 163(d)(4)(B)(iii).
``(4) Adjusted net capital gain.--For purposes of
this subsection, the term `adjusted net capital gain'
means net capital gain determined without regard to--
``(A) collectibles gain,
``(B) unrecaptured section 1250 gain,
``(C) section 1202 gain, and
``(D) mid-term gain.
``(5) Collectibles gain.--For purposes of this
subsection--
``(A) In general.--The term `collectibles
gain' means gain from the sale or exchange of a
collectible (as defined in section 408(m)
without regard to paragraph (3) thereof) which
is a capital asset held for more than 1 year
but only to the extent such gain is taken into
account in computing gross income.
``(B) Partnerships, etc.--For purposes of
subparagraph (A), any gain from the sale of an
interest in a partnership, S corporation, or
trust which is attributable to unrealized
appreciation in the value of collectibles shall
be treated as gain from the sale or exchange of
a collectible. Rules similar to the rules of
section 751 shall apply for purposes of the
preceding sentence.
``(6) Unrecaptured section 1250 gain.--For purposes
of this subsection--
``(A) In general.--The term `unrecaptured
section 1250 gain' means the amount of long-
term capital gain which would be treated as
ordinary income if--
``(i) section 1250(b)(1) included
all depreciation and the applicable
percentage under section 1250(a) were
100 percent, and
``(ii) in the case of gain properly
taken into account after July 28, 1997,
only gain from section 1250 property
held for more than 18 months were taken
into account.
``(B) Limitation with respect to section
1231 property.--The amount of unrecaptured
section 1250 gain from sales, exchanges, and
conversions described in section 1231(a)(3)(A)
for any taxable year shall not exceed the
excess of the net section 1231 gain (as defined
in section 1231(c)(3)) for such year over the
amount treated as ordinary income under section
1231(c)(1) for such year.
``(C) Pre-may 7, 1997, gain.--In the case
of a taxable year which includes May 7, 1997,
subparagraph (A) shall be applied by taking
into account only the gain properly taken into
account for the portion of the taxable year
after May 6, 1997.
``(7) Section 1202 gain.--For purposes of this
subsection, the term `section 1202 gain' means an
amount equal to the gain excluded from gross income
under section 1202(a).
``(8) Mid-term gain.--For purposes of this
subsection, the term `mid-term gain' means the amount
which would be adjusted net capital gain for the
taxable year if--
``(A) adjusted net capital gain were
determined by taking into account only the gain
or loss properly taken into account after July
28, 1997, from property held for more than 1
year but not more than 18 months, and
``(B) paragraph (3) and section 1212 did
not apply.
``(9) Qualified 5-year gain.--For purposes of this
subsection, the term `qualified 5-year gain' means the
amount of long-term capital gain which would be
computed for the taxable year if only gains from the
sale or exchange of property held by the taxpayer for
more than 5 years were taken into account. The
determination under the preceding sentence shall be
made without regard to collectibles gain, unrecaptured
section 1250 gain (determinedwithout regard to
subparagraph (B) of paragraph (6)), section 1202 gain, or mid-term
gain.
``(10) Pre-effective date gain.--
``(A) In general.--In the case of a taxable
year which includes May 7, 1997, gains and
losses properly taken into account for the
portion of the taxable year before May 7, 1997,
shall be taken into account in determining mid-
term gain as if such gains and losses were
described in paragraph (8)(A).
``(B) Special rules for pass-thru
entities.--In applying subparagraph (A) with
respect to any pass-thru entity, the
determination of when gains and loss are
properly taken into account shall be made at
the entity level.
``(C) Pass-thru entity defined.--For
purposes of subparagraph (B), the term `pass-
thru entity' means--
``(i) a regulated investment
company,
``(ii) a real estate investment
trust,
``(iii) an S corporation,
``(iv) a partnership,
``(v) an estate or trust, and
``(vi) a common trust fund.
``(11) Treatment of pass-thru entities.--The
Secretary may prescribe such regulations as are
appropriate (including regulations requiring reporting)
to apply this subsection in the case of sales and
exchanges by pass-thru entities (as defined in
paragraph (10)(C)) and of interests in such
entities.''.
(b) Minimum Tax.--
(1) In general.--Subsection (b) of section 55 is
amended by adding at the end the following new
paragraph:
``(3) Maximum rate of tax on net capital gain of
noncorporate taxpayers.--The amount determined under
the first sentence of paragraph (1)(A)(i) shall not
exceed the sum of--
``(A) the amount determined under such
first sentence computed at the rates and in the
same manner as if this paragraph had not been
enacted on the taxable excess reduced by the
lesser of--
``(i) the net capital gain, or
``(ii) the sum of--
``(I) the adjusted net
capital gain, plus
``(II) the unrecaptured
section 1250 gain, plus
``(B) 25 percent of the lesser of--
``(i) the unrecaptured section 1250
gain, or
``(ii) the amount of taxable excess
in excess of the sum of--
``(I) the adjusted net
capital gain, plus
``(II) the amount on which
a tax is determined under
subparagraph (A), plus
``(C) 10 percent of so much of the
taxpayer's adjusted net capital gain (or, if
less, taxable excess) as does not exceed the
amount on which a tax is determined under
section 1(h)(1)(D), plus
``(D) 20 percent of the taxpayer's adjusted
net capital gain (or, if less, taxable excess)
in excess of the amount on which tax is
determined under subparagraph (C).
In the case of taxable years beginning after December
31, 2000, rules similar to the rules of section 1(h)(2)
shall apply for purposes of subparagraphs (C) and (D).
Terms used in this paragraph which are also used in
section 1(h) shall have the respective meanings given
such terms by section 1(h).''.
(2) Conforming amendments.--
(A) Clause (ii) of section 55(b)(1)(A) is
amended by striking ``clause (i)'' and
inserting ``this subsection''.
(B) Paragraph (7) of section 57(a) is
amended by striking ``one-half'' and inserting
``42 percent''.
(c) Other Conforming Amendments.--
(1) Paragraph (1) of section 1445(e) is amended by
striking ``28 percent'' and inserting ``20 percent''.
(2) The second sentence of section 7518(g)(6)(A),
and the second sentence of section 607(h)(6)(A) of the
Merchant Marine Act, 1936, are each amended by striking
``28 percent'' and inserting ``20 percent''.
(3) Paragraph (2) of section 904(b) is amended by
adding at the end the following new subparagraph:
``(C) Coordination with capital gains
rates.--The Secretary may by regulations modify
the application of this paragraph and paragraph
(3) to the extent necessary to properly reflect
any capital gain rate differential under
section 1(h) or 1201(a) and the computation of
net capital gain.''.
(d) Effective Dates.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years ending after May 6, 1997.
(2) Withholding.--The amendment made by subsection
(c)(1) shall apply only to amounts paid after the date
of the enactment of this Act.
(e) Election To Recognize Gain on Assets Held on January 1,
2001.--For purposes of the Internal Revenue Code of 1986--
(1) In general.--A taxpayer other than a
corporation may elect to treat--
(A) any readily tradable stock (which is a
capital asset) held by such taxpayer on January
1, 2001, and not sold before the next business
day after such date, as having been sold on
such next business day for an amount equal to
its closing market price on such next business
day (and as having been reacquired on such next
business day for an amount equal to such
closing market price), and
(B) any other capital asset or property
used in the trade or business (as defined in
section 1231(b) of the Internal Revenue Code of
1986) held by the taxpayer on January 1, 2001,
as having been sold on such date for an amount
equal to its fair market value on such date
(and as having been reacquired on such date for
an amount equal to such fair market value).
(2) Treatment of gain or loss.--
(A) Any gain resulting from an election
under paragraph (1) shall be treated as
received or accrued on the date the asset is
treated as sold under paragraph (1) and shall
be recognized notwithstanding any provision of
the Internal Revenue Code of 1986.
(B) Any loss resulting from an election
under paragraph (1) shall not be allowed for
any taxable year.
(3) Election.--An election under paragraph (1)
shall be made in such manner as the Secretary of the
Treasury or his delegate may prescribe and shall
specify the assets for which such election is made.
Such an election, once made with respect to any asset,
shall be irrevocable.
(4) Readily tradable stock.--For purposes of this
subsection, the term ``readily tradable stock'' means
any stock which, as of January 1, 2001, is readily
tradable on an established securities market or
otherwise.
SEC. 312. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.
(a) In General.--Section 121 (relating to one-time
exclusion of gain from sale of principal residence by
individual who has attained age 55) is amended to read as
follows:
``SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
``(a) Exclusion.--Gross income shall not include gain from
the sale or exchange of property if, during the 5-year period
ending on the date of the sale or exchange, such property has
been owned and used by the taxpayer as the taxpayer's principal
residence for periods aggregating 2 years or more.
``(b) Limitations.--
``(1) In general.--The amount of gain excluded from
gross income under subsection (a) with respect to any
sale or exchange shall not exceed $250,000.
``(2) $500,000 limitation for certain joint
returns.--Paragraph (1) shall be applied by
substituting `$500,000' for `$250,000' if--
``(A) a husband and wife make a joint
return for the taxable year of the sale or
exchange of the property,
``(B) either spouse meets the ownership
requirements of subsection (a) with respect to
such property,
``(C) both spouses meet the use
requirements of subsection (a) with respect to
such property, and
``(D) neither spouse is ineligible for the
benefits of subsection (a) with respect to such
property by reason of paragraph (3).
``(3) Application to only 1 sale or exchange every
2 years.--
``(A) In general.--Subsection (a) shall not
apply to any sale or exchange by the taxpayer
if, during the 2-year period ending on the date
of such sale or exchange, there was any other
sale or exchange by the taxpayer to which
subsection (a) applied.
``(B) Pre-may 7, 1997, sales not taken into
account.--Subparagraph (A) shall be applied
without regard to any sale or exchange before
May 7, 1997.
``(c) Exclusion for Taxpayers Failing To Meet Certain
Requirements.--
``(1) In general.--In the case of a sale or
exchange to which this subsection applies, the
ownership and use requirements of subsection (a) shall
not apply and subsection (b)(3) shall not apply; but
the amount of gain excluded from gross income under
subsection (a) with respect to such sale or exchange
shall not exceed--
``(A) the amount which bears the same ratio
to the amount which would be so excluded under
this section if such requirements had been met,
as
``(B) the shorter of--
``(i) the aggregate periods, during
the 5-year period ending on the date of
such sale or exchange, such property
has been owned and used by the taxpayer
as the taxpayer's principal residence,
or
``(ii) the period after the date of
the most recent prior sale or exchange
by the taxpayer to which subsection (a)
appliedand before the date of such sale
or exchange,
bears to 2 years.
``(2) Sales and exchanges to which subsection
applies.--This subsection shall apply to any sale or
exchange if--
``(A) subsection (a) would not (but for
this subsection) apply to such sale or exchange
by reason of--
``(i) a failure to meet the
ownership and use requirements of
subsection (a), or
``(ii) subsection (b)(3), and
``(B) such sale or exchange is by reason of
a change in place of employment, health, or, to
the extent provided in regulations, unforeseen
circumstances.
``(d) Special Rules.--
``(1) Joint returns.--If a husband and wife make a
joint return for the taxable year of the sale or
exchange of the property, subsections (a) and (c) shall
apply if either spouse meets the ownership and use
requirements of subsection (a) with respect to such
property.
``(2) Property of deceased spouse.--For purposes of
this section, in the case of an unmarried individual
whose spouse is deceased on the date of the sale or
exchange of property, the period such unmarried
individual owned and used such property shall include
the period such deceased spouse owned and used such
property before death.
``(3) Property owned by spouse or former spouse.--
For purposes of this section--
``(A) Property transferred to individual
from spouse or former spouse.--In the case of
an individual holding property transferred to
such individual in a transaction described in
section 1041(a), the period such individual
owns such property shall include the period the
transferor owned the property.
``(B) Property used by former spouse
pursuant to divorce decree, etc.--Solely for
purposes of this section, an individual shall
be treated as using property as such
individual's principal residence during any
period of ownership while such individual's
spouse or former spouse is granted use of the
property under a divorce or separation
instrument (as defined in section 71(b)(2)).
``(4) Tenant-stockholder in cooperative housing
corporation.--For purposes of this section, if the
taxpayer holds stock as a tenant-stockholder (as
defined in section 216) in a cooperative housing
corporation (as defined in such section), then--
``(A) the holding requirements of
subsection (a) shall be applied to the holding
of such stock, and
``(B) the use requirements of subsection
(a) shall be applied to the house or apartment
which the taxpayer was entitled to occupy as
such stockholder.
``(5) Involuntary conversions.--
``(A) In general.--For purposes of this
section, the destruction, theft, seizure,
requisition, or condemnation of property shall
be treated as the sale of such property.
``(B) Application of section 1033.--In
applying section 1033 (relating to involuntary
conversions), the amount realized from the sale
or exchange of property shall be treated as
being the amount determined without regard to
this section, reduced by the amount of gain not
included in gross income pursuant to this
section.
``(C) Property acquired after involuntary
conversion.--If the basis of the property sold
or exchanged is determined (in whole or in
part) under section 1033(b) (relating to basis
of property acquired through involuntary
conversion), then the holding and use by the
taxpayer of the converted property shall be
treated as holding and use by the taxpayer of
the property sold or exchanged.
``(6) Recognition of gain attributable to
depreciation.--Subsection (a) shall not apply to so
much of the gain from the sale of any property as does
not exceed the portion of the depreciation adjustments
(as defined in section 1250(b)(3)) attributable to
periods after May 6, 1997, in respect of such property.
``(7) Determination of use during periods of out-
of-residence care.--In the case of a taxpayer who--
``(A) becomes physically or mentally
incapable of self-care, and
``(B) owns property and uses such property
as the taxpayer's principal residence during
the 5-year period described in subsection (a)
for periods aggregating at least 1 year,
then the taxpayer shall be treated as using such
property as the taxpayer's principal residence during
any time during such 5-year period in which the
taxpayer owns the property and resides in any facility
(including a nursing home) licensed by a State or
political subdivision to care for an individual in the
taxpayer's condition.
``(8) Sales of remainder interests.--For purposes
of this section--
``(A) In general.--At the election of the
taxpayer, this section shall not fail to apply
to the sale or exchange of an interest in a
principal residence by reason of such interest
being a remainder interest in such residence,
but this section shall not apply to any other
interest in such residence which is sold or
exchanged separately.
``(B) Exception for sales to related
parties.--Subparagraph (A) shall not apply to
any sale to, or exchange with, any person who
bears a relationship to the taxpayer which is
described in section 267(b) or 707(b).
``(e) Denial of Exclusion for Expatriates.--This section
shall not apply to any sale or exchange by an individual if the
treatment provided by section 877(a)(1) applies to such
individual.
``(f) Election To Have Section Not Apply.--This section
shall not apply to any sale or exchange with respect to which
the taxpayer elects not to have this section apply.
``(g) Residences Acquired in Rollovers Under Section
1034.--For purposes of this section, in the case of property
the acquisition of which by the taxpayer resulted under section
1034 (as in effect on the day before the date of the enactment
of this section) in the nonrecognition of any part of the gain
realized on the sale or exchange of another residence, in
determining the period for which the taxpayer has owned and
used such property as the taxpayer's principal residence, there
shall be included the aggregate periods for which such other
residence (and each prior residence taken into account under
section 1223(7) in determining the holding period of such
property) had been so owned and used.''.
(b) Repeal of Nonrecognition of Gain on Rollover of
Principal Residence.--Section 1034 (relating to rollover of
gain on sale of principal residence) is hereby repealed.
(c) Exception From Reporting.--Subsection (e) of section
6045 (relating to return required in the caseof real estate
transactions) is amended by adding at the end the following new
paragraph:
``(5) Exception for sales or exchanges of certain
principal residences.--
``(A) In general.--Paragraph (1) shall not
apply to any sale or exchange of a residence
for $250,000 or less if the person referred to
in paragraph (2) receives written assurance in
a form acceptable to the Secretary from the
seller that--
``(i) such residence is the
principal residence (within the meaning
of section 121) of the seller,
``(ii) if the Secretary requires
the inclusion on the return under
subsection (a) of information as to
whether there is federally subsidized
mortgage financing assistance with
respect to the mortgage on residences,
that there is no such assistance with
respect to the mortgage on such
residence, and
``(iii) the full amount of the gain
on such sale or exchange is excludable
from gross income under section 121.
If such assurance includes an assurance that
the seller is married, the preceding sentence
shall be applied by substituting `$500,000' for
`$250,000'.
The Secretary may by regulation increase the dollar
amounts under this subparagraph if the Secretary
determines that such an increase will not materially
reduce revenues to the Treasury.
``(B) Seller.--For purposes of this
paragraph, the term `seller' includes the
person relinquishing the residence in an
exchange.''.
(d) Conforming Amendments.--
(1) The following provisions of the Internal
Revenue Code of 1986 are each amended by striking
``section 1034'' and inserting ``section 121'':
sections 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i),
143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A),
464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B),
6334(a)(13), and 7872(f)(11)(A).
(2) Paragraph (4) of section 32(c) is amended by
striking ``(as defined in section 1034(h)(3))'' and by
adding at the end the following new sentence: ``For
purposes of the preceding sentence, the term `extended
active duty' means any period of active duty pursuant
to a call or order to such duty for a period in excess
of 90 days or for an indefinite period.''.
(3) Subparagraph (A) of 143(m)(6) is amended by
inserting ``(as in effect on the day before the date of
the enactment of the Taxpayer Relief Act of 1997)''
after ``1034(e)''.
(4) Subsection (e) of section 216 is amended by
striking ``such exchange qualifies for nonrecognition
of gain under section 1034(f)'' and inserting ``such
dwelling unit is used as his principal residence
(within the meaning of section 121)''.
(5) Section 512(a)(3)(D) is amended by inserting
``(as in effect on the day before the date of the
enactment of the Taxpayer Relief Act of 1997)'' after
``1034''.
(6) Paragraph (7) of section 1016(a) is amended by
inserting ``(as in effect on the day before the date of
the enactment of the Taxpayer Relief Act of 1997)''
after ``1034'' and by inserting ``(as so in effect)''
after ``1034(e)''.
(7) Paragraph (3) of section 1033(k) is amended to
read as follows:
``(3) For exclusion from gross income of gain from
involuntary conversion of principal residence, see
section 121.''.
(8) Subsection (e) of section 1038 is amended to
read as follows:
``(e) Principal Residences.--If--
``(1) subsection (a) applies to a reacquisition of
real property with respect to the sale of which gain
was not recognized under section 121 (relating to gain
on sale of principal residence); and
``(2) within 1 year after the date of the
reacquisition of such property by the seller, such
property is resold by him,
then, under regulations prescribed by the Secretary,
subsections (b), (c), and (d) of this section shall not apply
to the reacquisition of such property and, for purposes of
applying section 121, the resale of such property shall be
treated as a part of the transaction constituting the original
sale of such property.''.
(9) Paragraph (7) of section 1223 is amended by
inserting ``(as in effect on the day before the date of
the enactment of the Taxpayer Relief Act of 1997)''
after ``1034''.
(10)(A) Subsection (d) of section 1250 is amended
by striking paragraph (7) and by redesignating
paragraphs (9) and (10) as paragraphs (7) and (8),
respectively.
(B) Subsection (e) of section 1250 is amended by
striking paragraph (3).
(11) Subsection (c) of section 6012 is amended by
striking ``(relating to one-time exclusion of gain from
sale of principal residence by individual who has
attained age 55)'' and inserting ``(relating to gain
from sale of principal residence)''.
(12) Paragraph (2) of section 6212(c) is amended by
striking subparagraph (C) and by redesignating the
succeeding subparagraphs accordingly.
(13) Section 6504 is amended by striking paragraph
(4) and by redesignating the succeeding paragraphs
accordingly.
(14) The item relating to section 121 in the table
of sections for part III of subchapter B of chapter 1
is amended to read as follows:
``Sec. 121. Exclusion of gain from sale of principal
residence.''.
(15) The table of sections for part III of
subchapter O of chapter 1 is amended by striking the
item relating to section 1034.
(d) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to sales and exchanges after May 6,
1997.
(2) Sales before date of enactment.--At the
election of the taxpayer, the amendments made by this
section shall not apply to any sale or exchange before
the date of the enactment of this Act.
(3) Certain sales within 2 years after date of
enactment.--Section 121 of the Internal Revenue Code of
1986 (as amended by this section) shall be applied
without regard to subsection (c)(2)(B) thereof in the
case of any sale or exchange of property during the 2-
year period beginning on the date of the enactment of
this Act if the taxpayer held such property on the date
of the enactment of this Act and fails to meet the
ownership and use requirements of subsection (a)
thereof with respect to such property.
(4) Binding contracts.--At the election of the
taxpayer, the amendments made by this section shall not
apply to a sale or exchange after the date of the
enactment of this Act, if--
(A) such sale or exchange is pursuant to a
contract which was binding on such date, or
(B) without regard to such amendments, gain
would not be recognized under section 1034 of
the Internal Revenue Code of 1986 (as in effect
on the day before the date of the enactmentof
this Act) on such sale or exchange by reason of a new residence
acquired on or before such date or with respect to the acquisition of
which by the taxpayer a binding contract was in effect on such date.
This paragraph shall not apply to any sale or exchange
by an individual if the treatment provided by section
877(a)(1) of the Internal Revenue Code of 1986 applies
to such individual.
SEC. 313. ROLLOVER OF GAIN FROM SALE OF QUALIFIED STOCK.
(a) In General.--Part III of subchapter O of chapter 1 is
amended by adding at the end the following new section:
``SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL BUSINESS STOCK TO
ANOTHER QUALIFIED SMALL BUSINESS STOCK.
``(a) Nonrecognition of Gain.--In the case of any sale of
qualified small business stock held by an individual for more
than 6 months and with respect to which such individual elects
the application of this section, gain from such sale shall be
recognized only to the extent that the amount realized on such
sale exceeds--
``(1) the cost of any qualified small business
stock purchased by the taxpayer during the 60-day
period beginning on the date of such sale, reduced by
``(2) any portion of such cost previously taken
into account under this section.
This section shall not apply to any gain which is treated as
ordinary income for purposes of this title.
``(b) Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified small business stock.--The term
`qualified small business stock' has the meaning given
such term by section 1202(c).
``(2) Purchase.--A taxpayer shall be treated as
having purchased any property if, but for paragraph
(3), the unadjusted basis of such property in the hands
of the taxpayer would be its cost (within the meaning
of section 1012).
``(3) Basis adjustments.--If gain from any sale is
not recognized by reason of subsection (a), such gain
shall be applied to reduce (in the order acquired) the
basis for determining gain or loss of any qualified
small business stock which is purchased by the taxpayer
during the 60-day period described in subsection (a).
``(4) Holding period.--For purposes of determining
whether the nonrecognition of gain under subsection (a)
applies to stock which is sold--
``(A) the taxpayer's holding period for
such stock and the stock referred to in
subsection (a)(1) shall be determined without
regard to section 1223, and
``(B) only the first 6 months of the
taxpayer's holding period for the stock
referred to in subsection (a)(1) shall be taken
into account for purposes of applying section
1202(c)(2).''.
(b) Conforming Amendments.--
(1) Section 1016(a)(23) is amended--
(A) by striking ``or 1044'' and inserting
``, 1044, or 1045'', and
(B) by striking ``or 1044(d)'' and
inserting ``, 1044(d), or 1045(b)(4)''.
(2) Section 1223 is amended by redesignating
paragraph (15) as paragraph (16) and by inserting after
paragraph (14) the following new paragraph:
``(15) In determining the period for which the
taxpayer has held property the acquisition of which
resulted under section 1045 in the nonrecognition of
any part of the gain realized on the sale of other
property, there shall be included the period for which
such other property has been held as of the date of
such sale.''.
(3) The table of sections for part III of
subchapter O of chapter 1 is amended by adding at the
end the following new item:
``Sec. 1045. Rollover of gain from qualified small business
stock to another qualified small business stock.''.
(c) Effective Date.--The amendments made by this section
shall apply to sales after the date of enactment of this Act.
SEC. 314. AMOUNT OF NET CAPITAL GAIN TAKEN INTO ACCOUNT IN COMPUTING
ALTERNATIVE TAX ON CAPITAL GAINS FOR CORPORATIONS
NOT TO EXCEED TAXABLE INCOME OF THE CORPORATION.
(a) In General.--Paragraph (2) of section 1201(a) is
amended by inserting before the period ``(or, if less, taxable
income)''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years ending after December 31, 1997.
TITLE IV--ALTERNATIVE MINIMUM TAX REFORM
SEC. 401. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL
CORPORATIONS.
(a) In General.--Section 55 (relating to alternative
minimum tax imposed) is amended by adding at the end the
following new subsection:
``(e) Exemption for Small Corporations.--
``(1) In general.--The tentative minimum tax of a
corporation shall be zero for any taxable year if--
``(A) such corporation met the $5,000,000
gross receipts test of section 448(c) for its
first taxable year beginning after December 31,
1996, and
``(B) such corporation would meet such test
for the taxable year and all prior taxable
years beginning after such first taxable year
if such test were applied by substituting
`$7,500,000' for `$5,000,000'.
``(2) Prospective application of minimum tax if
small corporation ceases to be small.--In the case of a
corporation whose tentative minimum tax is zero for any
prior taxable year by reason of paragraph (1), the
application of this part for taxable years beginning
with the first taxable year such corporation ceases to
be described in paragraph (1) shall be determined with
the following modifications:
``(A) Section 56(a)(1) (relating to
depreciation) and section 56(a)(5) (relating to
pollution control facilities) shall apply only
to property placed in service on or after the
change date.
``(B) Section 56(a)(2) (relating to mining
exploration and development costs) shall apply
only to costs paid or incurred on or after the
change date.
``(C) Section 56(a)(3) (relating to
treatment of long-term contracts) shall apply
only to contracts entered into on or after the
change date.
``(D) Section 56(a)(4) (relating to
alternative net operating loss deduction) shall
apply in the same manner as if, in section
56(d)(2), the change date were substituted for
`January 1, 1987' and the day before the change
date were substituted for `December 31, 1986'
each place it appears.
``(E) Section 56(g)(2)(B) (relating to
limitation on allowance of negative adjustments
based on adjusted current earnings) shall apply
only to prior taxable years beginning on or
after the change date.
``(F) Section 56(g)(4)(A) (relating to
adjustment for depreciation to adjusted current
earnings) shall not apply.
``(G) Subparagraphs (D) and (F) of section
56(g)(4) (relating to other earnings and
profits adjustments and depletion) shall apply
in the same manner as if the day before the
change date were substituted for `December 31,
1989' each place it appears therein.
``(3) Exception.--The modifications in paragraph
(2) shall not apply to--
``(A) any item acquired by the corporation
in a transaction to which section 381 applies,
and
``(B) any property the basis of which in
the hands of the corporation is determined by
reference to the basis of the property in the
hands of the transferor,
if such item or property was subject to any provision
referred to in paragraph (2) while held by the
transferor.
``(4) Change date.--For purposes of paragraph (2),
the change date is the first day of the first taxable
year for which the taxpayer ceases to be described in
paragraph (1).
``(5) Limitation on use of credit for prior year
minimum tax liability.--In the case of a taxpayer whose
tentative minimum tax for any taxable year is zero by
reason of paragraph (1), section 53(c) shall be applied
for such year by reducing the amount otherwise taken
into account under section 53(c)(1) by 25 percent of so
much of such amount as exceeds $25,000. Rules similar
to the rules of section 38(c)(3)(B) shall apply for
purposes of the preceding sentence.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 402. REPEAL OF SEPARATE DEPRECIATION LIVES FOR MINIMUM TAX
PURPOSES.
(a) In General.--Clause (i) of section 56(a)(1)(A) is
amended by adding at the end the following new sentence: ``In
the case of property placed in service after December 31, 1998,
the preceding sentence shall not apply but clause (ii) shall
continue to apply.''
(b) Pollution Control Facilities.--Paragraph (5) of section
56(a) is amended by adding at the end the following new
sentence: ``In the case of such a facility placed in service
after December 31, 1998, such deduction shall be determined
under section 168 using the straight line method.''.
SEC. 403. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT SALES.
(a) In General.--Subsection (a) of section 56 is amended by
striking paragraph (6) (relating to treatment of installment
sales) and by redesignating paragraphs (7) and (8) as
paragraphs (6) and (7), respectively.
(b) Effective Dates.--
(1) In general.--The amendment made by this section
shall apply to dispositions in taxable years beginning
after December 31, 1987.
(2) Special rule for 1987.--In the case of taxable
years beginning in 1987, the last sentence of section
56(a)(6) of the Internal Revenue Code of 1986 (as in
effect for such taxable years) shall be applied by
inserting ``or in the case of a taxpayer using the cash
receipts and disbursements method of accounting, any
disposition described in section 453C(e)(1)(B)(ii)''
after ``section 453C(e)(4)''.
TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
Subtitle A--Estate and Gift Tax Provisions
SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ESTATE AND GIFT TAX
PROVISIONS.
(a) Increase in Unified Estate and Gift Tax Credit.--
(1) Estate tax credit.--
(A) In general.--Subsection (a) of section
2010 (relating to unified credit against estate
tax) is amended by striking ``$192,800'' and
inserting ``the applicable credit amount''.
(B) Applicable credit amount.--Section 2010
is amended by redesignating subsection (c) as
subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Applicable Credit Amount.--For purposes of this
section, the applicable credit amount is the amount of the
tentative tax which would be determined under the rate schedule
set forth in section 2001(c) if the amount with respect to
which such tentative tax is to be computed were the applicable
exclusion amount determined in accordance with the following
table:
``In the case of estates
of decedents dying, The applicable
and gifts made, exclusion
during: amount is:
1998.......................................... $ 625,000
1999.......................................... $ 650,000
2000 and 2001................................. $ 675,000
2002 and 2003................................. $ 700,000
2004.......................................... $ 850,000
2005.......................................... $ 950,000
2006 or thereafter............................ $1,000,000.''
(C) Estate tax returns.--Paragraph (1) of
section 6018(a) is amended by striking
``$600,000'' and inserting ``the applicable
exclusion amount in effect under section
2010(c) for the calendar year which includes
the date of death''.
(D) Phaseout of graduated rates and unified
credit.--Paragraph (2) of section 2001(c) is
amended by striking ``$21,040,000'' and
inserting ``the amount at which the average tax
rate under this section is 55 percent''.
(E) Estates of nonresidents not citizens.--
Subparagraph (A) of section 2102(c)(3) is
amended by striking ``$192,800'' and inserting
``the applicable credit amount in effect under
section 2010(c) for the calendar year which
includes the date of death''.
(2) Unified gift tax credit.--Paragraph (1) of
section 2505(a) is amended by striking ``$192,800'' and
inserting ``the applicable credit amount in effect
under section 2010(c) for such calendar year''.
(b) Alternate Valuation of Certain Farm, Etc., Real
Property.--Subsection (a) of section 2032A is amended by adding
at the end the following new paragraph:
``(3) Inflation adjustment.--In the case of estates
of decedents dying in a calendar year after 1998, the
$750,000 amount contained in paragraph (2) shall be
increased by an amount equal to--
``(A) $750,000, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year by substituting `calendar year
1997' for `calendar year 1992' in subparagraph
(B) thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be
rounded to the next lowest multiple of $10,000.''.
(c) Annual Gift Tax Exclusion.--Subsection (b) of section
2503 is amended--
(1) by striking the subsection heading and
inserting the following:
``(b) Exclusions From Gifts.--
``(1) In general.--'',
(2) by moving the text 2 ems to the right, and
(3) by adding at the end the following new
paragraph:
``(2) Inflation adjustment.--In the case of gifts
made in a calendar year after 1998, the $10,000 amount
contained in paragraph (1) shall be increased by an
amount equal to--
``(A) $10,000, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year by substituting `calendar year
1997' for `calendar year 1992' in subparagraph
(B) thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $1,000, such amount shall be
rounded to the next lowest multiple of $1,000.''.
(d) Exemption From Generation-Skipping Tax.--Section 2631
(relating to GST exemption) is amended by adding at the end the
following new subsection:
``(c) Inflation Adjustment.--In the case of an individual
who dies in any calendar year after 1998, the $1,000,000 amount
contained in subsection (a) shall be increased by an amount
equal to--
``(1) $1,000,000, multiplied by
``(2) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting `calendar year 1997' for `calendar year
1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the next
lowest multiple of $10,000.''.
(e) Amount Subject to Reduced Rate Where Extension of Time
for Payment of Estate Tax on Closely Held Business.--Subsection
(j) of section 6601 is amended by redesignating paragraph (3)
as paragraph (4) and by inserting after paragraph (2) the
following new paragraph:
``(3) Inflation adjustment.--In the case of estates
of decedents dying in a calendar year after 1998, the
$1,000,000 amount contained in paragraph (2)(A) shall
be increased by an amount equal to--
``(A) $1,000,000, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year by substituting `calendar year
1997' for `calendar year 1992' in subparagraph
(B) thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be
rounded to the next lowest multiple of $10,000.''.
(f) Effective date.--The amendments made by this section
shall apply to the estates of decedents dying, and gifts made,
after December 31, 1997.
SEC. 502. FAMILY-OWNED BUSINESS EXCLUSION.
(a) In General.--Part III of subchapter A of chapter 11
(relating to gross estate) is amended by inserting after
section 2033 the following new section:
``SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.
``(a) In General.--In the case of an estate of a decedent
to which this section applies, the value of the gross estate
shall not include the lesser of--
``(1) the adjusted value of the qualified family-
owned business interests of the decedent otherwise
includible in the estate, or
``(2) the excess of $1,300,000 over the applicable
exclusion amount under section 2010(c) with respect to
such estate.
``(b) Estates to Which Section Applies.--
``(1) In general.--This section shall apply to an
estate if--
``(A) the decedent was (at the date of the
decedent's death) a citizen or resident of the
United States,
``(B) the executor elects the application
of this section and files the agreement
referred to in subsection (h),
``(C) the sum of--
``(i) the adjusted value of the
qualified family-owned business
interests described in paragraph (2),
plus
``(ii) the amount of the gifts of
such interests determined under
paragraph (3),
exceeds 50 percent of the adjusted gross
estate, and
``(D) during the 8-year period ending on
the date of the decedent's death there have
been periods aggregating 5 years or more during
which--
``(i) such interests were owned by
the decedent or a member of the
decedent's family, and
``(ii) there was material
participation (within the meaning of
section 2032A(e)(6)) by the decedent or
a member of the decedent's family in
the operation of the business to which
such interests relate.
``(2) Includible qualified family-owned business
interests.--The qualified family-owned business
interests described in this paragraph are the interests
which--
``(A) are included in determining the value
of the gross estate (without regard to this
section), and
``(B) are acquired by any qualified heir
from, or passed to any qualified heir from, the
decedent (within the meaning of section
2032A(e)(9)).
``(3) Includible gifts of interests.--The amount of
the gifts of qualified family-owned business interests
determined under this paragraph is the excess of--
``(A) the sum of--
``(i) the amount of such gifts from
the decedent to members of the
decedent's family taken into account
under subsection 2001(b)(1)(B), plus
``(ii) the amount of such gifts
otherwise excluded under section
2503(b),
to the extent such interests are continuously
held by members of such family (other than the
decedent's spouse) between the date of the gift
and the date of the decedent's death, over
``(B) the amount of such gifts from the
decedent to members of the decedent's family
otherwise included in the gross estate.
``(c) Adjusted Gross Estate.--For purposes of this section,
the term `adjusted gross estate' means the value of the gross
estate (determined without regard to this section)--
``(1) reduced by any amount deductible under
paragraph (3) or (4) of section 2053(a), and
``(2) increased by the excess of--
``(A) the sum of--
``(i) the amount of gifts
determined under subsection (b)(3),
plus
``(ii) the amount (if more than de
minimis) of other transfers from the
decedent to the decedent's spouse (at
the time of the transfer) within 10
years of the date of the decedent's
death, plus
``(iii) the amount of other gifts
(not included under clause (i) or (ii))
from the decedent within 3 years of
such date, other than gifts to members
of the decedent's family otherwise
excluded under section 2503(b), over
``(B) the sum of the amounts described in
clauses (i), (ii), and (iii) of subparagraph
(A) which are otherwise includible in the gross
estate.
For purposes of the preceding sentence, the Secretary may
provide that de minimis gifts to persons other than members of
the decedent's family shall not be taken into account.
``(d) Adjusted Value of the Qualified Family-Owned Business
Interests.--For purposes of this section, the adjusted value of
any qualified family-owned business interest is the value of
such interest for purposes of this chapter (determined without
regard to this section), reduced by the excess of--
``(1) any amount deductible under paragraph (3) or
(4) of section 2053(a), over
``(2) the sum of--
``(A) any indebtedness on any qualified
residence of the decedent the interest on which
is deductible under section 163(h)(3), plus
``(B) any indebtedness to the extent the
taxpayer establishes that the proceeds of such
indebtedness were used for the payment of
educational and medical expenses of the
decedent, the decedent's spouse, or the
decedent's dependents (within the meaning of
section 152), plus
``(C) any indebtedness not described in
subparagraph (A) or (B), to the extent such
indebtedness does not exceed $10,000.
``(e) Qualified Family-Owned Business Interest.--
``(1) In general.--For purposes of this section,
the term `qualified family-owned business interest'
means--
``(A) an interest as a proprietor in a
trade or business carried on as a
proprietorship, or
``(B) an interest in an entity carrying on
a trade or business, if--
``(i) at least--
``(I) 50 percent of such
entity is owned (directly or
indirectly) by the decedent and
members of the decedent's
family,
``(II) 70 percent of such
entity is so owned by members
of 2 families, or
``(III) 90 percent of such
entity is so owned by members
of 3 families, and
``(ii) for purposes of subclause
(II) or (III) of clause (i), at least
30 percent of such entity is so owned
by the decedent and members of the
decedent's family.
``(2) Limitation.--Such term shall not include--
``(A) any interest in a trade or business
the principal place of business of which is not
located in the United States,
``(B) any interest in an entity, if the
stock or debt of such entity or a controlled
group (as defined in section 267(f)(1)) of
which such entity was a member was readily
tradable on an established securities market or
secondary market (as defined by the Secretary)
at any time within 3 years of the date of the
decedent's death,
``(C) any interest in a trade or business
not described in section 542(c)(2), if more
than 35 percent of the adjusted ordinary gross
income of such trade or business for the
taxable year which includes the date of the
decedent's death would qualify as personal
holding company income (as defined in section
543(a)),
``(D) that portion of an interest in a
trade or business that is attributable to--
``(i) cash or marketable
securities, or both, in excess of the
reasonably expected day-to-day working
capital needs of such trade or
business, and
``(ii) any other assets of the
trade or business (other than assets
used in the active conduct of a trade
or business described in section
542(c)(2)), which produce, or are held
for the production of, income of which
is described in section 543(a) or in
section 954(c)(1) (determined without
regard to subparagraph (A) thereof and
by substituting `trade or business' for
`controlled foreign corporation').
``(3) Rules regarding ownership.--
``(A) Ownership of entities.--For purposes
of paragraph (1)(B)--
``(i) Corporations.--Ownership of a
corporation shall be determined by the
holding of stock possessing the
appropriate percentage of the total
combined voting power of all classes of
stock entitled to vote and the
appropriate percentage of the total
value of shares of all classes of
stock.
``(ii) Partnerships.--Ownership of
a partnership shall be determined by
the owning of the appropriate
percentage of the capital interest in
such partnership.
``(B) Ownership of tiered entities.--For
purposes of this section, if by reason of
holding an interest in a trade or business, a
decedent, any member of the decedent's family,
any qualified heir, or any member of any
qualified heir's family is treated as holding
an interest in any other trade or business--
``(i) such ownership interest in
the other trade or business shall be
disregarded in determining if the
ownership interest in the first trade
or business is aqualified family-owned
business interest, and
``(ii) this section shall be
applied separately in determining if
such interest in any other trade or
business is a qualified family-owned
business interest.
``(C) Individual ownership rules.--For
purposes of this section, an interest owned,
directly or indirectly, by or for an entity
described in paragraph (1)(B) shall be
considered as being owned proportionately by or
for the entity's shareholders, partners, or
beneficiaries. A person shall be treated as a
beneficiary of any trust only if such person
has a present interest in such trust.
``(f) Tax Treatment of Failure To Materially Participate in
Business or Dispositions of Interests.--
``(1) In general.--There is imposed an additional
estate tax if, within 10 years after the date of the
decedent's death and before the date of the qualified
heir's death--
``(A) the material participation
requirements described in section
2032A(c)(6)(B) are not met with respect to the
qualified family-owned business interest which
was acquired (or passed) from the decedent,
``(B) the qualified heir disposes of any
portion of a qualified family-owned business
interest (other than by a disposition to a
member of the qualified heir's family or
through a qualified conservation contribution
under section 170(h)),
``(C) the qualified heir loses United
States citizenship (within the meaning of
section 877) or with respect to whom an event
described in subparagraph (A) or (B) of section
877(e)(1) occurs, and such heir does not comply
with the requirements of subsection (g), or
``(D) the principal place of business of a
trade or business of the qualified family-owned
business interest ceases to be located in the
United States.
``(2) Additional estate tax.--
``(A) In general.--The amount of the
additional estate tax imposed by paragraph (1)
shall be equal to--
``(i) the applicable percentage of
the adjusted tax difference
attributable to the qualified family-
owned business interest(as determined
under rules similar to the rules of section 2032A(c)(2)(B)), plus
``(ii) interest on the amount
determined under clause (i) at the
underpayment rate established under
section 6621 for the period beginning
on the date the estate tax liability
was due under this chapter and ending
on the date such additional estate tax
is due.
``(B) Applicable percentage.--For purposes
of this paragraph, the applicable percentage
shall be determined under the following table:
``If the event described in
paragraph (1) occurs in
the following year of The applicable
material participation: percentage is:
1 through 6............................................... 100
7......................................................... 80
8......................................................... 60
9......................................................... 40
10........................................................ 20.
``(g) Security Requirements for Noncitizen Qualified
Heirs.--
``(1) In general.--Except upon the application of
subparagraph (F) or (M) of subsection (i)(3), if a
qualified heir is not a citizen of the United States,
any interest under this section passing to or acquired
by such heir (including any interest held by such heir
at a time described in subsection (f)(1)(C)) shall be
treated as a qualified family-owned business interest
only if the interest passes or is acquired (or is held)
in a qualified trust.
``(2) Qualified trust.--The term `qualified trust'
means a trust--
``(A) which is organized under, and
governed by, the laws of the United States or a
State, and
``(B) except as otherwise provided in
regulations, with respect to which the trust
instrument requires that at least 1 trustee of
the trust be an individual citizen of the
United States or a domestic corporation.
``(h) Agreement.--The agreement referred to in this
subsection is a written agreement signed by each person in
being who has an interest (whether or not in possession) in any
property designated in such agreement consenting to the
application of subsection (f) with respect to such property.
``(i) Other Definitions and Applicable Rules.--For purposes
of this section--
``(1) Qualified heir.--The term `qualified heir'--
``(A) has the meaning given to such term by
section 2032A(e)(1), and
``(B) includes any active employee of the
trade or business to which the qualified
family-owned business interest relates if such
employee has been employed by such trade or
business for a period of at least 10 years
before the date of the decedent's death.
``(2) Member of the family.--The term `member of
the family' has the meaning given to such term by
section 2032A(e)(2).
``(3) Applicable rules.--Rules similar to the
following rules shall apply:
``(A) Section 2032A(b)(4) (relating to
decedents who are retired or disabled).
``(B) Section 2032A(b)(5) (relating to
special rules for surviving spouses).
``(C) Section 2032A(c)(2)(D) (relating to
partial dispositions).
``(D) Section 2032A(c)(3) (relating to only
1 additional tax imposed with respect to any 1
portion).
``(E) Section 2032A(c)(4) (relating to due
date).
``(F) Section 2032A(c)(5) (relating to
liability for tax; furnishing of bond).
``(G) Section 2032A(c)(7) (relating to no
tax if use begins within 2 years; active
management by eligible qualified heir treated
as material participation).
``(H) Paragraphs (1) and (3) of section
2032A(d) (relating to election; agreement).
``(I) Section 2032A(e)(10) (relating to
community property).
``(J) Section 2032A(e)(14) (relating to
treatment of replacement property acquired in
section 1031 or 1033 transactions).
``(K) Section 2032A(f) (relating to statute
of limitations).
``(L) Section 6166(b)(3) (relating to
farmhouses and certain other structures taken
into account).
``(M) Subparagraphs (B), (C), and (D) of
section 6166(g)(1) (relating to acceleration of
payment).
``(N) Section 6324B (relating to special
lien for additional estate tax).''.
(b) Clerical Amendment.--The table of sections for part III
of subchapter A of chapter 11 is amended by inserting after the
item relating to section 2033 the following new item:
``Sec. 2033A. Family-owned business exclusion.''.
(c) Effective Date.--The amendments made by this section
shall apply to estates of decedents dying after December 31,
1997.
SEC. 503. MODIFICATIONS TO RATE OF INTEREST ON PORTION OF ESTATE TAX
EXTENDED UNDER SECTION 6166.
(a) In General.--Paragraphs (1) and (2) of section 6601(j)
(relating to 4-percent rate on certain portion of estate tax
extended under section 6166) are amended to read as follows:
``(1) In general.--If the time for payment of an
amount of tax imposed by chapter 11 is extended as
provided in section 6166, then in lieu of the annual
rate provided by subsection (a)--
``(A) interest on the 2-percent portion of
such amount shall be paid at the rate of 2
percent, and
``(B) interest on so much of such amount as
exceeds the 2-percent portion shall be paid at
a rate equal to 45 percent of the annual rate
provided by subsection (a).
For purposes of this subsection, the amount of any
deficiency which is prorated to installments payable
under section 6166 shall be treated as an amount of tax
payable in installments under such section.
``(2) 2-percent portion.--For purposes of this
subsection, the term `2-percent portion' means the
lesser of--
``(A)(i) the amount of the tentative tax
which would be determined under the rate
schedule set forth in section 2001(c) if the
amount with respect to which such tentative tax
is to be computed were the sum of $1,000,000
and the applicable exclusion amount in effect
under section 2010(c), reduced by
``(ii) the applicable credit amount in
effect under section 2010(c), or
``(B) the amount of the tax imposed by
chapter 11 which is extended as provided in
section 6166.''.
(b) Disallowance of Interest Deduction.--
(1) Estate tax.--Paragraph (1) of section 2053(c)
is amended by adding at the end the following new
subparagraph:
``(D) Section 6166 interest.--No deduction
shall be allowed under this section for any
interest payable under section 6601 on any
unpaid portion of the tax imposed by section
2001 for the period during which an extension
of time for payment of such tax is in effect
under section 6166.''.
(2) Income tax.--
(A) Section 163 is amended by redesignating
subsection (k) as subsection (l) and by
inserting after subsection (j) the following
new subsection:
``(k) Section 6166 Interest.--No deduction shall be allowed
under this section for any interest payable under section 6601
on any unpaid portion of the tax imposed by section 2001 for
the period during which an extension of time for payment of
such tax is in effect under section 6166.''.
(B) Subparagraph (E) of section 163(h)(2)
is amended by striking ``or 6166'' and all that
follows and inserting a period.
(c) Conforming Amendments.--
(1) Paragraphs (7)(A)(iii) and (8)(A)(iii) of
section 6166(b) are amended by striking ``4-percent''
each place it appears (including the heading) and
inserting ``2-percent''.
(2) Paragraph (4) of section 6601(j), as
redesignated by section 501(e), is amended by striking
``4-percent'' each place it appears and inserting ``2-
percent''.
(3) The subsection heading for section 6601(j) is
amended by striking ``4-Percent'' and inserting ``2-
Percent''.
(d) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to estates of decedents dying after
December 31, 1997.
(2) Election.--In the case of the estate of any
decedent dying before January 1, 1998, with respect to
which there is an election under section 6166 of the
Internal Revenue Code of 1986, the executor of the
estate may elect to have the amendments made by this
section apply with respect to installments due after
the effective date of the election; except that the 2-
percent portion of such installments shall be equal to
the amount which would be the 4-percent portion of such
installments without regard to such election. Such an
election shall be made before January 1, 1999 in the
manner prescribed by the Secretary of the Treasury and,
once made, is irrevocable.
SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER SECTION 2032A
TO LINEAL DESCENDANTS.
(a) General Rule.--Paragraph (7) of section 2032A(c)
(relating to special rules for tax treatment of dispositions
and failures to use for qualified use) is amended by adding at
the end the following new subparagraph:
``(E) Certain rents treated as qualified
use.--For purposes of this subsection, a
surviving spouse or lineal descendant of the
decedent shall not be treated as failing to use
qualified real property in a qualified use
solely because such spouse or descendant rents
such property to a member of the family of such
spouse or descendant on a net cash basis. For
purposes of the preceding sentence, a legally
adopted child of an individual shall be treated
as the child of such individual by blood.''.
(b) Conforming Amendment.--Section 2032A(b)(5)(A) is
amended by striking the last sentence.
(c) Effective Date.--The amendments made by this section
shall apply with respect to leases entered into after December
31, 1976.
SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGIBILITY FOR EXTENSION
OF TIME FOR PAYMENT OF ESTATE TAX.
(a) In General.--Part IV of subchapter C of chapter 76 of
the Internal Revenue Code of 1986 (relating to declaratory
judgments) is amended by adding at the end the following new
section:
``SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF ESTATE
WITH RESPECT TO INSTALLMENT PAYMENTS UNDER SECTION
6166.
``(a) Creation of Remedy.--In a case of actual controversy
involving a determination by the Secretary of (or a failure by
the Secretary to make a determination with respect to)--
``(1) whether an election may be made under section
6166 (relating to extension of time for payment of
estate tax where estate consists largely of interest in
closely held business) with respect to an estate, or
``(2) whether the extension of time for payment of
tax provided in section 6166(a) has ceased to apply
with respect to an estate,
upon the filing of an appropriate pleading, the Tax Court may
make a declaration with respect to whether such election may be
made or whether such extension has ceased to apply. Any such
declaration shall have the force and effect of a decision of
the Tax Court and shall be reviewable as such.
``(b) Limitations.--
``(1) Petitioner.--A pleading may be filed under
this section, with respect to any estate, only--
``(A) by the executor of such estate, or
``(B) by any person who has assumed an
obligation to make payments under section 6166
with respect to such estate (but only if each
other such person is joined as a party).
``(2) Exhaustion of administrative remedies.--The
court shall not issue a declaratory judgment or decree
under this section in any proceeding unless it
determines that the petitioner has exhausted all
available administrative remedies within the Internal
Revenue Service. A petitioner shall be deemed to have
exhausted its administrative remedies with respect to a
failure of the Secretary to make a determination at the
expiration of 180 days after the date on which the
request for such determination was made if the
petitioner has taken, in a timely manner, all
reasonable steps to secure such determination.
``(3) Time for bringing action.--If the Secretary
sends by certified or registered mail notice of his
determination as described in subsection (a) to the
petitioner, no proceeding may be initiated under this
section unless the pleading is filed before the 91st
day after the date of such mailing.''.
(b) Clerical Amendment.--The table of sections for part IV
of subchapter C of chapter 76 of such Code is amended by adding
at the end the following new item:
``Sec. 7479. Declaratory judgments relating to eligibility of
estate with respect to installment payments under
section 6166.''.
1 (c) Effective Date.--The amendments made by this section
shall apply to the estates of decedents dying after the date of
the enactment of this Act.
SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES AFTER
EXPIRATION OF STATUTE OF LIMITATIONS.
(a) In General.--Section 2001 (relating to imposition and
rate of estate tax) is amended by adding at the end the
following new subsection:
``(f) Valuation of Gifts.--If--
``(1) the time has expired within which a tax may
be assessed under chapter 12 (or under corresponding
provisions of prior laws) on the transfer of property
by gift made during a preceding calendar period (as
defined in section 2502(b)), and
``(2) the value of such gift is shown on the return
for such preceding calendar period or is disclosed in
such return, or in a statement attached to the return,
in a manner adequate to apprise the Secretary of the
nature of such gift,
the value of such gift shall, for purposes of computing the tax
under this chapter, be the value of such gift as finally
determined for purposes of chapter 12.''.
(b) Modification of Application of Statute of
Limitations.--Paragraph (9) of section 6501(c) is amended to
read as follows:
``(9) Gift tax on certain gifts not shown on
return.--If any gift of property the value of which (or
any increase in taxable gifts required under section
2701(d) which) is required to be shown on a return of
tax imposed by chapter 12 (without regard to section
2503(b)), and is not shown on such return, any tax
imposed by chapter 12 on such gift may be assessed, or
a proceeding in court for the collection of such tax
may be begun without assessment, at any time. The
preceding sentence shall not apply to any item which is
disclosed in such return, or in a statement attached to
the return, in a manner adequate to apprise the
Secretary of the nature of such item. The value of any
item which is so disclosed may not be redetermined by
the Secretary after the expiration of the period under
subsection (a).''.
(c) Declaratory Judgment Procedure for Determining Value of
Gift.--
(1) In general.--Part IV of subchapter C of chapter
76 is amended by inserting after section 7476 the
following new section:
``SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF CERTAIN GIFTS.
``(a) Creation of Remedy.--In a case of an actual
controversy involving a determination by the Secretary of the
value of any gift shown on the return of tax imposed by chapter
12 or disclosed on such return or in any statement attached to
such return, upon the filing of an appropriate pleading, the
Tax Court may make a declaration of the value of such gift. Any
such declaration shall have the force and effect of a decision
of the Tax Court and shall be reviewable as such.
``(b) Limitations.--
``(1) Petitioner.--A pleading may be filed under
this section only by the donor.
``(2) Exhaustion of administrative remedies.--The
court shall not issue a declaratory judgment or decree
under this section in any proceedingunless it
determines that the petitioner has exhausted all available
administrative remedies within the Internal Revenue Service.
``(3) Time for bringing action.--If the Secretary
sends by certified or registered mail notice of his
determination as described in subsection (a) to the
petitioner, no proceeding may be initiated under this
section unless the pleading is filed before the 91st
day after the date of such mailing.''.
(2) Clerical amendment.--The table of sections for
such part IV is amended by inserting after the item
relating to section 7476 the following new item:
``Sec. 7477. Declaratory judgments relating to value of certain
gifts.''.
(d) Conforming Amendment.--Subsection (c) of section 2504
is amended by striking ``, and if a tax under this chapter or
under corresponding provisions of prior laws has been assessed
or paid for such preceding calendar period''.
(e) Effective Dates.--
(1) In general.--The amendments made by subsections
(a) and (c) shall apply to gifts made after the date of
the enactment of this Act.
(2) Subsection (b)--The amendment made by
subsection (b) shall apply to gifts made in calendar
years ending after the date of the enactment of this
Act.
SEC. 507. REPEAL OF THROWBACK RULES APPLICABLE TO CERTAIN DOMESTIC
TRUSTS.
(a) Accumulation Distributions.--
(1) In general.--Section 665 is amended by
inserting after subsection (b) the following new
subsection:
``(c) Exception for Accumulation Distributions From Certain
Domestic Trusts.--For purposes of this subpart--
``(1) In general.--In the case of a qualified
trust, any distribution in any taxable year beginning
after the date of the enactment of this subsection
shall be computed without regard to any undistributed
net income.
``(2) Qualified trust.--For purposes of this
subsection, the term `qualified trust' means any trust
other than--
``(A) a foreign trust (or, except as
provided in regulations, a domestic trust which
at any time was a foreign trust), or
``(B) a trust created before March 1, 1984,
unless it is established that the trust would
not be aggregated with other trusts under
section 643(f) if such section applied to such
trust.''.
(2) Conforming amendments.--Subsection (b) of
section 665 is amended by inserting ``except as
provided in subsection (c),'' after ``subpart,''.
(b) Repeal of Tax on Transfers to Trusts at Less Than Fair
Market Value.--
(1) Subpart A of part I of subchapter J of chapter
1 is amended by striking section 644 and by
redesignating section 645 as section 644.
(2) Paragraph (5) of section 706(b) is amended by
striking ``section 645'' and inserting ``section 644''.
(3) The table of sections for such subpart is
amended by striking the last 2 items and inserting the
following new item:
``Sec. 644. Taxable year of trusts.''
(c) Effective Dates.--
(1) Accumulation distributions.--The amendments
made by subsection (a) shall apply to distributions in
taxable years beginning after the date of the enactment
of this Act.
(2) Transferred property.--The amendments made by
subsection (b) shall apply to sales or exchanges after
the date of the enactment of this Act.
SEC. 508. TREATMENT OF LAND SUBJECT TO A QUALIFIED CONSERVATION
EASEMENT.
(a) Estate Tax With Respect to Land Subject to a Qualified
Conservation Easement.--Section 2031 (relating to the
definition of gross estate) is amended by redesignating
subsection (c) as subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Estate Tax With Respect to Land Subject to a
Qualified Conservation Easement.--
``(1) In general.--If the executor makes the
election described in paragraph (6), then, except as
otherwise provided in this subsection, there shall be
excluded from the gross estate the lesser of--
``(A) the applicable percentage of the
value of land subject to a qualified
conservation easement, reduced by the amount of
any deduction under section 2055(f) with
respect to such land, or
``(B) the exclusion limitation.
``(2) Applicable percentage.--For purposes of
paragraph (1), the term `applicable percentage' means
40 percent reduced (but not below zero) by 2 percentage
points for each percentage point (or fraction thereof)
by which the value of the qualified conservation
easement is less than 30 percent of the value of the
land (determined without regard to the value of such
easement and reduced by the value of any retained
development right (as defined in paragraph (5)).
``(3) Exclusion limitation.--For purposes of
paragraph (1), the exclusion limitation is the
limitation determined in accordance with the following
table:
``In the case of estates of The exclusion
decedents dying during: limitation is:
1998.......................................... $100,000
1999.......................................... $200,000
2000.......................................... $300,000
2001.......................................... $400,000
2002 or thereafter............................ $500,000.
``(4) Treatment of certain indebtedness.--
``(A) In general.--The exclusion provided
in paragraph (1) shall not apply to the extent
that the land is debt-financed property.
``(B) Definitions.--For purposes of this
paragraph--
``(i) Debt-financed property.--The
term `debt-financed property' means any
property with respect to which there is
an acquisition indebtedness (as defined
in clause (ii)) on the date of the
decedent's death.
``(ii) Acquisition indebtedness.--
The term `acquisition indebtedness'
means, with respect to debt-financed
property, the unpaid amount of--
``(I) the indebtedness
incurred by the donor in
acquiring such property,
``(II) the indebtedness
incurred before the acquisition
of such property if such
indebtedness would not have
been incurred but for such
acquisition,
``(III) the indebtedness
incurred after the acquisition
of such property if such
indebtedness would not have
been incurred but for such
acquisition and the incurrence
of such indebtedness was
reasonably foreseeable at the
time of such acquisition, and
``(IV) the extension,
renewal, or refinancing of an
acquisition indebtedness.
``(5) Treatment of retained development right.--
``(A) In general.--Paragraph (1) shall not
apply to the value of any development right
retained by the donor in the conveyance of a
qualified conservation easement.
``(B) Termination of retained development
right.--If every person in being who has an
interest (whether or not in possession) in the
land executes an agreement to extinguish
permanently some or all of any development
rights (as defined in subparagraph (D))
retained by the donor on or before the date for
filing the return of the tax imposed by section
2001, then any tax imposed by section 2001
shall be reduced accordingly. Such agreement
shall be filed with the return of the tax
imposed by section 2001. The agreement shall be
in such form as the Secretary shall prescribe.
``(C) Additional tax.--Any failure to
implement the agreement described in
subparagraph (B) not later than the earlier
of--
``(i) the date which is 2 years
after the date of the decedent's death,
or
``(ii) the date of the sale of such
land subject to the qualified
conservation easement,
shall result in the imposition of an additional
tax in the amount of the tax which would
havebeen due on the retained development rights subject to such
agreement. Such additional tax shall be due and payable on the last day
of the 6th month following such date.
``(D) Development right defined.--For
purposes of this paragraph, the term
`development right' means any right to use the
land subject to the qualified conservation
easement in which such right is retained for
any commercial purpose which is not subordinate
to and directly supportive of the use of such
land as a farm for farming purposes (within the
meaning of section 2032A(e)(5)).
``(6) Election.--The election under this subsection
shall be made on the return of the tax imposed by
section 2001. Such an election, once made, shall be
irrevocable.
``(7) Calculation of estate tax due.--An executor
making the election described in paragraph (6) shall,
for purposes of calculating the amount of tax imposed
by section 2001, include the value of any development
right (as defined in paragraph (5)) retained by the
donor in the conveyance of such qualified conservation
easement. The computation of tax on any retained
development right prescribed in this paragraph shall be
done in such manner and on such forms as the Secretary
shall prescribe.
``(8) Definitions.--For purposes of this
subsection--
``(A) Land subject to a qualified
conservation easement.--The term `land subject
to a qualified conservation easement' means
land--
``(i) which is located--
``(I) in or within 25 miles
of an area which, on the date
of the decedent's death, is a
metropolitan area (as defined
by the Office of Management and
Budget),
``(II) in or within 25
miles of an area which, on the
date of the decedent's death,
is a national park or
wilderness area designated as
part of the National Wilderness
Preservation System (unless it
is determined by the Secretary
that land in or within 25 miles
of such a park or wilderness
area is not under significant
development pressure), or
``(III) in or within 10
miles of an area which, on the
date of the decedent's death,
is an Urban National Forest (as
designated by the Forest
Service),
``(ii) which was owned by the
decedent or a member of the decedent's
family at all times during the 3-year
period ending on the date of the
decedent's death, and
``(iii) with respect to which a
qualified conservation easement has
been made by an individual described in
subparagraph (C), as of the date of the
election described in paragraph (6).
``(B) Qualified conservation easement.--The
term `qualified conservation easement' means a
qualified conservation contribution (as defined
in section 170(h)(1)) of a qualified real
property interest (as defined in section
170(h)(2)(C)), except that clause (iv) of
section 170(h)(4)(A) shall not apply, and the
restriction on the use of such interest
described in section 170(h)(2)(C) shall include
a prohibition on more than a de minimis use for
a commercial recreational activity.
``(C) Individual described.--An individual
is described in this subparagraph if such
individual is--
``(i) the decedent,
``(ii) a member of the decedent's
family,
``(iii) the executor of the
decedent's estate, or
``(iv) the trustee of a trust the
corpus of which includes the land to be
subject to the qualified conservation
easement.
``(D) Member of family.--The term `member
of the decedent's family' means any member of
the family (as defined in section 2032A(e)(2))
of the decedent.
``(9) Application of this section to interests in
partnerships, corporations, and trusts.--This section
shall apply to an interest in a partnership,
corporation, or trust if at least 30 percent of the
entity is owned (directly or indirectly) by the
decedent, as determined under the rules described in
section 2033A(e)(3).''.
(b) Carryover Basis.--Section 1014(a) (relating to basis of
property acquired from a decedent) is amended by striking
``or'' at the end of paragraphs (1) and (2), by striking the
period at the end of paragraph (3) and inserting ``, or'' and
by adding at the end the following new paragraph:
``(4) to the extent of the applicability of the
exclusion described in section 2031(c), the basis in
the hands of the decedent.''.
(c) Qualified Conservation Contribution Is Not a
Disposition.--Subsection (c) of section 2032A (relating to
alternative valuation method) is amended by adding at the end
the following new paragraph:
``(8) Qualified conservation contribution is not a
disposition.--A qualified conservation contribution (as
defined in section 170(h)) by gift or otherwise shall
not be deemed a disposition under subsection
(c)(1)(A).''.
(d) Qualified Conservation Contribution Where Surface and
Mineral Rights are Separated.--Section 170(h)(5)(B)(ii)
(relating to special rule) is amended to read as follows:
``(ii) Special rule.--With respect to any
contribution of property in which the ownership of the
surface estate and mineral interests has been and
remains separated, subparagraph (A) shall be treated as
met if the probability of surface mining occurring on
such property is so remote as to be negligible.''.
(e) Effective Dates.--
(1) Enclusion.--The amendments made by subsections
(a) and (b) shall apply to estates of decedents dying
after December 31, 1997.
(2) Easements.--The amendments made by subsections
(c) and (d) shall apply to easements granted after
December 31, 1997.
Subtitle B--Generation-Skipping Tax Provision
SEC. 511. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING TRANSFER TAX
FOR TRANSFERS TO INDIVIDUALS WITH DECEASED PARENTS.
(a) In General.--Section 2651 (relating to generation
assignment) is amended by redesignating subsection (e) as
subsection (f) and by inserting after subsection (d) the
following new subsection:
``(e) Special Rule for Persons With a Deceased Parent.--
``(1) In general.--For purposes of determining
whether any transfer is a generation-skipping transfer,
if--
``(A) an individual is a descendant of a
parent of the transferor (or the transferor's
spouse or former spouse), and
``(B) such individual's parent who is a
lineal descendant of the parent of the
transferor (or the transferor's spouse or
former spouse) is dead at the time the transfer
(from which an interest of such individual is
established or derived) is subject to a tax
imposed by chapter 11 or 12 upon the transferor
(and if there shall be more than 1 such time,
then at the earliest such time),
such individual shall be treated as if such individual
were a member of the generation which is 1 generation
below the lower of the transferor's generation or the
generation assignment of the youngest living ancestor
of such individual who is also a descendant of the
parent of the transferor (or the transferor's spouse or
former spouse), and the generation assignment of any
descendant of such individual shall be adjusted
accordingly.
``(2) Limited application of subsection to
collateral heirs.--This subsection shall not apply with
respect to a transfer to any individual who is not a
lineal descendant of the transferor (or the
transferor's spouse or former spouse) if, at the time
of the transfer, such transferor has any living lineal
descendant.''.
(b) Conforming Amendments.--
(1) Section 2612(c) (defining direct skip) is
amended by striking paragraph (2) and by redesignating
paragraph (3) as paragraph (2).
(2) Section 2612(c)(2) (as so redesignated) is
amended by striking ``section 2651(e)(2)'' and
inserting ``section 2651(f)(2)''.
(c) Effective Date.--The amendments made by this section
shall apply to terminations, distributions, and transfers
occurring after December 31, 1997.
TITLE VI--EXTENSIONS
SEC. 601. RESEARCH TAX CREDIT.
(a) In General.--Paragraph (1) of section 41(h) (relating
to termination) is amended--
(1) by striking ``May 31, 1997'' and inserting
``June 30, 1998'', and
(2) by striking in the last sentence ``during the
first 11 months of such taxable year.'' and inserting
``during the 24-month period beginning with the first
month of such year. The 24 months referred to in the
preceding sentence shall be reduced by the number of
full months after June 1996 (and before the first month
of such first taxable year) during which the taxpayer
paid or incurred any amount which is taken into account
in determining the credit under this section.''.
(b) Technical Amendments.--
(1) Subparagraph (B) of section 41(c)(4) is amended
to read as follows:
``(B) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary.''.
(2) Paragraph (1) of section 45C(b) is amended by
striking ``May 31, 1997'' and inserting ``June 30,
1998''.
(c) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred after May 31, 1997.
SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.
(a) In General.--Clause (ii) of section 170(e)(5)(D)
(relating to termination) is amended by striking ``May 31,
1997'' and inserting ``June 30, 1998''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to contributions made after May 31, 1997.
SEC. 603. WORK OPPORTUNITY TAX CREDIT.
(a) Extension.--Subparagraph (B) of section 51(c)(4)
(relating to termination) is amended by striking ``September
30, 1997'' and inserting ``June 30, 1998''.
(b) Modification of Eligibility Requirement Based on Period
on Welfare.--
(1) In general.--Subparagraph (A) of section
51(d)(2) (defining qualified IV-A recipient) is amended
by striking all that follows ``a IV-A program'' and
inserting ``for any 9 months during the 18-month period
ending on the hiring date.''.
(2) Conforming amendment.--Subparagraph (A) of
section 51(d)(3) is amended to read as follows:
``(A) In general.--The term `qualified
veteran' means any veteran who is certified by
the designated local agency as being a member
of a family receiving assistance under a food
stamp program under the Food Stamp Act of 1977
for at least a 3-month period ending during the
12-month period ending on the hiring date.''.
(c) Qualified SSI Recipients Treated as Members of Targeted
Groups.--
(1) In general.--Section 51(d)(1) (relating to
members of targeted groups) is amended by striking
``or'' at the end of subparagraph (F), by striking the
period at the end of subparagraph (G) and inserting ``,
or'', and by adding at the end the following new
subparagraph:
``(H) a qualified SSI recipient.''.
(2) Qualified ssi recipients.--Section 51(d) is
amended by redesignating paragraphs (9), (10), and (11)
as paragraphs (10), (11), and (12), respectively, and
by inserting after paragraph (8) the following new
paragraph:
``(9) Qualified ssi recipient.--The term `qualified
SSI recipient' means any individual who is certified by
the designated local agency as receiving supplemental
security income benefits under title XVI of the Social
Security Act (including supplemental security income
benefits of the type described in section 1616 of such
Act or section 212 of Public Law 93-66) for any month
ending within the 60-day period ending on the hiring
date.''.
(d) Percentage of Wages Allowed as Credit.--
(1) In general.--Subsection (a) of section 51
(relating to determination of amount) is amended by
striking ``35 percent'' and inserting ``40 percent''.
(2) Application of credit for individuals
performing fewer than 400 hours of services.--Paragraph
(3) of section 51(i) is amended to read as follows:
``(3) Individuals not meeting minimum employment
periods.--
``(A) Reduction of credit for individuals
performing fewer than 400 hours of service.--In
the case of an individual who has performed at
least 120 hours, but less than 400 hours, of
service for the employer, subsection (a) shall
be applied by substituting `25 percent' for `40
percent'.
``(B) Denial of credit for individuals
performing fewer than 120 hours of service.--No
wages shall be taken into account under
subsection (a) with respect to any individual
unless such individual has performed at least
120 hours of service for the employer.''.
(e) Effective date.--The amendments made by this section
shall apply to individuals who begin work for the employer
after September 30, 1997.
SEC. 604. ORPHAN DRUG TAX CREDIT.
(a) In General.--Section 45C (relating to clinical testing
expenses for certain drugs for rare diseases or conditions) is
amended by striking subsection (e).
(b) Effective Date.--The amendment made by subsection (a)
shall apply to amounts paid or incurred after May 31, 1997.
TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA
SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF
COLUMBIA.
(a) In General.--Chapter 1 is amended by adding at the end
the following new subchapter:
``Subchapter W--District of Columbia Enterprise Zone
``Sec. 1400. Establishment of DC Zone.
``Sec. 1400A. Tax-exempt economic development bonds.
``Sec. 1400B. Zero percent capital gains rate.
``Sec. 1400C. First-time homebuyer credit for District of
Columbia.
``SEC. 1400. ESTABLISHMENT OF DC ZONE.
``(a) In General.--For purposes of this title--
``(1) the applicable DC area is hereby designated
as the District of Columbia Enterprise Zone, and
``(2) except as otherwise provided in this
subchapter, the District of Columbia Enterprise Zone
shall be treated as an empowerment zone designated
under subchapter U.
``(b) Applicable DC Area.--For purposes of subsection (a),
the term `applicable DC area' means the area consisting of--
``(1) the census tracts located in the District of
Columbia which are part of an enterprise community
designated under subchapter U before the date of the
enactment of this subchapter, and
``(2) all other census tracts--
``(A) which are located in the District of
Columbia, and
``(B) for which the poverty rate is not
less than than 20 percent.
``(c) District of Columbia Enterprise Zone.--For purposes
of this subchapter, the terms `District of Columbia Enterprise
Zone' and `DC Zone' mean the District of Columbia Enterprise
Zone designated by subsection (a).
``(d) Special Rules for Application of Employment Credit.--
``(1) Employees whose principal place of abode is
in district of columbia.--With respect to the DC Zone,
section 1396(d)(1)(B) (relating to empowerment zone
employment credit) shall be applied by substituting
`the District of Columbia' for `such empowerment zone'.
``(2) No decrease of percentage in 2002.--In the
case of the DC Zone, section 1396 (relating to
empowerment zone employment credit) shall be applied by
substituting ``20'' for ``15'' in the table contained
in section 1396(b). The preceding sentence shall apply
only with respect to qualified zone employees, as
defined in section 1396(d), determined by treating no
area other than the DC Zone as an empowerment zone or
enterprise community.
``(e) Special Rule for Application of Enterprise Zone
Business Definition.--For purposes of this subchapter and for
purposes of applying subchapter U with respect to the DC Zone,
section 1397B shall be applied without regard to subsections
(b)(6) and (c)(5) thereof.
``(f) Time For Which Designation Applicable.--
``(1) In general.--The designation made by
subsection (a) shall apply for the period beginning on
January 1, 1998, and ending on December 31, 2002.
``(2) Coordination with dc enterprise community
designated under subchapter u.--The designation under
subchapter U of the census tracts referred to in
subsection (b)(1) as an enterprise community shall
terminate on December 31, 2002.
``SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.
``(a) In General.--In the case of the District of Columbia
Enterprise Zone, subparagraph (A) of section 1394(c)(1)
(relating to limitation on amount of bonds) shall be applied by
substituting `$15,000,000' for `$3,000,000'.
``(b) Period of Applicability.--This section shall apply to
bonds issued during the period beginning on January 1, 1998,
and ending on December 31, 2002.
``SEC. 1400B. ZERO PERCENT CAPITAL GAINS RATE.
``(a) Exclusion.--Gross income shall not include qualified
capital gain from the sale or exchange of any DC Zone asset
held for more than 5 years.
``(b) DC Zone Asset.--For purposes of this section--
``(1) In general.--The term `DC Zone asset' means--
``(A) any DC Zone business stock,
``(B) any DC Zone partnership interest, and
``(C) any DC Zone business property.
``(2) DC zone business stock.--
``(A) In general.--The term `DC Zone
business stock' means any stock in a domestic
corporation which is originally issued after
December 31, 1997, if--
``(i) such stock is acquired by the
taxpayer, before January 1, 2003, at
its original issue (directly or through
an underwriter) solely in exchange for
cash,
``(ii) as of the time such stock
was issued, such corporation was a DC
Zone business (or, in the case of a new
corporation, such corporation was being
organized for purposes of being a DC
Zone business), and
``(iii) during substantially all of
the taxpayer's holding period for such
stock, such corporation qualified as a
DC Zone business.
``(B) Redemptions.--A rule similar to the
rule of section 1202(c)(3) shall apply for
purposes of this paragraph.
``(3) DC zone partnership interest.--The term `DC
Zone partnership interest' means any capital or profits
interest in a domestic partnership which is originally
issued after December 31, 1997, if--
``(A) such interest is acquired by the
taxpayer, before January 1, 2003, from the
partnership solely in exchange for cash,
``(B) as of the time such interest was
acquired, such partnership was a DC Zone
business (or, in the case of a new partnership,
such partnership was being organized for
purposes of being a DC Zone business), and
``(C) during substantially all of the
taxpayer's holding period for such interest,
such partnership qualified as a DC Zone
business.
A rule similar to the rule of paragraph (2)(B) shall
apply for purposes of this paragraph.
``(4) DC zone business property.--
``(A) In general.--The term `DC Zone
business property' means tangible property if--
``(i) such property was acquired by
the taxpayer by purchase (as defined in
section 179(d)(2)) after December 31,
1997, and before January 1, 2003,
``(ii) the original use of such
property in the DC Zone commences with
the taxpayer, and
``(iii) during substantially all of
the taxpayer's holding period for such
property, substantially all of the use
of such property was in a DC Zone
business of the taxpayer.
``(B) Special rule for buildings which are
substantially improved.--
``(i) In general.--The requirements
of clauses (i) and (ii) of subparagraph
(A) shall be treated as met with
respect to--
``(I) property which is
substantially improved by the
taxpayer before January 1,
2003, and
``(II) any land on which
such property is located.
``(ii) Substantial improvement.--
For purposes of clause (i), property
shall be treated as substantially
improved by the taxpayer only if,
during any 24-month period beginning
after December 31, 1997, additions to
basis with respect to such property in
the hands of the taxpayer exceed the
greater of--
``(I) an amount equal to
the adjusted basis of such
property at the beginning of
such 24-month period in the
hands of the taxpayer, or
``(II) $5,000.
``(6) Treatment of subsequent purchasers, etc.--The
term `DC Zone asset' includes any property which would
be a DC Zone asset but for paragraph (2)(A)(i), (3)(A),
or (4)(A)(ii) in the hands of the taxpayer if such
property was a DC Zone asset in the hands of a prior
holder.
``(7) 5-year safe harbor.--If any property ceases
to be a DC Zone asset by reason of paragraph
(2)(A)(iii), (3)(C), or (4)(A)(iii) after the 5-year
period beginning on the date the taxpayer acquired such
property, such property shall continue to be treated as
meeting the requirements of such paragraph; except that
the amount of gain to which subsection (a) applies on
any sale or exchange of such property shall not exceed
the amount which would be qualified capital gain had
such property been sold on the date of such cessation.
``(c) DC Zone Business.--For purposes of this section, the
term `DC Zone business' means any entity which is an enterprise
zone business (as defined in section 1397B), determined--
``(1) after the application of section 1400(e),
``(2) by substituting ``80 percent'' for ``50
percent'' in subsections (b)(2) and (c)(1) of section
1397B, and
``(3) by treating no area other than the DC Zone as
an empowerment zone or enterprise community.
``(d) Treatment of Zone as Including Census Tracts With 10
Percent Poverty Rate.--For purposes of applying this section
(and for purposes of applying this subchapter and subchapter U
with respect to this section), the DC Zone shall be treated as
including all census tracts--
``(1) which are located in the District of
Columbia, and
``(2) for which the poverty rate is not less than
10 percent.
``(e) Other Definitions and Special Rules.--For purposes of
this section--
``(1) Qualified capital gain.--Except as otherwise
provided in this subsection, the term `qualified
capital gain' means any gain recognized on the sale or
exchange of--
``(A) a capital asset, or
``(B) property used in the trade or
business (as defined in section 1231(b)).
``(2) Gain before 1998 or after 2007 not
qualified.--The term `qualified capital gain' shall not
include any gain attributable to periods before January
1, 1998, or after December 31, 2007.
``(3) Certain gain not qualified.--The term
`qualified capital gain' shall not include any gain
which would be treated as ordinary income under section
1245 or under section 1250 if section 1250 applied to
all depreciation rather than the additional
depreciation.
``(4) Intangibles and land not integral part of dc
zone business.--The term `qualified capital gain' shall
not include any gain which is attributable to real
property, or an intangible asset, which is not an
integral part of a DC Zone business.
``(5) Related party transactions.--The term
`qualified capital gain' shall not include any gain
attributable, directly or indirectly, in whole or in
part, to a transaction with a related person. For
purposes of this paragraph, persons are related to each
other if such persons are described in section 267(b)
or 707(b)(1).
``(f) Certain Other Rules To Apply.--Rules similar to the
rules of subsections (g), (h), (i)(2), and (j) of section 1202
shall apply for purposes of this section.
``(g) Sales and Exchanges of Interests in Partnerships and
S Corporations Which Are DC Zone Businesses.--In the case of
the sale or exchange of an interest in a partnership, or of
stock in an S corporation, which was a DC Zone business during
substantially all of the period the taxpayer held such interest
or stock, the amount of qualified capital gain shall be
determined without regard to--
``(1) any gain which is attributable to real
property, or an intangible asset, which is not an
integral part of a DC Zone business, and
``(2) any gain attributable to periods before
January 1, 1998, or after December 31, 2007.
``SEC. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA.
``(a) Allowance of Credit.--In the case of an individual
who is a first-time homebuyer of a principal residence in the
District of Columbia during any taxable year, there shall be
allowed as a credit against the tax imposed by this chapter for
the taxable year an amount equal to so much of the purchase
price of the residence as does not exceed $5,000.
``(b) Limitation Based on Modified Adjusted Gross Income.--
``(1) In general.--The amount allowable as a credit
under subsection (a) (determined without regard to this
subsection) for the taxable year shall be reduced (but
not below zero) by the amount which bears the same
ratio to the credit so allowable as--
``(A) the excess (if any) of--
``(i) the taxpayer's modified
adjusted gross income for such taxable
year, over
``(ii) $70,000 ($110,000 in the
case of a joint return), bears to
``(B) $20,000.
``(2) Modified adjusted gross income.--For purposes
of paragraph (1), the term `modified adjusted gross
income' means the adjusted gross income of the taxpayer
for the taxable year increased by any amount excluded
from gross income under section 911, 931, or 933.
``(c) First-Time Homebuyer.--For purposes of this section--
``(1) In general.--The term `first-time homebuyer'
has the same meaning as when used in section
72(t)(8)(D)(i), except that `principal residence in the
District of Columbia during the 1-year period' shall be
substituted for `principal residence during the 2-year
period' in subclause (I) thereof.
``(2) One-time only.--If an individual is treated
as a first-time homebuyer with respect to any principal
residence, such individual may not be treated as a
first-time homebuyer with respect to any other
principal residence.
``(3) Principal residence.--The term `principal
residence' has the same meaning as when used in section
121.
``(d) Carryover of Credit.--If the credit allowable under
subsection (a) exceeds the limitation imposed by section 26(a)
for such taxable year reduced by the sum of the credits
allowable under subpart A of part IV of subchapter A (other
than this section), such excess shall be carried to the
succeeding taxable year and added to the credit allowable under
subsection (a) for such taxable year.
``(e) Special Rules.--For purposes of this section--
``(1) Allocation of dollar limitation.--
``(A) Married individuals filing
separately.--In the case of a married
individual filing a separate return, subsection
(a) shall be applied by substituting `$2,500'
for `$5,000'.
``(B) Other taxpayers.--If 2 or more
individuals who are not married purchase a
principal residence, the amount of the credit
allowed under subsection (a) shall be allocated
among such individuals in such manner as the
Secretary may prescribe, except that the total
amount of the credits allowed to all such
individuals shall not exceed $5,000.
``(2) Purchase.--
``(A) In general.--The term `purchase'
means any acquisition, but only if--
``(i) the property is not acquired
from a person whose relationship to the
person acquiring it would result in the
disallowance of losses under section
267 or 707(b) (but, in applying section
267 (b) and (c) for purposes of this
section, paragraph (4) of section
267(c) shall be treated as providing
that the family of an individual shall
include only his spouse, ancestors, and
lineal descendants), and
``(ii) the basis of the property in
the hands of the person acquiring it is
not determined--
``(I) in whole or in part
by reference to the adjusted
basis of such property in the
hands of the person from whom
acquired, or
``(II) under section
1014(a) (relating to property
acquired from a decedent).
``(B) Construction.--A residence which is
constructed by the taxpayer shall be treated as
purchased by the taxpayer.
``(3) Purchase price.--The term `purchase price'
means the adjusted basis of the principal residence on
the date of acquisition (within the meaning of section
72(t)(8)(D)(iii)).
``(f) Reporting.--If the Secretary requires information
reporting under section 6045 by a person described in
subsection (e)(2) thereof to verify the eligibility of
taxpayers for the credit allowable by this section, the
exception provided by section 6045(e)(5) shall not apply.
``(g) Credit Treated as Nonrefundable Personal Credit.--For
purposes of this title, the credit allowed by this section
shall be treated as a credit allowable under subpart A of part
IV of subchapter A of this chapter.
``(h) Basis Adjustment.--For purposes of this subtitle, if
a credit is allowed under this section with respect to the
purchase of any residence, the basis of such residence shall be
reduced by the amount of the credit so allowed.
``(i) Termination.--This section shall not apply to any
property purchased after December 31, 2000.''
(b) Conforming Amendments.--
(1) Subsection (d) of section 39 is amended by
adding at the end the following new paragraph:
``(8) No carryback of dc zone credits before
effective date.--No portion of the unused business
credit for any taxable year which is attributable to
the credits allowable under subchapter U by reason of
section 1400 may be carried back to a taxable year
ending before the date of the enactment of section
1400.''
(2) Subsection (a) of section 1016 is amended by
striking ``and'' at the end of paragraph (25), by
striking the period at the end of paragraph (26) and
inserting ``, and'', and by adding at the end thereof
the following new paragraph:
``(27) in the case of a residence with respect to
which a credit was allowed under section 1400C, to the
extent provided in section 1400C(h).''
(c) Clerical Amendment.--The table of subchapters for
chapter 1 is amended by adding at the end the following new
item:
``Subchapter W. District of Columbia Enterprise Zone.''.
(d) Effective Date.--Except as provided in subsection (c),
the amendments made by this section shall take effect on the
date of the enactment of this Act.
TITLE VIII--WELFARE-TO-WORK INCENTIVES
SEC. 801. INCENTIVES FOR EMPLOYING LONG-TERM FAMILY ASSISTANCE
RECIPIENTS.
(a) In General.--Subpart F of part IV of subchapter A of
chapter 1 is amended by inserting after section 51 the
following new section:
``SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM FAMILY
ASSISTANCE RECIPIENTS.
``(a) Determination of Amount.--For purposes of section 38,
the amount of the welfare-to-work credit determined under this
section for the taxable year shall be equal to--
``(1) 35 percent of the qualified first-year wages
for such year, and
``(2) 50 percent of the qualified second-year wages
for such year.
``(b) Qualified Wages Defined.--For purposes of this
section--
``(1) In general.--The term `qualified wages' means
the wages paid or incurred by the employer during the
taxable year to individuals who are long-term family
assistance recipients.
``(2) Qualified first-year wages.--The term
`qualified first-year wages' means, with respect to any
individual, qualified wages attributable to service
rendered during the 1-year period beginning with the
day the individual begins work for the employer.
``(3) Qualified second-year wages.--The term
`qualified second-year wages' means, with respect to
any individual, qualified wages attributable to service
rendered during the 1-year period beginning on the day
after the last day of the 1-year period with respect to
such individual determined under paragraph (2).
``(4) Only first $10,000 of wages per year taken
into account.--The amount of the qualified first-year
wages, and the amount of qualified second-year wages,
which may be taken into account with respect to any
individual shall not exceed $10,000 per year.
``(5) Wages.--
``(A) In general.--The term `wages' has the
meaning given such term by section 51(c),
without regard to paragraph (4) thereof.
``(B) Certain amounts treated as wages.--
The term `wages' includes amounts paid or
incurred by the employer which are excludable
from such recipient's gross income under--
``(i) section 105 (relating to
amounts received under accident and
health plans),
``(ii) section 106 (relating to
contributions by employer to accident
and health plans),
``(iii) section 127 (relating to
educational assistance programs) or
would be so excludable but for section
127(d), but only to the extent paid or
incurred to a person not related to the
employer, or
``(iv) section 129 (relating to
dependent care assistance programs).
The amount treated as wages by clause (i) or
(ii) for any period shall be based on the
reasonable cost of coverage for the period, but
shall not exceed the applicable premium for the
period under section 4980B(f)(4).
``(C) Special rules for agricultural and
railway labor.--If such recipient is an
employee to whom subparagraph (A) or (B) of
section 51(h)(1) applies, rules similar to
therules of such subparagraphs shall apply except that--
``(i) such subparagraph (A) shall
be applied by substituting `$10,000'
for `$6,000', and
``(ii) such subparagraph (B) shall
be applied by substituting `$833.33'
for `$500'.
``(c) Long-Term Family Assistance Recipients.--For purposes
of this section--
``(1) In general.--The term `long-term family
assistance recipient' means any individual who is
certified by the designated local agency (as defined in
section 51(d)(10))--
``(A) as being a member of a family
receiving assistance under a IV-A program (as
defined in section 51(d)(2)(B)) for at least
the 18-month period ending on the hiring date,
``(B)(i) as being a member of a family
receiving such assistance for 18 months
beginning after the date of the enactment of
this section, and
``(ii) as having a hiring date which is not
more than 2 years after the end of the earliest
such 18-month period, or
``(C)(i) as being a member of a family
which ceased to be eligible after the date of
the enactment of this section for such
assistance by reason of any limitation imposed
by Federal or State law on the maximum period
such assistance is payable to a family, and
``(ii) as having a hiring date which is not
more than 2 years after the date of such
cessation.
``(2) Hiring date.--The term `hiring date' has the
meaning given such term by section 51(d).
``(d) Certain Rules To Apply.--
``(1) In general.--Rules similar to the rules of
section 52, and subsections (d)(11), (f), (g), (i) (as
in effect on the day before the date of the enactment
of the Taxpayer Relief Act of 1997), (j), and (k) of
section 51, shall apply for purposes of this section.
``(2) Credit to be part of general business credit,
etc.--References to section 51 in section 38(b),
280C(a), and 1396(c)(3) shall be treated as including
references to this section.
``(e) Coordination With Work Opportunity Credit.--If a
credit is allowed under this section to an employer with
respect to an individual for any taxable year, then for
purposes of applying section 51 to such employer, such
individual shall not be treated as a member of a targeted group
for such taxable year.
``(f) Termination.--This section shall not apply to
individuals who begin work for the employer after April 30,
1999.''.
(b) Clerical Amendment.--The table of sections for subpart
F of part IV of subchapter A of chapter 1 is amended by
inserting after the item relating to section 51 the following
new item:
``Sec. 51A. Temporary incentives for employing long-term family
assistance recipients.''.
(c) Effective Date.--The amendments made by this section
shall apply to individuals who begin work for the employer
after December 31, 1997.
TITLE IX--MISCELLANEOUS PROVISIONS
Subtitle A--Provisions Relating to Excise Taxes
SEC. 901. GENERAL REVENUE PORTION OF HIGHWAY MOTOR FUELS TAXES
DEPOSITED INTO HIGHWAY TRUST FUND.
(a) In General.--Paragraph (4) of section 9503(b) (relating
to certain additional taxes not transferred to Highway Trust
Fund) is amended to read as follows:
``(4) Certain taxes not transferred to highway
trust fund.--For purposes of paragraphs (1) and (2),
there shall not be taken into account the taxes imposed
by--
``(A) section 4041(d),
``(B) section 4081 to the extent
attributable to the rate specified in section
4081(a)(2)(B),
``(C) section 4041 or 4081 to the extent
attributable to fuel used in a train,
``(D) in the case of fuels used as
described in paragraph (4)(D), (5)(B), or
(6)(D) of subsection (c), section 4041 or
4081--
``(i) with respect to so much of
the rate of tax on gasoline or special
motor fuels as exceeds 11.5 cents per
gallon, and
``(ii) with respect to so much of
the rate of tax on diesel fuel or
kerosene as exceeds 17.5 cents per
gallon,
``(E) in the case of fuels described in
section 4041(b)(2)(A), 4041(k), or 4081(c),
section 4041 or 4081 before October 1, 1999,
with respect to a rate equal to 2.5 cents per
gallon, or
``(F) in the case of fuels described in
section 4081(c)(2), such section before October
1, 1999, with respect to a rate equal to 2.8
cents per gallon.''.
(b) Mass Transit Portion.--Section 9503(e)(2) (relating to
transfers to Mass Transit Account) is amended by striking ``2
cents'' and inserting ``2.85 cents''.
(c) Limitation on Expenditures.--Subsection (c) of section
9503 is amended by adding at the end the following new
paragraph:
``(7) Limitation on expenditures.--Notwithstanding
any other provision of law, in calculating amounts
under section 157(a) of title 23, United States Code,
and sections 1013(c), 1015(a), and 1015(b) of the
Intermodal Surface Transportation Efficiency Act of
1991 (Public Law 102-240; 105 Stat. 1914), deposits in
the Highway Trust Fund resulting from the amendments
made by the Taxpayer Relief Act of 1997 shall not be
taken into account.''.
(d) Technical Amendments.--
(1) Section 9503 is amended by striking subsection
(f).
(2) The last sentence of subparagraph (A) of
section 9503(c)(2) is amended by striking ``by taking
into account only the Highway Trust Fund financing rate
applicable to any fuel'' and inserting ``by taking into
account only the portion of the taxes which are
deposited into the Highway Trust Fund''.
(3) Paragraphs (4)(D), (5)(B), and (6)(D) of
section 9503(c) are each amended by striking
``attributable to the Highway Trust Fund financing
rate'' and inserting ``deposited into the Highway Trust
Fund''.
(e) Delayed Deposits of Highway Motor Fuel Tax Revenues.--
Notwithstanding section 6302 of the Internal Revenue Code of
1986, in the case of deposits of taxes imposed by sections 4041
and 4081 (other than subsection (a)(2)(A)(ii)) of the Internal
Revenue Code of1986, the due date for any deposit which would
(but for this subsection) be required to be made after July 31, 1998,
and before October 1, 1998, shall be October 5, 1998.
(f) Effective Date.--The amendments made by this section
shall apply to taxes received in the Treasury after September
30, 1997.
SEC. 902. REPEAL OF TAX ON DIESEL FUEL USED IN RECREATIONAL BOATS.
(a) In General.--Subparagraph (B) of section 6421(e)(2)
(defining off-highway business use) is amended by striking
clauses (iii) and (iv).
(b) Conforming Amendments.--
(1) Subparagraph (A) of section 4041(a)(1) is
amended--
(A) by striking ``, a diesel-powered train,
or a diesel-powered boat'' each place it
appears and inserting ``or a diesel-powered
train'', and
(B) by striking ``vehicle, train, or boat''
and inserting ``vehicle or train''.
(2) Paragraph (1) of section 4041(a) is amended by
striking subparagraph (D).
(3) Paragraph (3) of section 4083(a) is amended by
striking ``, a diesel-powered train, or a diesel-
powered boat'' and inserting ``or a diesel-powered
train''.
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 1998.
SEC. 903. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED HALON-1211.
(a) In General.--Paragraph (1) of section 4682(d) is
amended by striking ``recycled halon'' and inserting ``recycled
Halon-1301 or recycled Halon-2402''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the date of the enactment of this Act.
SEC. 904. UNIFORM RATE OF TAX ON VACCINES.
(a) In General.--Subsection (b) of section 4131 is amended
to read as follows:
``(b) Amount of Tax.--
``(1) In general.--The amount of the tax imposed by
subsection (a) shall be 75 cents per dose of any
taxable vaccine.
``(2) Combinations of vaccines.--If any taxable
vaccine is described in more than 1 subparagraph of
section 4132(a)(1), the amount of the tax imposed by
subsection (a) on such vaccine shall be the sum of the
amounts for the vaccines which are so included.''.
(b) Taxable Vaccines.--Paragraph (1) of section 4132(a) is
amended to read as follows:
``(1) Taxable vaccine.--The term `taxable vaccine'
means any of the following vaccines which are
manufactured or produced in the United States or
entered into the United States for consumption, use, or
warehousing:
``(A) Any vaccine containing diphtheria
toxoid.
``(B) Any vaccine containing tetanus
toxoid.
``(C) Any vaccine containing pertussis
bacteria, extracted or partial cell bacteria,
or specific pertussis antigens.
``(D) Any vaccine against measles.
``(E) Any vaccine against mumps.
``(F) Any vaccine against rubella.
``(G) Any vaccine containing polio virus.
``(H) Any HIB vaccine.
``(I) Any vaccine against hepatitis B.
``(J) Any vaccine against chicken pox.''.
(c) Conforming Amendment.--Subsection (a) of section 4132
is amended by striking paragraphs (2), (3), (4), and (5) and by
redesignating paragraphs (6) through (8) as paragraphs (2)
through (4), respectively.
(d) Effective Date.--The amendments made by this section
shall take effect on the day after the date of the enactment of
this Act.
(e) Limitation on Certain Credits or Refunds.--For purposes
of applying section 4132(b) of the Internal Revenue Code of
1986 with respect to any claim for credit or refund filed
before January 1, 1999, the amount of tax taken into account
shall not exceed the tax computed under the rate in effect on
the day after the date of the enactment of this Act.
SEC. 905. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS TREATED AS
WHOLESALE DISTRIBUTOR FOR REFUND PURPOSES.
(a) In General.--Subparagraph (B) of section 6416(a)(4)
(defining wholesale distributor) is amended by adding at the
end the following new sentence: ``Such term includes any person
who makes retail sales of gasoline at 10 or more retail motor
fuel outlets.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to sales after the date of the enactment of this
Act.
SEC. 906. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR VEHICLES
FROM LUXURY AUTOMOBILE CLASSIFICATION.
(a) In General.--Subsection (a) of section 4001 (relating
to imposition of tax) is amended to read as follows:
``(a) Imposition of Tax.--
``(1) In general.--There is hereby imposed on the
1st retail sale of any passenger vehicle a tax equal to
10 percent of the price for which so sold to the extent
such price exceeds the applicable amount.
``(2) Applicable amount.--
``(A) In general.--Except as provided in
subparagraphs (B) and (C), the applicable
amount is $30,000.
``(B) Qualified clean-fuel vehicle
property.--In the case of a passenger vehicle
which is propelled by a fuel which is not a
clean-burning fuel and to which is installed
qualified clean-fuel vehicle property (as
defined in section 179A(c)(1)(A)) for purposes
of permitting such vehicle to be propelled by a
clean-burning fuel, the applicable amount is
equal to the sum of--
``(i) the dollar amount in effect
under subparagraph (A), plus
``(ii) the increase in the price
for which the passenger vehicle was
sold (within the meaning of section
4002) due to the installation of such
property.
``(C) Purpose built passenger vehicle.--
``(i) In general.--In the case of a
purpose built passenger vehicle, the
applicable amount is equal to 150
percent of the dollar amount in effect
under subparagraph (A).
``(ii) Purpose built passenger
vehicle.--For purposes of clause (i),
the term `purpose built passenger
vehicle' means a passenger vehicle
produced by an original equipment
manufacturer and designed so that the
vehicle may be propelled primarily by
electricity.''.
(b) Conforming Amendments.--
(1) Subsection (e) of section 4001 (relating to
inflation adjustment) is amended by striking ``and
section 4003(a)''.
(2) Subsection (f) of section 4001 (relating to
phasedown) is amended by striking ``subsection (a)''
and inserting ``subsection (a)(1)''.
(3) Subparagraph (A) of section 4003(a)(1) is
amended by inserting ``(other than property described
in section 4001(a)(2)(B))'' after ``part or
accessory''.
(4) Subparagraph (B) of section 4003(a)(2) is
amended to read as follows:
``(B) the appropriate applicable amount as
determined under section 4001(a)(2).''.
(c) Effective Date.--The amendments made by this section
shall apply to sales and installations occurring after the date
of the enactment of this Act.
SEC. 907. RATE OF TAX ON CERTAIN SPECIAL FUELS DETERMINED ON BASIS OF
BTU EQUIVALENCY WITH GASOLINE.
(a) Special Motor Fuels.--
(1) In general.--Paragraph (2) of section 4041(a)
(relating to special motor fuels) is amended to read as
follows:
``(2) Special motor fuels.--
``(A) In general.--There is hereby imposed
a tax on any liquid (other than kerosene, gas
oil, fuel oil, or any product taxable under
section 4081)--
``(i) sold by any person to an
owner, lessee, or other operator of a
motor vehicle or motorboat for use as a
fuel in such motor vehicle or
motorboat, or
``(ii) used by any person as a fuel
in a motor vehicle or motorboat unless
there was a taxable sale of such liquid
under clause (i).
``(B) Rate of tax.--The rate of the tax
imposed by this paragraph shall be--
``(i) except as otherwise provided
in this subparagraph, the rate of tax
specified in section 4081(a)(2)(A)(i)
which is in effect at the time of such
sale or use,
``(ii) 13.6 cents per gallon in the
case of liquefied petroleum gas, and
``(iii) 11.9 cents per gallon in
the case of liquefied natural gas.
In the case of any sale or use after September
30, 1999, clause (ii) shall be applied by
substituting `3.2 cents' for `13.6 cents', and
clause (iii) shall be applied by substituting
`2.8 cents' for `11.9 cents'.''.
(2) Conforming amendment.--Paragraph (1) of section
4041(d) is amended by inserting ``and other than
liquefied natural gas'' after ``liquefied petroleum
gas''.
(b) Methanol Fuel Produced From Natural Gas.--Subparagraph
(A) of section 4041(m)(1) is amended to read as follows:
``(A) the rate of the tax imposed by
subsection (a)(2) shall be--
``(i) after September 30, 1997, and
before October 1, 1999--
``(I) in the case of fuel
none of the alcohol in which
consists of ethanol, 9.15 cents
per gallon, and
``(II) in any other case,
11.3 cents per gallon, and
``(ii) after September 30, 1999--
``(I) in the case of fuel
none of the alcohol in which
consists of ethanol, 2.15 cents
per gallon, and
``(II) in any other case,
4.3 cents per gallon, and''.
(c) Effective Date.--The amendments made by this section
shall take effect on October 1, 1997.
SEC. 908. MODIFICATION OF TAX TREATMENT OF HARD CIDER.
(a) Hard Cider Containing Less Than 7 Percent Alcohol Taxed
as Wine.--Subsection (b) of section 5041 (relating to
imposition and rate of tax) is amended by striking ``and'' at
the end of paragraph (4), by striking the period at the end of
paragraph (5) and inserting ``; and'', and by adding at the end
the following new paragraph:
``(6) On hard cider derived primarily from apples
or apple concentrate and water, containing no other
fruit product, and containing at least one-half of 1
percent and less than 7 percent alcohol by volume, 22.6
cents per wine gallon.''.
(b) Application of Small Producer Credit.--Paragraph (1) of
section 5041(c) (relating to credit for small domestic
producers) is amended by adding at the end the following new
sentence: ``In the case of wine described in subsection (b)(6),
the preceding sentence shall be applied by substituting `5.6
cents' for `90 cents'.''
(c) Effective Date.--The amendments made by this section
shall take effect on October 1, 1997.
SEC. 909. STUDY OF FEASIBILITY OF MOVING COLLECTION POINT FOR DISTILLED
SPIRITS EXCISE TAX.
(a) In General.--The Secretary of the Treasury or his
delegate shall conduct a study of options for changing the
event on which the tax imposed by section 5001 of the Internal
Revenue Code of 1986 is determined. One such option which shall
be studied is determining such tax on removal from registered
wholesale warehouses. In studying each such option, such
Secretary shall focus on administrative issues including--
(1) tax compliance,
(2) the number of taxpayers required to pay the
tax,
(3) the types of financial responsibility
requirements that might be required, and
(4) special requirements regarding segregation of
non-tax-paid distilled spirits from other products.
Such study shall review the effects of each such option on the
Department of the Treasury (including staffing and other
demands on budgetary resources) and the change in the period
between the time such tax is currently paid and the time such
tax would be paid under each such option.
(b) Report.--The report of such study shall be submitted to
the Committee on Finance of the Senate and the Committee on
Ways and Means of the House of Representatives not later than
March 31, 1998.
SEC. 910. CLARIFICATION OF AUTHORITY TO USE SEMI-GENERIC DESIGNATIONS
ON WINE LABELS.
(a) In General.--Section 5388 (relating to designation of
wines) is amended by adding at the end the following new
subsection:
``(c) Use of Semi-Generic Designations.--
``(1) In general.--Semi-generic designations may be
used to designate wines of an origin other than that
indicated by such name only if--
``(A) there appears in direct conjunction
therewith an appropriate appellation of origin
disclosing the true place of origin of the
wine, and
``(B) the wine so designated conforms to
the standard of identity, if any, for such wine
contained in the regulations under this section
or, if there is no such standard, to the trade
understanding of such class or type.
``(2) Determination of whether name is semi-
generic.--
``(A) In general.--Except as provided in
subparagraph (B), a name of geographic
significance, which is also the designation of
a class or type of wine, shall be deemed to
have become semi-generic only if so found by
the Secretary.
``(B) Certain names treated as semi-
generic.--The following names shall be treated
as semi-generic: Angelica, Burgundy, Claret,
Chablis, Champagne, Chianti, Malaga, Marsala,
Madeira, Moselle, Port, Rhine Wine or Hock,
Sauterne, Haut Sauterne, Sherry, Tokay.''.
(b) Effective Date.--The amendment made by this section
shall take effect on the date of the enactment of this Act.
Subtitle B--Revisions Relating to Disasters
SEC. 911. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY REASON
OF PRESIDENTIALLY DECLARED DISASTER.
(a) In General.--Chapter 77 is amended by inserting after
section 7508 the following new section:
``SEC. 7508A. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY
REASON OF PRESIDENTIALLY DECLARED DISASTER.
``(a) In General.--In the case of a taxpayer determined by
the Secretary to be affected by a Presidentially declared
disaster (as defined by section 1033(h)(3)), the Secretary may
prescribe regulations under which a period of up to 90 days may
be disregarded in determining, under the internal revenue laws,
in respect of any tax liability (including any penalty,
additional amount, or addition to the tax) of such taxpayer--
``(1) whether any of the acts described in
paragraph (1) of section 7508(a) were performed within
the time prescribed therefor, and
``(2) the amount of any credit or refund.
``(b) Interest on Overpayments and Underpayments.--
Subsection (a) shall not apply for the purpose of determining
interest on any overpayment or underpayment.''.
(b) Clerical Amendment.--The table of sections for chapter
77 is amended by inserting after the item relating to section
7508 the following new item:
``Sec. 7508A. Authority to postpone certain tax-related
deadlines by reason of presidentially declared
disaster.''.
(c) Effective Date.--The amendments made by this section
shall apply with respect to any period for performing an act
that has not expired before the date of the enactment of this
Act.
SEC. 912. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF DISASTER
LOSS.
(a) In General.--Subsection (i) of section 165 is amended
by adding at the end the following new paragraph:
``(4) Use of disaster loan appraisals to establish
amount of loss.--Nothing in this title shall be
construed to prohibit the Secretary from prescribing
regulations or other guidance under which an appraisal
for the purpose of obtaining a loan of Federal funds or
a loan guarantee from the Federal Government as a
result of a Presidentially declared disaster (as
defined by section 1033(h)(3)) may be used to establish
the amount of any loss described in paragraph (1) or
(2).''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the date of the enactment of this Act.
SEC. 913. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED
CONDITIONS.
(a) Deferral of Income Inclusion.--Subsection (e) of
section 451 (relating to special rules for proceeds from
livestock sold on account of drought) is amended--
(1) by striking ``drought conditions, and that
these drought conditions'' in paragraph (1) and
inserting ``drought, flood, or other weather-related
conditions, and that such conditions''; and
(2) by inserting ``, Flood, or Other Weather-
Related Conditions'' after ``Drought'' in the
subsection heading.
(b) Involuntary Conversions.--Subsection (e) of section
1033 (relating to livestock sold on account of drought) is
amended--
(1) by inserting ``, flood, or other weather-
related conditions'' before the period at the end
thereof; and
(2) by inserting ``, Flood, or Other Weather-
Related Conditions'' after ``Drought'' in the
subsection heading.
(c) Effective Date.--The amendments made by this section
shall apply to sales and exchanges after December 31, 1996.
SEC. 914. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN DISASTER AREAS.
Subsection (k) of section 143 (relating to mortgage revenue
bonds; qualified mortgage bond and qualified veteran's mortgage
bond) is amended by adding at the end the following new
paragraph:
``(11) Special rules for residences located in
disaster areas.--In the case of a residence located in
an area determined by the President to warrant
assistance from the Federal Government under the Robert
T. Stafford Disaster Relief and Emergency Assistance
Act (as in effect on the date of the enactment of the
Taxpayer Relief Act of 1997), this section shall be
applied with the following modifications to financing
provided with respect to such residence within 2 years
after the date of the disaster declaration:
``(A) Subsection (d) (relating to 3-year
requirement) shall not apply.
``(B) Subsections (e) and (f) (relating to
purchase price requirement and income
requirement) shall be applied as if such
residence were a targeted area residence.
The preceding sentence shall apply only with respect to
bonds issued after December 31, 1996, and before
January 1, 1999.''.
SEC. 915. ABATEMENT OF INTEREST ON UNDERPAYMENTS BY TAXPAYERS IN
PRESIDENTIALLY DECLARED DISASTER AREAS.
(a) In General.--If the Secretary of the Treasury extends
for any period the time for filing income tax returns under
section 6081 of the Internal Revenue Code of 1986 and the time
for paying income tax with respect to such returns under
section 6161 of such Code (and waives any penalties relating to
the failure to so file or so pay) for any individual located in
a Presidentially declared disaster area, the Secretary shall,
notwithstanding section 7508A(b) of such Code, abate for such
period the assessment of any interest prescribed under section
6601 of such Code on such income tax.
(b) Presidentially Declared Disaster Area.--For purposes of
subsection (a), the term ``Presidentially declared disaster
area'' means, with respect to any individual, any area which
the President has determined during 1997 warrants assistance by
the Federal Government under the Robert T. Stafford Disaster
Relief and Emergency Assistance Act.
(c) Individual.--For purposes of this section, the term
``individual'' shall not include any estate or trust.
(d) Effective Date.--This section shall apply to disasters
declared after December 31, 1996.
Subtitle C--Provisions Relating to Employment Taxes
SEC. 921. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING
EMPLOYMENT TAX STATUS OF SECURITIES BROKERS.
(a) In General.--In determining for purposes of the
Internal Revenue Code of 1986 whether a registered
representative of a securities broker-dealer is an employee (as
defined in section 3121(d) of the Internal Revenue Code of
1986), no weight shall be given to instructions from the
service recipient which are imposed only in compliance with
investor protection standards imposed by the Federal
Government, any State government, or a governing body pursuant
to a delegation by a Federal or State agency.
(b) Effective Date.--Subsection (a) shall apply to services
performed after December 31, 1997.
SEC. 922. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX FOR
CERTAIN TERMINATION PAYMENTS RECEIVED BY FORMER
INSURANCE SALESMEN.
(a) Internal Revenue Code.--Section 1402 (relating to
definitions) is amended by adding at the end the following new
subsection:
``(k) Codification of Treatment of Certain Termination
Payments Received by Former Insurance Salesmen.--Nothing in
subsection (a) shall be construed as including in the net
earnings from self-employment of an individual any amount
received during the taxable year from an insurance company on
account of services performed by such individual as an
insurance salesman for such company if--
``(1) such amount is received after termination of
such individual's agreement to perform such services
for such company,
``(2) such individual performs no services for such
company after such termination and before the close of
such taxable year,
``(3) such individual enters into a covenant not to
compete against such company which applies to at least
the 1-year period beginning on the date of such
termination, and
``(4) the amount of such payment--
``(A) depends primarily on policies sold by
or credited to the account of such individual
during the last year of such agreement or the
extent to which such policies remain in force
for some period after such termination, or
both, and
``(B) does not depend to any extent on
length of service or overall earnings from
services performed for such company (without
regard to whether eligibility for payment
depends on length of service).''.
(b) Social Security Act.--Section 211 of the Social
Security Act is amended by adding at the end the following new
subsection:
``Codification of Treatment of Certain Termination Payments Received by
Former Insurance Salesmen
``(j) Nothing in subsection (a) shall be construed as
including in the net earnings from self-employment of an
individual any amount received during the taxable year from an
insurance company on account of services performed by such
individual as an insurance salesman for such company if--
``(1) such amount is received after termination of
such individual's agreement to perform such services
for such company,
``(2) such individual performs no services for such
company after such termination and before the close of
such taxable year,
``(3) such individual enters into a covenant not to
compete against such company which applies to at least
the 1-year period beginning on the date of such
termination, and
``(4) the amount of such payment--
``(A) depends primarily on policies sold by
or credited to the account of such individual
during the last year of such agreement or the
extent to which such policies remain in force
for some period after such termination, or
both, and
``(B) does not depend to any extent on
length of service or overall earnings from
services performed for such company (without
regard to whether eligibility for payment
depends on length of service).''.
(c) Effective Date.--The amendments made by this section
shall apply to payments after December 31, 1997.
Subtitle D--Provisions Relating to Small Businesses
SEC. 931. WAIVER OF PENALTY THROUGH JUNE 30, 1998, ON SMALL BUSINESSES
FAILING TO MAKE ELECTRONIC FUND TRANSFERS OF TAXES.
No penalty shall be imposed under the Internal Revenue Code
of 1986 solely by reason of a failure by a person to use the
electronic fund transfer system established under section
6302(h) of such Code if--
(1) such person is a member of a class of taxpayers
first required to use such system on or after July 1,
1997, and
(2) such failure occurs before July 1, 1998.
SEC. 932. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR
ADMINISTRATIVE AND MANAGEMENT ACTIVITIES.
(a) In General.--Paragraph (1) of section 280A(c) is
amended by adding at the end the following new sentence: ``For
purposes of subparagraph (A), the term `principal place of
business' includes a place of business which is used by the
taxpayer for the administrative or management activities of any
trade or business of the taxpayer if there is no other fixed
location of such trade or business where the taxpayer conducts
substantial administrative or management activities of such
trade or business.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1998.
SEC. 933. AVERAGING OF FARM INCOME OVER 3 YEARS.
(a) In General.--Subchapter Q of chapter 1 (relating to
readjustment of tax between years and special limitations) is
amended by adding the following new part:
``PART I--INCOME AVERAGING
``Sec. 1301. Averaging of farm income.
``SEC. 1301. AVERAGING OF FARM INCOME.
``(a) In General.--At the election of an individual engaged
in a farming business, the tax imposed by section 1 for such
taxable year shall be equal to the sum of--
``(1) a tax computed under such section on taxable
income reduced by elected farm income, plus
``(2) the increase in tax imposed by section 1
which would result if taxable income for each of the 3
prior taxable years were increased by an amount equal
to one-third of the elected farm income.
Any adjustment under this section for any taxable year shall be
taken into account in applying this section for any subsequent
taxable year.
``(b) Definitions.--In this section--
``(1) Elected farm income.--
``(A) In general.--The term `elected farm
income' means so much of the taxable income for
the taxable year--
``(i) which is attributable to any
farming business; and
``(ii) which is specified in the
election under subsection (a).
``(B) Treatment of gains.--For purposes of
subparagraph (A), gain from the sale or other
disposition of property (other than land)
regularly used by the taxpayer in such a
farming business for a substantial period shall
be treated as attributable to such a farming
business.
``(2) Individual.--The term `individual' shall not
include any estate or trust.
``(3) Farming business.--The term `farming
business' has the meaning given such term by section
263A(e)(4).
``(c) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
this section, including regulations regarding--
``(1) the order and manner in which items of
income, gain, deduction, or loss, or limitations on
tax, shall be taken into account in computing the tax
imposed by this chapter on the income of any taxpayer
to whom this section applies for any taxable year, and
``(2) the treatment of any short taxable year.''.
(b) Clerical Amendment.--The table of parts for such
subchapter Q is amended by inserting before the item relating
to part II the following new item:
``Part I. Income averaging.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997,
and before January 1, 2001.
SEC. 934. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
EMPLOYED INDIVIDUALS.
(a) In General.--The table contained in section
162(l)(1)(B) is amended to read as follows:
``For taxable years be- The applicable
ginning in calendar year-- percentage is--
1997...................................................... 40
1998 and 1999............................................. 45
2000 and 2001............................................. 50
2002...................................................... 60
2003 through 2005......................................... 80
2006...................................................... 90
2007 and thereafter....................................... 100.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1996.
SEC. 935. MORATORIUM ON CERTAIN REGULATIONS.
No temporary or final regulation with respect to the
definition of a limited partner under section 1402(a)(13) of
the Internal Revenue Code of 1986 may be issued or made
effective before July 1, 1998.
Subtitle E--Brownfields
SEC. 941. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.
(a) In General.--Part VI of subchapter B of chapter 1 is
amended by adding at the end the following new section:
``SEC. 198. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.
``(a) In General.--A taxpayer may elect to treat any
qualified environmental remediation expenditure which is paid
or incurred by the taxpayer as an expense which is not
chargeable to capital account. Any expenditure which is so
treated shall be allowed as a deduction for the taxable year in
which it is paid or incurred.
``(b) Qualified Environmental Remediation Expenditure.--For
purposes of this section--
``(1) In general.--The term `qualified
environmental remediation expenditure' means any
expenditure--
``(A) which is otherwise chargeable to
capital account, and
``(B) which is paid or incurred in
connection with the abatement or control of
hazardous substances at a qualified
contaminated site.
``(2) Special rule for expenditures for depreciable
property.--Such term shall not include any expenditure
for the acquisition of property of a character subject
to the allowance for depreciation which is used in
connection with the abatement or control of hazardous
substances at a qualified contaminated site; except
that the portion of the allowance under section 167 for
such property which is otherwise allocated to such site
shall be treated as a qualified environmental
remediation expenditure.
``(c) Qualified Contaminated Site.--For purposes of this
section--
``(1) Qualified contaminated site.--
``(A) In general.--The term `qualified
contaminated site' means any area--
``(i) which is held by the taxpayer
for use in a trade or business or for
the production of income, or which is
property described in section 1221(1)
in the hands of the taxpayer,
``(ii) which is within a targeted
area, and
``(iii) at or on which there has
been a release (or threat of release)
or disposal of any hazardous substance.
``(B) Taxpayer must receive statement from
state environmental agency.--An area shall be
treated as a qualified contaminated site with
respect to expenditures paid or incurred during
any taxable year only if the taxpayer receives
a statement from the appropriate agency of the
State in which such area is located that such
area meets the requirements of clauses (ii) and
(iii) of subparagraph (A).
``(C) Appropriate state agency.--For
purposes of subparagraph (B), the chief
executive officer of each State may, in
consultation with the Administrator of the
Environmental Protection Agency, designate the
appropriate State environmental agency within
60 days of the date of the enactment of this
section. If the chief executive officer of a
State has not designated an appropriate State
environmental agency within such 60-day period,
the appropriate environmental agency for such
State shall be designated by the Administrator
of the Environmental Protection Agency.
``(2) Targeted area.--
``(A) In general.--The term `targeted area'
means--
``(i) any population census tract
with a poverty rate of not less than 20
percent,
``(ii) a population census tract
with a population of less than 2,000
if--
``(I) more than 75 percent
of such tract is zoned for
commercial or industrial use,
and
``(II) such tract is
contiguous to 1 or more other
population census tracts which
meet the requirement of clause
(i) without regard to this
clause,
``(iii) any empowerment zone or
enterprise community (and any
supplemental zone designated on
December 21, 1994), and
``(iv) any site announced before
February 1, 1997, as being included as
a brownfields pilot project of the
Environmental Protection Agency.
``(B) National priorities listed sites not
included.--Such term shall not include any site
which is on, or proposed for, the national
priorities list under section 105(a)(8)(B) of
the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (as in
effect on the date of the enactment of this
section).
``(C) Certain rules to apply.--For purposes
of this paragraph the rules of sections
1392(b)(4) and 1393(a)(9) shall apply.
``(d) Hazardous Substance.--For purposes of this section--
``(1) In general.--The term `hazardous substance'
means--
``(A) any substance which is a hazardous
substance as defined in section 101(14) of the
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, and
``(B) any substance which is designated as
a hazardous substance under section 102 of such
Act.
``(2) Exception.--Such term shall not include any
substance with respect to which a removal or remedial
action is not permitted under section 104 of such Act
by reason of subsection (a)(3) thereof.
``(e) Deduction Recaptured as Ordinary Income on Sale,
Etc.--Solely for purposes of section 1245, in the case of
property to which a qualified environmental remediation
expenditure would have been capitalized but for this section--
``(1) the deduction allowed by this section for
such expenditure shall be treated as a deduction for
depreciation, and
``(2) such property (if not otherwise section 1245
property) shall be treated as section 1245 property
solely for purposes of applying section 1245 to such
deduction.
``(f) Coordination With Other Provisions.--Sections 280B
and 468 shall not apply to amounts which are treated as
expenses under this section.
``(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.
``(h) Termination.--This section shall not apply to
expenditures paid or incurred after December 31, 2000.''.
(b) Clerical Amendment.--The table of sections for part VI
of subchapter B of chapter 1 is amended by adding at the end
the following new item:
``Sec. 198. Expensing of environmental remediation costs.''.
(c) Effective Date.--The amendments made by this section
shall apply to expenditures paid or incurred after the date of
the enactment of this Act, in taxable years ending after such
date.
Subtitle F--Empowerment Zones, Enterprise Communities, Brownfields, and
Community Development Financial Institutions
CHAPTER 1--ADDITIONAL EMPOWERMENT ZONES
SEC. 951. ADDITIONAL EMPOWERMENT ZONES.
(a) In General.--Paragraph (2) of section 1391(b) (relating
to designations of empowerment zones and enterprise
communities) is amended--
(1) by striking ``9'' and inserting ``11'',
(2) by striking ``6'' and inserting ``8'', and
(3) by striking ``750,000'' and inserting
``1,000,000''.
(b) Special Rules for Application of Employment Credit.--
Subsection (b) of section 1396 (relating to empowerment zone
employment credit) is amended--
(1) by striking so much of the subsection as
precedes the table and inserting the following:
``(b) Applicable Percentage.--For purposes of this
section--
``(1) In general.--Except as provided in paragraph
(2), the term `applicable percentage' means the
percentage determined in accordance with the following
table:'', and
(2) by adding at the end the following new
paragraph:
``(2) Special rule.--With respect to each
empowerment zone designated pursuant to the amendments
made by the Taxpayer Relief Act of 1997 to section
1391(b)(2), the following table shall apply in lieu of
the table in paragraph (1):
``In the case of wages
paid or incurred during The applicable
calendar year-- percentage is:
2000 through 2004......................................... 20
2005...................................................... 15
2006...................................................... 10
2007...................................................... 5.''
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act,
except that designations of new empowerment zones made pursuant
to such amendments shall be made during the 180-day period
beginning on the date of the enactment of this Act. No
designation pursuant to such amendments shall take effect
before January 1, 2000.
CHAPTER 2--NEW EMPOWERMENT ZONES
SEC. 952. DESIGNATION OF NEW EMPOWERMENT ZONES.
(a) In General.--Section 1391 (relating to designation
procedure for empowerment zones and enterprise communities) is
amended by adding at the end the following new subsection:
``(g) Additional Designations Permitted.--
``(1) In general.--In addition to the areas
designated under subsection (a), the appropriate
Secretaries may designate in the aggregate an
additional 20 nominated areas as empowerment zones
under this section, subject to the availability of
eligible nominated areas. Of that number, not more than
15 may be designated in urban areas and not more than 5
may be designated in rural areas.
``(2) Period designations may be made and take
effect.--A designation may be made under this
subsection after the date of the enactment of this
subsection and before January 1, 1999.
``(3) Modifications to eligibility criteria, etc.--
``(A) Poverty rate requirement.--
``(i) In general.--A nominated area
shall be eligible for designation under
this subsection only if the poverty
rate for each population census tract
within the nominated area is not less
than 20 percent and the poverty rate
for at least 90 percent of the
population census tracts within the
nominated area is not less than 25
percent.
``(ii) Treatment of census tracts
with small populations.--A population
census tract with a population of less
than 2,000 shall be treated as having a
poverty rate of not less than 25
percent if--
``(I) more than 75 percent
of such tract is zoned for
commercial or industrial use,
and
``(II) such tract is
contiguous to 1 or more other
population census tracts which
have a poverty rate of not less
than 25 percent (determined
without regard to this clause).
``(iii) Exception for developable
sites.--Clause (i) shall not apply to
up to 3 noncontiguous parcels in a
nominated area which may be developed
for commercial or industrial purposes.
The aggregate area of noncontiguous
parcels to which the preceding sentence
applies with respect to any nominated
area shall not exceed 2,000 acres.
``(iv) Certain provisions not to
apply.--Section 1392(a)(4) (and so much
of paragraphs (1) and (2) of section
1392(b) as relate to section
1392(a)(4)) shall not apply to an area
nominated for designation under this
subsection.
``(v) Special rule for rural
empowerment zone.--The Secretary of
Agriculture may designate not more than
1 empowerment zone in a rural area
without regard to clause (i) if such
area satisfies emigration criteria
specified by the Secretary of
Agriculture.
``(B) Size limitation.--
``(i) In general.--The parcels
described in subparagraph (A)(iii)
shall not be taken into account in
determining whether the requirement of
subparagraph (A) or (B) of section
1392(a)(3) is met.
``(ii) Special rule for rural
areas.--If a population census tract
(or equivalent division under section
1392(b)(4)) in a rural area exceeds
1,000 square miles or includes a
substantial amount of land owned by the
Federal, State, or local government,
the nominated area may exclude such
excess square mileage or governmentally
owned land and the exclusion of that
area will not be treated as violating
the continuous boundary requirement of
section 1392(a)(3)(B).
``(C) Aggregate population limitation.--The
aggregate population limitation under the last
sentence of subsection (b)(2) shall not apply
to a designation under paragraph (1)(B).
``(D) Previously designated enterprise
communities may be included.--Subsection (e)(5)
shall not apply to any enterprise community
designated under subsection (a) that is also
nominated for designation under this
subsection.
``(E) Indian reservations may be
nominated.--
``(i) In general.--Section
1393(a)(4) shall not apply to an area
nominated for designation under this
subsection.
``(ii) Special rule.--An area in an
Indian reservation shall be treated as
nominated by a State and a local
government if it is nominated by the
reservation governing body (as
determined by the Secretary of
Interior).''
(b) Employment Credit Not To Apply to New Empowerment
Zones.--Section 1396 (relating to empowerment zone employment
credit) is amended by adding at the end the following new
subsection:
``(e) Credit Not To Apply to Empowerment Zones Designated
Under Section 1391(g).--This section shall be applied without
regard to any empowerment zone designated under section
1391(g).''
(c) Increased Expensing Under Section 179 Not To Apply in
Developable Sites.--Section 1397A (relating to increase in
expensing under section 179) is amended by adding at the end
the following new subsection:
``(c) Limitation.--For purposes of this section, qualified
zone property shall not include any property substantially all
of the use of which is in any parcel described in section
1391(g)(3)(A)(iii).''
(d) Conforming Amendments.--
(1) Subsections (e) and (f) of section 1391 are
each amended by striking ``subsection (a)'' and
inserting ``this section''.
(2) Section 1391(c) is amended by striking ``this
section'' and inserting ``subsection (a)''.
SEC. 953. VOLUME CAP NOT TO APPLY TO ENTERPRISE ZONE FACILITY BONDS
WITH RESPECT TO NEW EMPOWERMENT ZONES.
(a) In General.--Section 1394 (relating to tax-exempt
enterprise zone facility bonds) is amended by adding at the end
the following new subsection:
``(f) Bonds for Empowerment Zones Designated Under Section
1391(g).--
``(1) In general.--In the case of a new empowerment
zone facility bond--
``(A) such bond shall not be treated as a
private activity bond for purposes of section
146, and
``(B) subsection (c) of this section shall
not apply.
``(2) Limitation on amount of bonds.--
``(A) In general.--Paragraph (1) shall
apply to a new empowerment zone facility bond
only if such bond is designated for purposes of
this subsection by the local government which
nominated the area to which such bond relates.
``(B) Limitation on bonds designated.--The
aggregate face amount of bonds which may be
designated under subparagraph (A) with respect
to any empowerment zone shall not exceed--
``(i) $60,000,000 if such zone is
in a rural area,
``(ii) $130,000,000 if such zone is
in an urban area and the zone has a
population of less than 100,000, and
``(iii) $230,000,000 if such zone
is in an urban area and the zone has a
population of at least 100,000.
``(C) Special rules.--
``(i) Coordination with limitation
in subsection (c).--Bonds to which
paragraph (1) applies shall not be
taken into account in applying the
limitation of subsection (c) to other
bonds.
``(ii) Current refunding not taken
into account.--In the case of a
refunding (or series of refundings) of
a bond designated under this paragraph,
the refunding obligation shall be
treated as designated under this
paragraph (and shall not be taken into
account in applying subparagraph (B))
if--
``(I) the amount of the
refunding bond does not exceed
the outstanding amount of the
refunded bond, and
``(II) the refunded bond is
redeemed not later than 90 days
after the date of issuance of
the refunding bond.
``(3) New empowerment zone facility bond.--For
purposes of this subsection, the term `new empowerment
zone facility bond' means any bond which would be
described in subsection (a) if only empowerment zones
designated under section 1391(g) were taken into
account under sections 1397B and 1397C.''
(b) Effective Date.--The amendment made by this section
shall apply to obligations issued after the date of the
enactment of this Act.
SEC. 954. MODIFICATION TO ELIGIBILITY CRITERIA FOR DESIGNATION OF
FUTURE ENTERPRISE ZONES IN ALASKA OR HAWAII.
Section 1392 (relating to eligibility criteria) is amended
by adding at the end the following new subsection:
``(d) Special Eligibility for Nominated Areas Located in
Alaska or Hawaii.--A nominated area in Alaska or Hawaii shall
be treated as meeting the requirements of paragraphs (2), (3),
and (4) of subsection (a) if for each census tract or block
group within such area 20 percent or more of the families have
income which is 50 percent or less of the statewide median
family income (as determined under section 143).''.
CHAPTER 3--TREATMENT OF EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES
SEC. 955. MODIFICATIONS TO ENTERPRISE ZONE FACILITY BOND RULES FOR ALL
EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.
(a) Modifications Relating to Enterprise Zone Business.--
Paragraph (3) of section 1394(b) (defining enterprise zone
business) is amended to read as follows:
``(3) Enterprise zone business.--
``(A) In general.--Except as modified in
this paragraph, the term `enterprise zone
business' has the meaning given such term by
section 1397B.
``(B) Modifications.--In applying section
1397B for purposes of this section--
``(i) Businesses in enterprise
communities eligible.--References in
section 1397B to empowerment zones
shall be treated as including
references to enterprise communities.
``(ii) Waiver of requirements
during startup period.--A business
shall not fail to be treated as an
enterprise zone business during the
startup period if--
``(I) as of the beginning
of the startup period, it is
reasonably expected that such
business will be an enterprise
zone business (as defined in
section 1397B as modified by
this paragraph) at the end of
such period, and
``(II) such business makes
bona fide efforts to be such a
business.
``(iii) Reduced requirements after
testing period.--A business shall not
fail to be treated as an enterprise
zone business for any taxable year
beginning after the testing period by
reason of failing to meet any
requirement of subsection (b) or (c) of
section 1397B if at least 35 percent of
the employees of such business for such
year are residents of an empowerment
zone or an enterprise community. The
preceding sentence shall not apply to
any business which is not a qualified
business by reason of paragraph (1),
(4), or (5) of section 1397B(d).
``(C) Definitions relating to subparagraph
(b).--For purposes of subparagraph (B)--
``(i) Startup period.--The term
`startup period' means, with respect to
any property being provided for any
business, the period before the first
taxable year beginning more than 2
years after the later of--
``(I) the date of issuance
of the issue providing such
property, or
``(II) the date such
property is first placed in
service after such issuance
(or, if earlier, the date which
is 3 years after the date
described in subclause (I)).
``(ii) Testing period.--The term
`testing period' means the first 3
taxable years beginning after the
startup period.
``(D) Portions of business may be
enterprise zone business.--The term `enterprise
zone business' includes any trades or
businesses which would qualify as an enterprise
zone business (determined after the
modifications of subparagraph (B)) if such
trades or businesses were separately
incorporated.''
(b) Modifications Relating to Qualified Zone Property.--
Paragraph (2) of section 1394(b) (defining qualified zone
property) is amended to read as follows:
``(2) Qualified zone property.--The term `qualified
zone property' has the meaning given such term by
section 1397C; except that--
``(A) the references to empowerment zones
shall be treated as including references to
enterprise communities, and
``(B) section 1397C(a)(2) shall be applied
by substituting `an amount equal to 15 percent
of the adjusted basis' for `an amount equal to
the adjusted basis'.''
(c) Effective Date.--The amendments made by this section
shall apply to obligations issued after the date of the
enactment of this Act.
SEC. 956. MODIFICATIONS TO ENTERPRISE ZONE BUSINESS DEFINITION FOR ALL
EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.
(a) In General.--Section 1397B (defining enterprise zone
business) is amended--
(1) by striking ``80 percent'' in subsections
(b)(2) and (c)(1) and inserting ``50 percent'',
(2) by striking ``substantially all'' each place it
appears in subsections (b) and (c) and inserting ``a
substantial portion'',
(3) by striking ``, and exclusively related to,''
in subsections (b)(4) and (c)(3),
(4) by adding at the end of subsection (d)(2) the
following new flush sentence:
``For purposes of subparagraph (B), the lessor of the
property may rely on a lessee's certification that such
lessee is an enterprise zone business.'',
(5) by striking ``substantially all'' in subsection
(d)(3) and inserting ``at least 50 percent'', and
(6) by adding at the end the following new
subsection:
``(f) Treatment of Businesses Straddling Census Tract
Lines.--For purposes of this section, if--
``(1) a business entity or proprietorship uses real
property located within an empowerment zone,
``(2) the business entity or proprietorship also
uses real property located outside the empowerment
zone,
``(3) the amount of real property described in
paragraph (1) is substantial compared to the amount of
real property described in paragraph (2), and
``(4) the real property described in paragraph (2)
is contiguous to part or all of the real property
described in paragraph (1),
then all the services performed by employees, all business
activities, all tangible property, and all intangible property
of the business entity or proprietorship that occur in or is
located on the real property described in paragraphs (1) and
(2) shall be treated as occurring or situated in an empowerment
zone.''
(b) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to taxable years beginning on or
after the date of the enactment of this Act.
(2) Special rule for enterprise zone facility
bonds.--For purposes of section 1394(b) of the Internal
Revenue Code of 1986, the amendments made by this
section shall apply to obligations issued after the
date of the enactment of this Act.
Subtitle G--Other Provisions
SEC. 961. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY ACCOUNTING.
(a) In General.--Section 471 (relating to general rule for
inventories) is amended by redesignating subsection (b) as
subsection (c) and by inserting after subsection (a) the
following new subsection:
``(b) Estimates of Inventory Shrinkage Permitted.--A method
of determining inventories shall not be treated as failing to
clearly reflect income solely because it utilizes estimates of
inventory shrinkage that are confirmed by a physical count only
after the last day of the taxable year if--
``(1) the taxpayer normally does a physical count
of inventories at each location on a regular and
consistent basis, and
``(2) the taxpayer makes proper adjustments to such
inventories and to its estimating methods to the extent
such estimates are greater than or less than the actual
shrinkage.''.
(b) Effective Date.--
(1) In general.--The amendment made by this section
shall apply to taxable years ending after the date of
the enactment of this Act.
(2) Coordination with section 481.--In the case of
any taxpayer permitted by this section to change its
method of accounting to a permissible method for any
taxable year--
(A) such changes shall be treated as
initiated by the taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary of the
Treasury, and
(C) the period for taking into account the
adjustments under section 481 by reason of such
change shall be 4 years.
SEC. 962. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY ELIGIBLE FOR
EXCLUSION RELATING TO PERSONAL INJURY LIABILITY
ASSIGNMENTS.
(a) In General.--Subsection (c) of section 130 (relating to
certain personal injury liability assignments) is amended--
(1) by inserting ``, or as compensation under any
workmen's compensation act,'' after ``(whether by suit
or agreement)'' in the material preceding paragraph
(1),
(2) by inserting ``or the workmen's compensation
claim,'' after ``agreement,'' in paragraph (1), and
(3) by striking ``section 104(a)(2)'' in paragraph
(2)(D) and inserting ``paragraph (1) or (2) of section
104(a)''.
(b) Effective Date.--The amendments made by subsection (a)
shall apply to claims under workmen's compensation acts filed
after the date of the enactment of this Act.
SEC. 963. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S COMPENSATION ACT
COMPANIES.
(a) In General.--Section 501(c)(27) (relating to membership
organizations under workmen's compensation acts) is amended by
adding at the end the following:
``(B) Any organization (including a mutual
insurance company) if--
``(i) such organization is created by State
law and is organized and operated under State
law exclusively to--
``(I) provide workmen's
compensation insurance which is
required by State law or with respect
to which State law provides significant
disincentives if such insurance is not
purchased by an employer, and
``(II) provide related coverage
which is incidental to workmen's
compensation insurance,
``(ii) such organization must provide
workmen's compensation insurance to any
employer in the State (for employees in the
State or temporarily assigned out-of-State)
which seeks such insurance and meets other
reasonable requirements relating thereto,
``(iii)(I) the State makes a financial
commitment with respect to such organization
either by extending the full faith and credit
of the State to the initial debt of such
organization or by providing the initial
operating capital of such organization, and
(II) in the case of periods after the date of
enactment of this subparagraph, the assets of
such organization revert to the State upon
dissolution or State law does not permit the
dissolution of such organization, and
``(iv) the majority of the board of
directors or oversight body of such
organization are appointed by the chief
executive officer or other executive branch
official of the State, by the State
legislature, or by both.''.
(b) Conforming Amendments.--Section 501(c)(27) is amended
by inserting ``(A)'' after ``(27)'', by redesignating
subparagraphs (A), (B), and (C) as clauses (i), (ii), and
(iii), respectively, and by redesignating clauses (i) and (ii)
of subparagraphs (B) and (C) (before redesignation) as
subclauses (I) and (II), respectively.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 964. ELECTION FOR 1987 PARTNERSHIPS TO CONTINUE EXCEPTION FROM
TREATMENT OF PUBLICLY TRADED PARTNERSHIPS AS
CORPORATIONS.
(a) In General.--Section 7704 is amended by adding at the
end the following new subsection:
``(g) Exception for Electing 1987 Partnerships.--
``(1) In general.--Subsection (a) shall not apply
to an electing 1987 partnership.
``(2) Electing 1987 partnership.--For purposes of
this subsection, the term `electing 1987 partnership'
means any publicly traded partnership if--
``(A) such partnership is an existing
partnership (as defined in section 10211(c)(2)
of the Revenue Reconciliation Act of 1987),
``(B) subsection (a) has not applied (and
without regard to subsection (c)(1) would not
have applied) to such partnership for all prior
taxable years beginning after December 31,
1987, and before January 1, 1998, and
``(C) such partnership elects the
application of this subsection, and consents to
the application of the tax imposed by paragraph
(3), for its first taxable year beginning after
December 31, 1997.
A partnership which, but for this sentence, would be
treated as an electing 1987 partnership shall cease to
be so treated (and the election under subparagraph (C)
shall cease to be in effect) as of the 1st day after
December 31, 1997, on which there has been an addition
of a substantial new line of business with respect to
such partnership.
``(3) Additional tax on electing partnerships.--
``(A) Imposition of tax.--There is hereby
imposed for each taxable year on the income of
each electing 1987 partnership a tax equal to
3.5 percent of such partnership's gross income
for the taxable year from the active conduct of
trades and businesses by the partnership.
``(B) Adjustments in the case of tiered
partnerships.--For purposes of this paragraph,
in the case of a partnership which is a partner
in another partnership, the gross income
referred to in subparagraph (A) shall include
the partnership's distributive share of the
gross income of such other partnership from the
active conduct of trades and businesses of such
other partnership. A similar rule shall apply
in the case of lower-tiered partnerships.
``(C) Treatment of tax.--For purposes of
this title, the tax imposed by this paragraph
shall be treated as imposed by chapter 1 other
than for purposes of determining the amount of
any credit allowable under chapter 1.
``(4) Election.--An election and consent under this
subsection shall apply to the taxable year for which
made and all subsequent taxable years unless revoked by
the partnership. Such revocation may be made without
the consent of the Secretary, but, once so revoked, may
not be reinstated.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 965. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME FOR CERTAIN
SPONSORSHIP PAYMENTS.
(a) In General.--Section 513 (relating to unrelated trade
or business income) is amended by adding at the end the
following new subsection:
``(i) Treatment of Certain Sponsorship Payments.--
``(1) In general.--The term `unrelated trade or
business' does not include the activity of soliciting
and receiving qualified sponsorship payments.
``(2) Qualified sponsorship payments.--For purposes
of this subsection--
``(A) In general.--The term `qualified
sponsorship payment' means any payment made by
any person engaged in a trade or business with
respect to which there is no arrangement or
expectation that such person will receive any
substantial return benefit other than the use
or acknowledgement of the name or logo (or
product lines) of such person's trade or
business in connection with the activities of
the organization that receives such payment.
Such a use or acknowledgement does not include
advertising such person's products or services
(including messages containing qualitative or
comparative language, price information, or
other indications of savings or value, an
endorsement, or an inducement to purchase,
sell, or use such products or services).
``(B) Limitations.--
``(i) Contingent payments.--The
term `qualified sponsorship payment'
does not include any payment if the
amount of such payment is contingent
upon the level of attendance at one or
more events, broadcast ratings, or
other factors indicating the degree of
public exposure to one or more events.
``(ii) Safe harbor does not apply
to periodicals and qualified convention
and trade show activities.--The term
`qualified sponsorship payment' does
not include--
``(I) any payment which
entitles the payor to the use
or acknowledgement of the name
or logo (or product lines) of
the payor's trade or business
in regularly scheduled and
printed material published by
or on behalf of the payee
organization that is not
related to and primarily
distributed in connection with
a specific event conducted by
the payee organization, or
``(II) any payment made in
connection with any qualified
convention or trade show
activity (as defined in
subsection (d)(3)(B)).
``(3) Allocation of portions of single payment.--
For purposes of this subsection, to the extent that a
portion of a payment would (if made as a separate
payment) be a qualified sponsorship payment, such
portion of such payment and the other portion of such
payment shall be treated as separate payments.''.
(b) Effective Date.--The amendment made by this section
shall apply to payments solicited or received after December
31, 1997.
SEC. 966. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO BE TAXED
LIKE OTHER HOMEOWNERS ASSOCIATIONS.
(a) Timeshare Associations Included as Homeowner
Associations.--
(1) In general.--Paragraph (1) of section 528(c)
(defining homeowners association) is amended--
(A) by striking ``or a residential real
estate management association'' and inserting
``, a residential real estate management
association, or a timeshare association'' in
the material preceding subparagraph (A),
(B) by striking ``or'' at the end of clause
(i) of subparagraph (B), by striking the period
at the end of clause (ii) of subparagraph (B)
and inserting ``, or'', and by adding at the
end of subparagraph (B) the following new
clause:
``(iii) owners of timeshare rights
to use, or timeshare ownership
interests in, association property in
the case of a timeshare association,'',
and
(C) by inserting ``and, in the case of a
timeshare association, for activities provided
to or on behalf of members of the association''
before the comma at the end of subparagraph
(C).
(2) Timeshare association defined.--Subsection (c)
of section 528 is amended by redesignating paragraph
(4) as paragraph (5) and by inserting after paragraph
(3) the following new paragraph:
``(4) Timeshare association.--The term `timeshare
association' means any organization (other than a
condominium management association) meeting the
requirement of subparagraph (A) of paragraph (1) if any
member thereof holds a timeshare right to use, or a
timeshare ownership interest in, real property
constituting association property.''.
(b) Exempt Function Income.--Paragraph (3) of section
528(d) is amended by striking ``or'' at the end of subparagraph
(A), by striking the period at the end of subparagraph (B) and
inserting ``, or'', and by adding at the end the following new
subparagraph:
``(C) owners of timeshare rights to use, or
timeshare ownership interests in, real property
in the case of a timeshare association.''.
(c) Association Property.--Paragraph (5) of section 528(c),
as redesignated by subsection (a)(2), is amended by adding at
the end the following new flush sentence:
``In the case of a timeshare association, such term
includes property in which the timeshare association,
or members of the association, have rights arising out
of recorded easements, covenants, or other recorded
instruments to use property related to the timeshare
project.''.
(d) Rate of Tax.--Subsection (b) of section 528 (relating
to certain homeowners associations) is amended by inserting
before the period ``(32 percent of such income in the case of a
timeshare association)''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
SEC. 967. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN ISLAND BONDS.
Subclause (I) of section 149(d)(3)(A)(i) of the Internal
Revenue Code of 1986 shall not apply to the second advance
refunding of any issue of the Virgin Islands which was first
advance refunded before June 9, 1997, if the debt provisions of
the refunding bonds are changed to repeal the priority first
lien requirement of the refunded bonds.
SEC. 968. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN FARMERS'
COOPERATIVES.
(a) In General.--Section 1042 (relating to sales of stock
to employee stock ownership plans or certain cooperatives) is
amended by adding at the end the following new subsection:
``(g) Application of Section to Sales of Stock in
Agricultural Refiners and Processors to Eligible Farm
Cooperatives.--
``(1) In general.--This section shall apply to the
sale of stock of a qualified refiner or processor to an
eligible farmers' cooperative.
``(2) Qualified refiner or processor.--For purposes
of this subsection, the term `qualified refiner or
processor' means a domestic corporation--
``(A) substantially all of the activities
of which consist of the active conduct of the
trade or business of refining or processing
agricultural or horticultural products, and
``(B) which, during the 1-year period
ending on the date of the sale, purchases
morethan one-half of such products to be refined or processed from--
``(i) farmers who make up the
eligible farmers' cooperative which is
purchasing stock in the corporation in
a transaction to which this subsection
is to apply, or
``(ii) such cooperative.
``(3) Eligible farmers' cooperative.--For purposes
of this section, the term `eligible farmers'
cooperative' means an organization to which part I of
subchapter T applies and which is engaged in the
marketing of agricultural or horticultural products.
``(4) Special rules.--In applying this section to a
sale to which paragraph (1) applies--
``(A) the eligible farmers' cooperative
shall be treated in the same manner as a
cooperative described in subsection (b)(1)(B),
``(B) subsection (b)(2) shall be applied by
substituting `100 percent' for `30 percent'
each place it appears,
``(C) the determination as to whether any
stock in the domestic corporation is a
qualified security shall be made without regard
to whether the stock is an employer security or
to subsection (c)(1)(A), and
``(D) paragraphs (2)(D) and (7) of
subsection (c) shall not apply.''.
(b) Effective Date.--The amendment made by this section
shall apply to sales after December 31, 1997.
SEC. 969. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES FOR
INDIVIDUALS SUBJECT TO FEDERAL HOURS OF SERVICE.
(a) In General.--Section 274(n) (relating to only 50
percent of meal and entertainment expenses allowed as
deduction) is amended by adding at the end the following new
paragraph:
``(3) Special rule for individuals subject to
federal hours of service.--
``(A) In general.--In the case of any
expenses for food or beverages consumed while
away from home (within the meaning of section
162(a)(2)) by an individual during, or incident
to, the period of duty subject to the hours of
service limitations of the Department of
Transportation, paragraph (1) shall be applied
by substituting `the applicable percentage' for
`50 percent'.
``(B) Applicable percentage.--For purposes
of this paragraph, the term `applicable
percentage' means the percentage determined
under the following table:
``For taxable years be- The applicable
ginning in calendar year-- percentage is--
1998 or 1999.............................................. 55
2000 or 2001.............................................. 60
2002 or 2003.............................................. 65
2004 or 2005.............................................. 70
2006 or 2007.............................................. 75
2008 or thereafter........................................ 80.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1997.
SEC. 970. CLARIFICATION OF DE MINIMIS FRINGE BENEFIT RULES TO NO-CHARGE
EMPLOYEE MEALS.
(a) In General.--Paragraph (2) of section 132(e) (defining
de minimis fringe) is amended by adding at the end the
following new sentence: ``For purposes of subparagraph (B), an
employee entitled under section 119 to exclude the value of a
meal provided at such facility shall be treated as having paid
an amount for such meal equal to the direct operating costs of
the facility attributable to such meal.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 971. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL VEHICLE
FROM THE LIMITS ON DEPRECIATION FOR VEHICLES.
(a) In General.--Section 280F(a)(1) (relating to limiting
depreciation on luxury automobiles) is amended by adding at the
end the following new subparagraph:
``(C) Special rule for certain clean-fuel
passenger automobiles.--
``(i) Modified automobiles.--In the
case of a passenger automobile which is
propelled by a fuel which is not a
clean-burning fuel and to which is
installed qualified clean-fuel vehicle
property (as defined in section
179A(c)(1)(A)) for purposes of
permitting such vehicle to be propelled
by a clean burning fuel (as defined in
section 179A(e)(1)), subparagraph (A)
shall not apply to the cost of the
installed qualified clean burning
vehicle property.
``(ii) Purpose built passenger
vehicles.--In the case of a purpose
built passenger vehicle (as defined in
section 4001(a)(2)(C)(ii)), each of the
annual limitations specified in
subparagraph (A) shall be tripled.''.
(b) Effective Date.--The amendments made by this section
shall apply to property placed in service after the date of
enactment of this Act and before January 1, 2005.
SEC. 972. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON PERCENTAGE
DEPLETION FOR MARGINAL PRODUCTION.
(a) In General.--Paragraph (6) of section 613A(c) is
amended by adding at the end the following new subparagraph:
``(H) Temporary suspension of taxable
income limit with respect to marginal
production.--The second sentence of subsection
(a) of section 613 shall not apply to so much
of the allowance for depletion as is determined
under subparagraph (A) for any taxable year
beginning after December 31, 1997, and before
January 1, 2000.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1997.
SEC. 973. INCREASE IN STANDARD MILEAGE RATE EXPENSE DEDUCTION FOR
CHARITABLE USE OF PASSENGER AUTOMOBILE.
(a) In General.--Section 170(i) (relating to standard
mileage rate for use of passenger automobile) is amended to
read as follows:
``(i) Standard Mileage Rate for Use of Passenger
Automobile.--For purposes of computing the deduction under this
section for use of a passenger automobile, the standard mileage
rate shall be 14 cents per mile.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1997.
SEC. 974. CLARIFICATION OF TREATMENT OF CERTAIN RECEIVABLES PURCHASED
BY COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS.
(a) In General.--Subparagraph (A) of section 501(e)(1) is
amended by inserting ``(including the purchase of patron
accounts receivable on a recourse basis)'' after ``billing and
collection''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1996.
SEC. 975. DEDUCTION IN COMPUTING ADJUSTED GROSS INCOME FOR EXPENSES IN
CONNECTION WITH SERVICE PERFORMED BY CERTAIN
OFFICIALS.
(a) In General.--Paragraph (2) of section 62(a) (defining
adjusted gross income) is amended by adding at the end the
following new subparagraph:
``(C) Certain expenses of officials.--The
deductions allowed by section 162 which consist
of expenses paid or incurred with respect to
services performed by an official as an
employee of a State or a political subdivision
thereof in a position compensated in whole or
in part on a fee basis.''.
(b) Effective Date.--The amendment made by this section
shall apply to expenses paid or incurred in taxable years
beginning after December 31, 1986.
SEC. 976. COMBINED EMPLOYMENT TAX REPORTING DEMONSTRATION PROJECT.
(a) In General.--The Secretary of the Treasury shall
provide for a demonstration project to assess the feasibility
and desirability of expanding combined Federal and State tax
reporting.
(b) Description of Demonstration Project.--The
demonstration project under subsection (a) shall be--
(1) carried out between the Internal Revenue
Service and the State of Montana for a period ending
with the date which is 5 years after the date of the
enactment of this Act,
(2) limited to the reporting of employment taxes,
and
(3) limited to the disclosure of the taxpayer
identity (as defined in section 6103(b)(6) of such
Code) and the signature of the taxpayer.
(c) Conforming Amendment.--Section 6103(d) is amended by
adding at the end the following new paragraph:
``(5) Disclosure for certain combined reporting
project.--The Secretary shall disclose taxpayer
identities and signatures for purposes of the
demonstration project described in section 967 of the
Taxpayer Relief Act of 1997.''.
SEC. 977. ELECTIVE CARRYBACK OF EXISTING CARRYOVERS OF NATIONAL
RAILROAD PASSENGER CORPORATION.
(a) Elective Carryback.--
(1) In general.--If the National Railroad Passenger
Corporation (in this section referred to as the
``Corporation'')--
(A) makes an election under this section
for its first taxable year ending after
September 30, 1997, and
(B) agrees to the conditions specified in
paragraph (2),
then the Corporation shall be treated as having made a
payment of the tax imposed by chapter 1 of the Internal
Revenue Code of 1986 for such first taxable year and
the succeeding taxable year in an amount (for each such
taxable year) equal to 50 percent of the amount
determined under paragraph (3). Each such payment shall
be treated as having been made by the Corporation on
the last day prescribed by law (without regard to
extensions) for filing its return of tax under chapter
1 of such Code for the taxable year to which such
payment relates.
(2) Conditions.--
(A) In general.--This section shall only
apply to the Corporation if it agrees (in such
manner as the Secretary of the Treasury or his
delegate may prescribe) to--
(i) except as provided in clause
(ii), use any refund of the payment
described in paragraph (1) (and any
interest thereon) solely to finance
qualified expenses of the Corporation,
and
(ii) make the payments to non-
Amtrak States as described in
subsection (c).
(B) Repayment.--
(i) In general.--The Corporation
shall repay to the United States any
amount not used in accordance with this
paragraph and any amount remaining
unused as of January 1, 2010.
(ii) Special rules.--For purposes
of clause (i)--
(I) no amount shall be
treated as remaining unused as
of January 1, 2010, if it is
obligated as of such date for a
qualified expense, and
(II) the Corporation shall
not be treated as failing to
meet the requirements of clause
(i) by reason of investing any
amount for a temporary period.
(3) Amount.--For purposes of paragraph (1)--
(A) In general.--The amount determined
under this paragraph shall be the lesser of--
(i) 35 percent of the Corporation's
existing qualified carryovers, or
(ii) the Corporation's net tax
liability for the carryback period.
(B) Dollar limit.--Such amount shall not
exceed $2,323,000,000.
(b) Existing Qualified Carryovers; Net Tax Liability.--For
purposes of this section--
(1) Existing qualified carryovers.--The term
``existing qualified carryovers'' means the aggregate
of the amounts which are net operating loss carryovers
under section 172(b) of the Internal Revenue Code of
1986 to the Corporation's first taxable year ending
after September 30, 1997.
(2) Net tax liability for carryback period.--
(A) In general.--The Corporation's net tax
liability for the carryback period is the
aggregate of the net tax liability of the
Corporation's railroad predecessors for taxable
years in the carryback period.
(B) Net tax liability.--The term ``net tax
liability'' means, with respect to any taxable
year, the amount of the tax imposed by chapter
1 of the Internal Revenue Code of 1986 (or any
corresponding provision of prior law) for such
taxable year, reduced by the sum of the credits
allowable against such tax under such Code (or
any corresponding provision of prior law).
(C) Carryback period.--The term ``carryback
period'' means the period--
(i) which begins with the first
taxable year of any railroad
predecessor beginning before January 1,
1971, for which there is a net tax
liability, and
(ii) which ends with the last
taxable year of any railroad
predecessor beginning before January 1,
1971.
(3) Railroad predecessor.--
(A) In general.--The term ``railroad
predecessor'' means--
(i) any railroad which entered into
a contract under section 401 or 404(a)
of the Rail Passenger Service Act of
1970 relieving the railroad of its
entire responsibility for the provision
of intercity rail passenger service,
and
(ii) any predecessor thereof.
(B) Consolidated returns.--If any railroad
described in subparagraph (A) was a member of
an affiliated group which filed a consolidated
return for any taxable year in the carryback
period, each member of such group shall be
treated as a railroad predecessor for such
year.
(c) Payments to Non-Amtrak States.--
(1) In general.--Within 30 days after receipt of
any refund of any payment described in subsection
(a)(1), the Corporation shall pay to each non-Amtrak
State an amount equal to 1 percent of the amount of
such refund.
(2) Use of payment.--Each non-Amtrak State shall
use the payment described in paragraph (1) (and any
interest thereon) solely to finance qualified expenses
of the State.
(3) Repayment.--A non-Amtrak State shall pay to the
United States--
(A) any portion of the payment received by
the State under paragraph (1) (and any interest
thereon) which is used for a purpose other than
to finance qualified expenses of the State or
which remains unused as of January 1, 2010, or
(B) if such State ceases to be a non-Amtrak
State, the portion of such payment (and any
interest thereon) remaining as of the date of
the cessation.
Rules similar to the rules of subsection (a)(2)(B)
shall apply for purposes of this paragraph.
(d) Tax Consequences.--
(1) Reduction in carryovers.--If the Corporation
elects the application of this section, the
Corporation's existing qualified carryovers shall be
reduced by an amount equal to the amount determined
under subsection (a)(3) divided by 0.35.
(2) Reduction in tax paid by railroad
predecessors.--
(A) In general.--The Secretary of the
Treasury or his delegate shall appropriately
adjust the tax account of each railroad
predecessor to reduce the net tax liability of
such predecessor for taxable years beginning in
the carryback period which is offset by reason
of the application of this section.
(B) FIFO ordering rule.--The Secretary
shall make the adjustments under subparagraph
(A) first for the earliest year in the
carryback period and then for each subsequent
year in such period.
(C) No effect on other taxpayers.--In no
event shall any taxpayer other than the
Corporation be allowed a refund or credit by
reason of this section.
(D) Waiver of limitations.--If the
adjustment under subparagraph (A) is barred by
the operation of any law or rule of law, such
law or rule of law shall be waived solely for
purposes of making such adjustment.
(3) Tax treatment of expenditures.--With respect to
any payment by the Corporation of qualified expenses
described in subsection (e)(1)(A) during any taxable
year from the amount of any refund of the payment
described in subsection (a)(1)--
(A) no deduction shall be allowed to the
Corporation with respect to any amount paid or
incurred which is attributable to such amount,
and
(B) the basis of any property shall be
reduced by the portion of the cost of such
property which is attributable to such amount.
(4) Payments to a non-amtrak state.--No deduction
shall be allowed to the Corporation under chapter 1 of
the Internal Revenue Code of 1986 for any payment to a
non-Amtrak State required under subsection
(a)(2)(A)(ii).
(e) Definitions.--For purposes of this section--
(1) Qualified expenses.--The term ``qualified
expenses'' means expenses incurred for--
(A) in the case of the Corporation--
(i) the acquisition of equipment,
rolling stock, and other capital
improvements, the upgrading of
maintenance facilities, and the
maintenance of existing equipment, in
intercity passenger rail service, and
(ii) the payment of interest and
principal on obligations incurred for
such acquisition, upgrading, and
maintenance, and
(B) in the case of a non-Amtrak State--
(i) the acquisition of equipment,
rolling stock, and other capital
improvements, the upgrading of
maintenance facilities, and the
maintenance of existing equipment, in
intercity passenger rail service,
(ii) the acquisition of equipment,
rolling stock, and other capital
improvements, the upgrading of
maintenance facilities, and the
maintenance of existing equipment, in
intercity bus service,
(iii) the purchase of intercity
passenger rail services from the
Corporation, and
(iv) the payment of interest and
principal on obligations incurred for
such acquisition, upgrading,
maintenance, and purchase.
In the case of a non-Amtrak State which provides its
own intercity passenger rail service on the date of the
enactment of this paragraph, subparagraph (B) shall be
applied by only taking into account clauses (i) and
(iv).
(2) Non-amtrak state.--The term ``non-Amtrak
State'' means, with respect to any payment, any State
which does not receive intercity passenger rail service
from the Corporation at any time during the period
beginning on the date of the enactment of this Act and
ending on the date of the payment.
(f) Authorizing Reform Required.--
(1) In general.--The Secretary of the Treasury
shall not make payment of any refund of any payment
described in subsection (a)(1) earlier than the date of
the enactment of Federal legislation, other than
legislation included in this section, which is enacted
after July 29, 1997, and which authorizes reforms of
the National Railroad Passenger Corporation.
(2) No interest.--Notwithstanding any other
provision of law, if the payment of any refund is
delayed by reason of paragraph (1), no interest shall
accrue with respect to such payment prior to the 45th
day following the date of the enactment of Federal
legislation described in paragraph (1).
(3) Estimate of revenue.--For purposes of
estimating revenues under budget reconciliation, the
impact of this section on Federal revenues shall be
determined without regard to this subsection.
Subtitle H--Extension of Duty-Free Treatment Under Generalized System
of Preferences
SEC. 981. GENERALIZED SYSTEM OF PREFERENCES.
(a) Extension of Duty-Free Treatment Under System.--Section
505 of the Trade Act of 1974 (19 U.S.C. 2465) is amended by
striking ``May 31, 1997'' and inserting ``June 30, 1998''.
(b) Retroactive Application for Certain Liquidations and
Reliquidations.--
(1) In general.--Notwithstanding section 514 of the
Tariff Act of 1930 or any other provision of law and
subject to paragraph (2), the entry--
(A) of any article to which duty-free
treatment under title V of the Trade Act of
1974 would have applied if the entry had been
made on May 31, 1997, and
(B) that was made after May 31, 1997, and
before the date of the enactment of this Act,
shall be liquidated or reliquidated as free of duty,
and the Secretary of the Treasury shall refund any duty
paid with respect to such entry. As used in this
subsection, the term ``entry'' includes a withdrawal
from warehouse for consumption.
(2) Requests.--Liquidation or reliquidation may be
made under paragraph (1) with respect to an entry only
if a request therefor is filed with the Customs
Service, within 180 days after the date of the
enactment of this Act, that contains sufficient
information to enable the Customs Service--
(A) to locate the entry; or
(B) to reconstruct the entry if it cannot
be located.
TITLE X--REVENUES
Subtitle A--Financial Products
SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED FINANCIAL
POSITIONS.
(a) In General.--Part IV of subchapter P of chapter 1 is
amended by adding at the end the following new section:
``SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED FINANCIAL
POSITIONS.
``(a) In General.--If there is a constructive sale of an
appreciated financial position--
``(1) the taxpayer shall recognize gain as if such
position were sold, assigned, or otherwise terminated
at its fair market value on the date of such
constructive sale (and any gain shall be taken into
account for the taxable year which includes such date),
and
``(2) for purposes of applying this title for
periods after the constructive sale--
``(A) proper adjustment shall be made in
the amount of any gain or loss subsequently
realized with respect to such position for any
gain taken into account by reason of paragraph
(1), and
``(B) the holding period of such position
shall be determined as if such position were
originally acquired on the date of such
constructive sale.
``(b) Appreciated Financial Position.--For purposes of this
section--
``(1) In general.--Except as provided in paragraph
(2), the term `appreciated financial position' means
any position with respect to any stock, debt
instrument, or partnership interest if there would be
gain were such position sold, assigned, or otherwise
terminated at its fair market value.
``(2) Exceptions.--The term `appreciated financial
position' shall not include--
``(A) any position with respect to debt
if--
``(i) the debt unconditionally
entitles the holder to receive a
specified principal amount,
``(ii) the interest payments (or
other similar amounts) with respect to
such debt meet the requirements of
clause (i) of section 860G(a)(1)(B),
and
``(iii) such debt is not
convertible (directly or indirectly)
into stock of the issuer or any related
person, and
``(B) any position which is marked to
market under any provision of this title or the
regulations thereunder.
``(3) Position.--The term `position' means an
interest, including a futures or forward contract,
short sale, or option.
``(c) Constructive Sale.--For purposes of this section--
``(1) In general.--A taxpayer shall be treated as
having made a constructive sale of an appreciated
financial position if the taxpayer (or a related
person)--
``(A) enters into a short sale of the same
or substantially identical property,
``(B) enters into an offsetting notional
principal contract with respect to the same or
substantially identical property,
``(C) enters into a futures or forward
contract to deliver the same or substantially
identical property,
``(D) in the case of an appreciated
financial position that is a short sale or a
contract described in subparagraph (B) or (C)
with respect to any property, acquires the same
or substantially identical property, or
``(E) to the extent prescribed by the
Secretary in regulations, enters into 1 or more
other transactions (or acquires 1 or more
positions) that have substantially the same
effect as a transaction described in any of the
preceding subparagraphs.
``(2) Exception for sales of nonpublicly traded
property.--The term `constructive sale' shall not
include any contract for sale of any stock, debt
instrument, or partnership interest which is not a
marketable security (as defined in section 453(f)) if
the contract settles within 1 year after the date such
contract is entered into.
``(3) Exception for certain closed transactions.--
``(A) In general.--In applying this
section, there shall be disregarded any
transaction (which would otherwise be treated
as a constructive sale) during the taxable year
if--
``(i) such transaction is closed
before the end of the 30th day after
the close of such taxable year,
``(ii) the taxpayer holds the
appreciated financial position
throughout the 60-day period beginning
on the date such transaction is closed,
and
``(iii) at no time during such 60-
day period is the taxpayer's risk of
loss with respect to such position
reduced by reason of a circumstance
which would be described in section
246(c)(4) if references to stock
included references to such position.
``(B) Treatment of positions which are
reestablished.--If--
``(i) a transaction, which would
otherwise be treated as a constructive
sale of an appreciated financial
position, is closed during the taxable
year or during the 30 days thereafter,
and
``(ii) another substantially
similar transaction is entered into
during the 60-day period beginning on
the date the transaction referred to in
clause (i) is closed--
``(I) which also would
otherwise be treated as a
constructive sale of such
position,
``(II) which is closed
before the 30th day after the
close of the taxable year in
which the transaction referred to in clause (i) occurs, and
``(III) which meets the
requirements of clauses (ii)
and (iii) of subparagraph (A),
the transaction referred to in clause (ii)
shall be disregarded for purposes of
determining whether the requirements of
subparagraph (A)(iii) are met with respect to
the transaction described in clause (i).
``(4) Related person.--A person is related to
another person with respect to a transaction if--
``(A) the relationship is described in
section 267(b) or 707(b), and
``(B) such transaction is entered into with
a view toward avoiding the purposes of this
section.
``(d) Other Definitions.--For purposes of this section--
``(1) Forward contract.--The term `forward
contract' means a contract to deliver a substantially
fixed amount of property for a substantially fixed
price.
``(2) Offsetting notional principal contract.--The
term `offsetting notional principal contract' means,
with respect to any property, an agreement which
includes--
``(A) a requirement to pay (or provide
credit for) all or substantially all of the
investment yield (including appreciation) on
such property for a specified period, and
``(B) a right to be reimbursed for (or
receive credit for) all or substantially all of
any decline in the value of such property.
``(e) Special Rules.--
``(1) Treatment of subsequent sale of position
which was deemed sold.--If--
``(A) there is a constructive sale of any
appreciated financial position,
``(B) such position is subsequently
disposed of, and
``(C) at the time of such disposition, the
transaction resulting in the constructive sale
of such position is open with respect to the
taxpayer or any related person,
solely for purposes of determining whether the taxpayer
has entered into a constructive sale of any other
appreciated financial position held by the taxpayer,
the taxpayer shall be treated as entering into such
transaction immediately after such disposition.For
purposes of the preceding sentence, an assignment or other termination
shall be treated as a disposition.
``(2) Certain trust instruments treated as stock.--
For purposes of this section, an interest in a trust
which is actively traded (within the meaning of section
1092(d)(1)) shall be treated as stock unless
substantially all (by value) of the property held by
the trust is debt described in subsection (b)(2)(A).
``(3) Multiple positions in property.--If a
taxpayer holds multiple positions in property, the
determination of whether a specific transaction is a
constructive sale and, if so, which appreciated
financial position is deemed sold shall be made in the
same manner as actual sales.
``(f) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.''.
(b) Election of Mark to Market for Dealers in Commodities
and for Traders in Securities or Commodities.--Section 475
(relating to mark to market accounting method for dealers in
securities) is amended by redesignating subsection (e) as
subsection (g) and by inserting after subsection (d) the
following new subsections:
``(e) Election of Mark to Market for Dealers in
Commodities.--
``(1) In general.--In the case of a dealer in
commodities who elects the application of this
subsection, this section shall apply to commodities
held by such dealer in the same manner as this section
applies to securities held by a dealer in securities.
``(2) Commodity.--For purposes of this subsection
and subsection (f), the term `commodity' means--
``(A) any commodity which is actively
traded (within the meaning of section
1092(d)(1));
``(B) any notional principal contract with
respect to any commodity described in
subparagraph (A);
``(C) any evidence of an interest in, or a
derivative instrument in, any commodity
described in subparagraph (A) or (B), including
any option, forward contract, futures contract,
short position, and any similar instrument in
such a commodity; and
``(D) any position which--
``(i) is not a commodity described
in subparagraph (A), (B), or (C),
``(ii) is a hedge with respect to
such a commodity, and
``(iii) is clearly identified in
the taxpayer's records as being
described in this subparagraph before
the close of the day on which it was
acquired or entered into (or such other
time as the Secretary may by
regulations prescribe).
``(3) Election.--An election under this subsection
may be made without the consent of the Secretary. Such
an election, once made, shall apply to the taxable year
for which made and all subsequent taxable years unless
revoked with the consent of the Secretary.
``(f) Election of Mark to Market for Traders in Securities
or Commodities.--
``(1) Traders in securities.--
``(A) In general.--In the case of a person
who is engaged in a trade or business as a
trader in securities and who elects to have
this paragraph apply to such trade or
business--
``(i) such person shall recognize
gain or loss on any security held in
connection with such trade or business
at the close of any taxable year as if
such security were sold for its fair
market value on the last business day
of such taxable year, and
``(ii) any gain or loss shall be
taken into account for such taxable
year.
Proper adjustment shall be made in the amount
of any gain or loss subsequently realized for
gain or loss taken into account under the
preceding sentence. The Secretary may provide
by regulations for the application of this
subparagraph at times other than the times
provided in this subparagraph.
``(B) Exception.--Subparagraph (A) shall
not apply to any security--
``(i) which is established to the
satisfaction of the Secretary as having
no connection to the activities of such
person as a trader, and
``(ii) which is clearly identified
in such person's records as being
described in clause (i) before the
close of the day on which it was
acquired, originated, or entered into
(or such other time as the Secretary
may by regulations prescribe).
If a security ceases to be described in clause
(i) at any time after it was identified as such
under clause (ii), subparagraph (A) shall apply
to any changes in value of the security
occurring after the cessation.
``(C) Coordination with section 1259.--Any
security to which subparagraph (A) applies and
which was acquired in the normal course of the
taxpayer's activities as a trader in securities
shall not be taken into account in applying
section 1259 to any position to which
subparagraph (A) does not apply.
``(D) Other rules to apply.--Rules similar
to the rules of subsections (b)(4) and (d)
shall apply to securities held by a person in
any trade or business with respect to which an
election under this paragraph is in effect.
``(2) Traders in commodities.--In the case of a
person who is engaged in a trade or business as a
trader in commodities and who elects to have this
paragraph apply to such trade or business, paragraph
(1) shall apply to commodities held by such trader in
connection with such trade or business in the same
manner as paragraph (1) applies to securities held by a
trader in securities.
``(3) Election.--The elections under paragraphs (1)
and (2) may be made separately for each trade or
business and without the consent of the Secretary. Such
an election, once made, shall apply to the taxable year
for which made and all subsequent taxable years unless
revoked with the consent of the Secretary.''.
(c) Clerical Amendment.--The table of sections for part IV
of subchapter P of chapter 1 is amended by adding at the end
the following new item:
``Sec. 1259. Constructive sales treatment for appreciated
financial positions.''.
(d) Effective Dates.--
(1) In general.--Except as otherwise provided in
this subsection, the amendments made by this section
shall apply to any constructive sale after June 8,
1997.
(2) Exception for sales of positions, etc. held
before june 9, 1997.--If--
(A) before June 9, 1997, the taxpayer
entered into any transaction which is a
constructive sale of any appreciated financial
position, and
(B) before the close of the 30-day period
beginning on the date of the enactment of this
Act or before such later date as may be
specified by the Secretary of the Treasury,
such transaction and position are clearly
identified in the taxpayer's records as
offsetting,
such transaction and position shall not be taken into
account in determining whether any other constructive
sale after June 8, 1997, has occurred. The preceding
sentence shall cease to apply as of the date such
transaction is closed or the taxpayer ceases to hold
such position.
(3) Special rule.--In the case of a decedent dying
after June 8, 1997, if--
(A) there was a constructive sale on or
before such date of any appreciated financial
position,
(B) the transaction resulting in such
constructive sale of such position remains open
(with respect to the decedent or any related
person)--
(i) for not less than 2 years after
the date of such transaction (whether
such period is before or after June 8,
1997), and
(ii) at any time during the 3-year
period ending on the date of the
decedent's death, and
(C) such transaction is not closed within
the 30-day period beginning on the date of the
enactment of this Act,
then, for purposes of such Code, such position (and the
transaction resulting in such constructive sale) shall
be treated as property constituting rights to receive
an item of income in respect of a decedent under
section 691 of such Code. Section 1014(c) of such Code
shall not apply to so much of such position's or
property's value (as included in the decedent's estate
for purposes of chapter 11 of such Code) as exceeds its
fair market value as of the date such transaction is
closed.
(4) Election of mark to market by securities
traders and traders and dealers in commodities.--
(A) In general.--The amendments made by
subsection (b) shall apply to taxable years
ending after the date of the enactment of this
Act.
(B) 4-year spread of adjustments.--In the
case of a taxpayer who elects under subsection
(e) or (f) of section 475 of the Internal
Revenue Code of 1986 (as added by this section)
to change its method of accounting for the
taxable year which includes the date of the
enactment of this Act--
(i) any identification required
under such subsection with respect to
securities and commodities held on the
date of the enactment of this Act shall
be treated as timely made if made on or
before the 30th day after such date of
enactment, and
(ii) the net amount of the
adjustments required to be taken into
account by the taxpayer under section
481 of such Code shall be taken into
account ratably over the 4-taxable year
period beginning with such first
taxable year.
SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES UNDER
SECTION 351.
(a) In General.--Paragraph (1) of section 351(e) (relating
to exceptions) is amended by adding at the end the following:
``For purposes of the preceding sentence, the determination of
whether a company is an investment company shall be made--
``(A) by taking into account all stock and
securities held by the company, and
``(B) by treating as stock and securities--
``(i) money,
``(ii) stocks and other equity
interests in a corporation, evidences
of indebtedness, options, forward or
futures contracts, notional principal
contracts and derivatives,
``(iii) any foreign currency,
``(iv) any interest in a real
estate investment trust, a common trust
fund, a regulated investment company, a
publicly-traded partnership (as defined
in section 7704(b)) or any other equity
interest (other than in a corporation)
which pursuant to its terms or any
other arrangement is readily
convertible into, or exchangeable for,
any asset described in any preceding
clause, this clause or clause (v) or
(viii),
``(v) except to the extent provided
in regulations prescribed by the
Secretary, any interest in a precious
metal, unless such metal is used or
held in the active conduct of a trade
or business after the contribution,
``(vi) except as otherwise provided
in regulations prescribed by the
Secretary, interests in any entity if
substantially all of the assets of such
entity consist (directly or indirectly)
of any assets described in any
preceding clause or clause (viii),
``(vii) to the extent provided in
regulations prescribed by the
Secretary, any interest in any entity
not described in clause (vi), but only
to the extent of the value of such
interest that is attributable to assets
listed in clauses (i) through (v) or
clause (viii), or
``(viii) any other asset specified
in regulations prescribed by the
Secretary.
The Secretary may prescribe regulations that, under
appropriate circumstances, treat any asset described in
clauses (i) through (v) as not so listed.''.
(b) Effective Date.--
(1) In general.--The amendment made by subsection
(a) shall apply to transfers after June 8, 1997, in
taxable years ending after such date.
(2) Binding contracts.--The amendment made by
subsection (a) shall not apply to any transfer pursuant
to a written binding contract in effect on June 8,
1997, and at all times thereafter before such transfer
if such contract provides for the transfer of a fixed
amount of property.
SEC. 1003. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH RESPECT TO
PROPERTY.
(a) Application of Capital Treatment to Property Other Than
Personal Property.--
(1) In general.--Paragraph (1) of section 1234A
(relating to gains and losses from certain
terminations) is amended by striking ``personal
property (as defined in section 1092(d)(1))'' and
inserting ``property''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply to terminations more than 30
days after the date of the enactment of this Act.
(b) Treatment of Short Sales of Property Which Becomes
Substantially Worthless.--
(1) In general.--Section 1233 is amended by adding
at the end the following new subsection:
``(h) Short Sales of Property Which Becomes Substantially
Worthless.--
``(1) In general.--If--
``(A) the taxpayer enters into a short sale
of property, and
``(B) such property becomes substantially
worthless,
the taxpayer shall recognize gain in the same manner as
if the short sale were closed when the property becomes
substantially worthless. To the extent provided in
regulations prescribed by the Secretary, the preceding
sentence also shall apply with respect to any option
with respect to property, any offsetting notional
principal contract with respect to property, any
futures or forward contract to deliver any property,
and any other similar transaction.
``(2) Statute of limitations.--If property becomes
substantially worthless during a taxable year and any
short sale of such property remains open at the time
such property becomes substantially worthless, then--
``(A) the statutory period for the
assessment of any deficiency attributable to
any part of the gain on such transaction shall
not expire before the earlier of--
``(i) the date which is 3 years
after the date the Secretary is
notified by the taxpayer (in such
manner as the Secretary may by
regulations prescribe) of the
substantial worthlessness of such
property, or
``(ii) the date which is 6 years
after the date the return for such
taxable year is filed, and
``(B) such deficiency may be assessed
before the date applicable under subparagraph
(A) notwithstanding the provisions of any other
law or rule of law which would otherwise
prevent such assessment.''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply to property which becomes
substantially worthless after the date of the enactment
of this Act.
(c) Application of Capital Treatment, Etc. to Obligations
Issued by Natural Persons.--
(1) In general.--Section 1271(b) is amended to read
as follows:
``(b) Exception for Certain Obligations.--
``(1) In general.--This section shall not apply
to--
``(A) any obligation issued by a natural
person before June 9, 1997, and
``(B) any obligation issued before July 2,
1982, by an issuer which is not a corporation
and is not a government or political
subdivision thereof.
``(2) Termination.--Paragraph (1) shall not apply
to any obligation purchased (within the meaning of
section 1272(d)(1)) after June 8, 1997.''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply to sales, exchanges, and
retirements after the date of enactment of this Act.
SEC. 1004. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE POOLED DEBT
OBLIGATIONS SUBJECT TO ACCELERATION.
(a) In General.--Subparagraph (C) of section 1272(a)(6)
(relating to debt instruments to which the paragraph applies)
is amended by striking ``or'' at the end of clause (i), by
striking the period at the end of clause (ii) and inserting ``,
or'', and by inserting after clause (ii) the following:
``(iii) any pool of debt
instruments the yield on which may be
affected by reason of prepayments (or
to the extent provided in regulations,
by reason of other events).
To the extent provided in regulations
prescribed by the Secretary, in the case of a
small business engaged in the trade or business
of selling tangible personal property at
retail, clause (iii) shall not apply to debt
instruments incurred in the ordinary course of
such trade or business while held by such
business.''.
(b) Effective Dates.--
(1) In general.--The amendment made by this section
shall apply to taxable years beginning after the date
of the enactment of this Act.
(2) Change in method of accounting.--In the case of
any taxpayer required by this section to change its
method of accounting for its first taxable year
beginning after the date of the enactment of this Act--
(A) such change shall be treated as
initiated by the taxpayer,
(B) such change shall be treated as made
with the consent of the Secretary of the
Treasury, and
(C) the net amount of the adjustments
required to be taken into account by the
taxpayer under section 481 of the Internal
Revenue Code of 1986 shall be taken into
account ratably over the 4-taxable year period
beginning with such first taxable year.
SEC. 1005. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.
(a) In General.--Section 163 (relating to deduction for
interest), as amended by title V, is amended by redesignating
subsection (l) as subsection (m) and by inserting after
subsection (k) the following new subsection:
``(l) Disallowance of Deduction on Certain Debt Instruments
of Corporations.--
``(1) In general.--No deduction shall be allowed
under this chapter for any interest paid or accrued on
a disqualified debt instrument.
``(2) Disqualified debt instrument.--For purposes
of this subsection, the term `disqualified debt
instrument' means any indebtedness of a corporation
which is payable in equity of the issuer or a related
party.
``(3) Special rules for amounts payable in
equity.--For purposes of paragraph (2), indebtedness
shall be treated as payable in equity of the issuer or
a related party only if--
``(A) a substantial amount of the principal
or interest is required to be paid or
converted, or at the option of the issuer or a
related party is payable in, or convertible
into, such equity,
``(B) a substantial amount of the principal
or interest is required to be determined, or at
the option of the issuer or a related party is
determined, by reference to the value of such
equity, or
``(C) the indebtedness is part of an
arrangement which is reasonably expected to
result in a transaction described in
subparagraph (A) or (B).
For purposes of this paragraph, principal or interest
shall be treated as required to be so paid, converted,
or determined if it may be required at the option of
the holder or a related party and there is a
substantial certainty the option will be exercised.
``(4) Related party.--For purposes of this
subsection, a person is a related party with respect to
another person if such person bears a relationship to
such other person described in section 267(b) or
707(b).
``(5) Regulations.--The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this subsection, including
regulations preventing avoidance of this subsection
through the use of an issuer other than a
corporation.''.
(b) Effective Date.--
(1) In general.--The amendment made by this section
shall apply to disqualified debt instruments issued
after June 8, 1997.
(2) Transition rule.--The amendment made by this
section shall not apply to any instrument issued after
June 8, 1997, if such instrument is--
(A) issued pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the
Securities and Exchange Commission required
solely by reason of the issuance.
Subtitle B--Corporate Organizations and Reorganizations
SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS.
(a) Treatment of Extraordinary Dividends in Excess of
Basis.--Paragraph (2) of section 1059(a) (relating to corporate
shareholder's recognition of gain attributable to nontaxed
portion of extraordinary dividends) is amended to read as
follows:
``(2) Amounts in excess of basis.--If the nontaxed
portion of such dividends exceeds such basis, such
excess shall be treated as gain from the sale or
exchange of such stock for the taxable year in which
the extraordinary dividend is received.''.
(b) Treatment of Redemptions Where Options Involved.--
Paragraph (1) of section 1059(e) (relating to treatment of
partial liquidations and non-pro rata redemptions) is amended
to read as follows:
``(1) Treatment of partial liquidations and certain
redemptions.--Except as otherwise provided in
regulations--
``(A) Redemptions.--In the case of any
redemption of stock--
``(i) which is part of a partial
liquidation (within the meaning of
section 302(e)) of the redeeming
corporation,
``(ii) which is not pro rata as to
all shareholders, or
``(iii) which would not have been
treated (in whole or in part) as a
dividend if any options had not been
taken into account under section
318(a)(4),
any amount treated as a dividend with respect
to such redemption shall be treated as an
extraordinary dividend to which paragraphs (1)
and (2) of subsection (a) apply without regard
to the period the taxpayer held such stock. In
the case of a redemption described in clause
(iii), only the basis in the stock redeemed
shall be taken into account under subsection
(a).
``(B) Reorganizations, etc.--An exchange
described in section 356 which is treated as a
dividend shall be treated as a redemption of
stock for purposes of applying subparagraph
(A).''.
(c) Time for Reduction.--Paragraph (1) of section 1059(d)
is amended to read as follows:
``(1) Time for reduction.--Any reduction in basis
under subsection (a)(1) shall be treated as occurring
at the beginning of the ex-dividend date of the
extraordinary dividend to which the reduction
relates.''.
(d) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to distributions after May 3, 1995.
(2) Transition rule.--The amendments made by this
section shall not apply to any distribution made
pursuant to the terms of--
(A) a written binding contract in effect on
May 3, 1995, and at all times thereafter before
such distribution, or
(B) a tender offer outstanding on May 3,
1995.
(3) Certain dividends not pursuant to certain
redemptions.--In determining whether the amendment made
by subsection (a) applies to any extraordinary dividend
other than a dividend treated as an extraordinary
dividend under section 1059(e)(1) of the Internal
Revenue Code of 1986 (as amended by this Act),
paragraphs (1) and (2) shall be applied by substituting
``September 13, 1995'' for ``May 3, 1995''.
SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS IN CONNECTION
WITH ACQUISITIONS AND TO INTRAGROUP TRANSACTIONS.
(a) Distributions In Connection With Acquisitions.--Section
355 (relating to distributions of stock and securities of a
controlled corporation) is amended by adding at the end the
following new subsection:
``(e) Recognition of Gain on Certain Distributions of Stock
or Securities in Connection With Acquisitions.--
``(1) General rule.--If there is a distribution to
which this subsection applies, any stock or securities
in the controlled corporation shall not be treated as
qualified property for purposes of subsection (c)(2) of
this section or section 361(c)(2).
``(2) Distributions to which subsection applies.--
``(A) In general.--This subsection shall
apply to any distribution--
``(i) to which this section (or so
much of section 356 as relates to this
section) applies, and
``(ii) which is part of a plan (or
series of related transactions)
pursuant to which 1 or more persons
acquire directly or indirectly stock
representing a 50-percent or greater
interest in the distributing
corporation or any controlled
corporation.
``(B) Plan presumed to exist in certain
cases.--If 1 or more persons acquire directly
or indirectly stock representing a 50-percent
or greater interest in the distributing
corporation or any controlled corporation
during the 4-year period beginning on the date
which is 2 years before the date of the
distribution, such acquisition shall be treated
as pursuant to a plan described in subparagraph
(A)(ii) unless it is established that the
distribution and theacquisition are not
pursuant to a plan or series of related transactions.
``(C) Certain plans disregarded.--A plan
(or series of related transactions) shall not
be treated as described in subparagraph (A)(ii)
if, immediately after the completion of such
plan or transactions, the distributing
corporation and all controlled corporations are
members of a single affiliated group (as
defined in section 1504 without regard to
subsection (b) thereof).
``(D) Coordination with subsection (d).--
This subsection shall not apply to any
distribution to which subsection (d) applies.
``(3) Special rules relating to acquisitions.--
``(A) Certain acquisitions not taken into
account.--Except as provided in regulations,
the following acquisitions shall not be treated
as described in paragraph (2)(A)(ii):
``(i) The acquisition of stock in
any controlled corporation by the
distributing corporation.
``(ii) The acquisition by a person
of stock in any controlled corporation
by reason of holding stock or
securities in the distributing
corporation.
``(iii) The acquisition by a person
of stock in any successor corporation
of the distributing corporation or any
controlled corporation by reason of
holding stock or securities in such
distributing or controlled corporation.
``(iv) The acquisition of stock in
a corporation if shareholders owning
directly or indirectly stock
possessing--
``(I) more than 50 percent
of the total combined voting
power of all classes of stock
entitled to vote, and
``(II) more than 50 percent
of the total value of shares of
all classes of stock,
in the distributing corporation or any
controlled corporation before such
acquisition own directly or indirectly
stock possessing such vote and value in
such distributing or controlled
corporation after such acquisition.
This subparagraph shall not apply to any
acquisition if the stock held before the
acquisition was acquired pursuant to a plan (or
series of related transactions) described in
paragraph (2)(A)(ii).
``(B) Asset acquisitions.--Except as
provided in regulations, for purposes of this
subsection, if the assets of the distributing
corporation or any controlled corporation are
acquired by a successor corporation in a
transaction described in subparagraph (A), (C),
or (D) of section 368(a)(1) or any other
transaction specified in regulations by the
Secretary, the shareholders (immediately before
the acquisition) of the corporation acquiring
such assets shall be treated as acquiring stock
in the corporation from which the assets were
acquired.
``(4) Definition and special rules.--For purposes
of this subsection--
``(A) 50-percent or greater interest.--The
term `50-percent or greater interest' has the
meaning given such term by subsection (d)(4).
``(B) Distributions in title 11 or similar
case.--Paragraph (1) shall not apply to any
distribution made in a title 11 or similar case
(as defined in section 368(a)(3)).
``(C) Aggregation and attribution rules.--
``(i) Aggregation.--The rules of
paragraph (7)(A) of subsection (d)
shall apply.
``(ii) Attribution.--Section
318(a)(2) shall apply in determining
whether a person holds stock or
securities in any corporation. Except
as provided in regulations, section
318(a)(2)(C) shall be applied without
regard to the phrase `50 percent or
more in value' for purposes of the
preceding sentence.
``(D) Successors and predecessors.--For
purposes of this subsection, any reference to a
controlled corporation or a distributing
corporation shall include a reference to any
predecessor or successor of such corporation.
``(E) Statute of limitations.--If there is
a distribution to which paragraph (1) applies--
``(i) the statutory period for the
assessment of any deficiency
attributable to any part of the gain
recognized under this subsection by
reason of such distribution shall not
expire before the expiration of 3 years
from the date the Secretary is notified
by the taxpayer (in such manner as the
Secretary may by regulations prescribe)
that such distribution occurred, and
``(ii) such deficiency may be
assessed before the expiration of such
3-year period notwithstanding the
provisions of any other law or rule of
law which would otherwise prevent such
assessment.
``(5) Regulations.--The Secretary shall prescribe
such regulations as may be necessary to carry out the
purposes of this subsection, including regulations--
``(A) providing for the application of this
subsection where there is more than 1
controlled corporation,
``(B) treating 2 or more distributions as 1
distribution where necessary to prevent the
avoidance of such purposes, and
``(C) providing for the application of
rules similar to the rules of subsection (d)(6)
where appropriate for purposes of paragraph
(2)(B).''.
(b) Special Rules for Certain Intragroup Transactions.--
(1) Section 355 not to apply.--Section 355, as
amended by subsection (a), is amended by adding at the
end the following new subsection:
``(f) Section Not To Apply to Certain Intragroup
Distributions.--Except as provided in regulations, this section
(or so much of section 356 as relates to this section) shall
not apply to the distribution of stock from 1 member of an
affiliated group (as defined in section 1504(a)) to another
member of such group if such distribution is part of a plan (or
series of related transactions) described in subsection
(e)(2)(A)(ii) (determined after the application of subsection
(e)).''.
(2) Adjustments to basis.--Section 358 (relating to
basis to distributees) is amended by adding at the end
the following new subsection:
``(g) Adjustments in Intragroup Transactions Involving
Section 355.--In the case of a distribution to which section
355 (or so much of section 356 as relates to section 355)
applies and which involves the distribution of stock from 1
member of an affiliated group (as defined in section 1504(a)
without regard to subsection (b) thereof) to another member of
such group, the Secretary may, notwithstanding any other
provision of this section, provide adjustments to the adjusted
basis of any stock which--
``(1) is in a corporation which is a member of such
group, and
``(2) is held by another member of such group,
to appropriately reflect the proper treatment of such
distribution.''.
(c) Determination of Control in Certain Divisive
Transactions.--
(1) Section 351 transactions.--Section 351(c)
(relating to special rule) is amended to read as
follows:
``(c) Special Rules Where Distribution to Shareholders.--In
determining control for purposes of this section--
``(1) the fact that any corporate transferor
distributes part or all of the stock in the corporation
which it receives in the exchange to its shareholders
shall not be taken into account, and
``(2) if the requirements of section 355 are met
with respect to such distribution, the shareholders
shall be treated as in control of such corporation
immediately after the exchange if the shareholders own
(immediately after the distribution) stock possessing--
``(A) more than 50 percent of the total
combined voting power of all classes of stock
of such corporation entitled to vote, and
``(B) more than 50 percent of the total
value of shares of all classes of stock of such
corporation.''.
(2) D reorganizations.--Section 368(a)(2)(H)
(relating to special rule for determining whether
certain transactions are qualified under paragraph
(1)(D)) is amended to read as follows:
``(H) Special rules for determining whether
certain transactions are qualified under
paragraph (1)(d).--For purposes of determining
whether a transaction qualifies under paragraph
(1)(D)--
``(i) in the case of a transaction
with respect to which the requirements
of subparagraphs (A) and (B) of section
354(b)(1) are met, the term `control'
has the meaning given such term by
section 304(c), and
``(ii) in the case of a transaction
with respect to which the requirements
of section 355 are met, the
shareholders described in paragraph
(1)(D) shall be treated as having
control of the corporation to which the
assets are transferred if such
shareholders own (immediately after the
distribution) stock possessing--
``(I) more than 50 percent
of the total combined voting
power of all classes of stock
of such corporation entitled to
vote, and
``(II) more than 50 percent
of the total value of shares of
all classes of stock of such
corporation.''.
(d) Effective Dates.--
(1) Section 355 rules.--The amendments made by
subsections (a) and (b) shall apply to distributions
after April 16, 1997, pursuant to a plan (or series of
related transactions) which involves an acquisition
described in section 355(e)(2)(A)(ii) of the Internal
Revenue Code of 1986 occurring after such date.
(2) Divisive transactions.--The amendments made by
subsection (c) shall apply to transfers after the date
of the enactment of this Act.
(3) Transition rule.--The amendments made by this
section shall not apply to any distribution pursuant to
a plan (or series of related transactions)which
involves an acquisition described in section 355(e)(2)(A)(ii) of the
Internal Revenue Code of 1986 (or, in the case of the amendments made
by subsection (c), any transfer) occurring after April 16, 1997, if
such acquisition or transfer is--
(A) made pursuant to an agreement which was
binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the
Securities and Exchange Commission required
solely by reason of the acquisition or
transfer.
This paragraph shall not apply to any agreement, ruling
request, or public announcement or filing unless it
identifies the acquirer of the distributing corporation
or any controlled corporation, or the transferee,
whichever is applicable.
SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING RELATED CORPORATIONS.
(a) Stock Purchases by Related Corporations.--The last
sentence of section 304(a)(1) (relating to acquisition by
related corporation other than subsidiary) is amended to read
as follows: ``To the extent that such distribution is treated
as a distribution to which section 301 applies, the transferor
and the acquiring corporation shall be treated in the same
manner as if the transferor had transferred the stock so
acquired to the acquiring corporation in exchange for stock of
the acquiring corporation in a transaction to which section
351(a) applies, and then the acquiring corporation had redeemed
the stock it was treated as issuing in such transaction.''.
(b) Coordination With Section 1059.--Clause (iii) of
section 1059(e)(1)(A), as amended by this title, is amended to
read as follows:
``(iii) which would not have been
treated (in whole or in part) as a
dividend if--
``(I) any options had not
been taken into account under
section 318(a)(4), or
``(II) section 304(a) had
not applied,''.
(c) Special Rule for Acquisitions by Foreign
Corporations.--Section 304(b) (relating to special rules for
application of subsection (a)) is amended by adding at the end
the following new paragraph:
``(5) Acquisitions by foreign corporations.--
``(A) In general.--In the case of any
acquisition to which subsection (a) applies in
which the acquiring corporation is a foreign
corporation, the only earnings and profits
taken into account under paragraph (2)(A) shall
be those earnings and profits--
``(i) which are attributable (under
regulations prescribed by the
Secretary) to stock of the acquiring
corporation owned (within the meaning
of section 958(a)) by a corporation or
individual which is--
``(I) a United States
shareholder (within the meaning
of section 951(b)) of the
acquiring corporation, and
``(II) the transferor or a
person who bears a relationship
to the transferor described in
section 267(b) or 707(b), and
``(ii) which were accumulated
during the period or periods such stock
was owned by such person while the
acquiring corporation was a controlled
foreign corporation.
``(B) Application of section 1248.--For
purposes of subparagraph (A), the rules of
section 1248(d) shall apply except to the
extent otherwise provided by the Secretary.
``(C) Regulations.--The Secretary shall
prescribe such regulations as are appropriate
to carry out the purposes of this paragraph.''.
(d) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to distributions and acquisitions
after June 8, 1997.
(2) Transition rule.--The amendments made by this
section shall not apply to any distribution or
acquisition after June 8, 1997, if such distribution or
acquisition is--
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described in a public announcement or
filing with the Securities and Exchange
Commission on or before such date.
SEC. 1014. CERTAIN PREFERRED STOCK TREATED AS BOOT.
(a) Section 351.--Section 351 (relating to transfer to
corporation controlled by transferor) is amended by
redesignating subsection (g) as subsection (h) and by inserting
after subsection (f) the following new subsection:
``(g) Nonqualified Preferred Stock Not Treated as Stock.--
``(1) In general.--In the case of a person who
transfers property to a corporation and receives
nonqualified preferred stock--
``(A) subsection (a) shall not apply to
such transferor,
``(B) subsection (b) shall apply to such
transferor, and
``(C) such nonqualified preferred stock
shall be treated as other property for purposes
of applying subsection (b).
``(2) Nonqualified preferred stock.--For purposes
of paragraph (1)--
``(A) In general.--The term `nonqualified
preferred stock' means preferred stock if--
``(i) the holder of such stock has
the right to require the issuer or a
related person to redeem or purchase
the stock,
``(ii) the issuer or a related
person is required to redeem or
purchase such stock,
``(iii) the issuer or a related
person has the right to redeem or
purchase the stock and, as of the issue
date, it is more likely than not that
such right will be exercised, or
``(iv) the dividend rate on such
stock varies in whole or in part
(directly or indirectly) with reference
to interest rates, commodity prices, or
other similar indices.
``(B) Limitations.--Clauses (i), (ii), and
(iii) of subparagraph (A) shall apply only if
the right or obligation referred to therein may
be exercised within the 20-year period
beginning on the issue date of such stock and
such right or obligation is not subject to a
contingency which, as of the issue date, makes
remote the likelihood of the redemption or
purchase.
``(C) Exceptions for certain rights or
obligations.--
``(i) In general.--A right or
obligation shall not be treated as
described in clause (i), (ii), or (iii)
of subparagraph (A) if--
``(I) it may be exercised
only upon the death,
disability, or mental
incompetency of the holder, or
``(II) in the case of a
right or obligation to redeem
or purchase stock transferred
in connection with the
performance of services for the
issuer or a related person (and
which represents reasonable
compensation), it may be
exercised only upon the
holder's separation from
service from the issuer or a
related person.
``(ii) Exception.--Clause (i)(I)
shall not apply if the stock
relinquished in the exchange, or the
stock acquired in the exchange is in--
``(I) a corporation if any
class of stock in such
corporation or a related party
is readily tradable on an
established securities market
or otherwise, or
``(II) any other
corporation if such exchange is
part of a transaction or series
of transactions in which such
corporation is to become a
corporation described in
subclause (I).
``(3) Definitions.--For purposes of this
subsection--
``(A) Preferred stock.--The term `preferred
stock' means stock which is limited and
preferred as to dividends and does not
participate in corporate growth to any
significant extent.
``(B) Related person.--A person shall be
treated as related to another person if they
bear a relationship to such other person
described in section 267(b) or 707(b).
``(4) Regulations.--The Secretary may prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this subsection and sections
354(a)(2)(C), 355(a)(3)(D), and 356(e). The Secretary
may also prescribe regulations, consistent with the
treatment under this subsection and such sections, for
the treatment of nonqualified preferred stock under
other provisions of this title.''.
(b) Section 354.--Paragraph (2) of section 354(a) (relating
to exchanges of stock and securities in certain
reorganizations) is amended by adding at the end the following
new subparagraph:
``(C) Nonqualified preferred stock.--
``(i) In general.--Nonqualified
preferred stock (as defined in section
351(g)(2)) received in exchange for
stock other than nonqualified preferred
stock (as so defined) shall not be
treated as stock or securities.
``(ii) Recapitalizations of family-
owned corporations.--
``(I) In general.--Clause
(i) shall not apply in the case
of a recapitalization under
section 368(a)(1)(E) of a
family-owned corporation.
``(II) Family-owned
corporation.--For purposes of
this clause, except as provided
in regulations, the term
`family-owned corporation'
means any corporation which is
described in clause (i) of
section 447(d)(2)(C) throughout
the 8-year period beginning on
the date which is 5 years
before the date of the
recapitalization. For purposes
of the preceding sentence,
stock shall not be treated as
owned by a family member during
any period described in section
355(d)(6)(B).''.
(c) Section 355.--Paragraph (3) of section 355(a) is
amended by adding at the end the following new subparagraph:
``(D) Nonqualified preferred stock.--
Nonqualified preferred stock (as defined in
section 351(g)(2)) received in a distribution
with respect to stock other than nonqualified
preferred stock (as so defined) shall not be
treated as stock or securities.''.
(d) Section 356.--Section 356 is amended by redesignating
subsections (e) and (f) as subsections (f) and (g),
respectively, and by inserting after subsection (d) the
following new subsection:
``(e) Nonqualified Preferred Stock Treated as Other
Property.--For purposes of this section--
``(1) In general.--Except as provided in paragraph
(2), the term `other property' includes
nonqualifiedpreferred stock (as defined in section 351(g)(2)).
``(2) Exception.--The term `other property' does
not include nonqualified preferred stock (as so
defined) to the extent that, under section 354 or 355,
such preferred stock would be permitted to be received
without the recognition of gain.''.
(e) Conforming Amendments.--
(1) Subparagraph (B) of section 354(a)(2) and
subparagraph (C) of section 355(a)(3)(C) are each
amended by inserting ``(including nonqualified
preferred stock, as defined in section 351(g)(2))''
after ``stock''.
(2) Subparagraph (A) of section 354(a)(3) and
subparagraph (A) of section 355(a)(4) are each amended
by inserting ``nonqualified preferred stock and'' after
``including''.
(3) Section 1036 is amended by redesignating
subsection (b) as subsection (c) and by inserting after
subsection (a) the following new subsection:
``(b) Nonqualified Preferred Stock Not Treated as Stock.--
For purposes of this section, nonqualified preferred stock (as
defined in section 351(g)(2)) shall be treated as property
other than stock.''.
(f) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to transactions after June 8, 1997.
(2) Transition rule.--The amendments made by this
section shall not apply to any transaction after June
8, 1997, if such transaction is--
(A) made pursuant to a written agreement
which was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the
Securities and Exchange Commission required
solely by reason of the transaction.
SEC. 1015. MODIFICATION OF HOLDING PERIOD APPLICABLE TO DIVIDENDS
RECEIVED DEDUCTION.
(a) In General.--Subparagraph (A) of section 246(c)(1) is
amended to read as follows:
``(A) which is held by the taxpayer for 45
days or less during the 90-day period beginning
on the date which is 45 days before the date on
which such share becomes ex-dividend with
respect to such dividend, or''.
(b) Conforming Amendments.--
(1) Paragraph (2) of section 246(c) is amended to
read as follows:
``(2) 90-day rule in the case of certain preference
dividends.--In the case of stock having preference in
dividends, if the taxpayer receives dividends with
respect to such stock which are attributable to a
period or periods aggregating in excess of 366 days,
paragraph (1)(A) shall be applied--
``(A) by substituting `90 days' for `45
days' each place it appears, and
``(B) by substituting `180-day period' for
`90-day period'.''.
(2) Paragraph (3) of section 246(c) is amended by
adding ``and'' at the end of subparagraph (A), by
striking subparagraph (B), and by redesignating
subparagraph (C) as subparagraph (B).
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to dividends received or accrued
after the 30th day after the date of the enactment of
this Act.
(2) Transitional rule.--The amendments made by this
section shall not apply to dividends received or
accrued during the 2-year period beginning on the date
of the enactment of this Act if--
(A) the dividend is paid with respect to
stock held by the taxpayer on June 8, 1997, and
all times thereafter until the dividend is
received,
(B) such stock is continuously subject to a
position described in section 246(c)(4) of the
Internal Revenue Code of 1986 on June 8, 1997,
and all times thereafter until the dividend is
received, and
(C) such stock and position are clearly
identified in the taxpayer's records within 30
days after the date of the enactment of this
Act.
Stock shall not be treated as meeting the requirement
of subparagraph (B) if the position is sold, closed, or
otherwise terminated and reestablished.
Subtitle C--Administrative Provisions
SEC. 1021. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS.
(a) In General.--Section 6045 (relating to returns of
brokers) is amended by adding at the end the following new
subsection:
``(f) Return Required in the Case of Payments to
Attorneys.--
``(1) In general.--Any person engaged in a trade or
business and making a payment (in the course of such
trade or business) to which this subsection applies
shall file a return under subsection (a) and a
statement under subsection (b) with respect to such
payment.
``(2) Application of subsection.--
``(A) In general.--This subsection shall
apply to any payment to an attorney in
connection with legal services (whether or not
such services are performed for the payor).
``(B) Exception.--This subsection shall not
apply to the portion of any payment which is
required to be reported under section 6041(a)
(or would be so required but for the dollar
limitation contained therein) or section
6051.''.
(b) Reporting of Attorneys' Fees Payable to Corporations.--
The regulations providing an exception under section 6041 of
the Internal Revenue Code of 1986 for payments made to
corporations shall not apply to payments of attorneys' fees.
(c) Effective Date.--The amendment made by this section
shall apply to payments made after December 31, 1997.
SEC. 1022. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS TO CORPORATIONS
PERFORMING SERVICES FOR FEDERAL AGENCIES.
(a) In General.--Subsection (d) of section 6041A (relating
to returns regarding payments of remuneration for services and
direct sales) is amended by adding at the end the following new
paragraph:
``(3) Payments to corporations by federal executive
agencies.--
``(A) In general.--Notwithstanding any
regulation prescribed by the Secretary before
the date of the enactment of this paragraph,
subsection (a) shall apply to remuneration paid
to a corporation by any Federal executive
agency (as defined in section 6050M(b)).
``(B) Exception.--Subparagraph (A) shall
not apply to--
``(i) services under contracts
described in section 6050M(e)(3) with
respect to which the requirements of
section 6050M(e)(2) are met, and
``(ii) such other services as the
Secretary may specify in regulations
prescribed after the date of the
enactment of this paragraph.''.
(b) Effective Date.--The amendment made by this section
shall apply to returns the due date for which (determined
without regard to any extension) is more than 90 days after the
date of the enactment of this Act.
SEC. 1023. DISCLOSURE OF RETURN INFORMATION FOR ADMINISTRATION OF
CERTAIN VETERANS PROGRAMS.
(a) General Rule.--Clause (viii) of section 6103(l)(7)(D)
(relating to disclosure of return information to Federal,
State, and local agencies administering certain programs) is
amended by striking ``1998'' and inserting ``2003''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the date of the enactment of this Act.
SEC. 1024. CONTINUOUS LEVY ON CERTAIN PAYMENTS.
(a) In General.--Section 6331 (relating to levy and
distraint) is amended--
(1) by redesignating subsection (h) as subsection
(i), and
(2) by inserting after subsection (g) the following
new subsection:
``(h) Continuing Levy on Certain Payments.--
``(1) In general.--The effect of a levy on
specified payments to or received by a taxpayer shall
be continuous from the date such levy is first made
until such levy is released. Notwithstanding section
6334, such continuous levy shall attach to up to 15
percent of any specified payment due to the taxpayer.
``(2) Specified payment.--For the purposes of
paragraph (1), the term `specified payment' means--
``(A) any Federal payment other than a
payment for which eligibility is based on the
income or assets (or both) of a payee,
``(B) any payment described in paragraph
(4), (7), (9), or (11) of section 6334(a), and
``(C) any annuity or pension payment under
the Railroad Retirement Act or benefit under
the Railroad Unemployment Insurance Act.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to levies issued after the date of the enactment of
this Act.
SEC. 1025. MODIFICATION OF LEVY EXEMPTION.
(a) In General.--Section 6334 (relating to property exempt
from levy) is amended by redesignating subsection (f) as
subsection (g) and by inserting after subsection (e) the
following new subsection:
``(f) Levy Allowed on Certain Specified Payments.--Any
payment described in subparagraph (B) or (C) of section
6331(h)(2) shall not be exempt from levy if the Secretary
approves the levy thereon under section 6331(h).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to levies issued after the date of the enactment of
this Act.
SEC. 1026. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.
(a) In General.--Subsection (k) of section 6103 is amended
by adding at the end the following new paragraph:
``(8) Levies on certain government payments.--
``(A) Disclosure of return information in
levies on financial management service.--In
serving a notice of levy, or release of such
levy, with respect to any applicable government
payment, the Secretary may disclose to officers
and employees of the Financial Management
Service--
``(i) return information, including
taxpayer identity information,
``(ii) the amount of any unpaid
liability under this title (including
penalties and interest), and
``(iii) the type of tax and tax
period to which such unpaid liability
relates.
``(B) Restriction on use of disclosed
information.--Return information disclosed
under subparagraph (A) may be used by officers
and employees of the Financial Management
Service only for the purpose of, and to the
extent necessary in, transferring levied funds
in satisfaction of the levy, maintaining
appropriate agency records in regard to such
levy or the release thereof, notifying the
taxpayer and the agency certifying such payment
that the levy has been honored, or in the
defense of any litigation ensuing from the
honor of such levy.
``(C) Applicable government payment.--For
purposes of this paragraph, the term
`applicable government payment' means--
``(i) any Federal payment (other
than a payment for which eligibility is
based on the income or assets (or both)
of a payee) certified to the Financial
Management Service for disbursement,
and
``(ii) any other payment which is
certified to the Financial Management
Service for disbursement and which the
Secretary designates by published
notice.''.
(b) Conforming Amendments.--
(1) Section 6103(p) is amended--
(A) in paragraph (3)(A), by striking ``(2),
or (6)'' and inserting ``(2), (6), or (8)'',
and
(B) in paragraph (4), by inserting
``(k)(8),'' after ``(j) (1) or (2),'' each
place it appears.
(2) Section 552a(a)(8)(B) of title 5, United States
Code, is amended by striking ``or'' at the end of
clause (v), by adding ``or'' at the end of clause (vi),
and by adding at the end the following new clause:
``(vii) matches performed incident
to a levy described in section
6103(k)(8) of the Internal Revenue Code
of 1986;''.
(c) Effective Date.--The amendments made by this section
shall apply to levies issued after the date of the enactment of
this Act.
SEC. 1027. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS REQUIRED TO
FILE RETURNS CONSISTENT WITH ESTATE OR TRUST RETURN
OR TO NOTIFY SECRETARY OF INCONSISTENCY.
(a) Domestic Estates and Trusts.--Section 6034A (relating
to information to beneficiaries of estates and trusts) is
amended by adding at the end the following new subsection:
``(c) Beneficiary's Return Must be Consistent with Estate
or Trust Return or Secretary Notified of Inconsistency.--
``(1) In general.--A beneficiary of any estate or
trust to which subsection (a) applies shall, on such
beneficiary's return, treat any reported item in a
manner which is consistent with the treatment of such
item on the applicable entity's return.
``(2) Notification of inconsistent treatment.--
``(A) In general.--In the case of any
reported item, if--
``(i)(I) the applicable entity has
filed a return but the beneficiary's
treatment on such beneficiary's return
is (or may be) inconsistent with the
treatment of the item on the applicable
entity's return, or
``(II) the applicable entity has
not filed a return, and
``(ii) the beneficiary files with
the Secretary a statement identifying
the inconsistency,
paragraph (1) shall not apply to such item.
``(B) Beneficiary receiving incorrect
information.--A beneficiary shall be treated as
having complied with clause (ii) of
subparagraph (A) with respect to a reported
item if the beneficiary--
``(i) demonstrates to the
satisfaction of the Secretary that the
treatment of the reported item on the
beneficiary's return is consistent with
the treatment of the item on the
statement furnished under subsection
(a) to the beneficiary by the
applicable entity, and
``(ii) elects to have this
paragraph apply with respect to that
item.
``(3) Effect of failure to notify.--In any case--
``(A) described in subparagraph (A)(i)(I)
of paragraph (2), and
``(B) in which the beneficiary does not
comply with subparagraph (A)(ii) of paragraph
(2),
any adjustment required to make the treatment of the
items by such beneficiary consistent with the treatment
of the items on the applicable entity's return shall be
treated as arising out of mathematical or clerical
errors and assessed according to section 6213(b)(1).
Paragraph (2) of section 6213(b) shall not apply to any
assessment referred to in the preceding sentence.
``(4) Definitions.--For purposes of this
subsection--
``(A) Reported item.--The term `reported
item' means any item for which information is
required to be furnished under subsection (a).
``(B) Applicable entity.--The term
`applicable entity' means the estate or trust
of which the taxpayer is the beneficiary.
``(5) Addition to tax for failure to comply with
section.--For addition to tax in the case of a
beneficiary's negligence in connection with, or
disregard of, the requirements of this section, see
part II of subchapter A of chapter 68.''.
(b) Foreign Trusts.--Subsection (d) of section 6048
(relating to information with respect to certain foreign
trusts) is amended by adding at the end the following new
paragraph:
``(5) United states person's return must be
consistent with trust return or secretary notified of
inconsistency.--Rules similar to the rules of section
6034A(c) shall apply to items reported by a trust under
subsection (b)(1)(B) and to United States persons
referred to in such subsection.''.
(c) Effective Date.--The amendments made by this section
shall apply to returns of beneficiaries and owners filed after
the date of the enactment of this Act.
SEC. 1028. REGISTRATION AND OTHER PROVISIONS RELATING TO CONFIDENTIAL
CORPORATE TAX SHELTERS.
(a) In General.--Section 6111 (relating to registration of
tax shelters) is amended by redesignating subsections (d) and
(e) as subsections (e) and (f), respectively, and by inserting
after subsection (c) the following new subsection:
``(d) Certain Confidential Arrangements Treated as Tax
Shelters.--
``(1) In general.--For purposes of this section,
the term `tax shelter' includes any entity, plan,
arrangement, or transaction--
``(A) a significant purpose of the
structure of which is the avoidance or evasion
of Federal income tax for a direct or indirect
participant which is a corporation,
``(B) which is offered to any potential
participant under conditions of
confidentiality, and
``(C) for which the tax shelter promoters
may receive fees in excess of $100,000 in the
aggregate.
``(2) Conditions of confidentiality.--For purposes
of paragraph (1)(B), an offer is under conditions of
confidentiality if--
``(A) the potential participant to whom the
offer is made (or any other person acting on
behalf of such participant) has an
understanding or agreement with or for the
benefit of any promoter of the tax shelter that
such participant (or such other person) will
limit disclosure of the tax shelter or any
significant tax features of the tax shelter, or
``(B) any promoter of the tax shelter--
``(i) claims, knows, or has reason
to know,
``(ii) knows or has reason to know
that any other person (other than the
potential participant) claims, or
``(iii) causes another person to
claim,
that the tax shelter (or any aspect thereof) is
proprietary to any person other than the
potential participant or is otherwise protected
from disclosure to or use by others.
For purposes of this subsection, the term `promoter'
means any person or any related person (within the
meaning of section 267 or 707) who participates in the
organization, management, or sale of the tax shelter.
``(3) Persons other than promoter required to
register in certain cases.--
``(A) In general.--If--
``(i) the requirements of
subsection (a) are not met with respect
to any tax shelter (as defined in
paragraph (1)) by any tax shelter
promoter, and
``(ii) no tax shelter promoter is a
United States person,
then each United States person who discussed
participation in such shelter shall register
such shelter under subsection (a).
``(B) Exception.--Subparagraph (A) shall
not apply to a United States person who
discussed participation in a tax shelter if--
``(i) such person notified the
promoter in writing (not later than the
close of the 90th day after the day on
which such discussions began) that such
person would not participate in such
shelter, and
``(ii) such person does not
participate in such shelter.
``(4) Offer to participate treated as offer for
sale.--For purposes of subsections (a) and (b), an
offer to participate in a tax shelter (as defined in
paragraph (1)) shall be treated as an offer for
sale.''.
(b) Penalty.--Subsection (a) of section 6707 (relating to
failure to furnish information regarding tax shelters) is
amended by adding at the end the following new paragraph:
``(3) Confidential arrangements.--
``(A) In general.--In the case of a tax
shelter (as defined in section 6111(d)), the
penalty imposed under paragraph (1) shall be an
amount equal to the greater of--
``(i) 50 percent of the fees paid
to all promoters of the tax shelter
with respect to offerings made before
the date such shelter is registered
under section 6111, or
``(ii) $10,000.
Clause (i) shall be applied by substituting `75
percent' for `50 percent' in the case of an
intentional failure or act described in
paragraph (1).
``(B) Special rule for participants
required to register shelter.--In the case of a
person required to register such a tax shelter
by reason of section 6111(d)(3)--
``(i) such person shall be required
to pay the penalty under paragraph (1)
only if such person actually
participated in such shelter,
``(ii) the amount of such penalty
shall be determined by taking into
account under subparagraph (A)(i) only
the fees paid by such person, and
``(iii) such penalty shall be in
addition to the penalty imposed on any
other person for failing to register
such shelter.''.
(c) Modifications to Substantial Understatement Penalty.--
(1) Restriction on reasonable basis for corporate
understatement of income tax.--Subparagraph (B) of
section 6662(d)(2) is amended by adding at the end the
following new flush sentence:
``For purposes of clause (ii)(II), in no event
shall a corporation be treated as having a
reasonable basis for its tax treatment of an
item attributable to a multiple-party financing
transaction if such treatment does not clearly
reflect the income of the corporation.''.
(2) Modification to definition of tax shelter.--
Clause (iii) of section 6662(d)(2)(C) is amended by
striking ``the principal purpose'' and inserting ``a
significant purpose''.
(d) Conforming Amendments.--
(1) Paragraph (2) of section 6707(a) is amended by
striking ``The penalty'' and inserting ``Except as
provided in paragraph (3), the penalty''.
(2) Subparagraph (A) of section 6707(a)(1) is
amended by striking ``paragraph (2)'' and inserting
``paragraph (2) or (3), as the case may be''.
(e) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
any tax shelter (as defined in section 6111(d) of the
Internal Revenue Code of 1986, as amended by this
section) interests in which are offered to potential
participants after the Secretary of the Treasury
prescribes guidance with respect to meeting
requirements added by such amendments.
(2) Modifications to substantial understatement
penalty.--The amendments made by subsection (c) shall
apply to items with respect to transactions entered
into after the date of the enactment of this Act.
Subtitle D--Excise and Employment Tax Provisions
SEC. 1031. EXTENSION AND MODIFICATION OF TAXES FUNDING AIRPORT AND
AIRWAY TRUST FUND; INCREASED DEPOSITS INTO SUCH
FUND.
(a) Fuel Taxes.--
(1) Aviation fuel.--Clause (ii) of section
4091(b)(3)(A) is amended by striking ``September 30,
1997'' and inserting ``September 30, 2007''.
(2) Aviation gasoline.--Subparagraph (B) of section
4081(d)(2) is amended by striking ``September 30,
1997'' and inserting ``September 30, 2007''.
(3) Noncommercial aviation.--Subparagraph (B) of
section 4041(c)(3) is amended by striking ``September
30, 1997'' and inserting ``September 30, 2007''.
(b) Ticket Taxes.--
(1) Persons.--Clause (ii) of section 4261(g)(1)(A)
is amended by striking ``September 30, 1997'' and
inserting ``September 30, 2007''.
(2) Property.--Clause (ii) of section 4271(d)(1)(A)
is amended by striking ``September 30, 1997'' and
inserting ``September 30, 2007''.
(c) Modifications to Tax on Transportation of Persons by
Air.--
(1) In general.--Section 4261 (relating to
imposition of tax) is amended by striking subsections
(a), (b), and (c) and inserting the following new
subsections:
``(a) In General.--There is hereby imposed on the amount
paid for taxable transportation of any person a tax equal to
7.5 percent of the amount so paid.
``(b) Domestic Segments of Taxable Transportation.--
``(1) In general.--There is hereby imposed on the
amount paid for each domestic segment of taxable
transportation by air a tax in the amount determined in
accordance with the following table for the period in
which the segment begins:
In the case of segments
beginning:
The tax is:
After September 30, 1997, and before October 1, 1998.. $1.00
After September 30, 1998, and before October 1, 1999.. $2.00
After September 30, 1999, and before January 1, 2000.. $2.25
During 2000........................................... $2.50
During 2001........................................... $2.75
During 2002 or thereafter............................. $3.00.
``(2) Domestic segment.--For purposes of this
section, the term `domestic segment' means any segment
consisting of 1 takeoff and 1 landing and which is
taxable transportation described in section 4262(a)(1).
``(3) Changes in segments by reason of rerouting.--
If--
``(A) transportation is purchased between 2
locations on specified flights, and
``(B) there is a change in the route taken
between such 2 locations which changes the
number of domestic segments, but there is no
change in the amount charged for such
transportation,
the tax imposed by paragraph (1) shall be determined
without regard to such change in route.
``(c) Use of International Travel Facilities.--
``(1) In general.--There is hereby imposed a tax of
$12.00 on any amount paid (whether within or without
the United States) for any transportation of any person
by air, if such transportation begins or ends in the
United States.
``(2) Exception for transportation entirely taxable
under subsection (a).--This subsection shall not apply
to any transportation all of which is taxable under
subsection (a) (determined without regard to sections
4281 and 4282).
``(3) Special rule for alaska and hawaii.--In any
case in which the tax imposed by paragraph (1) applies
to a domestic segment beginning or ending in Alaska or
Hawaii, such tax shall apply only to departures and
shall be at the rate of $6.''.
(2) Special rules.--Section 4261 is amended by
redesignating subsections (e), (f), and (g) as
subsections (f), (g), and (h), respectively, and by
inserting after subsection (d) the following new
subsection:
``(e) Special Rules.--
``(1) Segments to and from rural airports.--
``(A) Exception from segment tax.--The tax
imposed by subsection (b)(1) shall not apply to
any domestic segment beginning or ending at an
airport which is a rural airport for the
calendar year in which such segment begins or
ends (as the case may be).
``(B) Rural airport.--For purposes of this
paragraph, the term `rural airport' means, with
respect to any calendar year, any airport if--
``(i) there were fewer than 100,000
commercial passengers departing by air
during the second preceding calendar
year from such airport, and
``(ii) such airport--
``(I) is not located within
75 miles of another airport
which is not described in
clause (i), or
``(II) is receiving
essential air service subsidies
as of the date of the enactment
of this paragraph.
``(C) No phasein of reduced ticket tax.--In
the case of transportation beginning before
October 1, 1999--
``(i) In general.--Paragraph (5)
shall not apply to any domestic segment
beginning or ending at an airport which
is a rural airport for the calendar
year in which such segment begins or
ends (as the case may be).
``(ii) Transportation involving
multiple segments.--In the case of
transportation involving more than 1
domestic segment at least 1 of which
does not begin or end at a rural
airport, the 7.5 percent rate
applicable by reason of clause (i)
shall be applied by taking into account
only an amount which bears the same
ratio to the amount paid for such
transportation as the number of
specified miles in domestic segments
which begin or end at a rural airport
bears to the total number of specified
miles in such transportation.
``(2) Amounts paid outside the united states.--In
the case of amounts paid outside the United States for
taxable transportation, the taxes imposed by
subsections (a) and (b) shall apply only if such
transportation begins and ends in the United States.
``(3) Amounts paid for right to award free or
reduced rate air transportation.--
``(A) In general.--Any amount paid (and the
value of any other benefit provided) to an air
carrier (or any related person) for the right
to provide mileage awards for (or other
reductions in the cost of) any transportation
of persons by air shall be treated for purposes
of subsection (a) as an amount paid for taxable
transportation, and such amount shall be
taxable under subsection (a) without regard to
any other provision of this subchapter.
``(B) Controlled group.--For purposes of
subparagraph (A), a corporation and all wholly
owned subsidiaries of such corporation shall be
treated as 1 corporation.
``(C) Regulations.--The Secretary shall
prescribe rules which reallocate items of
income, deduction, credit, exclusion, or other
allowance to the extent necessary to prevent
the avoidance of tax imposed by reason of this
paragraph. The Secretary may prescribe rules
which exclude from the tax imposed by
subsection (a) amounts attributable to mileage
awards which are used other than for
transportation of persons by air.
``(4) Inflation adjustment of dollar rates of
tax.--
``(A) In general.--In the case of taxable
events in a calendar year after the last
nonindexed year, the $3.00 amount contained in
subsection (b) and each dollar amount contained
in subsection (c) shall be increased by an
amount equal to--
``(i) such dollar amount,
multiplied by
``(ii) the cost-of-living
adjustment determined under section
1(f)(3) for such calendar year by
substituting the year before the last
nonindexed year for `calendar year
1992' in subparagraph (B) thereof.
If any increase determined under the preceding
sentence is not a multiple of 10 cents, such
increase shall be rounded to the nearest
multiple of 10 cents.
``(B) Last nonindexed year.--For purposes
of subparagraph (A), the last nonindexed year
is--
``(i) 2002 in the case of the $3.00
amount contained in subsection (b), and
``(ii) 1998 in the case of the
dollar amounts contained in subsection
(c).
``(C) Taxable event.--For purposes of
subparagraph (A), in the case of the tax
imposed subsection (b), the beginning of the
domestic segment shall be treated as the
taxable event.
``(5) Rates of ticket tax for transportation
beginning before october 1, 1999.--Subsection (a) shall
be applied by substituting for `7.5 percent'--
``(A) `9 percent' in the case of
transportation beginning after September 30,
1997, and before October 1, 1998, and
``(B) `8 percent' in the case of
transportation beginning after September 30,
1998, and before October 1, 1999.''.
(3) Secondary liability of carrier for unpaid
tax.--Subsection (c) of section 4263 is amended by
striking ``subchapter--'' and all that follows and
inserting ``subchapter, such tax shall be paid by the
carrier providing the initial segment of such
transportation which begins or ends in the United
States.''.
(d) Increased Airport and Airway Trust Fund Deposits.--
(1) Paragraph (1) of section 9502(b) is amended--
(A) by striking ``(to the extent that the
rate of the tax on such gasoline exceeds 4.3
cents per gallon)'' in subparagraph (C),
(B) by striking ``to the extent
attributable to the Airport and Airway Trust
Fund financing rate'' in subparagraph (D), and
(C) by adding at the end the following
flush sentence:
``There shall not be taken into account under paragraph (1) so
much of the taxes imposed by sections 4081 and 4091 as are
determined at the rates specified in section 4081(a)(2)(B) or
4091(b)(2).''.
(2) Section 9502 is amended by striking subsection
(f).
(e) Effective Dates.--
(1) Fuel taxes.--The amendments made by subsection
(a) shall apply take effect on October 1, 1997.
(2) Ticket taxes.--
(A) In general.--Except as otherwise
provided in this paragraph, the amendments made
by subsections (b) and (c) shall apply to
transportation beginning on or after October 1,
1997.
(B) Treatment of amounts paid for tickets
purchased before date of enactment.--The
amendments made by subsection (c) shall not
apply to amounts paid for a ticket purchased
before the date of the enactment of this Act
for a specified flight beginning on or after
October 1, 1997.
(C) Amounts paid for right to award mileage
awards.--
(i) In general.--Paragraph (3) of
section 4261(e) of the Internal Revenue
Code of 1986 (as added by the amendment
made by subsection (c)) shall apply to
amounts paid (and other benefits
provided) after September 30, 1997.
(ii) Payments within controlled
group.--For purposes of clause (i), any
amount paid after June 11, 1997, and
before October 1, 1997, by 1 member of
a controlled group for a right which is
described in such section 4261(e)(3)
and is furnished by another member of
such group after September 30, 1997,
shall be treated as paid after
September 30, 1997. For purposes of the
preceding sentence, all persons treated
as a single employer under subsection
(a) or (b) of section 52 of such Code
shall be treated as members of a
controlled group.
(3) Increased deposits into airport and airway
trust fund.--The amendments made by subsection (d)
shall apply with respect to taxes received in the
Treasury on and after October 1, 1997.
(g) Delayed Deposits of Airport Trust Fund Tax Revenues.--
Notwithstanding section 6302 of the Internal Revenue Code of
1986--
(1) in the case of deposits of taxes imposed by
section 4261 of such Code, the due date for any such
deposit which would (but for this subsection) be
required to be made after August 14, 1997, and before
October 1, 1997, shall be October 10, 1997,
(2) in the case of deposits of taxes imposed by
section 4261 of such Code, the due date for any such
deposit which would (but for this subsection) be
required to be made after August 14, 1998, and before
October 1, 1998, shall be October 5, 1998, and
(3) in the case of deposits of taxes imposed by
sections 4081(a)(2)(A)(ii), 4091, and 4271 of such
Code, the due date for any such deposit which would
(but for this subsection) be required to be made after
July 31, 1998, and before October 1, 1998, shall be
October 5, 1998.
SEC. 1032. KEROSENE TAXED AS DIESEL FUEL.
(a) In General.--Subsection (a) of section 4083 (defining
taxable fuel) is amended by striking ``and'' at the end of
subparagraph (A), by striking the period at the end of
subparagraph (B) and inserting ``, and'', and by adding at the
end the following new subparagraph:
``(C) kerosene.''.
(b) Rate of Tax.--Clause (iii) of section 4081(a)(2)(A) is
amended by inserting ``or kerosene'' after ``diesel fuel''.
(c) Exemptions From Tax; Refunds to Vendors.--
(1) In general.--Section 4082 (relating to
exemptions for diesel fuel) is amended by striking
``diesel fuel'' each place it appears in subsections
(a), (c), and (d) and inserting ``diesel fuel and
kerosene''.
(2) Certain kerosene exempt from dyeing
requirement.--Section 4082 is amended by redesignating
subsections (d) and (e) as subsections (e) and (f),
respectively, and by inserting after subsection (c) the
following new subsection:
``(d) Additional Exceptions to Dyeing Requirements for
Kerosene.--
``(1) Aviation-grade kerosene.--Subsection (a)(2)
shall not apply to a removal, entry, or sale of
aviation-grade kerosene (as determined under
regulations prescribed by the Secretary) if the person
receiving the kerosene is registered under section 4101
with respect to the tax imposed by section 4091.
``(2) Use for non-fuel feedstock purposes.--
Subsection (a)(2) shall not apply to kerosene--
``(A) received by pipeline or vessel for
use by the person receiving the kerosene in the
manufacture or production of any substance
(other than gasoline, diesel fuel, or special
fuels referred to in section 4041), or
``(B) to the extent provided in
regulations, removed or entered--
``(i) for such a use by the person
removing or entering the kerosene, or
``(ii) for resale by such person
for such a use by the purchaser,
but only if the person receiving, removing, or entering
the kerosene and such purchaser (if any) are registered
under section 4101 with respect to the tax imposed by
section 4081.
``(3) Wholesale distributors.--To the extent
provided in regulations, subsection (a)(2) shall not
apply to a removal, entry, or sale of kerosene to a
wholesale distributor of kerosene if such distributor--
``(A) is registered under section 4101 with
respect to the tax imposed by section 4081 on
kerosene, and
``(B) sells kerosene exclusively to
ultimate vendors described in section
6427(l)(5)(B) with respect to kerosene.''
(3) Refunds.--
(A) Subsection (l) of section 6427 is
amended by inserting ``or kerosene'' after
``diesel fuel'' each place it appears in
paragraphs (1), (2), and (5) (including the
heading for paragraph (5)).
(B) Paragraph (5) of section 6427(l) is
amended by redesignating subparagraph (B) as
subparagraph (C) and by inserting after
subparagraph (A) the following new
subparagraph:
``(B) Sales of kerosene not for use in
motor fuel.--Paragraph (1)(A) shall not apply
to kerosene sold by a vendor--
``(i) for any use if such sale is
from a pump which (as determined under
regulations prescribed by the
Secretary) is not suitable for use in
fueling any diesel-powered highway
vehicle or train, or
``(ii) to the extent provided by
the Secretary, for blending with
heating oil to be used during periods
of extreme or unseasonable cold.''.
(C) Subparagraph (C) of section 6427(l)(5),
as redesignated by subparagraph (B) of this
paragraph, is amended by striking
``subparagraph (A)'' and inserting
``subparagraph (A) or (B)''.
(D) The heading for subsection (l) of
section 6427 is amended by inserting ``,
Kerosene,'' after ``Diesel Fuel''.
(E) Clause (i) of section 6427(i)(5)(A) is
amended by inserting ``($100 or more in the
case of kerosene)'' after ``$200 or more''.
(d) Certain Approved Terminals of Registered Persons
Required To Offer Dyed Diesel Fuel and Kerosene for Nontaxable
Purposes.--Section 4101 is amended by adding at the end the
following new subsection:
``(e) Certain Approved Terminals of Registered Persons
Required To Offer Dyed Diesel Fuel and Kerosene for Nontaxable
Purposes.--
``(1) In general.--A terminal for kerosene or
diesel fuel may not be an approved facility for storage
of non-tax-paid diesel fuel or kerosene under this
section unless the operator of such terminal offers
dyed diesel fuel and kerosene for removal for
nontaxable use in accordance with section 4082(a).
``(2) Exception.--Paragraph (1) shall not apply to
any terminal exclusively providing aviation-grade
kerosene by pipeline to an airport.''.
(e) Conforming Amendments.--
(1) Paragraph (2) of section 4041(a), as amended by
title IX, is amended by striking ``kerosene,''.
(2) Paragraph (1) of section 4041(c) is amended by
striking ``any liquid'' and inserting ``kerosene and
any other liquid''.
(3)(A) The heading for section 4082 is amended by
inserting ``AND KEROSENE'' after ``DIESEL FUEL''.
(B) The table of sections for subpart A of part III
of subchapter A of chapter 32 is amended by inserting
``and kerosene'' after ``diesel fuel'' in the item
relating to section 4082.
(4) Subsection (b) of section 4083 is amended by
striking ``gasoline, diesel fuel,'' and inserting
``taxable fuels''.
(5) Subsection (a) of section 4093 is amended by
striking ``any liquid'' and inserting ``kerosene and
any other liquid''.
(6) The material following subparagraph (F) of
section 6416(b)(2) is amended by inserting ``or
kerosene'' after ``diesel fuel''.
(7) Paragraphs (1) and (3) of section 6427(f), and
the heading for section 6427(f), are each amended by
inserting ``kerosene,'' after ``diesel fuel,''.
(8) Paragraph (2) of section 6427(f) is amended by
striking ``or diesel fuel'' each place it appears and
inserting ``, diesel fuel, or kerosene''.
(9) Subparagraph (A) of section 6427(i)(3) is
amended by striking ``or diesel fuel'' and inserting
``, diesel fuel, or kerosene''.
(10) The heading for paragraph (4) of section
6427(i) is amended to read as follows:
``(4) Special rule for refunds under subsection
(l).--''
(11) Paragraph (1) of section 6715(c) is amended by
inserting ``or kerosene'' after ``diesel fuel''.
(12)(A) The text of section 7232 is amended by
striking ``gasoline, lubricating oil, diesel fuel'' and
inserting ``any taxable fuel (as defined in section
4083)''.
(B) The section heading for section 7232 is amended
to read as follows:
``SEC. 7232. FAILURE TO REGISTER UNDER SECTION 4101, FALSE
REPRESENTATIONS OF REGISTRATION STATUS, ETC.''.
(C) The table of sections for part II of subchapter
A of chapter 75 is amended by striking the item
relating to section 7232 and inserting the following:
``Sec. 7232. Failure to register under section 4101, false
representations of registration status, etc.''.
(13) Sections 9503(b)(1)(E) and 9508(b)(2) are each
amended by striking ``and diesel fuel'' and inserting
``, diesel fuel, and kerosene''.
(14) Subparagraph (B) of section 9503(b)(5) is
amended by striking ``or diesel fuel'' and inserting
``, diesel fuel, or kerosene''.
(f) Effective Date.--The amendments made by this section
shall take effect on July 1, 1998.
(g) Floor Stock Taxes.--
(1) Imposition of tax.--In the case of kerosene
which is held on July 1, 1998, by any person, there is
hereby imposed a floor stocks tax of 24.4 cents per
gallon.
(2) Liability for tax and method of payment.--
(A) Liability for tax.--A person holding
kerosene on July 1, 1998, to which the
taximposed by paragraph (1) applies shall be liable for such tax.
(B) Method of payment.--The tax imposed by
paragraph (1) shall be paid in such manner as
the Secretary shall prescribe.
(C) Time for payment.--The tax imposed by
paragraph (1) shall be paid on or before August
31, 1998.
(3) Definitions.--For purposes of this subsection--
(A) Held by a person.--Kerosene shall be
considered as ``held by a person'' if title
thereto has passed to such person (whether or
not delivery to the person has been made).
(B) Secretary.--The term ``Secretary''
means the Secretary of the Treasury or his
delegate.
(4) Exception for exempt uses.--The tax imposed by
paragraph (1) shall not apply to kerosene held by any
person exclusively for any use to the extent a credit
or refund of the tax imposed by section 4081 of the
Internal Revenue Code of 1986 is allowable for such
use.
(5) Exception for fuel held in vehicle tank.--No
tax shall be imposed by paragraph (1) on kerosene held
in the tank of a motor vehicle or motorboat.
(6) Exception for certain amounts of fuel.--
(A) In general.--No tax shall be imposed by
paragraph (1) on kerosene held on July 1, 1998,
by any person if the aggregate amount of
kerosene held by such person on such date does
not exceed 2,000 gallons. The preceding
sentence shall apply only if such person
submits to the Secretary (at the time and in
the manner required by the Secretary) such
information as the Secretary shall require for
purposes of this paragraph.
(B) Exempt fuel.--For purposes of
subparagraph (A), there shall not be taken into
account fuel held by any person which is exempt
from the tax imposed by paragraph (1) by reason
of paragraph (4) or (5).
(C) Controlled groups.--For purposes of
this paragraph--
(i) Corporations.--
(I) In general.--All
persons treated as a controlled
group shall be treated as 1
person.
(II) Controlled group.--The
term ``controlled group'' has
the meaning given to such term
by subsection (a) of section
1563 of such Code; except that
for such purposes the phrase
``more than 50 percent'' shall
be substituted for the phrase
``at least 80 percent'' each
place it appears in such
subsection.
(ii) Nonincorporated persons under
common control.--Under regulations
prescribed by the Secretary, principles
similar to the principles of clause (i)
shall apply to a group of persons under
common control where 1 or more of such
persons is not a corporation.
(7) Coordination with section 4081.--No tax shall
be imposed by paragraph (1) on kerosene to the extent
that tax has been (or will be) imposed on such kerosene
under section 4081 or 4091 of such Code.
(8) Other laws applicable.--All provisions of law,
including penalties, applicable with respect to the
taxes imposed by section 4081 of such Code shall,
insofar as applicable and not inconsistent with the
provisions of this subsection, apply with respect to
the floor stock taxes imposed by paragraph (1) to the
same extent as if such taxes were imposed by such
section 4081.
SEC. 1033. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK TRUST FUND
TAXES.
Paragraph (3) of section 4081(d) is amended by striking
``shall not apply after December 31, 1995'' and inserting
``shall apply after September 30, 1997, and before April 1,
2005''.
SEC. 1034. APPLICATION OF COMMUNICATIONS TAX TO PREPAID TELEPHONE
CARDS.
(a) In General.--Section 4251 is amended by adding at the
end the following new subsection:
``(d) Treatment of Prepaid Telephone Cards.--
``(1) In general.--For purposes of this subchapter,
in the case of communications services acquired by
means of a prepaid telephone card--
``(A) the face amount of such card shall be
treated as the amount paid for such
communications services, and
``(B) that amount shall be treated as paid
when the card is transferred by any
telecommunications carrier to any person who is
not such a carrier.
``(2) Determination of face amount in absence of
specified dollar amount.--In the case of any prepaid
telephone card which entitles the user other than to a
specified dollar amount of use, the face amount shall
be determined under regulations prescribed by the
Secretary.
``(3) Prepaid telephone card.--For purposes of this
subsection, the term `prepaid telephone card' means any
card or other similar arrangement which permits its
holder to obtain communications services and pay for
such services in advance.''.
(b) Effective Date.--The amendments made by this section
shall apply to amounts paid in calendar months beginning more
than 60 days after the date of the enactment of this Act.
SEC. 1035. EXTENSION OF TEMPORARY UNEMPLOYMENT TAX.
Section 3301 (relating to rate of unemployment tax) is
amended--
(1) by striking ``1998'' in paragraph (1) and
inserting ``2007'', and
(2) by striking ``1999'' in paragraph (2) and
inserting ``2008''.
Subtitle E--Provisions Relating to Tax-Exempt Entities
SEC. 1041. EXPANSION OF LOOK-THRU RULE FOR INTEREST, ANNUITIES,
ROYALTIES, AND RENTS DERIVED BY SUBSIDIARIES OF
TAX-EXEMPT ORGANIZATIONS.
(a) In General.--Paragraph (13) of section 512(b) is
amended to read as follows:
``(13) Special rules for certain amounts received
from controlled entities.--
``(A) In general.--If an organization (in
this paragraph referred to as the `controlling
organization') receives (directly or
indirectly) a specified payment from another
entity which it controls (in this paragraph
referred to as the `controlled entity'),
notwithstanding paragraphs (1), (2), and (3),
the controlling organization shall include such
payment as an item of gross income derived from
an unrelated trade or business to the extent
such payment reduces the net unrelated income
of the controlled entity (or increases any net
unrelated loss of the controlled entity). There
shall be allowed all deductions of the
controlling organization directly connected
with amounts treated as derived from an
unrelated trade or business under the preceding
sentence.
``(B) Net unrelated income or loss.--For
purposes of this paragraph--
``(i) Net unrelated income.--The
term `net unrelated income' means--
``(I) in the case of a
controlled entity which is not
exempt from tax under section
501(a), the portion of such
entity's taxable income which
would be unrelated business
taxable income if such entity
were exempt from tax under
section 501(a) and had the same
exempt purposes (as defined in
section 513A(a)(5)(A)) as the
controlling organization, or
``(II) in the case of a
controlled entity which is
exempt from tax under section
501(a), the amount of the
unrelated business taxable
income of the controlled
entity.
``(ii) Net unrelated loss.--The
term `net unrelated loss' means the net
operating loss adjusted under rules
similar to the rules of clause (i).
``(C) Specified payment.--For purposes of
this paragraph, the term `specified payment'
means any interest, annuity, royalty, or rent.
``(D) Definition of control.--For purposes
of this paragraph--
``(i) Control.--The term `control'
means--
``(I) in the case of a
corporation, ownership (by vote
or value) of more than 50
percent of the stock in such
corporation,
``(II) in the case of a
partnership, ownership of more
than 50 percent of the profits
interests or capital interests
in such partnership, or
``(III) in any other case,
ownership of more than 50
percent of the beneficial
interests in the entity.
``(ii) Constructive ownership.--
Section 318 (relating to constructive
ownership of stock) shall apply for
purposes of determining ownership of
stock in a corporation. Similar
principles shall apply for purposes of
determining ownership of interests in
any other entity.
``(E) Related persons.--The Secretary shall
prescribe such rules as may be necessary or
appropriate to prevent avoidance of the
purposes of this paragraph through the use of
related persons.''.
(b) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after the date of the enactment
of this Act.
(2) Binding contracts.--The amendments made by this
section shall not apply to any payment made during the
first 2 taxable years beginning on or after the date of
the enactment of this Act if such payment is made
pursuant to a written binding contract in effect on
June 8, 1997, and at all times thereafter before such
payment.
SEC. 1042. TERMINATION OF CERTAIN EXCEPTIONS FROM RULES RELATING TO
EXEMPT ORGANIZATIONS WHICH PROVIDE COMMERCIAL-TYPE
INSURANCE.
(a) In General.--Subparagraphs (A) and (B) of section
1012(c)(4) of the Tax Reform Act of 1986 shall not apply to any
taxable year beginning after December 31, 1997.
(b) Special Rules.--In the case of an organization to which
section 501(m) of the Internal Revenue Code of 1986 applies
solely by reason of the amendment made by subsection (a)--
(1) no adjustment shall be made under section 481
(or any other provision) of such Code on account of a
change in its method of accounting for its first
taxable year beginning after December 31, 1997, and
(2) for purposes of determining gain or loss, the
adjusted basis of any asset held on the 1st day of such
taxable year shall be treated as equal to its fair
market value as of such day.
(c) Reserve Weakening After June 8, 1997.--Any reserve
weakening after June 8, 1997, by an organization described in
subsection (b) shall be treated as occurring in such
organization's 1st taxable year beginning after December 31,
1997.
(d) Regulations.--The Secretary of the Treasury or his
delegate may prescribe rules for providing proper adjustments
for organizations described in subsection (b) with respect to
short taxable years which begin during 1998 by reason of
section 843 of the Internal Revenue Code of 1986.
Subtitle F--Foreign Provisions
SEC. 1051. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY INCOME.
(a) Income From Notional Principal Contracts and Payments
in Lieu of Dividends.--
(1) In general.--Paragraph (1) of section 954(c)
(defining foreign personal holding company income) is
amended by adding at the end the following new
subparagraphs:
``(F) Income from notional principal
contracts.--Net income from notional principal
contracts. Any item of income, gain, deduction,
or loss from a notional principal contract
entered into for purposes of hedging any item
described in any preceding subparagraph shall
not be taken into account for purposes of this
subparagraph but shall be taken into account
under such other subparagraph.
``(G) Payments in lieu of dividends.--
Payments in lieu of dividends which are made
pursuant to an agreement to which section 1058
applies.''.
(2) Conforming amendment.--Subparagraph (B) of
section 954(c)(1) is amended--
(A) by striking the second sentence, and
(B) by striking ``also'' in the last
sentence.
(b) Exception for Dealers.--Paragraph (2) of section 954(c)
is amended by adding at the end the following new subparagraph:
``(C) Exception for dealers.--Except as
provided in subparagraph (A), (E), or (G) of
paragraph (1) or by regulations, in the case of
a regular dealer in property (within the
meaning of paragraph (1)(B)), forward
contracts, option contracts, or similar
financial instruments (including notional
principal contracts and all instruments
referenced to commodities), there shall not be
taken into account in computing foreign
personal holding income any item of income,
gain, deduction, or loss from any transaction
(including hedging transactions) entered into
in the ordinary course of such dealer's trade
or business as such a dealer.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 1052. PERSONAL PROPERTY USED PREDOMINANTLY IN THE UNITED STATES
TREATED AS NOT PROPERTY OF A LIKE KIND WITH RESPECT
TO PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED
STATES.
(a) In General.--Subsection (h) of section 1031 (relating
to exchange of property held for productive use or investment)
is amended to read as follows:
``(h) Special Rules for Foreign Real and Personal
Property.--For purposes of this section--
``(1) Real property.--Real property located in the
United States and real property located outside the
United States are not property of a like kind.
``(2) Personal property.--
``(A) In general.--Personal property used
predominantly within the United States and
personal property used predominantly outside
the United States are not property of a like
kind.
``(B) Predominant use.--Except as provided
in subparagraph (C) and (D), the predominant
use of any property shall be determined based
on--
``(i) in the case of the property
relinquished in the exchange, the 2-
year period ending on the date of such
relinquishment, and
``(ii) in the case of the property
acquired in the exchange, the 2-year
period beginning on the date of such
acquisition.
``(C) Property held for less than 2
years.--Except in the case of an exchange which
is part of a transaction (or series of
transactions) structured to avoid the purposes
of this subsection--
``(i) only the periods the property
was held by the person relinquishing
the property (or any related person)
shall be taken into account under
subparagraph (B)(i), and
``(ii) only the periods the
property was held by the person
acquiring the property (or any related
person) shall be taken into account
under subparagraph (B)(ii).
``(D) Special rule for certain property.--
Property described in any subparagraph of
section 168(g)(4) shall be treated as used
predominantly in the United States.''.
(b) Effective Date.--
(1) In general.--The amendment made by this section
shall apply to transfers after June 8, 1997, in taxable
years ending after such date.
(2) Binding contracts.--The amendment made by this
section shall not apply to any transfer pursuant to a
written binding contract in effect on June 8, 1997, and
at all times thereafter before the disposition of
property. A contract shall not fail to meet the
requirements of the preceding sentence solely because--
(A) it provides for a sale in lieu of an
exchange, or
(B) the property to be acquired as
replacement property was not identified under
such contract before June 9, 1997.
SEC. 1053. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN TAXES.
(a) In General.--Section 901 is amended by redesignating
subsection (k) as subsection (l) and by inserting after
subsection (j) the following new subsection:
``(k) Minimum Holding Period for Certain Taxes.--
``(1) Withholding taxes.--
``(A) In general.--In no event shall a
credit be allowed under subsection (a) for any
withholding tax on a dividend with respect to
stock in a corporation if--
``(i) such stock is held by the
recipient of the dividend for 15 days
or less during the 30-day period
beginning on the date which is 15 days
before the date on which such share
becomes ex-dividend with respect to
such dividend, or
``(ii) to the extent that the
recipient of the dividend is under an
obligation (whether pursuant to a short
sale or otherwise) to make related
payments with respect to positions in
substantially similar or related
property.
``(B) Withholding tax.--For purposes of
this paragraph, the term `withholding tax'
includes any tax determined on a gross basis;
but does not include any tax which is in the
nature of a prepayment of a tax imposed on a
net basis.
``(2) Deemed paid taxes.--In the case of income,
war profits, or excess profits taxes deemed paid under
section 853, 902, or 960 through a chain of ownership
of stock in 1 or more corporations, no credit shall be
allowed under subsection (a) for such taxes if--
``(A) any stock of any corporation in such
chain (the ownership of which is required to
obtain credit under subsection (a) for such
taxes) is held for less than the period
described in paragraph (1)(A)(i), or
``(B) the corporation holding the stock is
under an obligation referred to in paragraph
(1)(A)(ii).
``(3) 45-day rule in the case of certain preference
dividends.--In the case of stock having preference in
dividends and dividends with respect to such stock
which are attributable to a period or periods
aggregating in excess of 366 days, paragraph (1)(A)(i)
shall be applied--
``(A) by substituting `45 days' for `15
days' each place it appears, and
``(B) by substituting `90-day period' for
`30-day period'.
``(4) Exception for certain taxes paid by
securities dealers.--
``(A) In general.--Paragraphs (1) and (2)
shall not apply to any qualified tax with
respect to any security held in the active
conductin a foreign country of a securities
business of any person--
``(i) who is registered as a
securities broker or dealer under
section 15(a) of the Securities
Exchange Act of 1934,
``(ii) who is registered as a
Government securities broker or dealer
under section 15C(a) of such Act, or
``(iii) who is licensed or
authorized in such foreign country to
conduct securities activities in such
country and is subject to bona fide
regulation by a securities regulating
authority of such country.
``(B) Qualified tax.--For purposes of
subparagraph (A), the term `qualified tax'
means a tax paid to a foreign country (other
than the foreign country referred to in
subparagraph (A)) if--
``(i) the dividend to which such
tax is attributable is subject to
taxation on a net basis by the country
referred to in subparagraph (A), and
``(ii) such country allows a credit
against its net basis tax for the full
amount of the tax paid to such other
foreign country.
``(C) Regulations.--The Secretary may
prescribe such regulations as may be
appropriate to carry out this paragraph,
including regulations to prevent the abuse of
the exception provided by this paragraph and to
treat other taxes as qualified taxes.
``(5) Certain rules to apply.--For purposes of this
subsection, the rules of paragraphs (3) and (4) of
section 246(c) shall apply.
``(6) Treatment of bona fide sales.--If a person's
holding period is reduced by reason of the application
of the rules of section 246(c)(4) to any contract for
the bona fide sale of stock, the determination of
whether such person's holding period meets the
requirements of paragraph (2) with respect to taxes
deemed paid under section 902 or 960 shall be made as
of the date such contract is entered into.
``(7) Taxes allowed as deduction, etc.--Sections
275 and 78 shall not apply to any tax which is not
allowable as a credit under subsection (a) by reason of
this subsection.''.
(b) Notice of Withholding Taxes Paid by Regulated
Investment Company.--Subsection (c) of section 853 (relating to
foreign tax credit allowed to shareholders) is amended by
adding at the end the following new sentence: ``Such notice
shall also include the amount of such taxes which (without
regard to the election under this section) would not be
allowable as a credit under section 901(a) to the regulated
investment company by reason of section 901(k).''.
(c) Effective Date.--The amendments made by this section
shall apply to dividends paid or accrued more than 30 days
after the date of the enactment of this Act.
SEC. 1054. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS THROUGH
HYBRID ENTITIES.
(a) In General.--Section 894 (relating to income affected
by treaty) is amended by inserting after subsection (b) the
following new subsection:
``(c) Denial of Treaty Benefits for Certain Payments
Through Hybrid Entities.--
``(1) Application to certain payments.--A foreign
person shall not be entitled under any income tax
treaty of the United States with a foreign country to
any reduced rate of any withholding tax imposed by this
title on an item of income derived through an entity
which is treated as a partnership (or is otherwise
treated as fiscally transparent) for purposes of this
title if--
``(A) such item is not treated for purposes
of the taxation laws of such foreign country as
an item of income of such person,
``(B) the treaty does not contain a
provision addressing the applicability of the
treaty in the case of an item of income derived
through a partnership, and
``(C) the foreign country does not impose
tax on a distribution of such item of income
from such entity to such person.
``(2) Regulations.--The Secretary shall prescribe
such regulations as may be necessary or appropriate to
determine the extent to which a taxpayer to which
paragraph (1) does not apply shall not be entitled to
benefits under any income tax treaty of the United
States with respect to any payment received by, or
income attributable to any activities of, an entity
organized in any jurisdiction (including the United
States) that is treated as a partnership or is
otherwise treated as fiscally transparent for purposes
of this title (including a common investment trust
under section 584, a grantor trust, or an entity that
is disregarded for purposes of this title) and is
treated as fiscally nontransparent for purposes of the
tax laws of the jurisdiction of residence of the
taxpayer.''.
(b) Effective Date.--The amendments made by this section
shall apply upon the date of enactment of this Act.
SEC. 1055. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN TAX CREDIT
CARRYBACKS.
(a) In General.--Subsection (d) of section 6601 is amended
by redesignating paragraphs (2) and (3) as paragraphs (3) and
(4), respectively, and by inserting after paragraph (1) the
following new paragraph:
``(2) Foreign tax credit carrybacks.--If any credit
allowed for any taxable year is increased by reason of
a carryback of tax paid or accrued to foreign countries
or possessions of the United States, such increase
shall not affect the computation of interest under this
section for the period ending with the filing date for
the taxable year in which such taxes were in fact paid
or accrued, or, with respect to any portion of such
credit carryback from a taxable year attributable to a
net operating loss carryback or a capital loss
carryback from a subsequent taxable year, such increase
shall not affect the computation of interest under this
section for theperiod ending with the filing date for
such subsequent taxable year.''.
(b) Conforming Amendment to Refunds Attributable to Foreign
Tax Credit Carrybacks.--
(1) In general.--Subsection (f) of section 6611 is
amended by redesignating paragraphs (2) and (3) as
paragraphs (3) and (4), respectively, and by inserting
after paragraph (1) the following new paragraph:
``(2) Foreign tax credit carrybacks.--For purposes
of subsection (a), if any overpayment of tax imposed by
subtitle A results from a carryback of tax paid or
accrued to foreign countries or possessions of the
United States, such overpayment shall be deemed not to
have been made before the filing date for the taxable
year in which such taxes were in fact paid or accrued,
or, with respect to any portion of such credit
carryback from a taxable year attributable to a net
operating loss carryback or a capital loss carryback
from a subsequent taxable year, such overpayment shall
be deemed not to have been made before the filing date
for such subsequent taxable year.''.
(2) Conforming amendments.--
(A) Paragraph (4) of section 6611(f) (as so
redesignated) is amended--
(i) by striking ``paragraphs (1)
and (2)'' and inserting ``paragraphs
(1), (2), and (3)'', and
(ii) by striking ``paragraph (1) or
(2)'' each place it appears and
inserting ``paragraph (1), (2), or
(3)''.
(B) Clause (ii) of section 6611(f)(4)(B)
(as so redesignated) is amended by striking
``and'' at the end of subclause (I), by
redesignating subclause (II) as subclause
(III), and by inserting after subclause (I) the
following new subclause:
``(II) in the case of a
carryback of taxes paid or
accrued to foreign countries or
possessions of the United
States, the taxable year in
which such taxes were in fact
paid or accrued (or, with
respect to any portion of such
carryback from a taxable year
attributable to a net operating
loss carryback or a capital
loss carryback from a
subsequent taxable year, such
subsequent taxable year),
and''.
(C) Subclause (III) of section
6611(f)(4)(B)(ii) (as so redesignated) is
amended by inserting ``(as defined in paragraph
(3)(B))'' after ``credit carryback'' the first
place it appears.
(D) Section 6611 is amended by striking
subsection (g) and by redesignating subsections
(h) and (i) as subsections (g) and (h),
respectively.
(c) Effective Date.--The amendments made by this section
shall apply to foreign tax credit carrybacks arising in taxable
years beginning after the date of the enactment of this Act.
SEC. 1056. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM FOR CREDIT
OR REFUND ATTRIBUTABLE TO FOREIGN TAX CREDIT
CARRYFORWARD.
(a) In General.--Subparagraph (A) of section 6511(d)(3) is
amended by striking ``for the year with respect to which the
claim is made'' and inserting ``for the year in which such
taxes were actually paid or accrued''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxes paid or accrued in taxable years beginning
after the date of the enactment of this Act.
SEC. 1057. REPEAL OF EXCEPTION TO ALTERNATIVE MINIMUM FOREIGN TAX
CREDIT LIMIT.
(a) In General.--Section 59(a)(2) (relating to limitation
to 90 percent of tax) is amended by striking subparagraph (C).
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
Subtitle G--Partnership Provisions
SEC. 1061. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED BY
PARTNERSHIP.
(a) In General.--Subsection (c) of section 732 is amended
to read as follows:
``(c) Allocation of Basis.--
``(1) In general.--The basis of distributed
properties to which subsection (a)(2) or (b) is
applicable shall be allocated--
``(A)(i) first to any unrealized
receivables (as defined in section 751(c)) and
inventory items (as defined in section
751(d)(2)) in an amount equal to the adjusted
basis of each such property to the partnership,
and
``(ii) if the basis to be allocated is less
than the sum of the adjusted bases of such
properties to the partnership, then, to the
extent any decrease is required in order to
have the adjusted bases of such properties
equal the basis to be allocated, in the manner
provided in paragraph (3), and
``(B) to the extent of any basis remaining
after the allocation under subparagraph (A), to
other distributed properties--
``(i) first by assigning to each
such other property such other
property's adjusted basis to the
partnership, and
``(ii) then, to the extent any
increase or decrease in basis is
required in order to have the adjusted
bases of such other distributed
properties equal such remaining basis,
in the manner provided in paragraph (2)
or (3), whichever is appropriate.
``(2) Method of allocating increase.--Any increase
required under paragraph (1)(B) shall be allocated
among the properties--
``(A) first to properties with unrealized
appreciation in proportion to their respective
amounts of unrealized appreciation before such
increase (but only to the extent of each
property's unrealized appreciation), and
``(B) then, to the extent such increase is
not allocated under subparagraph (A), in
proportion to their respective fair market
values.
``(3) Method of allocating decrease.--Any decrease
required under paragraph (1)(A) or (1)(B) shall be
allocated--
``(A) first to properties with unrealized
depreciation in proportion to their respective
amounts of unrealized depreciation before such
decrease (but only to the extent of each
property's unrealized depreciation), and
``(B) then, to the extent such decrease is
not allocated under subparagraph (A), in
proportion to their respective adjusted bases
(as adjusted under subparagraph (A)).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to distributions after the date of the enactment of
this Act.
SEC. 1062. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTANTIALLY
APPRECIATED WITH RESPECT TO SALE OR EXCHANGE OF
PARTNERSHIP INTEREST.
(a) In General.--Paragraph (2) of section 751(a) is amended
to read as follows:
``(2) inventory items of the partnership,''.
(b) Conforming Amendments.--
(1)(A) Paragraph (1) of section 751(b) is amended
by striking subparagraphs (A) and (B) and inserting the
following new subparagraphs:
``(A) partnership property which is--
``(i) unrealized receivables, or
``(ii) inventory items which have
appreciated substantially in value,
in exchange for all or a part of his interest
in other partnership property (including
money), or
``(B) partnership property (including
money) other than property described in
subparagraph (A)(i) or (ii) in exchange for all
or a part of his interest in partnership
property described in subparagraph (A)(i) or
(ii),''.
(B) Subsection (b) of section 751 is amended by
adding at the end the following new paragraph:
``(3) Substantial appreciation.--For purposes of
paragraph (1)--
``(A) In general.--Inventory items of the
partnership shall be considered to have
appreciated substantially in value if their
fair market value exceeds 120 percent of the
adjusted basis to the partnership of such
property.
``(B) Certain property excluded.--For
purposes of subparagraph (A), there shall be
excluded any inventory property if a principal
purpose for acquiring such property was to
avoid the provisions of this subsection
relating to inventory items.''
(2) Subsection (d) of section 751 is amended to
read as follows:
``(d) Inventory Items.--For purposes of this subchapter,
the term `inventory items' means--
``(1) property of the partnership of the kind
described in section 1221(1),
``(2) any other property of the partnership which,
on sale or exchange by the partnership, would be
considered property other than a capital asset and
other than property described in section 1231,
``(3) any other property of the partnership which,
if sold or exchanged by the partnership, would result
in a gain taxable under subsection (a) of section 1246
(relating to gain on foreign investment company stock),
and
``(4) any other property held by the partnership
which, if held by the selling or distributee partner,
would be considered property of the type described in
paragraph (1), (2), or (3).''.
(3) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6),
732(c)(1)(A) (as amended by the preceding section),
735(a)(2), and 735(c)(1) are each amended by striking
``section 751(d)(2)'' and inserting ``section 751(d)''.
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to sales, exchanges, and
distributions after the date of the enactment of this
Act.
(2) Binding contracts.--The amendments made by this
section shall not apply to any sale or exchange
pursuant to a written binding contract in effect on
June 8, 1997, and at all times thereafter before such
sale or exchange.
SEC. 1063. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN.
(a) In General.--Sections 704(c)(1)(B) and 737(b)(1) are
each amended by striking ``5 years'' and inserting ``7 years''.
(b) Effective Date.--
(1) In general.--The amendment made by subsection
(a) shall apply to property contributed to a
partnership after June 8, 1997.
(2) Binding contracts.--The amendment made by
subsection (a) shall not apply to any property
contributed pursuant to a written binding contract in
effect on June 8, 1997, and at all times thereafter
before such contribution if such contract provides for
the contribution of a fixed amount of property.
Subtitle H--Pension Provisions
SEC. 1071. PENSION ACCRUED BENEFIT DISTRIBUTABLE WITHOUT CONSENT
INCREASED TO $5,000.
(a) Amendment to 1986 Code.--
(1) In general.--Subparagraph (A) of section
411(a)(11) (relating to restrictions on certain
mandatory distributions) is amended by striking
``$3,500'' and inserting ``$5,000''.
(2) Conforming amendments.--
(A) Section 411(a)(7)(B), paragraphs (1)
and (2) of section 417(e), and section
457(e)(9) are each amended by striking
``$3,500'' each place it appears (other than
the headings) and inserting ``the dollar limit
under section 411(a)(11)(A)''.
(B) The headings for paragraphs (1) and (2)
of section 417(e) and subparagraph (A) of
section 457(e)(9) are each amended by striking
``$3,500'' and inserting ``dollar limit''.
(b) Amendments to ERISA.--
(1) In general.--Section 203(e)(1) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1053(e)(1)) is amended by striking ``$3,500'' and
inserting ``$5,000''.
(2) Conforming amendments.--Sections 204(d)(1) and
205(g) (1) and (2) (29 U.S.C. 1054(d)(1) and 1055(g)
(1) and (2)) are each amended by striking ``$3,500''
and inserting ``the dollar limit under section
203(e)(1)''.
(c) Effective Date.--The amendments made by this section
shall apply to plan years beginning after the date of the
enactment of this Act.
SEC. 1072. ELECTION TO RECEIVE TAXABLE CASH COMPENSATION IN LIEU OF
NONTAXABLE PARKING BENEFITS.
(a) In General.--Section 132(f)(4) (relating to benefits
not in lieu of compensation) is amended by adding at the end
the following new sentence: ``This paragraph shall not apply to
any qualified parking provided in lieu of compensation which
otherwise would have been includible in gross income of the
employee, and no amount shall be included in the gross income
of the employee solely because the employee may choose between
the qualified parking and compensation.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1073. REPEAL OF EXCESS DISTRIBUTION AND EXCESS RETIREMENT
ACCUMULATION TAX.
(a) Repeal of Excess Distribution and Excess Retirement
Accumulation Tax.--Section 4980A (relating to excess
distributions from qualified retirement plans) is repealed.
(b) Conforming Amendments.--
(1) Section 691(c)(1) is amended by striking
subparagraph (C).
(2) Section 2013 is amended by striking subsection
(g).
(3) Section 2053(c)(1)(B) is amended by striking
the last sentence.
(4) Section 6018(a) is amended by striking
paragraph (4).
(c) Effective Dates.--
(1) Excess distribution tax repeal.--Except as
provided in paragraph (2), the repeal made by
subsection (a) shall apply to excess distributions
received after December 31, 1996.
(2) Excess retirement accumulation tax repeal.--The
repeal made by subsection (a) with respect to section
4980A(d) of the Internal Revenue Code of 1986 and the
amendments made by subsection (b) shall apply to
estates of decedents dying after December 31, 1996.
SEC. 1074. INCREASE IN TAX ON PROHIBITED TRANSACTIONS.
(a) In General.--Section 4975(a) is amended by striking
``10 percent'' and inserting ``15 percent''.
(b) Effective Date.--The amendment made by this section
shall apply to prohibited transactions occurring after the date
of the enactment of this Act.
SEC. 1075. BASIS RECOVERY RULES FOR ANNUITIES OVER MORE THAN ONE LIFE.
(a) In General.--Section 72(d)(1)(B) is amended by adding
at the end the following new clause:
``(iv) Number of anticipated
payments where more than one life.--If
the annuity is payable over the lives
of more than 1 individual, the number
of anticipated payments shall be
determined as follows:
``If the combined ages
of annuitants are: The number is:
Not more than 110......................................... 410
More than 110 but not more than 120....................... 360
More than 120 but not more than 130....................... 310
More than 130 but not more than 140....................... 260
More than 140............................................. 210.''.
(b) Conforming Amendment.--Section 72(d)(1)(B)(iii) is
amended--
(1) by inserting ``If the annuity is payable over
the life of a single individual, the number of
anticipated payments shall be determined as follows:''
after the heading and before the table, and
(2) by striking ``primary'' in the table.
(c) Effective Date.--The amendments made by this section
shall apply with respect to annuity starting dates beginning
after December 31, 1997.
Subtitle I--Other Revenue Provisions
SEC. 1081. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY CORPORATIONS
REQUIRED TO USE ACCRUAL METHOD OF ACCOUNTING.
(a) In General.--Subsection (i) of section 447 (relating to
method of accounting for corporations engaged in farming) is
amended by striking paragraphs (3) and (4), by redesignating
paragraphs (5) and (6) as paragraphs (3) and (4), respectively,
and by adding at the end the following new paragraph:
``(5) Termination.--
``(A) In general.--No suspense account may
be established under this subsection by any
corporation required by this section to change
its method of accounting for any taxable year
ending after June 8, 1997.
``(B) Phaseout of existing suspense
accounts.--
``(i) In general.--Each suspense
account under this subsection shall be
reduced (but not below zero) for each
taxable year beginning after June 8,
1997, by an amount equal to the lesser
of--
``(I) the applicable
portion of such account, or
``(II) 50 percent of the
taxable income of the
corporation for the taxable
year, or, if the corporation
has no taxable income for such
year, the amount of any net
operating loss (as defined in
section 172(c)) for such
taxable year.
For purposes of the preceding sentence,
the amount of taxable income and net
operating loss shall be determined
without regard to this paragraph.
``(ii) Coordination with other
reductions.--The amount of the
applicable portion for any taxable year
shall be reduced (but not below zero)
by the amount of any reduction required
for such taxable year under any other
provision of this subsection.
``(iv) Inclusion in income.--Any
reduction in a suspense account under
this paragraph shall be included in
gross income for the taxable year of
the reduction.
``(C) Applicable portion.--For purposes of
subparagraph (B), the term `applicable portion'
means, for any taxable year, the amount which
would ratably reduce the amount in the account
(after taking into account prior reductions) to
zero over the period consisting of such taxable
year and the remaining taxable years in such
first 20 taxable years.
``(D) Amounts after 20th year.--Any amount
in the account as of the close of the 20th year
referred to in subparagraph (C) shall be
treated as the applicable portion for each
succeeding year thereafter to the extent not
reduced under this paragraph for any prior
taxable year after such 20th year.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years ending after June 8, 1997.
SEC. 1082. MODIFICATION OF TAXABLE YEARS TO WHICH NET OPERATING LOSSES
MAY BE CARRIED.
(a) In General.--Subparagraph (A) of section 172(b)(1)
(relating to years to which loss may be carried) is amended--
(1) by striking ``3'' in clause (i) and inserting
``2'', and
(2) by striking ``15'' in clause (ii) and inserting
``20''.
(b) Retention of 3-Year Carryback for Certain Losses.--
Paragraph (1) of section 172(b) is amended by adding at the end
the following new subparagraph:
``(F) Retention of 3-year carryback in
certain cases.--
``(i) In general.--Subparagraph
(A)(i) shall be applied by substituting
`3 years' for `2 years' with respect to
the portion of the net operating loss
for the taxable year which is an
eligible loss with respect to the
taxpayer.
``(ii) Eligible loss.--For purposes
of clause (i), the term `eligible loss'
means--
``(I) in the case of an
individual, losses of property
arising from fire, storm,
shipwreck, or other casualty,
or from theft,
``(II) in the case of a
taxpayer which is a small
business, net operating losses
attributable to Presidentially
declared disasters (as defined
in section 1033(h)(3)), and
``(III) in the case of a
taxpayer engaged in the trade
or business of farming (as
defined in section 263A(e)(4)),
net operating losses
attributable to such
Presidentially declared
disasters.
``(iii) Small business.--For
purposes of this subparagraph, the term
`small business' means a corporation or
partnership which meets the gross
receipts test of section 448(c) for the
taxable year in which the loss arose
(or, in the case of a sole
proprietorship, which would meet such
test if such proprietorship were a
corporation).''.
(c) Effective Date.--The amendments made by this section
shall apply to net operating losses for taxable years beginning
after the date of the enactment of this Act.
SEC. 1083. MODIFICATIONS TO TAXABLE YEARS TO WHICH UNUSED CREDITS MAY
BE CARRIED.
(a) In General.--Section 39(a) (relating to unused credits)
is amended--
(1) in paragraph (1), by striking ``3'' each place
it appears and inserting ``1'' and by striking ``15''
each place it appears and inserting ``20''; and
(2) in paragraph (2), by striking ``18'' each place
it appears and inserting ``22'' and by striking ``17''
each place it appears and inserting ``21''.
(b) Effective Date.--The amendments made by this section
shall apply to credits arising in taxable years beginning after
December 31, 1997.
SEC. 1084. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN AMOUNTS PAID IN
CONNECTION WITH INSURANCE.
(a) Denial of Deduction for Premiums.--
(1) In general.--Paragraph (1) of section 264(a) is
amended to read as follows:
``(1) Premiums on any life insurance policy, or
endowment or annuity contract, if the taxpayer is
directly or indirectly a beneficiary under the policy
or contract.''.
(2) Exceptions.--Section 264 is amended by
redesignating subsections (b), (c), and (d) as
subsections (c), (d), and (e), respectively, and by
inserting after subsection (a) the following new
subsection:
``(b) Exceptions to Subsection (a)(1).--Subsection (a)(1)
shall not apply to--
``(1) any annuity contract described in section
72(s)(5), and
``(2) any annuity contract to which section 72(u)
applies.''.
(b) Interest on Policy Loans.--
(1) In general.--Paragraph (4) of section 264(a) is
amended by striking ``individual, who'' and all that
follows and inserting ``individual.''.
(2) Coordination with transfers for value.--
Paragraph (2) of section 101(a) is amended by adding at
the end the following new flush sentence:
``The term `other amounts' in the first sentence of
this paragraph includes interest paid or accrued by the
transferee on indebtedness with respect to such
contract or any interest therein if such interest paid
or accrued is not allowable as a deduction by reason of
section 264(a)(4).''.
(c) Pro Rata Allocation of Interest Expense to Policy Cash
Values.--Section 264 is amended by adding at the end the
following new subsection:
``(f) Pro Rata Allocation of Interest Expense to Policy
Cash Values.--
``(1) In general.--No deduction shall be allowed
for that portion of the taxpayer's interest expense
which is allocable to unborrowed policy cash values.
``(2) Allocation.--For purposes of paragraph (1),
the portion of the taxpayer's interest expense which is
allocable to unborrowed policy cash values is an amount
which bears the same ratio to such interest expense
as--
``(A) the taxpayer's average unborrowed
policy cash values of life insurance policies,
and annuity and endowment contracts, issued
after June 8, 1997, bears to
``(B) the sum of--
``(i) in the case of assets of the
taxpayer which are life insurance
policies or annuity or endowment
contracts, the average unborrowed
policy cash values of such policies and
contracts, and
``(ii) in the case of assets of the
taxpayer not described in clause (i),
the average adjusted bases (within the
meaning of section 1016) of such
assets.
``(3) Unborrowed policy cash value.--For purposes
of this subsection, the term `unborrowed policy cash
value' means, with respect to any life insurance policy
or annuity or endowment contract, the excess of--
``(A) the cash surrender value of such
policy or contract determined without regard to
any surrender charge, over
``(B) the amount of any loan with respect
to such policy or contract.
``(4) Exception for certain policies and
contracts.--
``(A) Policies and contracts covering 20-
percent owners, officers, directors, and
employees.--Paragraph (1) shall not apply to
any policy or contract owned by an entity
engaged in a trade or business if such policy
or contract covers only 1 individual and if
such individual is (at the time first covered by the policy or
contract)--
``(i) a 20-percent owner of such
entity, or
``(ii) an individual (not described
in clause (i)) who is an officer,
director, or employee of such trade or
business.
A policy or contract covering a 20-percent
owner of such entity shall not be treated as
failing to meet the requirements of the
preceding sentence by reason of covering the
joint lives of such owner and such owner's
spouse.
``(B) Contracts subject to current income
inclusion.--Paragraph (1) shall not apply to
any annuity contract to which section 72(u)
applies.
``(C) Coordination with paragraph (2).--Any
policy or contract to which paragraph (1) does
not apply by reason of this paragraph shall not
be taken into account under paragraph (2).
``(D) 20-percent owner.--For purposes of
subparagraph (A), the term `20-percent owner'
has the meaning given such term by subsection
(e)(4).
``(5) Exception for policies and contracts held by
natural persons; treatment of partnerships and s
corporations.--
``(A) Policies and contracts held by
natural persons.--
``(i) In general.--This subsection
shall not apply to any policy or
contract held by a natural person.
``(ii) Exception where business is
beneficiary.--If a trade or business is
directly or indirectly the beneficiary
under any policy or contract, such
policy or contract shall be treated as
held by such trade or business and not
by a natural person.
``(iii) Special rules.--
``(I) Certain trades or
businesses not taken into
account.--Clause (ii) shall not
apply to any trade or business
carried on as a sole
proprietorship and to any trade
or business performing services
as an employee.
``(II) Limitation on
unborrowed cash value.--The
amount of the unborrowed cash
value of any policy or contract
which is taken into account by
reason of clause (ii) shall not
exceed the benefit to which the
trade or business is directly
or indirectly entitled under
the policy or contract.
``(iv) Reporting.--The Secretary
shall require such reporting from
policyholders and issuers as is
necessary to carry out clause (ii). Any
report required under the preceding
sentence shall be treated as a
statement referred to in section
6724(d)(1).
``(B) Treatment of partnerships and s
corporations.--In the case of a partnership or
S corporation, this subsection shall be applied
at the partnership and corporate levels.
``(6) Special rules.--
``(A) Coordination with subsection (a) and
section 265.--If interest on any indebtedness
is disallowed under subsection (a) or section
265--
``(i) such disallowed interest
shall not be taken into account for
purposes of applying this subsection,
and
``(ii) the amount otherwise taken
into account under paragraph (2)(B)
shall be reduced (but not below zero)
by the amount of such indebtedness.
``(B) Coordination with section 263a.--This
subsection shall be applied before the
application of section 263A (relating to
capitalization of certain expenses where
taxpayer produces property).
``(7) Interest expense.--The term `interest
expense' means the aggregate amount allowable to the
taxpayer as a deduction for interest (within the
meaning of section 265(b)(4)) for the taxable year
(determined without regard to this subsection, section
265(b), and section 291).
``(8) Aggregation rules.--
``(A) In general.--All members of a
controlled group (within the meaning of
subsection (d)(5)(B)) shall be treated as 1
taxpayer for purposes of this subsection.
``(B) Treatment of insurance companies.--
This subsection shall not apply to an insurance
company subject to tax under subchapter L, and
subparagraph (A) shall be applied without
regard to any member of an affiliated group
which is an insurance company.''.
(b) Treatment of Insurance Companies.--
(1)(A) Clause (ii) of section 805(a)(4)(C) is
amended by inserting ``, or out of the increase for the
taxable year in policy cash values (within the meaning
of subparagraph (F)) of life insurance policies and
annuity and endowment contracts to which section 264(f)
applies,'' after ``tax-exempt interest''.
(B) Clause (iii) of section 805(a)(4)(D) is amended
by striking ``and'' and inserting ``, the increase for
the taxable year in policy cash values (within the
meaning of subparagraph (F)) of life insurance policies
and annuity and endowment contracts to which section
264(f) applies, and''.
(C) Paragraph (4) of section 805(a) is amended by
adding at the end the following new subparagraph:
``(F) Increase in policy cash values.--For
purposes of subparagraphs (C) and (D)--
``(i) In general.--The increase in
the policy cash value for any taxable
year with respect to policy or contract
is the amount of the increase in the
adjusted cash value during such taxable
year determined without regard to--
``(I) gross premiums paid
during such taxable year, and
``(II) distributions (other
than amounts includible in the
policyholder's gross income)
during such taxable year to
which section 72(e) applies.
``(ii) Adjusted cash value.--For
purposes of clause (i), the term
`adjusted cash value' means the cash
surrender value of the policy or
contract increased by the sum of--
``(I) commissions payable
with respect to such policy or
contract for the taxable year,
and
``(II) asset management
fees, surrender charges,
mortality and expense charges,
and any other fees or charges
specified in regulations
prescribed by the Secretary
which are imposed (or which
would be imposed were the
policy or contract canceled)
with respect to such policy or contract for the taxable year.''.
(2)(A) Subparagraph (B) of section 807(a)(2) is
amended by striking ``interest,'' and inserting
``interest and the amount of the policyholder's share
of the increase for the taxable year in policy cash
values (within the meaning of section 805(a)(4)(F)) of
life insurance policies and annuity and endowment
contracts to which section 264(f) applies,''.
(B) Subparagraph (B) of section 807(b)(1) is
amended by striking ``interest,'' and inserting
``interest and the amount of the policyholder's share
of the increase for the taxable year in policy cash
values (within the meaning of section 805(a)(4)(F)) of
life insurance policies and annuity and endowment
contracts to which section 264(f) applies,''.
(3) Paragraph (1) of section 812(d) is amended by
striking ``and'' at the end of subparagraph (B), by
striking the period at the end of subparagraph (C) and
inserting ``, and'', and by adding at the end the
following new subparagraph:
``(D) the increase for any taxable year in
the policy cash values (within the meaning of
section 805(a)(4)(F)) of life insurance
policies and annuity and endowment contracts to
which section 264(f) applies.''.
(4) Subparagraph (B) of section 832(b)(5) is
amended by striking ``and'' at the end of clause (i),
by striking the period at the end of clause (ii) and
inserting ``, and'', and by adding at the end the
following new clause:
``(iii) the increase for the
taxable year in policy cash values
(within the meaning of section
805(a)(4)(F)) of life insurance
policies and annuity and endowment
contracts to which section 264(f)
applies.''.
(c) Conforming Amendment.--Subparagraph (A) of section
265(b)(4) is amended by inserting ``, section 264,'' before
``and section 291''.
(d) Effective Date.--The amendments made by this section
shall apply to contracts issued after June 8, 1997, in taxable
years ending after such date. For purposes of the preceding
sentence, any material increase in the death benefit or other
material change in the contract shall be treated as a new
contract but the addition of covered lives shall be treated as
a new contract only with respect to such additional covered
lives. For purposes of this subsection, an increase in the
death benefit under a policy or contract issued in connection
with a lapse described in section 501(d)(2) of the Health
Insurance Portability and Accountability Act of 1996 shall not
be treated as a new contract.
SEC. 1085. IMPROVED ENFORCEMENT OF THE APPLICATION OF THE EARNED INCOME
CREDIT.
(a) Restrictions on Availability of Earned Income Credit
for Taxpayers who Improperly Claimed Credit in Prior Year.--
(1) In general.--Section 32 is amended by
redesignating subsections (k) and (l) as subsections
(l) and (m), respectively, and by inserting after
subsection (j) the following new subsection:
``(k) Restrictions on Taxpayers Who Improperly Claimed
Credit in Prior Year.--
``(1) Taxpayers making prior fraudulent or reckless
claims.--
``(A) In general.--No credit shall be
allowed under this section for any taxable year
in the disallowance period.
``(B) Disallowance period.--For purposes of
paragraph (1), the disallowance period is--
``(i) the period of 10 taxable
years after the most recent taxable
year for which there was a final
determination that the taxpayer's claim
of credit under this section was due to fraud, and
``(ii) the period of 2 taxable
years after the most recent taxable
year for which there was a final
determination that the taxpayer's claim
of credit under this section was due to
reckless or intentional disregard of
rules and regulations (but not due to
fraud).
``(2) Taxpayers making improper prior claims.--In
the case of a taxpayer who is denied credit under this
section for any taxable year as a result of the
deficiency procedures under subchapter B of chapter 63,
no credit shall be allowed under this section for any
subsequent taxable year unless the taxpayer provides
such information as the Secretary may require to
demonstrate eligibility for such credit.''.
(2) Due diligence requirement on income tax return
preparers.--Section 6695 is amended by adding at the
end the following new subsection:
``(g) Failure To Be Diligent in Determining Eligibility for
Earned Income Credit.--Any person who is an income tax return
preparer with respect to any return or claim for refund who
fails to comply with due diligence requirements imposed by the
Secretary by regulations with respect to determining
eligibility for, or the amount of, the credit allowable by
section 32 shall pay a penalty of $100 for each such
failure.''.
(3) Extension procedures applicable to mathematical
or clerical errors.--Paragraph (2) of section 6213(g)
(relating to the definition of mathematical or clerical
errors) is amended by striking ``and'' at the end of
subparagraph (H), by striking the period at the end of
subparagraph (I) and inserting ``, and'', and by
inserting after subparagraph (I) the following new
subparagraph:
``(J) an omission of information required
by section 32(k)(2) (relating to taxpayers
making improper prior claims of earned income
credit).''.
(b) Increase in Net Loss Disregarded for Modified Adjusted
Gross Income.--Section 32(c)(5)(B)(iv) is amended by striking
``50 percent'' and inserting ``75 percent''.
(c) Workfare Payments Not Included in Earned Income.--
Section 32(c)(2)(B) is amended by striking ``and'' at the end
of clause (iii), by striking the period at the end of clause
(iv) and inserting ``, and'', and by adding at the end the
following new clause:
``(v) no amount described in
subparagraph (A) received for service
performed in work activities as defined
in section 407(d) of the Social
Security Act to which the taxpayer is
assigned under any State program under
part A of title IV of such Act, but
only to the extent such amount is
subsidized under such State program.''.
(d) Certain Nontaxable Income Included in Modified Adjusted
Gross Income.--Section 32(c)(5)(B) is amended--
(1) by striking ``and'' at the end of clause (iii),
(2) by striking the period at the end of clause
(iv)(III),
(3) by inserting after clause (iv)(III) the
following new clauses:
``(v) interest received or accrued
during the taxable year which is exempt
from tax imposed by this chapter, and
``(vi) amounts received as a
pension or annuity, and any
distributions or payments received from
an individual retirement plan, by the
taxpayer during the taxableyear to the
extent not included in gross income.'', and
(4) by adding at the end the following new
sentence: ``Clause (vi) shall not include any amount
which is not includible in gross income by reason of
section 402(c), 403(a)(4), 403(b), 408(d) (3), (4), or
(5), or 457(e)(10).''.
(e) Effective Dates.--
(1) The amendments made by subsection (a) shall
apply to taxable years beginning after December 31,
1996.
(2) The amendments made by subsections (b), (c),
and (d) shall apply to taxable years beginning after
December 31, 1997.
SEC. 1086. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST METHOD MAY
BE USED.
(a) Limitation.--Subsection (g) of section 167 is amended
by adding at the end the following new paragraph:
``(6) Limitation on property for which income
forecast method may be used.--The depreciation
deduction allowable under this section may be
determined under the income forecast method or any
similar method only with respect to--
``(A) property described in paragraph (3)
or (4) of section 168(f),
``(B) copyrights,
``(C) books,
``(D) patents, and
``(E) other property specified in
regulations.
Such methods may not be used with respect to any
amortizable section 197 intangible (as defined in
section 197(c)).''.
(b) Depreciation Period for Rent-To-Own Property.--
(1) In general.--Subparagraph (A) of section
168(e)(3) (relating to 3-year property) is amended by
striking ``and'' at the end of clause (i), by striking
the period at the end of clause (ii) and inserting ``,
and'', and by adding at the end the following new
clause:
``(iii) any qualified rent-to-own
property.''.
(2) 4-year class life.--The table contained in
section 168(g)(3)(B) is amended by inserting before the
first item the following new item:
``(A)(iii)............................................ 4 ''.
(3) Definition of qualified rent-to-own property.--
Subsection (i) of section 168 is amended by adding at
the end the following new paragraph:
``(14) Qualified rent-to-own property.--
``(A) In general.--The term `qualified
rent-to-own property' means property held by a
rent-to-own dealer for purposes of being
subject to a rent-to-own contract.
``(B) Rent-to-own dealer.--The term `rent-
to-own dealer' means a person that, in the
ordinary course of business, regularly enters
into rent-to-own contracts with customers for
the use of consumer property, if a substantial
portion of those contracts terminate and the
property is returned to such person before the
receipt of all payments required to transfer
ownership of the property from such person to
the customer.
``(C) Consumer property.--The term
`consumer property' means tangible personal
property of a type generally used within the
home for personal use.
``(D) Rent-to-own contract.--The term
`rent-to-own contract' means any lease for the
use of consumer property between a rent-to-own
dealer and a customer who is an individual which--
``(i) is titled `Rent-to-Own
Agreement' or `Lease Agreement with
Ownership Option,' or uses other
similar language,
``(ii) provides for level (or
decreasing where no payment is less
than 40 percent of the largest
payment), regular periodic payments
(for a payment period which is a week
or month),
``(iii) provides that legal title
to such property remains with the rent-
to-own dealer until the customer makes
all the payments described in clause
(ii) or early purchase payments
required under the contract to acquire
legal title to the item of property,
``(iv) provides a beginning date
and a maximum period of time for which
the contract may be in effect that does
not exceed 156 weeks or 36 months from
such beginning date (including renewals
or options to extend),
``(v) provides for payments within
the 156-week or 36-month period that,
in the aggregate, generally exceed the
normal retail price of the consumer
property plus interest,
``(vi) provides for payments under
the contract that, in the aggregate, do
not exceed $10,000 per item of consumer
property,
``(vii) provides that the customer
does not have any legal obligation to
make all the payments referred to in
clause (ii) set forth under the
contract, and that at the end of each
payment period the customer may either
continue to use the consumer property
by making the payment for the next
payment period or return such property
to the rent-to-own dealer in good
working order, in which case the
customer does not incur any further
obligations under the contract and is
not entitled to a return of any
payments previously made under the
contract, and
``(viii) provides that the customer
has no right to sell, sublease,
mortgage, pawn, pledge, encumber, or
otherwise dispose of the consumer
property until all the payments stated
in the contract have been made.''.
(c) Effective Date.--The amendment made by this section
shall apply to property placed in service after the date of the
enactment of this Act.
SEC. 1087. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY CONVERTED
PROPERTY BE REPLACED WITH PROPERTY ACQUIRED FROM AN
UNRELATED PERSON.
(a) In General.--Subsection (i) of section 1033 is amended
to read as follows:
``(i) Replacement Property Must Be Acquired From Unrelated
Person in Certain Cases.--
``(1) In general.--If the property which is
involuntarily converted is held by a taxpayer to which
this subsection applies, 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 applicable under subsection
(a)(2)(B).
``(2) Taxpayers to which subsection applies.--This
subsection shall apply to--
``(A) a C corporation,
``(B) a partnership in which 1 or more C
corporations own, directly or indirectly
(determined in accordance with section
707(b)(3)), more than 50 percent of the capital
interest, or profits interest, in such
partnership at the time of the involuntary
conversion, and
``(C) any other taxpayer if, with respect
to property which is involuntarily converted
during the taxable year, the aggregate of the
amount of realized gain on such property on
which there is realized gain exceeds $100,000.
In the case of a partnership, subparagraph (C) shall
apply with respect to the partnership and with respect
to each partner. A similar rule shall apply in the case
of an S corporation and its shareholders.
``(3) 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).''.
(b) Effective Date.--The amendment made by this section
shall apply to involuntary conversions occurring after June 8,
1997.
SEC. 1088. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES RULES FOR
SALES OF PROPERTY BY A MANUFACTURER TO A DEALER.
(a) In General.--Paragraph (2) of section 811(c) of the Tax
Reform Act of 1986 is hereby repealed.
(b) Effective Date.--
(1) In general.--The amendment made by this section
shall apply to taxable years beginning more than 1 year
after the date of the enactment of this Act.
(2) Coordination with section 481.--In the case of
any taxpayer required by this section to change its
method of accounting for any taxable year--
(A) such changes shall be treated as
initiated by the taxpayer,
(B) such changes shall be treated as made
with the consent of the Secretary of the
Treasury, and
(C) the net amount of the adjustments
required to be taken into account under section
481(a) of the Internal Revenue Code of 1986
shall be taken into account ratably over the 4
taxable year period beginning with the first
taxable year beginning after the date of the
enactment of this Act.
SEC. 1089. LIMITATIONS ON CHARITABLE REMAINDER TRUST ELIGIBILITY FOR
CERTAIN TRUSTS.
(a) Limitation on Noncharitable Distributions.--
(1) In general.--Paragraphs (1)(A) and (2)(A) of
section 664(d) (relating to charitable remainder
trusts) are each amended by inserting ``nor more than
50 percent'' after ``not less than 5 percent''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply to transfers in trust after
June 18, 1997.
(b) Minimum Charitable Benefit.--
(1) Charitable remainder annuity trusts.--Paragraph
(1) of section 664(d) is amended by striking ``and'' at
the end of subparagraph (B), by striking the period at
the end of subparagraph (C), and by adding at the end
the following new subparagraph:
``(D) the value (determined under section
7520) of such remainder interest is at least 10
percent of the initial net fair market value of
all property placed in the trust.''
(2) Charitable remainder unitrusts.--Paragraph (2)
of section 664(d) is amended by striking ``and'' at the
end of subparagraph (B), by striking the period at the
end of subparagraph (C), and by adding at the end the
following new subparagraph:
``(D) with respect to each contribution of
property to the trust, the value (determined
under section 7520) of such remainder interest
in such property is at least 10 percent of the
net fair market value of such property as of
the date such property is contributed to the
trust.''.
(3) Void or reformed trust.--Paragraph (3) of
section 2055(e) is amended by adding at the end the
following new subparagraph:
``(J) Void or reformed trust in cases of
insufficient remainder interests.--In the case
of a trust that would qualify (or could be
reformed to qualify pursuant to subparagraph
(B)) but for failure to satisfy the requirement
of paragraph (1)(D) or (2)(D) of section
664(d), such trust may be--
``(i) declared null and void ab
initio, or
``(ii) changed by reformation,
amendment, or otherwise to meet such
requirement by reducing the payout rate
or the duration (or both) of any
noncharitable beneficiary's interest to
the extent necessary to satisfy such
requirement,
pursuant to a proceeding that is commenced
within the period required in subparagraph
(C)(iii). In a case described in clause (i), no
deduction shall be allowed under this title for
any transfer to the trust and any transactions
entered into by the trust prior to being
declared void shall be treated as entered into
by the transferor.''
(4) Severance of certain additional
contributions.--Subsection (d) of section 664
is amended by adding at the end the following
new paragraph:
``(4) Severance of certain additional
contributions.--If--
``(A) any contribution is made to a trust
which before the contribution is a charitable
remainder unitrust, and
``(B) such contribution would (but for this
paragraph) result in such trust ceasing to be a
charitable unitrust by reason of paragraph
(2)(D), such contribution shall be treated as a
transfer to a separate trust under regulations prescribed by the
Secretary.''
(5) Conforming amendment.--Section 2055(e)(3)(G) is
amended by inserting ``(or other proceeding pursuant to
subparagraph (J)'' after ``reformation''.
(6) Effective dates.--
(A) In general.--Except as otherwise
provided in this paragraph, the amendments made
by this subsection shall apply to transfers in
trust after July 28, 1997.
(B) Special rule for certain decedents.--
The amendments made by this subsection shall
not apply to transfers in trust under the terms
of a will (or other testamentary instrument)
executed on or before July 28, 1997, if the
decedent--
(i) dies before January 1, 1999,
without having republished the will (or
amended such instrument) by codicil or
otherwise, or
(ii) was on July 28, 1997, under a
mental disability to change the
disposition of his property and did not
regain his competence to dispose of
such property before the date of his
death.
SEC. 1090. EXPANDED SSA RECORDS FOR TAX ENFORCEMENT.
(a) Expansion of Coordinated Enforcement Efforts of IRS and
HHS Office of Child Support Enforcement.--
(1) State reporting of ssn of child.--Section
454A(e)(4)(D) of the Social Security Act (42 U.S.C.
654a(e)(4)(D)) is amended by striking ``the birth date
of any child'' and inserting ``the birth date and,
beginning not later than October 1, 1999, the social
security number, of any child''.
(2) Federal case registry of child support
orders.--Section 453(h) of such Act (42 U.S.C. 653(h))
is amended--
(A) in paragraph (2), by adding at the end
the following: ``Beginning not later than
October 1, 1999, the information referred to in
paragraph (1) shall include the names and
social security numbers of the children of such
individuals.''; and
(B) by adding at the end the following:
``(3) Administration of federal tax laws.--The
Secretary of the Treasury shall have access to the
information described in paragraph (2) for the purpose
of administering those sections of the Internal Revenue
Code of 1986 which grant tax benefits based on support
or residence of children.''.
(3) Coordination between secretaries.--The
Secretary of the Treasury and the Secretary of Health
and Human Services shall consult regarding the
implementation issues resulting from the amendments
made by this subsection, including interim deadlines
for States that may be able before October 1, 1999, to
provide the data required by such amendments. The
Secretaries shall report to Congress on the results of
such consultation.
(4) Effective date.--The amendments made by this
subsection shall take effect on October 1, 1998.
(b) Required Submission of SSN's on Applications.--
(1) In general.--Section 205(c)(2) of the Social
Security Act (42 U.S.C. 405(c)(2)) is amended--
(A) in subparagraph (B)(ii), by adding at
the end the following new sentence: ``With
respect to an application for a social security
account number for an individual who has not
attainedthe age of 18 before such application,
such evidence shall include the information described in subparagraph
(C)(ii).'',
(B) in the second sentence of subparagraph
(C)(ii), insert ``the Commissioner of Social
Security and'' after ``available to'', and
(C) by adding at the end the following new
subparagraph:
``(H) The Commissioner of Social Security shall share with
the Secretary of the Treasury the information obtained by the
Commissioner pursuant to the second sentence of subparagraph
(B)(ii) and to subparagraph (C)(ii) for the purpose of
administering those sections of the Internal Revenue Code of
1986 which grant tax benefits based on support or residence of
children.''.
(2) Effective dates.--
(A) The amendment made by paragraph (1)(A)
shall apply to applications made after the date
which is 180 days after the date of the
enactment of this Act.
(B) The amendments made by subparagraphs
(B) and (C) of paragraph (1) shall apply to
information obtained on, before, or after the
date of the enactment of this Act.
SEC. 1091. MODIFICATION OF ESTIMATED TAX SAFE HARBORS.
(a) In General.--Clause (i) of section 6654(d)(1)(C)
(relating to limitation on use of preceding year's tax) is
amended to read as follows:
``(i) In general.--If the adjusted
gross income shown on the return of the
individual for the preceding taxable
year beginning in any calendar year
exceeds $150,000, clause (ii) of
subparagraph (B) shall be applied by
substituting the applicable percentage
for `100 percent'. For purposes of the
preceding sentence, the applicable
percentage shall be determined in
accordance with the following table:
``If the preceding tax- The applicable
able year begins in: percentage is:
1998, 1999, or 2000....................................... 105
2001...................................................... 112
2002 or thereafter........................................ 110.
This clause shall not apply in the case
of a preceding taxable year beginning
in calendar year 1997.''.
(b) Effective Date.--The amendment made by this section
shall apply with respect to any installment payment for taxable
years beginning after December 31, 1997.
TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS
Subtitle A--General Provisions
SEC. 1101. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX CREDIT
LIMITATION.
(a) General Rule.--Section 904 (relating to limitations on
foreign tax credit) is amended by redesignating subsection (j)
as subsection (k) and by inserting after subsection (i) the
following new subsection:
``(j) Certain Individuals Exempt.--
``(1) In general.--In the case of an individual to
whom this subsection applies for any taxable year--
``(A) the limitation of subsection (a)
shall not apply,
``(B) no taxes paid or accrued by the
individual during such taxable year may be
deemed paid or accrued under subsection (c) in
any other taxable year, and
``(C) no taxes paid or accrued by the
individual during any other taxable year may be
deemed paid or accrued under subsection (c) in
such taxable year.
``(2) Individuals to whom subsection applies.--This
subsection shall apply to an individual for any taxable
year if--
``(A) the entire amount of such
individual's gross income for the taxable year
from sources without the United States consists
of qualified passive income,
``(B) the amount of the creditable foreign
taxes paid or accrued by the individual during
the taxable year does not exceed $300 ($600 in
the case of a joint return), and
``(C) such individual elects to have this
subsection apply for the taxable year.
``(3) Definitions.--For purposes of this
subsection--
``(A) Qualified passive income.--The term
`qualified passive income' means any item of
gross income if--
``(i) such item of income is
passive income (as defined in
subsection (d)(2)(A) without regard to
clause (iii) thereof), and
``(ii) such item of income is shown
on a payee statement furnished to the
individual.
``(B) Creditable foreign taxes.--The term
`creditable foreign taxes' means any taxes for
which a credit is allowable under section 901;
except that such term shall not include any tax
unless such tax is shown on a payee statement
furnished to such individual.
``(C) Payee statement.--The term `payee
statement' has the meaning given to such term
by section 6724(d)(2).
``(D) Estates and trusts not eligible.--
This subsection shall not apply to any estate
or trust.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1997.
SEC. 1102. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.
(a) Accrued Taxes Translated by Using Average Rate for Year
to Which Taxes Relate.--
(1) In general.--Subsection (a) of section 986
(relating to translation of foreign taxes) is amended
to read as follows:
``(a) Foreign Income Taxes.--
``(1) Translation of accrued taxes.--
``(A) In general.--For purposes of
determining the amount of the foreign tax
credit, in the case of a taxpayer who takes
foreign income taxes into account when accrued,
the amount of any foreign income taxes (and any
adjustment thereto) shall be translated into
dollars by using the average exchange rate for
the taxable year to which such taxes relate.
``(B) Exception for certain taxes.--
Subparagraph (A) shall not apply to any foreign
income taxes--
``(i) paid after the date 2 years
after the close of the taxable year to
which such taxes relate, or
``(ii) paid before the beginning of
the taxable year to which such taxes
relate.
``(C) Exception for inflationary
currencies.--Subparagraph (A) shall not apply
to any foreign income taxes the liability for
which is denominated in any inflationary
currency (as determined under regulations).
``(D) Cross reference.--
``For adjustments where tax is not paid within 2 years, see
section 905(c).
``(2) Translation of taxes to which paragraph (1)
does not apply.--For purposes of determiningto the
amount of the foreign tax credit, in the case of any foreign income
taxes to which subparagraph (A) of paragraph (1) does not apply--
``(A) such taxes shall be translated into
dollars using the exchange rates as of the time
such taxes were paid to the foreign country or
possession of the United States, and
``(B) any adjustment to the amount of such
taxes shall be translated into dollars using--
``(i) except as provided in clause
(ii), the exchange rate as of the time
when such adjustment is paid to the
foreign country or possession, or
``(ii) in the case of any refund or
credit of foreign income taxes, using
the exchange rate as of the time of the
original payment of such foreign income
taxes.
``(3) Foreign income taxes.--For purposes of this
subsection, the term `foreign income taxes' means any
income, war profits, or excess profits taxes paid or
accrued to any foreign country or to any possession of
the United States.''.
(2) Adjustment when not paid within 2 years after
year to which taxes relate.--Subsection (c) of section
905 is amended to read as follows:
``(c) Adjustments to Accrued Taxes.--
``(1) In general.--If--
``(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
``(B) accrued taxes are not paid before the
date 2 years after the close of the taxable
year to which such taxes relate, or
``(C) any tax paid is refunded in whole or
in part,
the taxpayer shall notify the Secretary, who shall
redetermine the amount of the tax for the year or years
affected. The Secretary may prescribe adjustments to
the pools of post-1986 foreign income taxes and the
pools of post-1986 undistributed earnings under
sections 902 and 960 in lieu of the redetermination
under the preceding sentence.
``(2) Special rule for taxes not paid within 2
years.--
``(A) In general.--Except as provided in
subparagraph (B), in making the redetermination
under paragraph (1), no credit shall be allowed
for accrued taxes not paid before the
datereferred to in subparagraph (B) of paragraph (1).
``(B) Taxes subsequently paid.--Any such
taxes if subsequently paid--
``(i) shall be taken into account--
``(I) in the case of taxes
deemed paid under section 902
or section 960, for the taxable
year in which paid (and no
redetermination shall be made
under this section by reason of
such payment), and
``(II) in any other case,
for the taxable year to which
such taxes relate, and
``(ii) shall be translated as
provided in section 986(a)(2)(A).
``(3) Adjustments.--The amount of tax (if any) due
on any redetermination under paragraph (1) shall be
paid by the taxpayer on notice and demand by the
Secretary, and the amount of tax overpaid (if any)
shall be credited or refunded to the taxpayer in
accordance with subchapter B of chapter 66 (section
6511 et seq.).
``(4) Bond requirements.--In the case of any tax
accrued but not paid, the Secretary, as a condition
precedent to the allowance of the credit provided in
this subpart, may require the taxpayer to give a bond,
with sureties satisfactory to and approved by the
Secretary, in such sum as the Secretary may require,
conditioned on the payment by the taxpayer of any
amount of tax found due on any such redetermination.
Any such bond shall contain such further conditions as
the Secretary may require.
``(5) Other special rules.--In any redetermination
under paragraph (1) by the Secretary of the amount of
tax due from the taxpayer for the year or years
affected by a refund, the amount of the taxes refunded
for which credit has been allowed under this section
shall be reduced by the amount of any tax described in
section 901 imposed by the foreign country or
possession of the United States with respect to such
refund; but no credit under this subpart, or deduction
under section 164, shall be allowed for any taxable
year with respect to any such tax imposed on the
refund. No interest shall be assessed or collected on
any amount of tax due on any redetermination by the
Secretary, resulting from a refund to the taxpayer, for
any period before the receipt of such refund, except to
the extent interest was paid by the foreign country or
possession of the United States on such refund for such
period.''.
(b) Authority To Use Average Rates.--
(1) In general.--Subsection (a) of section 986 (as
amended by subsection (a)) is amended by redesignating
paragraph (3) as paragraph (4) and inserting after
paragraph (2) the following new paragraph:
``(3) Authority to permit use of average rates.--To
the extent prescribed in regulations, the average
exchange rate for the period (specified in such
regulations) during which the taxes or adjustment is
paid may be used instead of the exchange rate as of the
time of such payment.''.
(2) Determination of average rates.--Subsection (c)
of section 989 is amended by striking ``and'' at the
end of paragraph (4), by striking the period at the end
of paragraph (5) and inserting ``, and'', and by adding
at the end thereof the following new paragraph:
``(6) setting forth procedures for determining the
average exchange rate for any period.''.
(3) Conforming amendments.--Subsection (b) of
section 989 is amended by striking ``weighted'' each
place it appears.
(c) Effective Dates.--
(1) In general.--The amendments made by subsections
(a)(1) and (b) shall apply to taxes paid or accrued in
taxable years beginning after December 31, 1997.
(2) Subsection (a)(2).--The amendment made by
subsection (a)(2) shall apply to taxes which relate to
taxable years beginning after December 31, 1997.
SEC. 1103. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION FOR
ALTERNATIVE MINIMUM TAX.
(a) General Rule.--Subsection (a) of section 59 (relating
to alternative minimum tax foreign tax credit) is amended by
adding at the end thereof the following new paragraph:
``(3) Election to use simplified section 904
limitation.--
``(A) In general.--In determining the
alternative minimum tax foreign tax credit for
any taxable year to which an election under
this paragraph applies--
``(i) subparagraph (B) of paragraph
(1) shall not apply, and
``(ii) the limitation of section
904 shall be based on the proportion
which--
``(I) the taxpayer's
taxable income (as determined
for purposes of the regular
tax) from sources without the
United States (but not in
excess of the taxpayer's entire
alternative minimum taxable
income), bears to
``(II) the taxpayer's
entire alternative minimum
taxable income for the taxable
year.
``(B) Election.--
``(i) In general.--An election
under this paragraph may be made only
for the taxpayer's first taxable year
which begins after December 31, 1997,
and for which the taxpayer claims an
alternative minimum tax foreign tax
credit.
``(ii) Election revocable only with
consent.--An election under this
paragraph, once made, shall apply to
the taxable year for which made and all
subsequent taxable years unless revoked
with the consent of the Secretary.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1104. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS UNDER
FOREIGN CURRENCY RULES.
(a) General Rule.--Subsection (e) of section 988 (relating
to application to individuals) is amended to read as follows:
``(e) Application to Individuals.--
``(1) In general.--The preceding provisions of this
section shall not apply to any section 988 transaction
entered into by an individual which is a personal
transaction.
``(2) Exclusion for certain personal
transactions.--If--
``(A) nonfunctional currency is disposed of
by an individual in any transaction, and
``(B) such transaction is a personal
transaction,
no gain shall be recognized for purposes of this
subtitle by reason of changes in exchange rates after
such currency was acquired by such individual and
before such disposition. The preceding sentence shall
not apply if the gain which would otherwise be
recognized on the transaction exceeds $200.
``(3) Personal transactions.--For purposes of this
subsection, the term `personal transaction' means any
transaction entered into by an individual, except that
such term shall not include any transaction to the
extent that expenses properly allocable to such
transaction meet the requirements of--
``(A) section 162 (other than traveling
expenses described in subsection (a)(2)
thereof), or
``(B) section 212 (other than that part of
section 212 dealing with expenses incurred in
connection with taxes).''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1105. FOREIGN TAX CREDIT TREATMENT OF DIVIDENDS FROM NONCONTROLLED
SECTION 902 CORPORATIONS.
(a) Separate Basket Only To Apply to Pre-2003 Earnings.--
(1) In general.--Subparagraph (E) of section
904(d)(1) is amended to read as follows:
``(E) in the case of a corporation,
dividends from noncontrolled section 902
corporations out of earnings and profits
accumulated in taxable years beginning before
January 1, 2003,''.
(2) Aggregation of non-pfics.--Subparagraph (E) of
section 904(d)(2) (relating to noncontrolled section
902 corporations) is amended by adding at the end the
following new clause:
``(iv) All non-pfics treated as
one.--All noncontrolled section 902
corporations which are not passive
foreign investment companies (as
defined in section 1297) shall be
treated as one noncontrolled section
902 corporation for purposes of
paragraph (1).''.
(3) Conforming amendments.--Subparagraphs
(C)(iii)(II) and (D) of section 904(d)(2) are each
amended by inserting ``out of earnings and profits
accumulated in taxable years beginning before January
1, 2003'' after ``corporation''.
(b) Application of Look-Thru Rules to Dividends of
Noncontrolled Section 902 Corporations Attributable to Post-
2002 Earnings.--Section 904(d) is amended by redesignating
paragraphs (4) and (5) as paragraphs (5) and (6), respectively,
and by inserting after paragraph (3) the following new
paragraph:
``(4) Look-thru applies to dividends from
noncontrolled section 902 corporations.--
``(A) In general.--For purposes of this
subsection, any applicable dividend shall be
treated as income in a separate category in
proportion to the ratio of--
``(i) the portion of the earnings
and profits described in subparagraph
(B)(ii) attributable to income in such
category, to
``(ii) the total amount of such
earnings and profits.
``(B) Applicable dividend.--For purposes of
subparagraph (A), the term `applicable
dividend' means any dividend--
``(i) from a noncontrolled section
902 corporation with respect to the
taxpayer, and
``(ii) paid out of earnings and
profits accumulated in taxable years
beginning after December 31, 2002.
``(C) Special rules.--
``(i) In general.--Rules similar to
the rules of paragraph (3)(F) shall
apply for purposes of this paragraph.
``(ii) Earnings and profits.--For
purposes of this paragraph and
paragraph (1)(E)--
``(I) In general.--The
rules of section 316 shall
apply.
``(II) Regulations.--The
Secretary may prescribe
regulations regarding the
treatment of distributions out
of earnings and profits for
periods prior to the taxpayer's
acquisition of such stock.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
Subtitle B--Treatment of Controlled Foreign Corporations
SEC. 1111. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN
CORPORATIONS TREATED AS DIVIDENDS.
(a) General Rule.--Section 964 (relating to miscellaneous
provisions) is amended by adding at the end thereof the
following new subsection:
``(e) Gain on Certain Stock Sales by Controlled Foreign
Corporations Treated as Dividends.--
``(1) In general.--If a controlled foreign
corporation sells or exchanges stock in any other
foreign corporation, gain recognized on such sale or
exchange shall be included in the gross income of such
controlled foreign corporation as a dividend to the
same extent that it would have been so included under
section 1248(a) if such controlled foreign corporation
were a United States person. For purposes of
determining the amount which would have been so
includible, the determination of whether such other
foreign corporation was a controlled foreign
corporation shall be made without regard to the
preceding sentence.
``(2) Same country exception not applicable.--
Clause (i) of section 954(c)(3)(A) shall not apply to
any amount treated as a dividend by reason of paragraph
(1).
``(3) Clarification of deemed sales.--For purposes
of this subsection, a controlled foreign corporation
shall be treated as having sold or exchanged any stock
if, under any provision of this subtitle, such
controlled foreign corporation is treated as having
gain from the sale or exchange of such stock.''.
(b) Amendment of Section 904(d).--Clause (i) of section
904(d)(2)(E) is amended by striking ``and except as provided in
regulations, the taxpayer was a United States shareholder in
such corporation''.
(c) Effective Dates.--
(1) The amendment made by subsection (a) shall
apply to gain recognized on transactions occurring
after the date of the enactment of this Act.
(2) The amendment made by subsection (b) shall
apply to distributions after the date of the enactment
of this Act.
SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F.
(a) Section 1248 Gain Taken Into Account in Determining Pro
Rata Share.--
(1) In general.--Paragraph (2) of section 951(a)
(defining pro rata share of subpart F income) is
amended by adding at the end thereof the following new
sentence: ``For purposes of subparagraph (B), any gain
included in the gross income of any person as a
dividend under section 1248 shall be treated as a
distribution received by such person with respect to
the stock involved.''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
(b) Basis Adjustments in Stock Held by Foreign
Corporation.--
(1) In general.--Section 961 (relating to
adjustments to basis of stock in controlled foreign
corporations and of other property) is amended by
adding at the end thereof the following new subsection:
``(c) Basis Adjustments in Stock Held by Foreign
Corporation.--Under regulations prescribed by the Secretary, if
a United States shareholder is treated under section 958(a)(2)
as owning any stock in a controlled foreign corporation which
is actually owned by another controlled foreign corporation,
adjustments similar to the adjustments provided by subsections
(a) and (b) shall be made to the basis of such stock in the
hands of such other controlled foreign corporation, but only
for the purposes of determining the amount included under
section 951 in the gross income of such United States
shareholder (or any other United States shareholder who
acquires from any person any portion of the interest of such
United States shareholder by reason of which such shareholder
was treated as owning such stock, but only to the extent of
such portion, and subject to such proof of identity of such
interest as the Secretary may prescribe by regulations).''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply for purposes of determining
inclusions for taxable years of United States
shareholders beginning after December 31, 1997.
(c) Clarification of Treatment of Branch Tax Exemptions or
Reductions.--
(1) In general.--Subsection (b) of section 952 is
amended by adding at the end thereof the following new
sentence: ``For purposes of this subsection, any
exemption (or reduction) with respect to the tax
imposed by section 884 shall not be taken into
account.''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply to taxable years beginning
after December 31, 1986.
SEC. 1113. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN LOWER TIER
COMPANIES.
(a) Section 902 Credit.--
(1) In general.--Subsection (b) of section 902
(relating to deemed taxes increased in case of certain
2nd and 3rd tier foreign corporations) is amended to
read as follows:
``(b) Deemed Taxes Increased in Case of Certain Lower Tier
Corporations.--
``(1) In general.--If--
``(A) any foreign corporation is a member
of a qualified group, and
``(B) such foreign corporation owns 10
percent or more of the voting stock of another
member of such group from which it receives
dividends in any taxable year,
such foreign corporation shall be deemed to have paid
the same proportion of such other member's post-1986
foreign income taxes as would be determined under
subsection (a) if such foreign corporation were a
domestic corporation.
``(2) Qualified group.--For purposes of paragraph
(1), the term `qualified group' means--
``(A) the foreign corporation described in
subsection (a), and
``(B) any other foreign corporation if--
``(i) the domestic corporation owns
at least 5 percent of the voting stock
of such other foreign corporation
indirectly through a chain of foreign
corporations connected through stock
ownership of at least 10 percent of
their voting stock,
``(ii) the foreign corporation
described in subsection (a) is the
first tier corporation in such chain,
and
``(iii) such other corporation is
not below the sixth tier in such chain.
The term `qualified group' shall not include any
foreign corporation below the third tier in the chain
referred to in clause (i) unless such foreign
corporation is a controlled foreign corporation (as
defined in section 957) and the domestic corporation is
a United States shareholder (as defined in section
951(b)) in such foreign corporation. Paragraph (1)
shall apply to those taxes paid by a member of the
qualified group below the third tier only with respect
to periods during which it was a controlled foreign
corporation.''.
(2) Conforming amendments.--
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ``or'' at the end of
clause (i) and by striking clauses (ii) and
(iii) and inserting the following new clause:
``(ii) the requirements of
subsection (b)(2) are met with respect
to such foreign corporation.''.
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ``3rd foreign
corporation'' and inserting ``sixth tier
foreign corporation''.
(C) The heading for paragraph (3) of
section 902(c) is amended by striking ``where
domestic corporation acquires 10 percent of
foreign corporation'' and inserting ``where
foreign corporation first qualifies''.
(D) Paragraph (3) of section 902(c) is
amended by striking ``ownership'' each place it
appears.
(b) Section 960 Credit.--Paragraph (1) of section 960(a)
(relating to special rules for foreign tax credits) is amended
to read as follows:
``(1) Deemed paid credit.--For purposes of subpart
A of this part, if there is included under section
951(a) in the gross income of a domestic corporation
any amount attributable to earnings and profits of a
foreign corporation which is a member of a qualified
group (as defined in section 902(b)) with respect to
the domestic corporation, then, except to the extent
provided in regulations, section 902 shall be applied
as if the amount so included were a dividend paid by
such foreign corporation (determined by applying
section 902(c) in accordance with section
904(d)(3)(B)).''.
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to taxes of foreign corporationsfor
taxable years of such corporations beginning after the date of
enactment of this Act.
(2) Special rule.--In the case of any chain of
foreign corporations described in clauses (i) and (ii)
of section 902(b)(2)(B) of the Internal Revenue Code of
1986 (as amended by this section), no liquidation,
reorganization, or similar transaction in a taxable
year beginning after the date of the enactment of this
Act shall have the effect of permitting taxes to be
taken into account under section 902 of the Internal
Revenue Code of 1986 which could not have been taken
into account under such section but for such
transaction.
Subtitle C--Treatment of Passive Foreign Investment Companies
SEC. 1121. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN
CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.
Section 1296 is amended by adding at the end the following
new subsection:
``(e) Exception for United States Shareholders of
Controlled Foreign Corporations.--
``(1) In general.--For purposes of this part, a
corporation shall not be treated with respect to a
shareholder as a passive foreign investment company
during the qualified portion of such shareholder's
holding period with respect to stock in such
corporation.
``(2) Qualified portion.--For purposes of this
subsection, the term `qualified portion' means the
portion of the shareholder's holding period--
``(A) which is after December 31, 1997, and
``(B) during which the shareholder is a
United States shareholder (as defined in
section 951(b)) of the corporation and the
corporation is a controlled foreign
corporation.
``(3) New holding period if qualified portion
ends.--
``(A) In general.--Except as provided in
subparagraph (B), if the qualified portion of a
shareholder's holding period with respect to
any stock ends after December 31, 1997, solely
for purposes of this part, the shareholder's
holding period with respect to such stock shall
be treated as beginning as of the first day
following such period.
``(B) Exception.--Subparagraph (A) shall
not apply if such stock was, with respect to
such shareholder, stock in a passive
foreigninvestment company at any time before the qualified portion of
the shareholder's holding period with respect to such stock and no
election under section 1298(b)(1) is made.''.
SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN PASSIVE
FOREIGN INVESTMENT COMPANY.
(a) In General.--Part VI of subchapter P of chapter 1 is
amended by redesignating subpart C as subpart D, by
redesignating sections 1296 and 1297 as sections 1297 and 1298,
respectively, and by inserting after subpart B the following
new subpart:
``Subpart C--Election of Mark to Market For Marketable Stock
``Sec. 1296. Election of mark to market for marketable stock.
``SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.
``(a) General Rule.--In the case of marketable stock in a
passive foreign investment company which is owned (or treated
under subsection (g) as owned) by a United States person at the
close of any taxable year of such person, at the election of
such person--
``(1) If the fair market value of such stock as of
the close of such taxable year exceeds its adjusted
basis, such United States person shall include in gross
income for such taxable year an amount equal to the
amount of such excess.
``(2) If the adjusted basis of such stock exceeds
the fair market value of such stock as of the close of
such taxable year, such United States person shall be
allowed a deduction for such taxable year equal to the
lesser of--
``(A) the amount of such excess, or
``(B) the unreversed inclusions with
respect to such stock.
``(b) Basis Adjustments.--
``(1) In general.--The adjusted basis of stock in a
passive foreign investment company--
``(A) shall be increased by the amount
included in the gross income of the United
States person under subsection (a)(1) with
respect to such stock, and
``(B) shall be decreased by the amount
allowed as a deduction to the United States
person under subsection (a)(2) with respect to
such stock.
``(2) Special rule for stock constructively
owned.--In the case of stock in a passive foreign
investment company which the United States person is
treated as owning under subsection (g)--
``(A) the adjustments under paragraph (1)
shall apply to such stock in the hands of the
person actually holding such stock but only for
purposes of determining the subsequent
treatment under this chapter of the United
States person with respect to such stock, and
``(B) similar adjustments shall be made to
the adjusted basis of the property by reason of
which the United States person is treated as
owning such stock.
``(c) Character and Source Rules.--
``(1) Ordinary treatment.--
``(A) Gain.--Any amount included in gross
income under subsection (a)(1), and any gain on
the sale or other disposition of marketable
stock in a passive foreign investment company
(with respect to which an election under this
section is in effect), shall be treated as
ordinary income.
``(B) Loss.--Any--
``(i) amount allowed as a deduction
under subsection (a)(2), and
``(ii) loss on the sale or other
disposition of marketable stock in a
passive foreign investment company
(with respect towhich an election under
this section is in effect) to the extent that the amount of such loss
does not exceed the unreversed inclusions with respect to such stock,
shall be treated as an ordinary loss. The
amount so treated shall be treated as a
deduction allowable in computing adjusted gross
income.
``(2) Source.--The source of any amount included in
gross income under subsection (a)(1) (or allowed as a
deduction under subsection (a)(2)) shall be determined
in the same manner as if such amount were gain or loss
(as the case may be) from the sale of stock in the
passive foreign investment company.
``(d) Unreversed Inclusions.--For purposes of this section,
the term `unreversed inclusions' means, with respect to any
stock in a passive foreign investment company, the excess (if
any) of--
``(1) the amount included in gross income of the
taxpayer under subsection (a)(1) with respect to such
stock for prior taxable years, over
``(2) the amount allowed as a deduction under
subsection (a)(2) with respect to such stock for prior
taxable years.
The amount referred to in paragraph (1) shall include any
amount which would have been included in gross income under
subsection (a)(1) with respect to such stock for any prior
taxable year but for section 1291.
``(e) Marketable Stock.--For purposes of this section--
``(1) In general.--The term `marketable stock'
means--
``(A) any stock which is regularly traded
on--
``(i) a national securities
exchange which is registered with the
Securities and Exchange Commission or
the national market system established
pursuant to section 11A of the
Securities and Exchange Act of 1934, or
``(ii) any exchange or other market
which the Secretary determines has
rules adequate to carry out the
purposes of this part,
``(B) to the extent provided in
regulations, stock in any foreign corporation
which is comparable to a regulated investment
company and which offers for sale or has
outstanding anystock of which it is the issuer
and which is redeemable at its net asset value, and
``(C) to the extent provided in
regulations, any option on stock described in
subparagraph (A) or (B).
``(2) Special rule for regulated investment
companies.--In the case of any regulated investment
company which is offering for sale or has outstanding
any stock of which it is the issuer and which is
redeemable at its net asset value, all stock in a
passive foreign investment company which it owns
directly or indirectly shall be treated as marketable
stock for purposes of this section. Except as provided
in regulations, similar treatment as marketable stock
shall apply in the case of any other regulated
investment company which publishes net asset valuations
at least annually.
``(f) Treatment of Controlled Foreign Corporations Which
are Shareholders in Passive Foreign Investment Companies.--In
the case of a foreign corporation which is a controlled foreign
corporation and which owns (or is treated under subsection (g)
as owning) stock in a passive foreign investment company--
``(1) this section (other than subsection (c)(2))
shall apply to such foreign corporation in the same
manner as if such corporation were a United States
person, and
``(2) for purposes of subpart F of part III of
subchapter N--
``(A) any amount included in gross income
under subsection (a)(1) shall be treated as
foreign personal holding company income
described in section 954(c)(1)(A), and
``(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a
deduction allocable to foreign personal holding
company income so described.
``(g) Stock Owned Through Certain Foreign Entities.--Except
as provided in regulations--
``(1) In general.--For purposes of this section,
stock owned, directly or indirectly, by or for a
foreign partnership or foreign trust or foreign estate
shall be considered as being owned proportionately by
its partners or beneficiaries. Stock considered to be
owned by a person by reason of the application of the
preceding sentence shall, for purposes of applying such
sentence, be treated as actually owned by such person.
``(2) Treatment of certain dispositions.--In any
case in which a United States person istreated as
owning stock in a passive foreign investment company by reason of
paragraph (1)--
``(A) any disposition by the United States
person or by any other person which results in
the United States person being treated as no
longer owning such stock, and
``(B) any disposition by the person owning
such stock,
shall be treated as a disposition by the United States
person of the stock in the passive foreign investment
company.
``(h) Coordination With Section 851(b).--For purposes of
paragraphs (2) and (3) of section 851(b), any amount included
in gross income under subsection (a) shall be treated as a
dividend.
``(i) Stock Acquired From a Decedent.--In the case of stock
of a passive foreign investment company which is acquired by
bequest, devise, or inheritance (or by the decedent's estate)
and with respect to which an election under this section was in
effect as of the date of the decedent's death, notwithstanding
section 1014, the basis of such stock in the hands of the
person so acquiring it shall be the adjusted basis of such
stock in the hands of the decedent immediately before his death
(or, if lesser, the basis which would have been determined
under section 1014 without regard to this subsection).
``(j) Coordination With Section 1291 for First Year of
Election.--
``(1) Taxpayers other than regulated investment
companies.--
``(A) In general.--If the taxpayer elects
the application of this section with respect to
any marketable stock in a corporation after the
beginning of the taxpayer's holding period in
such stock, and if the requirements of
subparagraph (B) are not satisfied, section
1291 shall apply to--
``(i) any distributions with
respect to, or disposition of, such
stock in the first taxable year of the
taxpayer for which such election is
made, and
``(ii) any amount which, but for
section 1291, would have been included
in gross income under subsection (a)
with respect to such stock for such
taxable year in the same manner as if
such amount were gain on the
disposition of such stock.
``(B) Requirements.--The requirements of
this subparagraph are met if, with respect
toeach of such corporation's taxable years for which such corporation
was a passive foreign investment company and which begin after December
31, 1986, and included any portion of the taxpayer's holding period in
such stock, such corporation was treated as a qualified electing fund
under this part with respect to the taxpayer.
``(2) Special rules for regulated investment
companies.--
``(A) In general.--If a regulated
investment company elects the application of
this section with respect to any marketable
stock in a corporation after the beginning of
the taxpayer's holding period in such stock,
then, with respect to such company's first
taxable year for which such company elects the
application of this section with respect to
such stock--
``(i) section 1291 shall not apply
to such stock with respect to any
distribution or disposition during, or
amount included in gross income under
this section for, such first taxable
year, but
``(ii) such regulated investment
company's tax under this chapter for
such first taxable year shall be
increased by the aggregate amount of
interest which would have been
determined under section 1291(c)(3) if
section 1291 were applied without
regard to this subparagraph.
Clause (ii) shall not apply if for the
preceding taxable year the company elected to
mark to market the stock held by such company
as of the last day of such preceding taxable
year.
``(B) Disallowance of deduction.--No
deduction shall be allowed to any regulated
investment company for the increase in tax
under subparagraph (A)(ii).
``(k) Election.--This section shall apply to marketable
stock in a passive foreign investment company which is held by
a United States person only if such person elects to apply this
section with respect to such stock. Such an election shall
apply to the taxable year for which made and all subsequent
taxable years unless--
``(1) such stock ceases to be marketable stock, or
``(2) the Secretary consents to the revocation of
such election.
``(l) Transition Rule for Individuals Becoming Subject to
United States Tax.--If any individual becomes a United States
person in a taxable year beginning after December 31, 1997,
solely for purposes of this section, the adjusted basis (before
adjustments under subsection (b)) of any marketable stock in a
passive foreign investment company owned by such individual on
the first day of such taxable year shall be treated as being
the greater of its fair market value on such first day or its
adjusted basis on such first day.''.
(b) Coordination With Interest Charge, Etc.--
(1) Paragraph (1) of section 1291(d) is amended by
adding at the end the following new flush sentence:
``Except as provided in section 1296(j), this section
also shall not apply if an election under section
1296(k) is in effect for the taxpayer's taxable
year.''.
(2) The subsection heading for subsection (d) of
section 1291 is amended by striking ``Subpart B'' and
inserting ``Subparts B and C''.
(3) Subparagraph (A) of section 1291(a)(3) is
amended to read as follows:
``(A) Holding period.--The taxpayer's
holding period shall be determined under
section 1223; except that--
``(i) for purposes of applying this
section to an excess distribution, such
holding period shall be treated as
ending on the date of such
distribution, and
``(ii) if section 1296 applied to
such stock with respect to the taxpayer
for any prior taxable year, such
holding period shall be treated as
beginning on the first day of the first
taxable year beginning after the last
taxable year for which section 1296 so
applied.''.
(c) Treatment of Mark-to-Market Gain Under Section 4982.--
(1) Subsection (e) of section 4982 is amended by
adding at the end thereof the following new paragraph:
``(6) Treatment of gain recognized under section
1296.--For purposes of determining a regulated
investment company's ordinary income--
``(A) notwithstanding paragraph (1)(C),
section 1296 shall be applied as if such
company's taxable year ended on October 31, and
``(B) any ordinary gain or loss from an
actual disposition of stock in a passive
foreign investment company during the portion
of the calendar year after October 31 shall be
taken into account in determining such
regulated investment company's ordinary income
for the following calendar year.
In the case of a company making an election under
paragraph (4), the preceding sentence shall be applied
by substituting the last day of the company's taxable
year for October 31.''.
(2) Subsection (b) of section 852 is amended by
adding at the end thereof the following new paragraph:
``(10) Special rule for certain losses on stock in
passive foreign investment company.--To the extent
provided in regulations, the taxable income of a
regulated investment company (other than a company to
which an election under section 4982(e)(4) applies)
shall be computed without regard to any net reduction
in the value of any stock of a passive foreign
investment company with respect to which an election
under section 1296(k) is in effect occurring after
October 31 of the taxable year, and any such reduction
shall be treated as occurring on the first day of the
following taxable year.''.
(3) Subsection (c) of section 852 is amended by
inserting after ``October 31 of such year'' the
following: ``, without regard to any net reduction in
the value of any stock of a passive foreign investment
company with respect to which an election under section
1296(k) is in effect occurring after October 31 of such
year,''.
(d) Conforming Amendments.--
(1) Sections 532(b)(4) and 542(c)(10) are each
amended by striking ``section 1296'' and inserting
``section 1297''.
(2) Subsection (f) of section 551 is amended by
striking ``section 1297(b)(5)'' and inserting ``section
1298(b)(5)''.
(3) Subsections (a)(1) and (d) of section 1293 are
each amended by striking ``section 1297(a)'' and
inserting ``section 1298(a)''.
(4) Paragraph (3) of section 1297(b), as
redesignated by subsection (a), is hereby repealed.
(5) The table of sections for subpart D of part VI
of subchapter P of chapter 1, as redesignated by
subsection (a), is amended to read as follows:
``Sec. 1297. Passive foreign investment company.
``Sec. 1298. Special rules.''.
(6) The table of subparts for part VI of subchapter
P of chapter 1 is amended by striking the last item and
inserting the following new items:
``Subpart C. Election of mark to market for marketable stock.
``Subpart D. General provisions.''.
(e) Clarification of Gain Recognition Election.--The last
sentence of section 1298(b)(1), as so redesignated, is amended
by inserting ``(determined without regard to the preceding
sentence)'' after ``investment company''.
SEC. 1123. VALUATION OF ASSETS FOR PASSIVE FOREIGN INVESTMENT COMPANY
DETERMINATION.
(a) In General.--Section 1297, as redesignated by section
1122, is amended by adding at the end the following new
subsection:
``(e) Methods for Measuring Assets.--
``(1) Determination using value.--The determination
under subsection (a)(2) shall be made on the basis of
the value of the assets of a foreign corporation if--
``(A) such corporation is a publicly traded
corporation for the taxable year, or
``(B) paragraph (2) does not apply to such
corporation for the taxable year.
``(2) Determination using adjusted bases.--The
determination under subsection (a)(2) shall be based on
the adjusted bases (as determined for the purposes of
computing earnings and profits) of the assets of a
foreign corporation if such corporation is not
described in paragraph (1)(A) and such corporation--
``(A) is a controlled foreign corporation,
or
``(B) elects the application of this
paragraph.
An election under subparagraph (B), once made, may be
revoked only with the consent of the Secretary.
``(3) Publicly traded corporation.--For purposes of
this subsection, a foreign corporation shall be treated
as a publicly traded corporation if the stock in the
corporation is regularly traded on--
``(A) a national securities exchange which
is registered with the Securities and Exchange
Commission or the national market system
established pursuant to section 11A of the
Securities and Exchange Act of 1934, or
``(B) any exchange or other market which
the Secretary determines has rules adequate to
carry out the purposes of this subsection.''
(b) Conforming Amendments.--Section 1297(a), as
redesignated by section 1122, is amended--
(1) by striking ``(by value)'' and inserting ``(as
determined in accordance with subsection (e))'', and
(2) by striking the last two sentences.
SEC. 1124. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to--
(1) taxable years of United States persons
beginning after December 31, 1997, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities
SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN ENTITIES;
RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO FOREIGN
TRUSTS AND ESTATES.
(a) Repeal of Excise Tax.--Chapter 5 (relating to transfers
to avoid income tax) is hereby repealed.
(b) Recognition of Gain on Certain Transfers to Foreign
Trusts and Estates.--Subpart F of part I of subchapter J of
chapter 1 is amended by adding at the end the following new
section:
``SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN
TRUSTS AND ESTATES.
``(a) In General.--Except as provided in regulations, in
the case of any transfer of property by a United States person
to a foreign estate or trust, for purposes of this subtitle,
such transfer shall be treated as a sale or exchange for an
amount equal to the fair market value of the property
transferred, and the transferor shall recognize as gain the
excess of--
``(1) the fair market value of the property so
transferred, over
``(2) the adjusted basis (for purposes of
determining gain) of such property in the hands of the
transferor.
``(b) Exception.--Subsection (a) shall not apply to a
transfer to a trust by a United States person to the extent
that any person is treated as the owner of such trust under
section 671.
``(c) Treatment of Trusts Which Become Foreign Trusts.--If
a trust which is not a foreign trust becomes a foreign trust,
such trust shall be treated for purposes of this section as
having transferred, immediately before becoming a foreign
trust, all of its assets to a foreign trust.''.
(b) Other Anti-Avoidance Provisions Replacing Repealed
Excise Tax.--
(1) Gain recognition on exchanges involving foreign
persons.--Section 1035 is amended by redesignating
subsection (c) as subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Exchanges Involving Foreign Persons.--To the extent
provided in regulations, subsection (a) shall not apply to any
exchange having the effect of transferring property to any
person other than a United States person.''.
(2) Transfers to foreign corporations.--Section 367
is amended by adding at the end the following new
subsection:
``(f) Other Transfers.--To the extent provided in
regulations, if a United States person transfers property to a
foreign corporation as paid-in surplus or as a contribution to
capital (in a transaction not otherwise described in this
section), such transfer shall be treated as a sale or exchange
for an amount equal to the fair market value of the property
transferred, and the transferor shall recognize as gain the
excess of--
``(1) the fair market value of the property so
transferred, over
``(2) the adjusted basis (for purposes of
determining gain) of such property in the hands of the
transferor.''.
(3) Certain transfers to partnerships.--Section 721
is amended by adding at the end the following new
subsection:
``(c) Regulations Relating to Certain Transfers to
Partnerships.--The Secretary may provide by regulations that
subsection (a) shall not apply to gain realized on the transfer
of property to a partnership if such gain, when recognized,
will be includible in the gross income of a person other than a
United States person.''.
(4) Repeal of u.s. source treatment of deemed
royalties.--Subparagraph (C) of section 367(d)(2) is
amended to read as follows:
``(C) Amounts received treated as ordinary
income.--For purposes of this chapter, any
amount included in gross income by reason of
this subsection shall be treated as ordinary
income.''.
(5) Transfers of intangibles to partnerships.--
(A) Subsection (d) of section 367 is
amended by adding at the end the following new
paragraph:
``(3) Regulations relating to transfers of
intangibles to partnerships.--The Secretary may provide
by regulations that the rules of paragraph (2) also
apply to the transfer of intangible property by a
United States person to a partnership in circumstances
consistent with the purposes of this subsection.''.
(B) Section 721 is amended by adding at the
end the following new subsection:
``(d) Transfers of Intangibles.--
``For regulatory authority to treat intangibles transferred to
a partnership as sold, see section 367(d)(3).''.
(c) Technical and Conforming Amendments.--
(1) Subsection (h) of section 814 is amended by
striking ``or 1491''.
(2) Section 1057 (relating to election to treat
transfer to foreign trust, etc., as taxable exchange)
is hereby repealed.
(3) Section 6422 is amended by striking paragraph
(5) and by redesignating paragraphs (6) through (13) as
paragraphs (5) through (12), respectively.
(4) The table of chapters for subtitle A is amended
by striking the item relating to chapter 5.
(5) The table of sections for part IV of subchapter
O of chapter 1 is amended by striking the item relating
to section 1057.
(6) The table of sections for subpart F of part I
of subchapter J of chapter 1 is amended by adding at
the end the following new item:
``Sec. 684. Recognition of gain on certain transfers to certain
foreign trusts and estates.''.
(d) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
Subtitle E--Information Reporting
SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN REQUIREMENT TO
FOREIGN PARTNERSHIPS.
(a) In General.--Section 6031 (relating to return of
partnership income) is amended by adding at the end the
following new subsection:
``(e) Foreign Partnerships.--
``(1) Exception for foreign partnership.--Except as
provided in paragraph (2), the preceding provisions of
this section shall not apply to a foreign partnership.
``(2) Certain foreign partnerships required to file
return.--Except as provided in regulations prescribed
by the Secretary, this section shall apply to a foreign
partnership for any taxable year if for such year, such
partnership has--
``(A) gross income derived from sources
within the United States, or
``(B) gross income which is effectively
connected with the conduct of a trade or
business within the United States.
The Secretary may provide simplified filing procedures
for foreign partnerships to which this section
applies.''.
(b) Sanction for Failure by Foreign Partnership To Comply
With Section 6031 To Include Denial of Deductions.--Subsection
(f) of section 6231 is amended--
(1) by striking ``Losses and'' in the heading and
inserting ``Deductions, Losses, and'', and
(2) by striking ``loss or'' each place it appears
and inserting ``deduction, loss, or''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUBJECT TO INFORMATION
REPORTING COMPARABLE TO INFORMATION REPORTING FOR
CONTROLLED FOREIGN CORPORATIONS.
(a) In General.--So much of section 6038 (relating to
information with respect to certain foreign corporations) as
precedes paragraph (2) of subsection (a) is amended to read as
follows:
``SEC. 6038. INFORMATION REPORTING WITH RESPECT TO CERTAIN FOREIGN
CORPORATIONS AND PARTNERSHIPS.
``(a) Requirement.--
``(1) In general.--Every United States person shall
furnish, with respect to any foreign business entity
which such person controls, such information as the
Secretary may prescribe relating to--
``(A) the name, the principal place of
business, and the nature of business of such
entity, and the country under whose laws such
entity is incorporated (or organized in the
case of a partnership);
``(B) in the case of a foreign corporation,
its post-1986 undistributed earnings (as
defined in section 902(c));
``(C) a balance sheet for such entity
listing assets, liabilities, and capital;
``(D) transactions between such entity
and--
``(i) such person,
``(ii) any corporation or
partnership which such person controls,
and
``(iii) any United States person
owning, at the time the transaction
takes place--
``(I) in the case of a
foreign corporation, 10 percent
or more of the value of any
class of stock outstanding of
such corporation, and
``(II) in the case of a
foreign partnership, at least a
10-percent interest in such
partnership; and
``(E)(i) in the case of a foreign
corporation, a description of the various
classes of stock outstanding, and a list
showing the name and address of, and number of
shares held by, each United States person who
is a shareholder of record owning at any time
during the annual accounting period 5 percent
or more in value of any class of stock
outstanding of such foreign corporation, and
``(ii) information comparable to the
information described in clause (i) in the case
of a foreign partnership.
The Secretary may also require the furnishing of any
other information which is similar or related in nature
to that specified in the preceding sentence or which
the Secretary determines to be appropriate to carry out
the provisions of this title.''.
(b) Definitions.--
(1) In general.--Subsection (e) of section 6038
(relating to definitions) is amended--
(A) by redesignating paragraphs (1) and (2)
as paragraphs (2) and (4), respectively,
(B) by inserting before paragraph (2) (as
so redesignated) the following new paragraph:
``(1) Foreign business entity.--The term `foreign
business entity' means a foreign corporation and a
foreign partnership.'', and
(C) by inserting after paragraph (2) (as so
redesignated) the following new paragraph:
``(3) Partnership-related definitions.--
``(A) Control.--A person is in control of a
partnership if such person owns directly or
indirectly more than a 50 percent interest in
such partnership.
``(B) 50-percent interest.--For purposes of
subparagraph (A), a 50-percent interest in a
partnership is--
``(i) an interest equal to 50
percent of the capital interest, or 50
percent of the profits interest, in
such partnership, or
``(ii) to the extent provided in
regulations, an interest to which 50
percent of the deductions or losses of
such partnership are allocated.
For purposes of the preceding sentence, rules
similar to the rules of section 267(c) (other
than paragraph (3)) shall apply.
``(C) 10-percent interest.--A 10-percent
interest in a partnership is an interest which
would be described in subparagraph (B) if `10
percent' were substituted for `50 percent' each
place it appears.''.
(2) Clerical amendment.--The paragraph heading for
paragraph (2) of section 6038(e) (as so redesignated)
is amended by inserting ``of corporation'' after
``Control''.
(c) Modification of Sanctions on Partnerships and
Corporations for Failure To Furnish Information.--
(1) In general.--Subsection (b) of section 6038 is
amended--
(A) by striking ``$1,000'' each place it
appears and inserting ``$10,000'', and
(B) by striking ``$24,000'' in paragraph
(2) and inserting ``$50,000''.
(d) Reporting by 10-Percent Partners.--Subsection (a) of
section 6038 is amended by adding at the end the following new
paragraph:
``(5) Information required from 10-percent partner
of controlled foreign partnership.--In the case of a
foreign partnership which is controlled by United
States persons holding at least 10-percent interests
(but not by any one United States person), the
Secretary may require each United States person who
holds a 10-percent interest in such partnership to
furnish information relating to such partnership,
including information relating to such partner's
ownership interests in the partnership and allocations
to such partner of partnership items.''.
(e) Technical Amendments.--
(1) The following provisions of section 6038 are
each amended by striking ``foreign corporation'' each
place it appears and inserting ``foreign business
entity'':
(A) Paragraphs (2) and (3) of subsection
(a).
(B) Subsection (b).
(C) Subsection (c) other than paragraph
(1)(B) thereof.
(D) Subsection (d).
(E) Subsection (e)(4) (as redesignated by
subsection (b)).
(2) Subparagraph (B) of section 6038(c)(1) is
amended by inserting ``in the case of a foreign
business entity which is a foreign corporation,'' after
``(B)''.
(3) Paragraph (8) of section 318(b) is amended by
striking ``6038(d)(1)'' and inserting ``6038(d)(2)''.
(4) Paragraph (4) of section 901(k) is amended by
striking ``foreign corporation'' and inserting
``foreign corporation or partnership''.
(5) The table of sections for subpart A of part III
of subchapter A of chapter 61 is amended by striking
the item relating to section 6038 and inserting the
following new item:
``Sec. 6038. Information reporting with respect to certain
foreign corporations and partnerships.''.
(f) Effective Date.--The amendments made by this section
shall apply to annual accounting periods beginning after the
date of the enactment of this Act.
SEC. 1143. MODIFICATIONS RELATING TO RETURNS REQUIRED TO BE FILED BY
REASON OF CHANGES IN OWNERSHIP INTERESTS IN FOREIGN
PARTNERSHIP.
(a) No Return Required Unless Changes Involve 10-Percent
Interest in Partnership.--
(1) In general.--Subsection (a) of section 6046A
(relating to returns as to interests in foreign
partnerships) is amended by adding at the end the
following new sentence: ``Paragraphs (1) and (2) shall
apply to any acquisition or disposition only if the
United States person directly or indirectly holds at
least a 10-percent interest in such partnership either
before or after such acquisition or disposition, and
paragraph (3) shall apply to any change only if the
change is equivalent to at least a 10-percent interest
in such partnership.''.
(2) 10-percent interest.--Section 6046A is amended
by redesignating subsection (d) as subsection (e) and
by inserting after subsection (c) the following new
subsection:
``(d) 10-Percent Interest.--For purposes of subsection (a),
a 10-percent interest in a partnership is an interest described
in section 6038(e)(3)(C).''.
(b) Modification of Penalty on Failure to Report Changes in
Ownership Interests in Foreign Corporations and Partnerships.--
Subsection (a) of section 6679 (relating to failure to file
returns, etc., with respect to foreign corporations or foreign
partnerships) is amended to read as follows:
``(a) Civil Penalty.--
``(1) In general.--In addition to any criminal
penalty provided by law, any person required to file a
return under section 6035, 6046, or 6046A who fails to
file such return at the time provided in such section,
or who files a return which does not show the
information required pursuant to such section, shall
pay a penalty of $10,000, unless it is shown that such
failure is due to reasonable cause.
``(2) Increase in penalty where failure continues
after notification.--If any failure described in
paragraph (1) continues for more than 90 days after the
day on which the Secretary mails notice of such failure
to the United States person, such person shall pay a
penalty (in addition to the amount required under
paragraph (1)) of $10,000 for each 30-day period (or
fraction thereof) during which such failure continues
after the expiration of such 90-day period. The
increase in any penalty under this paragraph shall not
exceed $50,000.
``(3) Reduced penalty for returns relating to
foreign personal holding companies.--In the case of a
return required under section 6035, paragraph (1) shall
be applied by substituting `$1,000' for `$10,000', and
paragraph (2) shall not apply.''.
(c) Effective Date.--The amendments made by this section
shall apply to transfers and changes after the date of the
enactment of this Act.
SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PARTNERSHIPS SUBJECT TO
INFORMATION REPORTING COMPARABLE TO INFORMATION
REPORTING FOR SUCH TRANSFERS TO FOREIGN
CORPORATIONS.
(a) In General.--Paragraph (1) of section 6038B(a)
(relating to notice of certain transfers to foreign
corporations) is amended to read as follows:
``(1) transfers property to--
``(A) a foreign corporation in an exchange
described in section 332, 351, 354, 355, 356,
or 361, or
``(B) a foreign partnership in a
contribution described in section 721 or in any
other contribution described in regulations
prescribed by the Secretary,''.
(b) Exceptions.--Section 6038B is amended by redesignating
subsection (b) as subsection (c) and by inserting after
subsection (a) the following new subsection:
``(b) Exceptions for Certain Transfers to Foreign
Partnerships; Special Rule.--
``(1) Exceptions.--Subsection (a)(1)(B) shall apply
to a transfer by a United States person to a foreign
partnership only if--
``(A) the United States person holds
(immediately after the transfer) directly or
indirectly at least a 10-percent interest (as
defined in section 6046A(d)) in the
partnership, or
``(B) the value of the property transferred
(when added to the value of the property
transferred by such person or any related
person to such partnership or a related
partnership during the 12-month period ending
on the date of the transfer) exceeds $100,000.
For purposes of the preceding sentence, the value of
any transferred property is its fair market value at
the time of its transfer.
``(2) Special rule.--If by reason of an adjustment
under section 482 or otherwise, a contribution
described in subsection (a)(1) is deemed to have been
made, such contribution shall be treated for purposes
of this section as having been made not earlier than
the date specified by the Secretary.''.
(c) Modification of Penalty Applicable to Foreign
Corporations and Partnerships.--
(1) In general.--Paragraph (1) of section 6038B(b)
is amended by striking ``equal to'' and all that
follows and inserting ``equal to 10 percent of the fair
market value of the property at the time of the
exchange (and, in the case of a contribution described
in subsection (a)(1)(B), such person shall recognize
gain as if the contributed property had been sold for
such value at the time of such contribution).''.
(2) Limit on penalty.--Section 6038B(b) is amended
by adding at the end the following new paragraph:
``(3) Limit on penalty.--The penalty under
paragraph (1) with respect to any exchange shall not
exceed $100,000 unless the failure with respect to such
exchange was due to intentional disregard.''.
(d) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to transfers made after the date of
the enactment of this Act.
(2) Election of retroactive effect.--Section
1494(c) of the Internal Revenue Code of 1986 shall not
apply to any transfer after August 20, 1996, if all
applicable reporting requirements under section 6038B
of such Code (as amended by this section) are
satisfied. The Secretary of the Treasury or his
delegate may prescribe simplified reporting
requirements under the preceding sentence.
SEC. 1145. EXTENSION OF STATUTE OF LIMITATIONS FOR FOREIGN TRANSFERS.
(a) In General.--Paragraph (8) of section 6501(c) (relating
to failure to notify Secretary under section 6038B) is amended
to read as follows:
``(8) Failure to notify secretary of certain
foreign transfers.--In the case of any information
which is required to be reported to the Secretary under
section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the
time for assessment of any tax imposed by this title
with respect to any event or period to which such
information relates shall not expire before the date
which is 3 years after the date on which the Secretary
is furnished the information required to be reported
under such section.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to information the due date for the reporting of
which is after the date of the enactment of this Act.
SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO ORGANIZATION
OF FOREIGN CORPORATIONS AND ACQUISITIONS OF STOCK
IN SUCH CORPORATIONS.
(a) In General.--Subsection (a) of section 6046 (relating
to returns as to organization or reorganization of foreign
corporations and as to acquisitions of their stock) is amended
to read as follows:
``(a) Requirement of return.--
``(1) In general.--A return complying with the
requirements of subsection (b) shall be made by--
``(A) each United States citizen or
resident who becomes an officer or director of
a foreign corporation if a United States person
(as defined in section 7701(a)(30)) meets the
stock ownership requirements of paragraph (2)
with respect to such corporation,
``(B) each United States person--
``(i) who acquires stock which,
when added to any stock owned on the
date of such acquisition, meets the
stock ownership requirements of
paragraph (2) with respect to a foreign
corporation, or
``(ii) who acquires stock which,
without regard to stock owned on the
date of such acquisition, meets the
stock ownership requirements of
paragraph (2) with respect to a foreign
corporation,
``(C) each person (not described in
subparagraph (B)) who is treated as a United
States shareholder under section 953(c) with
respect to a foreign corporation, and
``(D) each person who becomes a United
States person while meeting the stock ownership
requirements of paragraph (2) with respect to
stock of a foreign corporation.
In the case of a foreign corporation with respect to
which any person is treated as a United States
shareholder under section 953(c), subparagraph (A)
shall be treated as including a reference to each
United States person who is an officer or director of
such corporation.
``(2) Stock ownership requirements.--A person meets
the stock ownership requirements of this paragraph with
respect to any corporation if such person owns 10
percent or more of--
``(A) the total combined voting power of
all classes of stock of such corporation
entitled to vote, or
``(B) the total value of the stock of such
corporation.''.
(b) Effective Date.--The amendment made by this section
shall take effect on January 1, 1998.
Subtitle F--Determination of Foreign or Domestic Status of Partnerships
SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF PARTNERSHIPS.
(a) In General.--Paragraph (4) of section 7701(a) is
amended by inserting before the period ``unless, in the case of
a partnership, the Secretary provides otherwise by
regulations''.
(b) Effective Date.--Any regulations issued with respect to
the amendment made by subsection (a) shall apply to
partnerships created or organized after the date determined
under section 7805(b) of the Internal Revenue Code of 1986
(without regard to paragraph (2) thereof) with respect to such
regulations.
Subtitle G--Other Simplification Provisions
SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.
(a) In General.--Paragraph (3) of section 1907(a) of the
Small Business Job Protection Act of 1996 is amended by adding
at the end the following flush sentence:
``To the extent prescribed in regulations by the
Secretary of the Treasury or his delegate, a trust
which was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under subpart E
of part I of subchapter J of chapter 1 of the Internal
Revenue Code of 1986), and which was treated as a
United States person on the day before the date of the
enactment of this Act may elect to continue to be
treated as a United States person notwithstanding
section 7701(a)(30)(E) of such Code.''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect as if included in the amendments made by
section 1907(a) of the Small Business Job Protection Act of
1996.
SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HARBOR REQUIREMENT THAT
PRINCIPAL OFFICE BE OUTSIDE THE UNITED STATES.
(a) In General.--The last sentence of clause (ii) of
section 864(b)(2)(A) (relating to stock or securities) is
amended by striking ``, or in the case of a corporation'' and
all that follows and inserting a period.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1997.
SEC. 1163. MISCELLANEOUS CLARIFICATIONS.
(a) Attribution of Deemed Paid Foreign Taxes to Prior
Distributions.--Subparagraph (B) of section 902(c)(2) is
amended by striking ``deemed paid with respect to'' and
inserting ``attributable to''.
(b) Financial Services Income Determined Without Regard to
High-Taxed Income.--Subclause (II) of section 904(d)(2)(C)(i)
is amended by striking ``subclause (I)'' and inserting
``subclauses (I) and (III)''.
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
Subtitle H--Other Provisions
SEC. 1171. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT PROPERTY.
(a) In General.--Subparagraph (B) of section 927(a)(2)
(relating to property excluded from eligibility as FSC export
property) is amended by inserting ``, and other than computer
software (whether or not patented)'' before ``, for commercial
or home use''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to gross receipts attributable to periods after
December 31, 1997, in taxable years ending after such date.
SEC. 1172. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 EXCLUSION.
(a) General Rule.--Paragraph (2) of section 911(b) is
amended by--
(1) by striking ``of $70,000'' in subparagraph (A)
and inserting ``equal to the exclusion amount for the
calendar year in which such taxable year begins'', and
(2) by adding at the end the following new
subparagraph:
``(D) Exclusion amount.--
``(i) In general.--The exclusion
amount for any calendar year is the
exclusion amount determined in
accordance with the following table (as
adjusted by clause (ii)):
The exclusion
``For calendar year-- amount is--
1998...................................................... $72,000
1999...................................................... 74,000
2000...................................................... 76,000
2001...................................................... 78,000
2002 and thereafter....................................... 80,000.
``(ii) Inflation adjustment.--In
the case of any taxable year beginning
in a calendar year after 2007, the
$80,000 amount in clause (i) shall be
increased by an amount equal to the
product of--
``(I) such dollar amount,
and
``(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting `2006' for
`1992' in subparagraph (B)
thereof.
If any increase determined under the
preceding sentence is not a multiple of
$100, such increase shall be rounded to
the next lowest multiple of $100.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1173. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS
ACQUIRED BY DEALERS IN ORDINARY COURSE OF TRADE OR
BUSINESS.
(a) In General.--Section 956(c)(2) is amended by striking
``and'' at the end of subparagraph (H), by striking the period
at the end of subparagraph (I) and inserting a semicolon, and
by adding at the end the following new subparagraphs:
``(J) deposits of cash or securities made
or received on commercial terms in the ordinary
course of a United States or foreign person's
business as a dealer in securities or in
commodities, but only to the extent such
deposits are made or received as collateral or
margin for (i) a securities loan, notional
principal contract, options contract, forward
contract, or futures contract, or (ii) any
other financial transaction in which the
Secretary determines that it is customary to
post collateral or margin; and
``(K) an obligation of a United States
person to the extent the principal amount of
the obligation does not exceed the fair market
value of readily marketable securities sold or
purchased pursuant to a sale and repurchase
agreement or otherwise posted or received as
collateral for the obligation in the ordinary
course of its business by a United States or
foreign person which is a dealer in securities
or commodities.
For purposes of subparagraphs (J) and (K), the term
`dealer in securities' has the meaning given such term
by section 475(c)(1), and the term `dealer in
commodities' has the meaning given such term by section
475(e), except that such term shall include a futures
commission merchant.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years of foreign corporations beginning
after December 31, 1997, and to taxable years of United States
shareholders with or within which such taxable years of foreign
corporations end.
SEC. 1174. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL
TRANSPORTATION SERVICES.
(a) Sourcing Rules.--
(1) In general.--Section 861(a)(3) is amended by
adding at the end the following new flush sentence:
``In addition, except for purposes of sections 79 and
105 and subchapter D, compensation for labor or
services performed in the United States shall not be
deemed to be income from sources within the
UnitedStates if the labor or services are performed by a nonresident
alien individual in connection with the individual's temporary presence
in the United States as a regular member of the crew of a foreign
vessel engaged in transportation between the United States and a
foreign country or a possession of the United States.''.
(2) Transportation income.--Subparagraph (B) of
section 863(c)(2) is amended by adding at the end the
following flush sentence:
``In the case of transportation income derived
from, or in connection with, a vessel, this
subparagraph shall only apply if the taxpayer
is a citizen or resident alien.''.
(b) Presence in United States.--
(1) In general.--Paragraph (7) of section 7701(b)
is amended by adding at the end the following new
subparagraph:
``(D) Crew members temporarily present.--An
individual who is temporarily present in the
United States on any day as a regular member of
the crew of a foreign vessel engaged in
transportation between the United States and a
foreign country or a possession of the United
States shall not be treated as present in the
United States on such day unless such
individual otherwise engages in any trade or
business in the United States on such day.''.
(2) Conforming amendment.--Subparagraph (A) of
section 7701(b)(7) is amended by striking ``or (C)''
and inserting ``, (C), or (D)''.
(c) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to remuneration for services
performed in taxable years beginning after December 31,
1997.
(2) Presence.--The amendment made by subsection (b)
shall apply to taxable years beginning after December
31, 1997.
SEC. 1175. EXEMPTION FOR ACTIVE FINANCING INCOME.
(a) Exemption From Foreign Personal Holding Company
Income.--Section 954 is amended by adding at the end the
following new subsection:
``(h) Special Rule for Income Derived in the Active Conduct
of Banking, Financing, or Similar Businesses.--
``(1) In general.--For purposes of subsection
(c)(1), foreign personal holding company income shall
not include income which is--
``(A) derived in the active conduct by a
controlled foreign corporation of a banking,
financing, or similar business, but only if the
corporation is predominantly engaged in the
active conduct of such business,
``(B) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from the
investments made by a qualifying insurance
company of its reserves or of 80 percent of its
unearned premiums (as both are determined in
the manner prescribed under paragraph (4)), or
``(C) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from investments
made by a qualifying insurance company of an
amount of its assets equal to--
``(i) in the case of contracts
regulated in the country in which sold
as property, casualty, or health
insurance contracts, one-third of its
premiums earned on such insurance
contracts during the taxable year (as
defined in section 832(b)(4)), and
``(ii) in the case of contracts
regulated in the country in which sold
as life insurance or annuity contracts,
the greater of--
``(I) 10 percent of the
reserves described in
subparagraph (B) for such
contracts, or
``(II) in the case of a
qualifying insurance company
which is a start-up company,
$10,000,000.
``(2) Principles for determining applicable
income.--
``(A) Banking and financing income.--The
determination as to whether income is described
in paragraph (1)(A) shall be made--
``(i) except as provided in clause
(ii), in accordance with the applicable
principles of section 904(d)(2)(C)(ii),
except that such income shall include
income from all leases entered into in
the ordinary course of the active
conduct of a banking, financing, or
similar business, and
``(ii) in the case of a corporation
described in paragraph (3)(B), in
accordance with the applicable
principles of section 1296(b) (as in
effect on the day before theenactment
of the Taxpayer Relief Act of 1997) for determining what is not passive
income.
``(B) Insurance income.--Under rules
prescribed by the Secretary, for purposes of
paragraphs (1) (B) and (C)--
``(i) in the case of contracts
which are separate account-type
contracts (including variable contracts
not meeting the requirements of section
817), only income specifically
allocable to such contracts shall be
taken into account, and
``(ii) in the case of other
contracts, income not allocable under
clause (i) shall be allocated ratably
among such contracts.
``(C) Look-thru rules.--The Secretary shall
prescribe regulations consistent with the
principles of section 904(d)(3) which provide
that dividends, interest, income equivalent to
interest, rents, or royalties received or
accrued from a related person (within the
meaning of subsection (d)(3)) shall be subject
to look-thru treatment for purposes of this
subsection.
``(3) Predominantly engaged.--For purposes of
paragraph (1)(A), a corporation shall be deemed
predominantly engaged in the active conduct of a
banking, financing, or similar business only if--
``(A) more than 70 percent of its gross
income is derived from such business from
transactions with persons which are not related
persons (as defined in subsection (d)(3)) and
which are located within the country under the
laws of which the controlled foreign
corporation is created or organized, or
``(B) the corporation is--
``(i) engaged in the active conduct
of a banking or securities business
(within the meaning of section 1296(b),
as in effect before the enactment of
the Taxpayer Relief Act of 1997), or
``(ii) a qualified bank affiliate
or a qualified securities affiliate
(within the meaning of the proposed
regulations under such section
1296(b)).
``(4) Methods for determining unearned premiums and
reserves.--For purposes of paragraph (1)(B)--
``(A) Property and casualty contracts.--The
unearned premiums and reserves of a qualifying
insurance company with respectto property,
casualty, or health insurance contracts shall be determined using the
same methods and interest rates which would be used if such company
were subject to tax under subchapter L.
``(B) Life insurance and annuity
contracts.--The reserves of a qualifying
insurance company with respect to life
insurance or annuity contracts shall be
determined under the method described in
paragraph (5) which such company elects to
apply for purposes of this paragraph. Such
election shall be made at such time and in such
manner as the Secretary may prescribe and, once
made, shall be irrevocable without the consent
of the Secretary.
``(C) Limitation on reserves.--In no event
shall the reserve determined under this
paragraph for any contract as of any time
exceed the amount which would be taken into
account with respect to such contract as of
such time in determining foreign annual
statement reserves (less any catastrophe or
deficiency reserves).
``(5) Methods.--The methods described in this
paragraph are as follows:
``(A) U.S. method.--The method which would
apply if the qualifying insurance company were
subject to tax under subchapter L, except that
the interest rate used shall be an interest
rate determined for the foreign country in
which such company is created or organized and
which is calculated in the same manner as the
Federal mid-term rate under section 1274(d).
``(B) Foreign method.--A preliminary term
method, except that the interest rate used
shall be the interest rate determined for the
foreign country in which such company is
created or organized and which is calculated in
the same manner as the Federal mid-term rate
under section 1274(d). If a qualifying
insurance company uses such a preliminary term
method with respect to contracts insuring risks
located in such foreign country, such method
shall apply if such company elects the method
under this clause.
``(C) Cash surrender value.--A method under
which reserves are equal to the net surrender
value (as defined in section 807(e)(1)(A)) of
the contract.
``(6) Definitions.--For purposes of this
subsection--
``(A) Terms relating to insurance
companies.--
``(i) Qualifying insurance
company.--The term `qualifying
insurance company' means any entity
which--
``(I) is subject to
regulation as an insurance
company under the laws of its
country of incorporation,
``(II) realizes at least 50
percent of its net written
premiums from the insurance or
reinsurance of risks located
within the country in which
such entity is created or
organized, and
``(III) is engaged in the
active conduct of an insurance
business and would be subject
to tax under subchapter L if it
were a domestic corporation.
``(ii) Start-up company.--A
qualifying insurance company shall be
treated as a start-up company if such
company (and any predecessor) has not
been engaged in the active conduct of
an insurance business for more than 5
years as of the beginning of the
taxable year of such company.
``(B) Located.--For purposes of paragraph
(3)(A)--
``(i) In general.--A person shall
be treated as located--
``(I) except as provided in
subclause (II), within the
country in which it maintains
an office or other fixed place
of business through which it
engages in a trade or business
and by which the transaction is
effected, or
``(II) in the case of a
natural person, within the
country in which such person is
physically located when such
person enters into a
transaction.
``(ii) Special rule for qualified
business units.--Gross income derived
by a corporation's qualified business
unit (within the meaning of section
989(a)) from transactions with persons
which are not related persons (as
defined in subsection (d)(3)) and which
are located inthe country in which the
qualified business unit both maintains its principal office and
conducts substantial business activity shall be treated as derived from
transactions with persons which are not related persons (as defined in
subsection (d)(3)) and which are located within the country under the
laws of which the controlled foreign corporation is created or
organized.
``(7) Anti-abuse rules.--For purposes of applying
this subsection, there shall be disregarded any item of
income, gain, loss, or deduction with respect to any
transaction or series of transactions one of the
principal purposes of which is qualifying income or
gain for the exclusion under this section, including
any change in the method of computing reserves or any
other transaction or series of transactions a principal
purpose of which is the acceleration or deferral of any
item in order to claim the benefits of such exclusion
through the application of this subsection.
``(8) Coordination with section 953.--This
subsection shall not apply to investment income
allocable to contracts that insure related party risks
or risks located in a foreign country other than the
country in which the qualifying insurance comapny is
created or organized.
``(9) Application.--This subsection shall apply to
the first full taxable year of a foreign corporation
beginning after December 31, 1997, and before January
1, 1999, and to taxable years of United States
shareholders with or within which such taxable year of
such foreign corporation ends.''.
(b) Exemption From Foreign Base Company Services Income.--
Paragraph (2) of section 954(e) is amended by striking ``or''
at the end of subparagraph (A), by striking the period at the
end of subparagraph (B) and inserting ``, or'', and by adding
at the end the following:
``(C) in the case of taxable years
described in subsection (h)(8), the active
conduct by a controlled foreign corporation of
a banking, financing, insurance, or similar
business, but only if the corporation is
predominantly engaged in the active conduct of
such business (within the meaning of subsection
(h)(3)) or is a qualifying insurance
company.''.
(c) Effective Date.--The amendments made by this section
shall apply to the first full taxable year of a foreign
corporation beginning after December 31, 1997, and before
January 1, 1999, and to taxable years of United States
shareholders with or within which such taxable year of such
foreign corporation ends.
TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
BUSINESSES
Subtitle A--Provisions Relating to Individuals
SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM TAX EXEMPTION AMOUNT
FOR CERTAIN DEPENDENTS.
(a) Basic Standard Deduction.--
(1) In general.--Paragraph (5) of section 63(c)
(relating to limitation on basic standard deduction in
the case of certain dependents) is amended by striking
``shall not exceed'' and all that follows and inserting
``shall not exceed the greater of--
``(A) $500, or
``(B) the sum of $250 and such individual's
earned income.''.
(2) Conforming amendment.--Paragraph (4) of section
63(c) is amended--
(A) by striking ``(5)(A)'' in the material
preceding subparagraph (A) and inserting
``(5)'', and
(B) by striking ``by substituting'' and all
that follows in subparagraph (B) and inserting
``by substituting for `calendar year 1992' in
subparagraph (B) thereof--
``(i) `calendar year 1987' in the
case of the dollar amounts contained in
paragraph (2) or (5)(A) or subsection
(f), and
``(ii) `calendar year 1997' in the
case of the dollar amount contained in
paragraph (5)(B).''.
(b) Minimum Tax Exemption Amount.--
(1) In general.--Subsection (j) of section 59 is
amended to read as follows:
``(j) Treatment of Unearned Income of Minor Children.--
``(1) In general.--In the case of a child to whom
section 1(g) applies, the exemption amount for purposes
of section 55 shall not exceed the sum of--
``(A) such child's earned income (as
defined in section 911(d)(2)) for the taxable
year, plus
``(B) $5,000.
``(2) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after 1998,
the dollar amount in paragraph (1)(B) shall be
increased by an amount equal to the product of--
``(A) such dollar amount, and
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `1997' for `1992' in
subparagraph (B) thereof.
If any increase determined under the preceding sentence
is not a multiple of $50, such increase shall be
rounded to the nearest multiple of $50.''.
(2) Conforming amendment.--Clause (iv) of section
6103(e)(1)(A) is amended by striking ``or 59(j)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM ESTIMATED TAX
REQUIREMENTS.
(a) In General.--Paragraph (1) of section 6654(e) (relating
to exception where tax is small amount) is amended by striking
``$500'' and inserting ``$1,000''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1203. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL MAIL
CARRIERS.
(a) In General.--Section 162 (relating to trade or business
expenses) is amended by redesignating subsection (o) as
subsection (p) and by inserting after subsection (n) the
following new subsection:
``(o) Treatment of Certain Reimbursed Expenses of Rural
Mail Carriers.--
``(1) General rule.--In the case of any employee of
the United States Postal Service who performs services
involving the collection and delivery of mail on a
rural route and who receives qualified reimbursements
for the expenses incurred by such employee for the use
of a vehicle in performing such services--
``(A) the amount allowable as a deduction
under this chapter for the use of a vehicle in
performing such services shall be equal to the
amount of such qualified reimbursements; and
``(B) such qualified reimbursements shall
be treated as paid under a reimbursement or
other expense allowance arrangement for
purposes of section 62(a)(2)(A) (and section
62(c) shall not apply to such qualified
reimbursements).
``(2) Definition of qualified reimbursements.--For
purposes of this subsection, the term `qualified
reimbursements' means the amounts paid by the United
States Postal Service to employees as an equipment
maintenance allowance under the 1991 collective
bargaining agreement between the United States Postal
Service and the National Rural Letter Carriers'
Association. Amounts paid as an equipment maintenance
allowance by such Postal Service under later collective
bargaining agreements that supersede the 1991 agreement
shall be considered qualified reimbursements if such
amounts do not exceed the amounts that would have been
paid under the 1991 agreement, adjusted for changes in
the Consumer Price Index (as defined in section
1(f)(5)) since 1991.''.
(b) Technical Amendment.--Section 6008 of the Technical and
Miscellaneous Revenue Act of 1988 is hereby repealed.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1204. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FEDERAL EMPLOYEES
ENGAGED IN CRIMINAL INVESTIGATIONS.
(a) In General.--Subsection (a) of section 162 is amended
by adding at the end the following new sentence: ``The
preceding sentence shall not apply to any Federal employee
during any period for which such employee is certified by the
Attorney General (or the designee thereof) as traveling on
behalf of the United States in temporary duty status to
investigate, or provide support services for the investigation
of, a Federal crime.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to amounts paid or incurred with respect to taxable
years ending after the date of the enactment of this Act.
SEC. 1205. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.
(a) General Rule.--Section 6311 is amended to read as
follows:
``SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.
``(a) Authority To Receive.--It shall be lawful for the
Secretary to receive for internal revenue taxes (or in payment
for internal revenue stamps) any commercially acceptable means
that the Secretary deems appropriate to the extent and under
the conditions provided in regulations prescribed by the
Secretary.
``(b) Ultimate Liability.--If a check, money order, or
other method of payment, including payment by credit card,
debit card, or charge card so received is not duly paid, or is
paid and subsequently charged back to the Secretary, the person
by whom such check, or money order, or other method of payment
has been tendered shall remain liable for the payment of the
tax or for the stamps, and for all legal penalties and
additions, to the same extent as if such check, money order, or
other method of payment had not been tendered.
``(c) Liability of Banks and Others.--If any certified,
treasurer's, or cashier's check (or other guaranteed draft), or
any money order, or any other means of payment that has been
guaranteed by a financial institution (such as a credit card,
debit card, or charge card transaction which has been
guaranteed expressly by a financial institution) so received is
not duly paid, the United States shall, in addition to its
right to exact payment from the party originally indebted
therefor, have a lien for--
``(1) the amount of such check (or draft) upon all
assets of the financial institution on which drawn,
``(2) the amount of such money order upon all the
assets of the issuer thereof, or
``(3) the guaranteed amount of any other
transaction upon all the assets of the institution
making such guarantee,
and such amount shall be paid out of such assets in preference
to any other claims whatsoever against such financial
institution, issuer, or guaranteeing institution, except the
necessary costs and expenses of administration and the
reimbursement of the United States for the amount expended in
the redemption of the circulating notes of such financial
institution.
``(d) Payment by Other Means.--
``(1) Authority to prescribe regulations.--The
Secretary shall prescribe such regulations as the
Secretary deems necessary to receive payment by
commercially acceptable means, including regulations
that--
``(A) specify which methods of payment by
commercially acceptable means will be
acceptable,
``(B) specify when payment by such means
will be considered received,
``(C) identify types of nontax matters
related to payment by such means that are to be
resolved by persons ultimately liable for
payment and financial intermediaries, without
the involvement of the Secretary, and
``(D) ensure that tax matters will be
resolved by the Secretary, without the
involvement of financial intermediaries.
``(2) Authority to enter into contracts.--
Notwithstanding section 3718(f) of title 31, United
States Code, the Secretary is authorized to enter into
contracts to obtain services related to receiving
payment by other means where cost beneficial to the
Government. The Secretary may not pay any fee or
provide any other consideration under such contracts.
``(3) Special provisions for use of credit cards.--
If use of credit cards is accepted as a method of
payment of taxes pursuant to subsection (a)--
``(A) a payment of internal revenue taxes
(or a payment for internal revenue stamps) by a
person by use of a credit card shall not be
subject to section 161 of the Truth in Lending
Act (15 U.S.C. 1666), or to any similar
provisions of State law, if the error alleged
by the person is an error relating to the
underlying tax liability, rather than an error
relating to the credit card account such as a
computational error or numerical transposition
in the credit card transaction or an issue as
to whether the person authorized payment by use
of the credit card,
``(B) a payment of internal revenue taxes
(or a payment for internal revenue stamps)
shall not be subject to section 170 of the
Truth in Lending Act (15 U.S.C. 1666i), or to
any similar provisions of State law,
``(C) a payment of internal revenue taxes
(or a payment for internal revenue stamps) by a
person by use of a debit card shall not be
subject to section 908 of the Electronic Fund
Transfer Act (15 U.S.C. 1693f), or to any
similar provisions of State law, if the error
alleged by the person is an error relating to
the underlying tax liability, rather than an
error relating to the debit card account such
as a computational error or numerical
transposition in the debit card transaction or
an issue as to whether the person authorized
payment by use of the debit card,
``(D) the term `creditor' under section
103(f) of the Truth in Lending Act (15 U.S.C.
1602(f)) shall not include the Secretary with
respect to credit card transactions in payment
of internal revenue taxes (or payment for
internal revenue stamps), and
``(E) notwithstanding any other provision
of law to the contrary, in the case of payment
made by credit card or debit card transaction
of an amount owed to a person as the result of
the correction of an error under section 161 of
the Truth in Lending Act (15 U.S.C. 1666) or
section 908 of the Electronic Fund Transfer Act
(15 U.S.C. 1693f), the Secretary is authorized
to provide such amount to such person as a
credit to that person's credit card or debit
card account through the applicable credit card
or debit card system.
``(e) Confidentiality of Information.--
``(1) In general.--Except as otherwise authorized
by this subsection, no person may use or disclose any
information relating to credit or debit card
transactions obtained pursuant to section 6103(k)(8)
other than for purposes directly related to the
processing of such transactions, or the billing or
collection of amounts charged or debited pursuant
thereto.
``(2) Exceptions.--
``(A) Debit or credit card issuers or
others acting on behalf of such issuers may
also use and disclose such information for
purposes directly related to servicing an
issuer's accounts.
``(B) Debit or credit card issuers or
others directly involved in the processing of
credit or debit card transactions or the
billing or collection of amounts charged or
debited thereto may also use and disclose such
information for purposes directly related to--
``(i) statistical risk and
profitability assessment;
``(ii) transferring receivables,
accounts, or interest therein;
``(iii) auditing the account
information;
``(iv) complying with Federal,
State, or local law; and
``(v) properly authorized civil,
criminal, or regulatory investigation
by Federal, State, or local
authorities.
``(3) Procedures.--Use and disclosure of
information under this paragraph shall be made only to
the extent authorized by written procedures promulgated
by the Secretary.
``(4) Cross reference.--
``For provision providing for civil damages for violation of
paragraph (1), see section 7431.''.
(b) Clerical Amendment.--The table of sections for
subchapter B of chapter 64 is amended by striking the item
relating to section 6311 and inserting the following:
``Sec. 6311. Payment of tax by commercially acceptable means.''.
(c) Amendments to Sections 6103 and 7431 With Respect to
Disclosure Authorization.--
(1) Subsection (k) of section 6103 (relating to
confidentiality and disclosure of returns and return
information) is amended by adding at the end the
following new paragraph:
``(8) Disclosure of information to administer
section 6311.--The Secretary may disclose returns or
return information to financial institutions and others
to the extent the Secretary deems necessary for the
administration of section 6311. Disclosures of
information for purposes other than to accept payments
by checks or money orders shall be made only to the
extent authorized by written procedures promulgated by
the Secretary.''.
(2) Section 7431 (relating to civil damages for
unauthorized disclosure of returns and return
information) is amended by adding at the end the
following new subsection:
``(g) Special Rule for Information Obtained Under Section
6103(k)(8).--For purposes of this section, any reference to
section 6103 shall be treated as including a reference to
section 6311(e).''.
(3) Section 6103(p)(3)(A) is amended by striking
``or (6)'' and inserting ``(6), or (8)''.
(d) Effective Date.--The amendments made by this section
shall take effect on the day 9 months after the date of the
enactment of this Act.
Subtitle B--Provisions Relating to Businesses Generally
SEC. 1211. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM CONTRACTS.
(a) Look-Back Method Not To Apply in Certain Cases.--
Subsection (b) of section 460 (relating to percentage of
completion method) is amended by adding at the end the
following new paragraph:
``(6) Election to have look-back method not apply
in de minimis cases.--
``(A) Amounts taken into account after
completion of contract.--Paragraph (1)(B) shall
not apply with respect to any taxable year
(beginning after the taxable year in which the
contract is completed) if--
``(i) the cumulative taxable income
(or loss) under the contract as of the
close of such taxable year, is within
``(ii) 10 percent of the cumulative
look-back taxable income (or loss)
under the contract as of the close of
the most recent taxable year to which
paragraph (1)(B) applied (or would have
applied but for subparagraph (B)).
``(B) De minimis discrepancies.--Paragraph
(1)(B) shall not apply in any case to which it
would otherwise apply if--
``(i) the cumulative taxable income
(or loss) under the contract as of the
close of each prior contract year, is
within
``(ii) 10 percent of the cumulative
look-back income (or loss) under the
contract as of the close of such prior
contract year.
``(C) Definitions.--For purposes of this
paragraph--
``(i) Contract year.--The term
`contract year' means any taxable year
for which income is taken into account
under the contract.
``(ii) Look-back income or loss.--
The look-back income (or loss) is the
amount which would be the taxable
income (or loss) under the contract if
the allocation method set forth in
paragraph (2)(A) were used in
determining taxable income.
``(iii) Discounting not
applicable.--The amounts taken into
account after the completion of the
contract shall be determined without
regard to any discounting under the 2nd
sentence of paragraph (2).
``(D) Contracts to which paragraph
applies.--This paragraph shall only apply if
the taxpayer makes an election under this
subparagraph. Unless revoked with the consent
of the Secretary, such an election shall apply
to all long-term contracts completed during the
taxable year for which election is made or
during any subsequent taxable year.''.
(b) Modification of Interest Rate.--
(1) In general.--Subparagraph (C) of section
460(b)(2) is amended by striking ``the overpayment rate
established by section 6621'' and inserting ``the
adjusted overpayment rate (as defined in paragraph
(7))''.
(2) Adjusted overpayment rate.--Subsection (b) of
section 460 is amended by adding at the end the
following new paragraph:
``(7) Adjusted overpayment rate.--
``(A) In general.--The adjusted overpayment
rate for any interest accrual period is the
overpayment rate in effect under section 6621
for the calendar quarter in which such interest
accrual period begins.
``(B) Interest accrual period.--For
purposes of subparagraph (A), the term
`interest accrual period' means the period--
``(i) beginning on the day after
the return due date for any taxable
year of the taxpayer, and
``(ii) ending on the return due
date for the following taxable year.
For purposes of the preceding sentence, the
term `return due date' means the date
prescribed for filing the return of the tax
imposed by this chapter (determined without
regard to extensions).''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
contracts completed in taxable years ending after the
date of the enactment of this Act.
(2) Subsection (b).--The amendments made by
subsection (b) shall apply for purposes of section
167(g) of the Internal Revenue Code of 1986 to property
placed in service after September 13, 1995.
SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND CASUALTY
INSURANCE COMPANIES.
(a) In General.--Clause (i) of section 56(g)(4)(B)
(relating to inclusion of items included for purposes of
computing earnings and profits) is amended by adding at the end
the following new sentence: ``In the case of any insurance
company taxable under section 831(b), this clause shall not
apply to any amount not described in section 834(b).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 1997.
SEC. 1213. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM
LEASES.
(a) In General.--Part III of subchapter B of chapter 1 is
amended by inserting after section 109 the following new
section:
``SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM
LEASES.
``(a) In General.--Gross income of a lessee does not
include any amount received in cash (or treated as a rent
reduction) by a lessee from a lessor--
``(1) under a short-term lease of retail space, and
``(2) for the purpose of such lessee's constructing
or improving qualified long-term real property for use
in such lessee's trade or business at such retail
space,
but only to the extent that such amount does not exceed the
amount expended by the lessee for such construction or
improvement.
``(b) Consistent Treatment by Lessor.--Qualified long-term
real property constructed or improved in connection with any
amount excluded from a lessee's income by reason of subsection
(a) shall be treated as nonresidential real property of the
lessor (including for purposes of section 168(i)(8)(B)).
``(c) Definitions.--For purposes of this section--
``(1) Qualified long-term real property.--The term
`qualified long-term real property' means
nonresidential real property which is part of, or
otherwise present at, the retail space referred to in
subsection (a) and which reverts to the lessor at the
termination of the lease.
``(2) Short-term lease.--The term `short-term
lease' means a lease (or other agreement for occupancy
or use) of retail space for 15 years or less (as
determined under the rules of section 168(i)(3)).
``(3) Retail space.--The term `retail space' means
real property leased, occupied, or otherwise used by a
lessee in its trade or business of selling tangible
personal property or services to the general public.
``(d) Information Required To Be Furnished to Secretary.--
Under regulations, the lessee and lessor described in
subsection (a) shall, at such times and in such manner as may
be provided in such regulations, furnish to the Secretary--
``(1) information concerning the amounts received
(or treated as a rent reduction) and expended as
described in subsection (a), and
``(2) any other information which the Secretary
deems necessary to carry out the provisions of this
section.''.
(b) Treatment as Information Return.--Subparagraph (A) of
section 6724(d)(1)(A) is amended by striking ``or'' at the end
of clause (vii), by adding ``or'' at the end of clause (viii),
and by adding at the end the following new clause:
``(ix) section 110(d) (relating to
qualified lessee construction
allowances for short-term leases),''.
(c) Cross Reference.--Paragraph (8) of section 168(i)
(relating to treatment of leasehold improvements) is amended by
adding at the end the following new subparagraph:
``(C) Cross reference.--
``For treatment of qualified long-term real property
constructed or improved in connection with cash or rent
reduction from lessor to lessee, see section 110(b).''.
(d) Clerical Amendment.--The table of sections for part III
of subchapter B of chapter 1 is amended by inserting after the
item relating to section 109 the following new item:
``Sec. 110. Qualified lessee construction allowances for short-
term leases.''.
(e) Effective Date.--The amendments made by this section
shall apply to leases entered into after the date of the
enactment of this Act.
Subtitle C--Simplification Relating to Electing Large Partnerships
PART I--GENERAL PROVISIONS
SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE PARTNERSHIPS.
(a) General Rule.--Subchapter K (relating to partners and
partnerships) is amended by adding at the end the following new
part:
``PART IV--SPECIAL RULES FOR ELECTING LARGE PARTNERSHIPS
``Sec. 771. Application of subchapter to electing large
partnerships.
``Sec. 772. Simplified flow-through.
``Sec. 773. Computations at partnership level.
``Sec. 774. Other modifications.
``Sec. 775. Electing large partnership defined.
``Sec. 776. Special rules for partnerships holding oil and gas
properties.
``Sec. 777. Regulations.
``SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE PARTNERSHIPS.
``The preceding provisions of this subchapter to the extent
inconsistent with the provisions of this part shall not apply
to an electing large partnership and its partners.
``SEC. 772. SIMPLIFIED FLOW-THROUGH.
``(a) General Rule.--In determining the income tax of a
partner of an electing large partnership, such partner shall
take into account separately such partner's distributive share
of the partnership's--
``(1) taxable income or loss from passive loss
limitation activities,
``(2) taxable income or loss from other activities,
``(3) net capital gain (or net capital loss)--
``(A) to the extent allocable to passive
loss limitation activities, and
``(B) to the extent allocable to other
activities,
``(4) tax-exempt interest,
``(5) applicable net AMT adjustment separately
computed for--
``(A) passive loss limitation activities,
and
``(B) other activities,
``(6) general credits,
``(7) low-income housing credit determined under
section 42,
``(8) rehabilitation credit determined under
section 47,
``(9) foreign income taxes,
``(10) the credit allowable under section 29, and
``(11) other items to the extent that the Secretary
determines that the separate treatment of such items is
appropriate.
``(b) Separate Computations.--In determining the amounts
required under subsection (a) to be separately taken into
account by any partner, this section and section 773 shall be
applied separately with respect to such partner by taking into
account such partner's distributive share of the items of
income, gain, loss, deduction, or credit of the partnership.
``(c) Treatment at Partner Level.--
``(1) In general.--Except as provided in this
subsection, rules similar to the rules of section
702(b) shall apply to any partner's distributive share
of the amounts referred to in subsection (a).
``(2) Income or loss from passive loss limitation
activities.--For purposes of this chapter, any
partner's distributive share of any income or loss
described in subsection (a)(1) shall be treated as an
item of income or loss (as the case may be) from the
conduct of a trade or business which is a single
passive activity (as defined in section 469). A similar
rule shall apply to a partner's distributive share of
amounts referred to in paragraphs (3)(A) and (5)(A) of
subsection (a).
``(3) Income or loss from other activities.--
``(A) In general.--For purposes of this
chapter, any partner's distributive share of
any income or loss described in subsection
(a)(2) shall be treated as an item of income or
expense (as the case may be) with respect to
property held for investment.
``(B) Deductions for loss not subject to
section 67.--The deduction under section 212
for any loss described in subparagraph (A)
shall not be treated as a miscellaneous
itemized deduction for purposes of section 67.
``(4) Treatment of net capital gain or loss.--For
purposes of this chapter, any partner's distributive
share of any gain or loss described in subsection
(a)(3) shall be treated as a long-term capital gain or
loss, as the case may be.
``(5) Minimum tax treatment.--In determining the
alternative minimum taxable income of any partner, such
partner's distributive share of any applicable net AMT
adjustment shall be taken into account in lieu of
making the separate adjustments provided in sections
56, 57, and 58 with respect to the items of the
partnership. Except as provided in regulations, the
applicable net AMT adjustment shall be treated, for
purposes of section 53, as an adjustment or item of tax
preference not specified in section 53(d)(1)(B)(ii).
``(6) General credits.--A partner's distributive
share of the amount referred to in paragraph (6) of
subsection (a) shall be taken into account as a current
year business credit.
``(d) Operating Rules.--For purposes of this section--
``(1) Passive loss limitation activity.--The term
`passive loss limitation activity' means--
``(A) any activity which involves the
conduct of a trade or business, and
``(B) any rental activity.
For purposes of the preceding sentence, the term `trade
or business' includes any activity treated as a trade
or business under paragraph (5) or (6) of section
469(c).
``(2) Tax-exempt interest.--The term `tax-exempt
interest' means interest excludable from gross income
under section 103.
``(3) Applicable net amt adjustment.--
``(A) In general.--The applicable net AMT
adjustment is--
``(i) with respect to taxpayers
other than corporations, the net
adjustment determined by using the
adjustments applicable to individuals,
and
``(ii) with respect to
corporations, the net adjustment
determined by using the adjustments
applicable to corporations.
``(B) Net adjustment.--The term `net
adjustment' means the net adjustment in the
items attributable to passive loss activities
or other activities (as the case may be) which
would result if such items were determined with
the adjustments of sections 56, 57, and 58.
``(4) Treatment of certain separately stated
items.--
``(A) Exclusion for certain purposes.--In
determining the amounts referred to in
paragraphs (1) and (2) of subsection (a), any
net capital gain or net capital loss (as the
case may be), and any item referred to in
subsection (a)(11), shall be excluded.
``(B) Allocation rules.--The net capital
gain shall be treated--
``(i) as allocable to passive loss
limitation activities to the extent the
net capital gain does not exceed the
net capital gain determined by only
taking into account gains and losses
from sales and exchanges of property
used in connection with such
activities, and
``(ii) as allocable to other
activities to the extent such gain
exceeds the amount allocated under
clause (i).
A similar rule shall apply for purposes of
allocating any net capital loss.
``(C) Net capital loss.--The term `net
capital loss' means the excess of the losses
from sales or exchanges of capital assets over
the gains from sales or exchange of capital
assets.
``(5) General credits.--The term `general credits'
means any credit other than the low-income housing
credit, the rehabilitation credit, the foreign tax
credit, and the credit allowable under section 29.
``(6) Foreign income taxes.--The term `foreign
income taxes' means taxes described in section 901
which are paid or accrued to foreign countries and to
possessions of the United States.
``(e) Special Rule for Unrelated Business Tax.--In the case
of a partner which is an organization subject to tax under
section 511, such partner's distributive share of any items
shall be taken into account separately to the extent necessary
to comply with the provisions of section 512(c)(1).
``(f) Special Rules for Applying Passive Loss
Limitations.--If any person holds an interest in an electing
large partnership other than as a limited partner--
``(1) paragraph (2) of subsection (c) shall not
apply to such partner, and
``(2) such partner's distributive share of the
partnership items allocable to passive loss limitation
activities shall be taken into account separately to
the extent necessary to comply with the provisions of
section 469.
The preceding sentence shall not apply to any items allocable
to an interest held as a limited partner.
``SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
``(a) General Rule.--
``(1) Taxable income.--The taxable income of an
electing large partnership shall be computed in the
same manner as in the case of an individual except
that--
``(A) the items described in section 772(a)
shall be separately stated, and
``(B) the modifications of subsection (b)
shall apply.
``(2) Elections.--All elections affecting the
computation of the taxable income of an electing large
partnership or the computation of any credit of an
electing large partnership shall be made by the
partnership; except that the election under section
901, and any election under section 108, shall be made
by each partner separately.
``(3) Limitations, etc.--
``(A) In general.--Except as provided in
subparagraph (B), all limitations and other
provisions affecting the computation of the
taxable income of an electing large partnership
or the computation of any credit of an electing
large partnership shall be applied at the
partnership level (and not at the partner
level).
``(B) Certain limitations applied at
partner level.--The following provisions shall
be applied at the partner level (and not at the
partnership level):
``(i) Section 68 (relating to
overall limitation on itemized
deductions).
``(ii) Sections 49 and 465
(relating to at risk limitations).
``(iii) Section 469 (relating to
limitation on passive activity losses
and credits).
``(iv) Any other provision
specified in regulations.
``(4) Coordination with other provisions.--
Paragraphs (2) and (3) shall apply notwithstanding any
other provision of this chapter other than this part.
``(b) Modifications to Determination of Taxable Income.--In
determining the taxable income of an electing large
partnership--
``(1) Certain deductions not allowed.--The
following deductions shall not be allowed:
``(A) The deduction for personal exemptions
provided in section 151.
``(B) The net operating loss deduction
provided in section 172.
``(C) The additional itemized deductions
for individuals provided in part VII of
subchapter B (other than section 212 thereof).
``(2) Charitable deductions.--In determining the
amount allowable under section 170, the limitation of
section 170(b)(2) shall apply.
``(3) Coordination with section 67.--In lieu of
applying section 67, 70 percent of the amount of the
miscellaneous itemized deductions shall be disallowed.
``(c) Special Rules for Income From Discharge of
Indebtedness.--If an electing large partnership has income from
the discharge of any indebtedness--
``(1) such income shall be excluded in determining
the amounts referred to in section 772(a), and
``(2) in determining the income tax of any partner
of such partnership--
``(A) such income shall be treated as an
item required to be separately taken into
account under section 772(a), and
``(B) the provisions of section 108 shall
be applied without regard to this part.
``SEC. 774. OTHER MODIFICATIONS.
``(a) Treatment of Certain Optional Adjustments, Etc.--In
the case of an electing large partnership--
``(1) computations under section 773 shall be made
without regard to any adjustment under section 743(b)
or 108(b), but
``(2) a partner's distributive share of any amount
referred to in section 772(a) shall be appropriately
adjusted to take into account any adjustment under
section 743(b) or 108(b) with respect to such partner.
``(b) Credit Recapture Determined at Partnership Level.--
``(1) In general.--In the case of an electing large
partnership--
``(A) any credit recapture shall be taken
into account by the partnership, and
``(B) the amount of such recapture shall be
determined as if the credit with respect to
which the recapture is made had been fully
utilized to reduce tax.
``(2) Method of taking recapture into account.--An
electing large partnership shall take into account a
credit recapture by reducing the amount of the
appropriate current year credit to the extent thereof,
and if such recapture exceeds the amount of such
current year credit, the partnership shall be liable to
pay such excess.
``(3) Dispositions not to trigger recapture.--No
credit recapture shall be required by reason of any
transfer of an interest in an electing large
partnership.
``(4) Credit recapture.--For purposes of this
subsection, the term `credit recapture' means any
increase in tax under section 42(j) or 50(a).
``(c) Partnership Not Terminated by Reason of Change in
Ownership.--Subparagraph (B) of section 708(b)(1) shall not
apply to an electing large partnership.
``(d) Partnership Entitled to Certain Credits.--The
following shall be allowed to an electing large partnership and
shall not be taken into account by the partners of such
partnership:
``(1) The credit provided by section 34.
``(2) Any credit or refund under section
852(b)(3)(D).
``(e) Treatment of REMIC Residuals.--For purposes of
applying section 860E(e)(6) to any electing large partnership--
``(1) all interests in such partnership shall be
treated as held by disqualified organizations,
``(2) in lieu of applying subparagraph (C) of
section 860E(e)(6), the amount subject to tax under
section 860E(e)(6) shall be excluded from the gross
income of such partnership, and
``(3) subparagraph (D) of section 860E(e)(6) shall
not apply.
``(f) Special Rules for Applying Certain Installment Sale
Rules.--In the case of an electing large partnership--
``(1) the provisions of sections 453(l)(3) and 453A
shall be applied at the partnership level, and
``(2) in determining the amount of interest payable
under such sections, such partnership shall be treated
as subject to tax under this chapter at the highest
rate of tax in effect under section 1 or 11.
``SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.
``(a) General Rule.--For purposes of this part--
``(1) In general.--The term `electing large
partnership' means, with respect to any partnership
taxable year, any partnership if--
``(A) the number of persons who were
partners in such partnership in the preceding
partnership taxable year equaled or exceeded
100, and
``(B) such partnership elects the
application of this part.
To the extent provided in regulations, a partnership
shall cease to be treated as an electing large
partnership for any partnership taxable year if in such
taxable year fewer than 100 persons were partners in
such partnership.
``(2) Election.--The election under this subsection
shall apply to the taxable year for which made and all
subsequent taxable years unless revoked with the
consent of the Secretary.
``(b) Special Rules for Certain Service Partnerships.--
``(1) Certain partners not counted.--For purposes
of this section, the term `partner' does not include
any individual performing substantial services in
connection with the activities of the partnership and
holding an interest in such partnership, or an
individual who formerly performed substantial services
in connection with such activities and who held an
interest in such partnership at the time the individual
performed such services.
``(2) Exclusion.--For purposes of this part, an
election under subsection (a) shall not be effective
with respect to any partnership if substantially all
the partners of such partnership--
``(A) are individuals performing
substantial services in connection with the
activities of such partnership or are personal
service corporations (as defined in section
269A(b)) the owner-employees (as defined in
section 269A(b)) of which perform such
substantial services,
``(B) are retired partners who had
performed such substantial services, or
``(C) are spouses of partners who are
performing (or had previously performed) such
substantial services.
``(3) Special rule for lower tier partnerships.--
For purposes of this subsection, the activities of a
partnership shall include the activities of any other
partnership in which the partnership owns directly an
interest in the capital and profits of at least 80
percent.
``(c) Exclusion of Commodity Pools.--For purposes of this
part, an election under subsection (a) shall not be effective
with respect to any partnership the principal activity of which
is the buying and selling of commodities (not described in
section 1221(1)), or options, futures, or forwards with respect
to such commodities.
``(d) Secretary May Rely on Treatment on Return.--If, on
the partnership return of any partnership, such partnership is
treated as an electing large partnership, such treatment shall
be binding on such partnership and all partners of such
partnership but not on the Secretary.
``SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND GAS
PROPERTIES.
``(a) Computation of Percentage Depletion.--In the case of
an electing large partnership, except as provided in subsection
(b)--
``(1) the allowance for depletion under section 611
with respect to any partnership oil or gas property
shall be computed at the partnership level without
regard to any provision of section 613A requiring such
allowance to be computed separately by each partner,
``(2) such allowance shall be determined without
regard to the provisions of section 613A(c) limiting
the amount of production for which percentage depletion
is allowable and without regard to paragraph (1) of
section 613A(d), and
``(3) paragraph (3) of section 705(a) shall not
apply.
``(b) Treatment of Certain Partners.--
``(1) In general.--In the case of a disqualified
person, the treatment under this chapter of such
person's distributive share of any item of income,
gain, loss, deduction, or credit attributable to any
partnership oil or gas property shall be determined
without regard to this part. Such person's distributive
share of any such items shall be excluded for purposes
of making determinations under sections 772 and 773.
``(2) Disqualified person.--For purposes of
paragraph (1), the term `disqualified person' means,
with respect to any partnership taxable year--
``(A) any person referred to in paragraph
(2) or (4) of section 613A(d) for such person's
taxable year in which such partnership taxable
year ends, and
``(B) any other person if such person's
average daily production of domestic crude oil
and natural gas for such person's taxable year
in which such partnership taxable year ends
exceeds 500 barrels.
``(3) Average daily production.--For purposes of
paragraph (2), a person's average daily production of
domestic crude oil and natural gas for any taxable year
shall be computed as provided in section 613A(c)(2)--
``(A) by taking into account all production
of domestic crude oil and natural gas
(including such person's proportionate share of
any production of a partnership),
``(B) by treating 6,000 cubic feet of
natural gas as a barrel of crude oil, and
``(C) by treating as 1 person all persons
treated as 1 taxpayer under section 613A(c)(8)
or among whom allocations are required under
such section.
``SEC. 777. REGULATIONS.
``The Secretary shall prescribe such regulations as may be
appropriate to carry out the purposes of this part.''.
(b) Clerical Amendment.--The table of parts for subchapter
K of chapter 1 is amended by adding at the end the following
new item:
``Part IV. Special rules for electing large partnerships.''.
(c) Effective Date.--The amendments made by this section
shall apply to partnership taxable years beginning after
December 31, 1997.
SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE PARTNERSHIPS.
(a) General Rule.--Chapter 63 is amended by adding at the
end thereof the following new subchapter:
``Subchapter D--Treatment of electing large partnerships
``Part I. Treatment of partnership items and adjustments.
``Part II. Partnership level adjustments.
``Part III. Definitions and special rules.
``PART I--TREATMENT OF PARTNERSHIP ITEMS AND ADJUSTMENTS
``Sec. 6240. Application of subchapter.
``Sec. 6241. Partner's return must be consistent with
partnership return.
``Sec. 6242. Procedures for taking partnership adjustments into
account.
``SEC. 6240. APPLICATION OF SUBCHAPTER.
``(a) General Rule.--This subchapter shall only apply to
electing large partnerships and partners in such partnerships.
``(b) Coordination With Other Partnership Audit
Procedures.--
``(1) In general.--Subchapter C of this chapter
shall not apply to any electing large partnership other
than in its capacity as a partner in another
partnership which is not an electing large partnership.
``(2) Treatment where partner in other
partnership.--If an electing large partnership is a
partner in another partnership which is not an electing
large partnership--
``(A) subchapter C of this chapter shall
apply to items of such electing large
partnership which are partnership items with
respect to such other partnership, but
``(B) any adjustment under such subchapter
C shall be taken into account in the manner
provided by section 6242.
``SEC. 6241. PARTNER'S RETURN MUST BE CONSISTENT WITH PARTNERSHIP
RETURN.
``(a) General Rule.--A partner of any electing large
partnership shall, on the partner's return, treat each
partnership item attributable to such partnership in a manner
which is consistent with the treatment of such partnership item
on the partnership return.
``(b) Underpayment Due to Inconsistent Treatment Assessed
as Math Error.--Any underpayment of tax by a partner by reason
of failing to comply with the requirements of subsection (a)
shall be assessed and collected in the same manner as if such
underpayment were on account of a mathematical or clerical
error appearing on the partner's return. Paragraph (2) of
section 6213(b) shall not apply to any assessment of an
underpayment referred to in the preceding sentence.
``(c) Adjustments Not To Affect Prior Year of Partners.--
``(1) In general.--Except as provided in paragraph
(2), subsections (a) and (b) shall apply without regard
to any adjustment to the partnership item under part
II.
``(2) Certain changes in distributive share taken
into account by partner.--
``(A) In general.--To the extent that any
adjustment under part II involves a change
under section 704 in a partner's distributive
share of the amount of any partnership item
shown on the partnership return, such
adjustment shall be taken into account in
applying this title to such partner for the
partner's taxable year for which such item was
required to be taken into account.
``(B) Coordination with deficiency
procedures.--
``(i) In general.--Subchapter B
shall not apply to the assessment or
collection of any underpayment of tax
attributable to an adjustment referred
to in subparagraph (A).
``(ii) Adjustment not precluded.--
Notwithstanding any other law or rule
of law, nothing in subchapter B (or in
any proceeding under subchapter B)
shall preclude the assessment or
collection of any underpayment of tax
(or the allowance of any credit or
refund of any overpayment of tax)
attributable to an adjustment referred
to in subparagraph (A) and such
assessment or collection or allowance
(or any notice thereof) shall not
preclude any notice, proceeding, or
determination under subchapter B.
``(C) Period of limitations.--The period
for--
``(i) assessing any underpayment of
tax, or
``(ii) filing a claim for credit or
refund of any overpayment of tax,
attributable to an adjustment referred to in
subparagraph (A) shall not expire before the
close of the period prescribed by section 6248
for making adjustments with respect to the
partnership taxable year involved.
``(D) Tiered structures.--If the partner
referred to in subparagraph (A) is another
partnership or an S corporation, the rules of
this paragraph shall also apply to persons
holding interests in such partnership or S
corporation (as the case may be); except that,
if such partner is an electing large
partnership, the adjustment referred to in
subparagraph (A) shall be taken into account in
the manner provided by section 6242.
``(d) Addition to Tax for Failure to Comply With Section.--
``For addition to tax in case of partner's disregard of
requirements of this section, see part II of subchapter A of
chapter 68.
``SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP ADJUSTMENTS INTO
ACCOUNT.
``(a) Adjustments Flow Through To Partners for Year in
Which Adjustment Takes Effect.--
``(1) In general.--If any partnership adjustment
with respect to any partnership item takes effect
(within the meaning of subsection (d)(2)) during any
partnership taxable year and if an election under
paragraph (2) does not apply to such adjustment, such
adjustment shall be taken into account in determining
the amount of such item for the partnership taxable
year in which such adjustment takes effect. In applying
this title to any person who is (directly or
indirectly) a partner in such partnership during such
partnership taxable year, such adjustment shall be
treated as an item actually arising during such taxable
year.
``(2) Partnership liable in certain cases.--If--
``(A) a partnership elects under this
paragraph to not take an adjustment into
account under paragraph (1),
``(B) a partnership does not make such an
election but in filing its return for any
partnership taxable year fails to take fully
into account any partnership adjustment as
required under paragraph (1), or
``(C) any partnership adjustment involves a
reduction in a credit which exceeds the amount
of such credit determined for the partnership
taxable year in which the adjustment takes
effect,
the partnership shall pay to the Secretary an amount
determined by applying the rules of subsection (b)(4)
to the adjustments not so taken into account and any
excess referred to in subparagraph (C).
``(3) Offsetting adjustments taken into account.--
If a partnership adjustment requires another adjustment
in a taxable year after the adjusted year and before
the partnership taxable year in which such partnership
adjustment takes effect, such other adjustment shall be
taken into account under this subsection for the
partnership taxable year in which such partnership
adjustment takes effect.
``(4) Coordination with part ii.--Amounts taken
into account under this subsection for any partnership
taxable year shall continue to be treated as
adjustments for the adjusted year for purposes of
determining whether such amounts may be readjusted
under part II.
``(b) Partnership Liable for Interest and Penalties.--
``(1) In general.--If a partnership adjustment
takes effect during any partnership taxable year and
such adjustment results in an imputed underpayment for
the adjusted year, the partnership--
``(A) shall pay to the Secretary interest
computed under paragraph (2), and
``(B) shall be liable for any penalty,
addition to tax, or additional amount as
provided in paragraph (3).
``(2) Determination of amount of interest.--The
interest computed under this paragraph with respect to
any partnership adjustment is the interest which would
be determined under chapter 67--
``(A) on the imputed underpayment
determined under paragraph (4) with respect to
such adjustment,
``(B) for the period beginning on the day
after the return due date for the adjusted year
and ending on the return due date for the
partnership taxable year in which such
adjustment takes effect (or, if earlier, in the
case of any adjustment to which subsection
(a)(2) applies, the date on which the payment
under subsection (a)(2) is made).
Proper adjustments in the amount determined under the
preceding sentence shall be made for adjustments
required for partnership taxable years after the
adjusted year and before the year in which the
partnership adjustment takes effect by reason of such
partnership adjustment.
``(3) Penalties.--A partnership shall be liable for
any penalty, addition to tax, or additional amount for
which it would have been liable if such partnership had
been an individual subject to tax under chapter 1 for
the adjusted year and the imputed underpayment
determined under paragraph (4) were an actual
underpayment (or understatement) for such year.
``(4) Imputed underpayment.--For purposes of this
subsection, the imputed underpayment determined under
this paragraph with respect to any partnership
adjustment is the underpayment (if any) which would
result--
``(A) by netting all adjustments to items
of income, gain, loss, or deduction and by
treating any net increase in income as an
underpayment equal to the amount of such net
increase multiplied by the highest rate of tax
in effect under section 1 or 11 for the
adjusted year, and
``(B) by taking adjustments to credits into
account as increases or decreases (whichever is
appropriate) in the amount of tax.
For purposes of the preceding sentence, any net
decrease in a loss shall be treated as an increase in
income and a similar rule shall apply to a net increase
in a loss.
``(c) Administrative Provisions.--
``(1) In general.--Any payment required by
subsection (a)(2) or (b)(1)(A)--
``(A) shall be assessed and collected in
the same manner as if it were a tax imposed by
subtitle C, and
``(B) shall be paid on or before the return
due date for the partnership taxable year in
which the partnership adjustment takes effect.
``(2) Interest.--For purposes of determining
interest, any payment required by subsection (a)(2) or
(b)(1)(A) shall be treated as an underpayment of tax.
``(3) Penalties.--
``(A) In general.--In the case of any
failure by any partnership to pay on the date
prescribed therefor any amount required by
subsection (a)(2) or (b)(1)(A), there is hereby
imposed on such partnership a penalty of 10
percent of the underpayment. For purposes of
the preceding sentence, the term `underpayment'
means the excess of any payment required under
this section over the amount (if any) paid on
or before the date prescribed therefor.
``(B) Accuracy-related and fraud penalties
made applicable.--For purposes of part II of
subchapter A of chapter 68, any payment
required by subsection (a)(2) shall be treated
as an underpayment of tax.
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Partnership adjustment.--The term
`partnership adjustment' means any adjustment in the
amount of any partnership item of an electing large
partnership.
``(2) When adjustment takes effect.--A partnership
adjustment takes effect--
``(A) in the case of an adjustment pursuant
to the decision of a court in a proceeding
brought under part II, when such decision
becomes final,
``(B) in the case of an adjustment pursuant
to any administrative adjustment request under
section 6251, when such adjustment is allowed
by the Secretary, or
``(C) in any other case, when such
adjustment is made.
``(3) Adjusted year.--The term `adjusted year'
means the partnership taxable year to which the item
being adjusted relates.
``(4) Return due date.--The term `return due date'
means, with respect to any taxable year, the date
prescribed for filing the partnership return for such
taxable year (determined without regard to extensions).
``(5) Adjustments involving changes in character.--
Under regulations, appropriate adjustments in the
application of this section shall be made for purposes
of taking into account partnership adjustments which
involve a change in the character of any item of
income, gain, loss, or deduction.
``(e) Payments Nondeductible.--No deduction shall be
allowed under subtitle A for any payment required to be made by
an electing large partnership under this section.
``PART II--PARTNERSHIP LEVEL ADJUSTMENTS
``Subpart A. Adjustments by Secretary.
``Subpart B. Claims for adjustments by partnership.
``Subpart A--Adjustments by Secretary
``Sec. 6245. Secretarial authority.
``Sec. 6246. Restrictions on partnership adjustments.
``Sec. 6247. Judicial review of partnership adjustment.
``Sec. 6248. Period of limitations for making adjustments.
``SEC. 6245. SECRETARIAL AUTHORITY.
``(a) General Rule.--The Secretary is authorized and
directed to make adjustments at the partnership level in any
partnership item to the extent necessary to have such item be
treated in the manner required.
``(b) Notice of Partnership Adjustment.--
``(1) In general.--If the Secretary determines that
a partnership adjustment is required, the Secretary is
authorized to send notice of such adjustment to the
partnership by certified mail or registered mail. Such
notice shall be sufficient if mailed to the partnership
at its last known address even if the partnership has
terminated its existence.
``(2) Further notices restricted.--If the Secretary
mails a notice of a partnership adjustment to any
partnership for any partnership taxable year and the
partnership files a petition under section 6247 with
respect to such notice, in the absence of a showing of
fraud, malfeasance, or misrepresentation of a material
fact, the Secretary shall not mail another such notice
to such partnership with respect to such taxable year.
``(3) Authority to rescind notice with partnership
consent.--The Secretary may, with the consent of the
partnership, rescind any notice of a partnership
adjustment mailed to such partnership. Any notice so
rescinded shall not be treated as a notice of a
partnership adjustment, for purposes of this section,
section 6246, and section 6247, and the taxpayer shall
have no right to bring a proceeding under section 6247
with respect to such notice. Nothing in this subsection
shall affect any suspension of the running of any
period of limitations during any periodany period
during which the rescinded notice was outstanding.
``SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUSTMENTS.
``(a) General Rule.--Except as otherwise provided in this
chapter, no adjustment to any partnership item may be made (and
no levy or proceeding in any court for the collection of any
amount resulting from such adjustment may be made, begun or
prosecuted) before--
``(1) the close of the 90th day after the day on
which a notice of a partnership adjustment was mailed
to the partnership, and
``(2) if a petition is filed under section 6247
with respect to such notice, the decision of the court
has become final.
``(b) Premature Action May Be Enjoined.--Notwithstanding
section 7421(a), any action which violates subsection (a) may
be enjoined in the proper court, including the Tax Court. The
Tax Court shall have no jurisdiction to enjoin any action under
this subsection unless a timely petition has been filed under
section 6247 and then only in respect of the adjustments that
are the subject of such petition.
``(c) Exceptions to Restrictions on Adjustments.--
``(1) Adjustments arising out of math or clerical
errors.--
``(A) In general.--If the partnership is
notified that, on account of a mathematical or
clerical error appearing on the partnership
return, an adjustment to a partnership item is
required, rules similar to the rules of
paragraphs (1) and (2) of section 6213(b) shall
apply to such adjustment.
``(B) Special rule.--If an electing large
partnership is a partner in another electing
large partnership, any adjustment on account of
such partnership's failure to comply with the
requirements of section 6241(a) with respect to
its interest in such other partnership shall be
treated as an adjustment referred to in
subparagraph (A), except that paragraph (2) of
section 6213(b) shall not apply to such
adjustment.
``(2) Partnership may waive restrictions.--The
partnership shall at any time (whether or not a notice
of partnership adjustment has been issued) have the
right, by a signed notice in writing filed with the
Secretary, to waive the restrictions provided in
subsection (a) on the making of any partnership
adjustment.
``(d) Limit Where No Proceeding Begun.--If no proceeding
under section 6247 is begun with respect to any notice of a
partnership adjustment during the 90-day period described in
subsection (a), the amount for which the partnership is liable
under section 6242 (and any increase in any partner's liability
for tax under chapter 1 by reason of any adjustment under
section 6242(a)) shall not exceed the amount determined in
accordance with such notice.
``SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT.
``(a) General Rule.--Within 90 days after the date on which
a notice of a partnership adjustment is mailed to the
partnership with respect to any partnership taxable year, the
partnership may file a petition for a readjustment of the
partnership items for such taxable year with--
``(1) the Tax Court,
``(2) the district court of the United States for
the district in which the partnership's principal place
of business is located, or
``(3) the Claims Court.
``(b) Jurisdictional Requirement for Bringing Action in
District Court or Claims Court.--
``(1) In general.--A readjustment petition under
this section may be filed in a district court of the
United States or the Claims Court only if the
partnership filing the petition deposits with the
Secretary, on or before the date the petition is filed,
the amount for which the partnership would be liable
under section 6242(b) (as of the date of the filing of
the petition) if the partnership items were adjusted as
provided by the notice of partnership adjustment. The
court may by order provide that the jurisdictional
requirements of this paragraph are satisfied where
there has been a good faith attempt to satisfy such
requirement and any shortfall of the amount required to
be deposited is timely corrected.
``(2) Interest payable.--Any amount deposited under
paragraph (1), while deposited, shall not be treated as
a payment of tax for purposes of this title (other than
chapter 67).
``(c) Scope of Judicial Review.--A court with which a
petition is filed in accordance with this section shall have
jurisdiction to determine all partnership items of the
partnership for the partnership taxable year to which the
notice of partnership adjustment relates and the proper
allocation of such items among the partners (and the
applicability of any penalty, addition to tax, or additional
amount for which the partnership may be liable under section
6242(b)).
``(d) Determination of Court Reviewable.--Any determination
by a court under this section shall have the force and effect
of a decision of the Tax Court or a final judgment or decree of
the district court or the Claims Court, as the case may be, and
shall be reviewable as such. The date of any such determination
shall be treated as being the date of the court's order
entering the decision.
``(e) Effect of Decision Dismissing Action.--If an action
brought under this section is dismissed other than by reason of
a rescission under section 6245(b)(3), the decision of the
court dismissing the action shall be considered as its decision
that the notice of partnership adjustment is correct, and an
appropriate order shall be entered in the records of the court.
``SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.
``(a) General Rule.--Except as otherwise provided in this
section, no adjustment under this subpart to any partnership
item for any partnership taxable year may be made after the
date which is 3 years after the later of--
``(1) the date on which the partnership return for
such taxable year was filed, or
``(2) the last day for filing such return for such
year (determined without regard to extensions).
``(b) Extension by Agreement.--The period described in
subsection (a) (including an extension period under this
subsection) may be extended by an agreement entered into by the
Secretary and the partnership before the expiration of such
period.
``(c) Special Rule in Case of Fraud, Etc.--
``(1) False return.--In the case of a false or
fraudulent partnership return with intent to evade tax,
the adjustment may be made at any time.
``(2) Substantial omission of income.--If any
partnership omits from gross income an amount properly
includible therein which is in excess of 25 percent of
the amount of gross income stated in its return,
subsection (a) shall be applied by substituting `6
years' for `3 years'.
``(3) No return.--In the case of a failure by a
partnership to file a return for any taxable year, the
adjustment may be made at any time.
``(4) Return filed by secretary.--For purposes of
this section, a return executed by the Secretary under
subsection (b) of section 6020 on behalf of the
partnership shall not be treated as a return of the
partnership.
``(d) Suspension When Secretary Mails Notice of
Adjustment.--If notice of a partnership adjustment with respect
to any taxable year is mailed to the partnership, the running
of the period specified in subsection (a) (as modified by the
other provisions of this section) shall be suspended--
``(1) for the period during which an action may be
brought under section 6247 (and, if a petition is filed
under section 6247 with respect to such notice, until
the decision of the court becomes final), and
``(2) for 1 year thereafter.
``Subpart B--Claims for Adjustments by Partnership
``Sec. 6251. Administrative adjustment requests.
``Sec. 6252. Judicial review where administrative adjustment
request is not allowed in full.
``SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
``(a) General Rule.--A partnership may file a request for
an administrative adjustment of partnership items for any
partnership taxable year at any time which is--
``(1) within 3 years after the later of--
``(A) the date on which the partnership
return for such year is filed, or
``(B) the last day for filing the
partnership return for such year (determined
without regard to extensions), and
``(2) before the mailing to the partnership of a
notice of a partnership adjustment with respect to such
taxable year.
``(b) Secretarial Action.--If a partnership files an
administrative adjustment request under subsection (a), the
Secretary may allow any part of the requested adjustments.
``(c) Special Rule in Case of Extension Under Section
6248.--If the period described in section 6248(a) is extended
pursuant to an agreement under section 6248(b), the period
prescribed by subsection (a)(1) shall not expire before the
date 6 months after the expiration of the extension under
section 6248(b).
``SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE ADJUSTMENT REQUEST IS
NOT ALLOWED IN FULL.
``(a) In General.--If any part of an administrative
adjustment request filed under section 6251 is not allowed by
the Secretary, the partnership may file a petition for an
adjustment with respect to the partnership items to which such
part of the request relates with--
``(1) the Tax Court,
``(2) the district court of the United States for
the district in which the principal place of business
of the partnership is located, or
``(3) the Claims Court.
``(b) Period for Filing Petition.--A petition may be filed
under subsection (a) with respect to partnership items for a
partnership taxable year only--
``(1) after the expiration of 6 months from the
date of filing of the request under section 6251, and
``(2) before the date which is 2 years after the
date of such request.
The 2-year period set forth in paragraph (2) shall be extended
for such period as may be agreed upon in writing by the
partnership and the Secretary.
``(c) Coordination With Subpart A.--
``(1) Notice of partnership adjustment before
filing of petition.--No petition may be filed under
this section after the Secretary mails to the
partnership a notice of a partnership adjustment for
the partnership taxable year to which the request under
section 6251 relates.
``(2) Notice of partnership adjustment after filing
but before hearing of petition.--If the Secretary mails
to the partnership a notice of a partnership adjustment
for the partnership taxable year to which the request
under section 6251 relates after the filing of a
petition under this subsection but before the hearing
of such petition, such petition shall be treated as an
action brought under section 6247 with respect to such notice, except
that subsection (b) of section 6247 shall not apply.
``(3) Notice must be before expiration of statute
of limitations.--A notice of a partnership adjustment
for the partnership taxable year shall be taken into
account under paragraphs (1) and (2) only if such
notice is mailed before the expiration of the period
prescribed by section 6248 for making adjustments to
partnership items for such taxable year.
``(d) Scope of Judicial Review.--Except in the case
described in paragraph (2) of subsection (c), a court with
which a petition is filed in accordance with this section shall
have jurisdiction to determine only those partnership items to
which the part of the request under section 6251 not allowed by
the Secretary relates and those items with respect to which the
Secretary asserts adjustments as offsets to the adjustments
requested by the partnership.
``(e) Determination of Court Reviewable.--Any determination
by a court under this section shall have the force and effect
of a decision of the Tax Court or a final judgment or decree of
the district court or the Claims Court, as the case may be, and
shall be reviewable as such. The date of any such determination
shall be treated as being the date of the court's order
entering the decision.
``PART III--DEFINITIONS AND SPECIAL RULES
``Sec. 6255. Definitions and special rules.
``SEC. 6255. DEFINITIONS AND SPECIAL RULES.
``(a) Definitions.--For purposes of this subchapter--
``(1) Electing large partnership.--The term
`electing large partnership' has the meaning given to
such term by section 775.
``(2) Partnership item.--The term `partnership
item' has the meaning given to such term by section
6231(a)(3).
``(b) Partners Bound by Actions of Partnership, Etc.--
``(1) Designation of partner.--Each electing large
partnership shall designate (in the manner prescribed
by the Secretary) a partner (or other person) who shall
have the sole authority to act on behalf of such
partnership under this subchapter. In any case in which
such a designation is not in effect, the Secretary may
select any partner as the partner with such authority.
``(2) Binding effect.--An electing large
partnership and all partners of such partnership shall
be bound--
``(A) by actions taken under this
subchapter by the partnership, and
``(B) by any decision in a proceeding
brought under this subchapter.
``(c) Partnerships Having Principal Place of Business
Outside the United States.--For purposes of sections 6247 and
6252, a principal place of business located outside the United
States shall be treated as located in the District of Columbia.
``(d) Treatment Where Partnership Ceases To Exist.--If a
partnership ceases to exist before a partnership adjustment
under this subchapter takes effect, such adjustment shall be
taken into account by the former partners of such partnership
under regulations prescribed by the Secretary.
``(e) Date Decision Becomes Final.--For purposes of this
subchapter, the principles of section 7481(a) shall be applied
in determining the date on which a decision of a district court
or the Claims Court becomes final.
``(f) Partnerships in Cases Under Title 11 of the United
States Code.--
``(1) Suspension of period of limitations on making
adjustment, assessment, or collection.--The running of
any period of limitations provided in this subchapter
on making a partnership adjustment (or provided by
section 6501 or 6502 on the assessment or collection of
any amount required to be paid under section 6242)
shall, in a case under title 11 of the United States
Code, be suspended during the period during which the
Secretary is prohibited by reason of such case from
making the adjustment (or assessment or collection)
and--
``(A) for adjustment or assessment, 60 days
thereafter, and
``(B) for collection, 6 months thereafter.
A rule similar to the rule of section 6213(f)(2) shall
apply for purposes of section 6246.
``(2) Suspension of period of limitation for filing
for judicial review.--The running of the period
specified in section 6247(a) or 6252(b) shall, in a
case under title 11 of the United States Code, be
suspended during the period during which the
partnership is prohibited by reason of such case from
filing a petition under section 6247 or 6252 and for 60
days thereafter.
``(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions of
this subchapter, including regulations--
``(1) to prevent abuse through manipulation of the
provisions of this subchapter, and
``(2) providing that this subchapter shall not
apply to any case described in section 6231(c)(1) (or
the regulations prescribed thereunder) where the
application of this subchapter to such a case would
interfere with the effective and efficient enforcement
of this title.
In any case to which this subchapter does not apply by reason
of paragraph (2), rules similar to the rules of sections
6229(f) and 6255(f) shall apply.''.
(b) Conforming Amendments.--
(1) Subsection (a) of section 7421 is amended by
inserting ``6246(b),'' after ``6213(a),''.
(2) Subsection (c) of section 7459 is amended by
striking ``or section 6228(a)'' and inserting ``,
6228(a), 6247, or 6252''.
(3) Subparagraph (E) of section 7482(b)(1) is
amended by striking ``or 6228(a)'' and inserting ``,
6228(a), 6247, or 6252''.
(4)(A) The text of section 7485(b) is amended by
striking ``or 6228(a)'' and inserting ``, 6228(a),
6247, or 6252''.
(B) The subsection heading for section 7485(b) is
amended to read as follows:
``(b) Bond in Case of Appeal of Certain Partnership-Related
Decisions.--''.
(c) Clerical Amendment.--The table of subchapters for
chapter 63 is amended by adding at the end thereof the
following new item:
``Subchapter D. Treatment of electing large partnerships.''.
SEC. 1223. DUE DATE FOR FURNISHING INFORMATION TO PARTNERS OF ELECTING
LARGE PARTNERSHIPS.
(a) General Rule.--Subsection (b) of section 6031 (relating
to copies to partners) is amended by adding at the end the
following new sentence: ``In the case of an electing large
partnership (as defined in section 775), such information shall
be furnished on or before the first March 15 following the
close of such taxable year.''.
(b) Treatment as Information Return.--Section 6724 is
amended by adding at the end the following new subsection:
``(e) Special Rule for Certain Partnership Returns.--If any
partnership return under section 6031(a) is required under
section 6011(e) to be filed on magnetic media or in other
machine-readable form, for purposes of this part, each schedule
required to be included with such return with respect to each
partner shall be treated as a separate information return.''.
SEC. 1224. RETURNS REQUIRED ON MAGNETIC MEDIA.
Paragraph (2) of section 6011(e) (relating to returns on
magnetic media) is amended by adding at the end thereof the
following new sentence:
``Notwithstanding the preceding sentence, the Secretary
shall require partnerships having more than 100
partners to file returns on magnetic media.''.
SEC. 1225. TREATMENT OF PARTNERSHIP ITEMS OF INDIVIDUAL RETIREMENT
ACCOUNTS.
Subsection (b) of section 6012 is amended by adding at the
end thereof the following new paragraph:
``(6) IRA share of partnership income.--In the case
of a trust which is exempt from taxation under section
408(e), for purposes of this section, the trust's
distributive share of items of gross income and gain of
any partnership to which subchapter C or D of chapter
63 applies shall be treated as equal to the trust's
distributive share of the taxable income of such
partnership.''.
SEC. 1226. EFFECTIVE DATE.
The amendments made by this part shall apply to partnership
taxable years ending on or after December 31, 1997.
PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS
SEC. 1231. TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY PROCEEDINGS.
(a) In General.--Subchapter C of chapter 63 is amended by
adding at the end the following new section:
``SEC. 6234. DECLARATORY JUDGMENT RELATING TO TREATMENT OF ITEMS OTHER
THAN PARTNERSHIP ITEMS WITH RESPECT TO AN
OVERSHELTERED RETURN.
``(a) General Rule.--If--
``(1) a taxpayer files an oversheltered return for
a taxable year,
``(2) the Secretary makes a determination with
respect to the treatment of items (other than
partnership items) of such taxpayer for such taxable
year, and
``(3) the adjustments resulting from such
determination do not give rise to a deficiency (as
defined in section 6211) but would give rise to a
deficiency if there were no net loss from partnership
items,
the Secretary is authorized to send a notice of adjustment
reflecting such determination to the taxpayer by certified or
registered mail.
``(b) Oversheltered Return.--For purposes of this section,
the term `oversheltered return' means an income tax return
which--
``(1) shows no taxable income for the taxable year,
and
``(2) shows a net loss from partnership items.
``(c) Judicial Review in the Tax Court.--Within 90 days, or
150 days if the notice is addressed to a person outside the
United States, after the day on which the notice of adjustment
authorized in subsection (a) is mailed to the taxpayer, the
taxpayer may file a petition with the Tax Court for
redetermination of the adjustments. Upon the filing of such a
petition, the Tax Court shall have jurisdiction to make a
declaration with respect to all items (other than partnership
items and affected items which require partner level
determinations as described in section 6230(a)(2)(A)(i)) for
the taxable year to which the notice of adjustment relates, in
accordance with the principles of section 6214(a). Any such
declaration shall have the force and effect of a decision of
the Tax Court and shall be reviewable as such.
``(d) Failure To File Petition.--
``(1) In general.--Except as provided in paragraph
(2), if the taxpayer does not file a petition with the
Tax Court within the time prescribed in subsection (c),
the determination of the Secretary set forth in the
notice of adjustment that was mailed to the taxpayer
shall be deemed to be correct.
``(2) Exception.--Paragraph (1) shall not apply
after the date that the taxpayer--
``(A) files a petition with the Tax Court
within the time prescribed in subsection (c)
with respect to a subsequent notice of
adjustment relating to the same taxable year,
or
``(B) files a claim for refund of an
overpayment of tax under section 6511 for the
taxable year involved.
If a claim for refund is filed by the taxpayer, then
solely for purposes of determining (for the taxable
year involved) the amount of any computational
adjustment in connection with a partnership proceeding
under this subchapter (other than under this section)
or the amount of any deficiency attributable to
affected items in a proceeding under section
6230(a)(2), the items that are the subject of the
notice of adjustment shall be presumed to have been
correctly reported on the taxpayer's return during the
pendency of the refund claim (and, if within the time
prescribed by section 6532 the taxpayer commences a
civil action for refund under section 7422, until the
decision in the refund action becomes final).
``(e) Limitations Period.--
``(1) In general.--Any notice to a taxpayer under
subsection (a) shall be mailed before the expiration of
the period prescribed by section 6501 (relating to the
period of limitations on assessment).
``(2) Suspension when secretary mails notice of
adjustment.--If the Secretary mails a notice of
adjustment to the taxpayer for a taxable year, the
period of limitations on the making of assessments
shall be suspended for the period during which the
Secretary is prohibited from making the assessment
(and, in any event, if a proceeding in respect of the
notice of adjustment is placed on the docket of the Tax
Court, until the decision of the Tax Court becomes
final), and for 60 days thereafter.
``(3) Restrictions on assessment.--Except as
otherwise provided in section 6851, 6852, or 6861, no
assessment of a deficiency with respect to any tax
imposed by subtitle A attributable to any item (other
than a partnership item or any item affected by a partnership item)
shall be made--
``(A) until the expiration of the
applicable 90-day or 150-day period set forth
in subsection (c) for filing a petition with
the Tax Court, or
``(B) if a petition has been filed with the
Tax Court, until the decision of the Tax Court
has become final.
``(f) Further Notices of Adjustment Restricted.--If the
Secretary mails a notice of adjustment to the taxpayer for a
taxable year and the taxpayer files a petition with the Tax
Court within the time prescribed in subsection (c), the
Secretary may not mail another such notice to the taxpayer with
respect to the same taxable year in the absence of a showing of
fraud, malfeasance, or misrepresentation of a material fact.
``(g) Coordination With Other Proceedings Under This
Subchapter.--
``(1) In general.--The treatment of any item that
has been determined pursuant to subsection (c) or (d)
shall be taken into account in determining the amount
of any computational adjustment that is made in
connection with a partnership proceeding under this
subchapter (other than under this section), or the
amount of any deficiency attributable to affected items
in a proceeding under section 6230(a)(2), for the
taxable year involved. Notwithstanding any other law or
rule of law pertaining to the period of limitations on
the making of assessments, for purposes of the
preceding sentence, any adjustment made in accordance
with this section shall be taken into account
regardless of whether any assessment has been made with
respect to such adjustment.
``(2) Special rule in case of computational
adjustment.--In the case of a computational adjustment
that is made in connection with a partnership
proceeding under this subchapter (other than under this
section), the provisions of paragraph (1) shall apply
only if the computational adjustment is made within the
period prescribed by section 6229 for assessing any tax
under subtitle A which is attributable to any
partnership item or affected item for the taxable year
involved.
``(3) Conversion to deficiency proceeding.--If--
``(A) after the notice referred to in
subsection (a) is mailed to a taxpayer for a
taxable year but before the expiration of the
period for filing a petition with the Tax Court
under subsection (c) (or, if a petition is
filed with the Tax Court, before the Tax Court
makes a declaration for that taxable year), the
treatment of any partnership item for the
taxable year is finally determined, or any such
item ceases to be a partnership item pursuant
to section 6231(b), and
``(B) as a result of that final
determination or cessation, a deficiency can be
determined with respect to the items that are
the subject of the notice of adjustment,
the notice of adjustment shall be treated as a notice
of deficiency under section 6212 and any petition filed
in respect of the notice shall be treated as an action
brought under section 6213.
``(4) Finally determined.--For purposes of this
subsection, the treatment of partnership items shall be
treated as finally determined if--
``(A) the Secretary enters into a
settlement agreement (within the meaning of
section 6224) with the taxpayer regarding such
items,
``(B) a notice of final partnership
administrative adjustment has been issued and--
``(i) no petition has been filed
under section 6226 and the time for
doing so has expired, or
``(ii) a petition has been filed
under section 6226 and the decision of
the court has become final, or
``(C) the period within which any tax
attributable to such items may be assessed
against the taxpayer has expired.
``(h) Special Rules if Secretary Incorrectly Determines
Applicable Procedure.--
``(1) Special rule if secretary erroneously mails
notice of adjustment.--If the Secretary erroneously
determines that subchapter B does not apply to a
taxable year of a taxpayer and consistent with that
determination timely mails a notice of adjustment to
the taxpayer pursuant to subsection (a) of this
section, the notice of adjustment shall be treated as a
notice of deficiency under section 6212 and any
petition that is filed in respect of the notice shall
be treated as an action brought under section 6213.
``(2) Special rule if secretary erroneously mails
notice of deficiency.--If the Secretary erroneously
determines that subchapter B applies to a taxable year
of a taxpayer and consistent with that determination
timely mails a notice of deficiency to the taxpayer
pursuant to section 6212, the notice of deficiency
shall be treated as a notice of adjustment under
subsection (a) and any petition that is filed in
respect of the notice shall be treated as an action
brought under subsection (c).''.
(b) Treatment of Partnership Items in Deficiency
Proceedings.--Section 6211 (defining deficiency) is amended by
adding at the end the following new subsection:
``(c) Coordination With Subchapter C.--In determining the
amount of any deficiency for purposes of this subchapter,
adjustments to partnership items shall be made only as provided
in subchapter C.''.
(c) Clerical Amendment.--The table of sections for
subchapter C of chapter 63 is amended by adding at the end the
following new item:
``Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an
oversheltered return.''.
(d) Effective Date.--The amendments made by this section
shall apply to partnership taxable years ending after the date
of the enactment of this Act.
SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE OF AUDIT PROCEDURES
TO BE FOLLOWED.
(a) In General.--Section 6231 (relating to definitions and
special rules) is amended by adding at the end the following
new subsection:
``(g) Partnership Return To Be Determinative of Whether
Subchapter Applies.--
``(1) Determination that subchapter applies.--If,
on the basis of a partnership return for a taxable
year, the Secretary reasonably determines that this
subchapter applies to such partnership for such year
but such determination is erroneous, then the
provisions of this subchapter are hereby extended to
such partnership (and its items) for such taxable year
and to partners of such partnership.
``(2) Determination that subchapter does not
apply.--If, on the basis of a partnership return for a
taxable year, the Secretary reasonably determines that
this subchapter does not apply to such partnership for
such year but such determination is erroneous, then the
provisions of this subchapter shall not apply to such
partnership (and its items) for such taxable year or to
partners of such partnership.''.
(b) Effective Date.--The amendment made by this section
shall apply to partnership taxable years ending after the date
of the enactment of this Act.
SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS.
(a) Suspension of Statute Where Untimely Petition Filed.--
Paragraph (1) of section 6229(d) (relating to suspension where
Secretary makes administrative adjustment) is amended by
striking all that follows ``section 6226'' and inserting the
following: ``(and, if a petition is filed under section 6226
with respect to such administrative adjustment, until the
decision of the court becomes final), and''.
(b) Suspension of Statute During Bankruptcy Proceeding.--
Section 6229 is amended by adding at the end the following new
subsection:
``(h) Suspension During Pendency of Bankruptcy
Proceeding.--If a petition is filed naming a partner as a
debtor in a bankruptcy proceeding under title 11 of the United
States Code, the running of the period of limitations provided
in this section with respect to such partner shall be
suspended--
``(1) for the period during which the Secretary is
prohibited by reason of such bankruptcy proceeding from
making an assessment, and
``(2) for 60 days thereafter.''.
(c) Tax Matters Partner in Bankruptcy.--Section 6229(b) is
amended by redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following new paragraph:
``(2) Special rule with respect to debtors in title
11 cases.--Notwithstanding any other law or rule of
law, if an agreement is entered into under paragraph
(1)(B) and the agreement is signed by a person who
would be the tax matters partner but for the fact that,
at the time that the agreement is executed, the person
is a debtor in a bankruptcy proceeding under title 11
of the United States Code, such agreement shall be
binding on all partners in the partnership unless the
Secretary has been notified of the bankruptcy
proceeding in accordance with regulations prescribed by
the Secretary.''.
(d) Effective Dates.--
(1) Subsections (a) and (b).--The amendments made
by subsections (a) and (b) shall apply to partnership
taxable years with respect to which the period under
section 6229 of the Internal Revenue Code of 1986 for
assessing tax has not expired on or before the date of
the enactment of this Act.
(2) Subsection (c).--The amendment made by
subsection (c) shall apply to agreements entered into
after the date of the enactment of this Act.
SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.
(a) In General.--Clause (i) of section 6231(a)(1)(B)
(relating to exception for small partnerships) is amended to
read as follows:
``(i) In general.--The term
`partnership' shall not include any
partnership having 10 or fewer partners
each of whom is an individual (other
than a nonresident alien), a C
corporation, or an estate of a deceased
partner. For purposes of the preceding
sentence, a husband and wife (and their
estates) shall be treated as 1
partner.''.
(b) Effective Date.--The amendment made by this section
shall apply to partnership taxable years ending after the date
of the enactment of this Act.
SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-YEAR LIMITATION ON
ASSESSMENT.
(a) In General.--Subsection (f) of section 6229 (relating
to items becoming nonpartnership items) is amended--
(1) by striking ``(f) Items Becoming Nonpartnership
Items.--If'' and inserting the following:
``(f) Special Rules.--
``(1) Items becoming nonpartnership items.--If'',
(2) by moving the text of such subsection 2 ems to
the right, and
(3) by adding at the end the following new
paragraph:
``(2) Special rule for partial settlement
agreements.--If a partner enters into a settlement
agreement with the Secretary with respect to the
treatment of some of the partnership items in dispute
for a partnership taxable year but other partnership
items for such year remain in dispute, the period of
limitations for assessing any tax attributable to the
settled items shall be determined as if such agreement
had not been entered into.''.
(b) Effective Date.--The amendment made by this section
shall apply to settlements entered into after the date of the
enactment of this Act.
SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST FOR ADMINISTRATIVE
ADJUSTMENT.
(a) In General.--Section 6227 (relating to administrative
adjustment requests) is amended by redesignating subsections
(b) and (c) as subsections (c) and (d), respectively, and by
inserting after subsection (a) the following new subsection:
``(b) Special Rule in Case of Extension of Period of
Limitations Under Section 6229.--The period prescribed by
subsection (a)(1) for filing of a request for an administrative
adjustment shall be extended--
``(1) for the period within which an assessment may
be made pursuant to an agreement (or any extension
thereof) under section 6229(b), and
``(2) for 6 months thereafter.''.
(b) Effective Date.--The amendment made by this section
shall take effect as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of
1982.
SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN CONTEXT OF
PARTNERSHIP PROCEEDINGS.
(a) In General.--Subsection (a) of section 6230 is amended
by adding at the end the following new paragraph:
``(3) Special rule in case of assertion by
partner's spouse of innocent spouse relief.--
``(A) Notwithstanding section 6404(b), if
the spouse of a partner asserts that section
6013(e) applies with respect to a liability
that is attributable to any adjustment to a
partnership item, then such spouse may file
with the Secretary within 60 days after the
notice of computational adjustment is mailed to
the spouse a request for abatement of the
assessment specified in such notice. Upon
receipt of such request, the Secretary shall
abate the assessment. Any reassessment of the
tax with respect to which an abatement is made
under this subparagraph shall be subject to the
deficiency procedures prescribed by subchapter
B. The period for making any such reassessment
shall not expire before the expiration of 60
days after the date of such abatement.
``(B) If the spouse files a petition with
the Tax Court pursuant to section 6213 with
respect to the request for abatement described
in subparagraph (A), the Tax Court shall only
have jurisdiction pursuant to this section to
determine whether the requirements of section
6013(e) have been satisfied. For purposes of
such determination, the treatment of
partnership items under the settlement, the
final partnership administrative adjustment, or
the decision of the court (whichever is
appropriate) that gave rise to the liability in
question shall be conclusive.
``(C) Rules similar to the rules contained
in subparagraphs (B) and (C) of paragraph (2)
shall apply for purposes of this paragraph.''.
(b) Claims for Refund.--Subsection (c) of section 6230 is
amended by adding at the end the following new paragraph:
``(5) Rules for seeking innocent spouse relief.--
``(A) In general.--The spouse of a partner
may file a claim for refund on the ground that
the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is
attributable to an adjustment to a partnership
item.
``(B) Time for filing claim.--Any claim
under subparagraph (A) shall be filed within 6
months after the day on which the
Secretarymails to the spouse the notice of computational adjustment
referred to in subsection (a)(3)(A).
``(C) Suit if claim not allowed.--If the
claim under subparagraph (B) is not allowed,
the spouse may bring suit with respect to the
claim within the period specified in paragraph
(3).
``(D) Prior determinations are binding.--
For purposes of any claim or suit under this
paragraph, the treatment of partnership items
under the settlement, the final partnership
administrative adjustment, or the decision of
the court (whichever is appropriate) that gave
rise to the liability in question shall be
conclusive.''.
(c) Technical Amendments.--
(1) Paragraph (1) of section 6230(a) is amended by
striking ``paragraph (2)'' and inserting ``paragraph
(2) or (3)''.
(2) Subsection (a) of section 6503 is amended by
striking ``section 6230(a)(2)(A)'' and inserting
``paragraph (2)(A) or (3) of section 6230(a)''.
(d) Effective Date.--The amendments made by this section
shall take effect as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of
1982.
SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSHIP LEVEL.
(a) In General.--Section 6221 (relating to tax treatment
determined at partnership level) is amended by striking
``item'' and inserting ``item (and the applicability of any
penalty, addition to tax, or additional amount which relates to
an adjustment to a partnership item)''.
(b) Conforming Amendments.--
(1) Subsection (f) of section 6226 is amended--
(A) by striking ``relates and'' and
inserting ``relates,'', and
(B) by inserting before the period ``, and
the applicability of any penalty, addition to
tax, or additional amount which relates to an
adjustment to a partnership item''.
(2) Clause (i) of section 6230(a)(2)(A) is amended
to read as follows:
``(i) affected items which require
partner level determinations (other
than penalties, additions to tax, and
additional amounts that relate to
adjustments to partnership items),
or''.
(3)(A) Subparagraph (A) of section 6230(a)(3), as
added by section 1237, is amended by inserting
``(including any liability for any penalties, additions
to tax, or additional amounts relating to such
adjustment)'' after ``partnership item''.
(B) Subparagraph (B) of such section is amended by
inserting ``(and the applicability of any penalties,
additions to tax, or additional amounts)'' after
``partnership items''.
(C) Subparagraph (A) of section 6230(c)(5), as
added by section 1237, is amended by inserting before
the period ``(including any liability for any
penalties, additions to tax, or additional amounts
relating to such adjustment)''.
(D) Subparagraph (D) of section 6230(c)(5), as
added by section 1237, is amended by inserting ``(and
the applicability of any penalties, additions to tax,
or additional amounts)'' after ``partnership items''.
(4) Paragraph (1) of section 6230(c) is amended by
striking ``or'' at the end of subparagraph (A), by
striking the period at the end of subparagraph (B) and
inserting ``, or'', and by adding at the end the
following new subparagraph:
``(C) the Secretary erroneously imposed any
penalty, addition to tax, or additional amount
which relates to an adjustment to a partnership
item.''.
(5) So much of subparagraph (A) of section
6230(c)(2) as precedes ``shall be filed'' is amended to
read as follows:
``(A) Under paragraph (1) (a) or (c).--Any
claim under subparagraph (A) or (C) of
paragraph (1)''.
(6) Paragraph (4) of section 6230(c) is amended by
adding at the end the following: ``In addition, the
determination under the final partnership
administrative adjustment or under the decision of the
court (whichever is appropriate) concerning the
applicability of any penalty, addition to tax, or
additional amount which relates to an adjustment to a
partnership item shall also be conclusive.
Notwithstanding the preceding sentence, the partner
shall be allowed to assert any partner level defenses
that may apply or to challenge the amount of the
computational adjustment.''.
(c) Effective Date.--The amendments made by this section
shall apply to partnership taxable years ending after the date
of the enactment of this Act.
SEC. 1239. PROVISIONS RELATING TO COURT JURISDICTION, ETC.
(a) Tax Court Jurisdiction To Enjoin Premature Assessments
of Deficiencies Attributable to Partnership Items.--Subsection
(b) of section 6225 is amended by striking ``the proper
court.'' and inserting ``the proper court, including the Tax
Court. The Tax Court shall have no jurisdiction to enjoin any
action or proceeding under this subsection unless a timely
petition for a readjustment of the partnership items for the
taxable year has been filed and then only in respect of the
adjustments that are the subject of such petition.''.
(b) Jurisdiction To Consider Statute of Limitations With
Respect to Partners.--Paragraph (1) of section 6226(d) is
amended by adding at the end the following new sentence:
``Notwithstanding subparagraph (B), any person treated
under subsection (c) as a party to an action shall be
permitted to participate in such action (or file a
readjustment petition under subsection (b) or paragraph
(2) of this subsection) solely for the purpose of
asserting that the period of limitations for assessing
any tax attributable to partnership items has expired
with respect to such person, and the court having
jurisdiction of such action shall have jurisdiction to
consider such assertion.''.
(c) Tax Court Jurisdiction To Determine Overpayments
Attributable to Affected Items.--
(1) Paragraph (6) of section 6230(d) is amended by
striking ``(or an affected item)''.
(2) Paragraph (3) of section 6512(b) is amended by
adding at the end the following new sentence:
``In the case of a credit or refund relating to an
affected item (within the meaning of section
6231(a)(5)), the preceding sentence shall be applied by
substituting the periods under sections 6229 and
6230(d) for the periods under section 6511 (b)(2), (c),
and (d).''.
(d) Venue on Appeal.--
(1) Paragraph (1) of section 7482(b) is amended by
striking ``or'' at the end of subparagraph (D), by
striking the period at the end of subparagraph (E) and
inserting ``, or'', and by inserting after subparagraph
(E) the following new subparagraph:
``(F) in the case of a petition under
section 6234(c)--
``(i) the legal residence of the
petitioner if the petitioner is not a
corporation, and
``(ii) the place or office
applicable under subparagraph (B) if
the petitioner is a corporation.''.
(2) The last sentence of section 7482(b)(1) is
amended by striking ``or 6228(a)'' and inserting ``,
6228(a), or 6234(c)''.
(e) Other Provisions.--
(1) Subsection (c) of section 7459 is amended by
striking ``or section 6228(a)'' and inserting ``,
6228(a), or 6234(c)''.
(2) Subsection (o) of section 6501 is amended by
adding at the end the following new paragraph:
``(3) For declaratory judgment relating to
treatment of items other than partnership items with
respect to an oversheltered return, see section
6234.''.
(3) Subsection (a) of section 7421, as amended by
section 1222, is amended by inserting ``6225(b),''
after ``6213(a),''.
(f) Effective Date.--The amendments made by this section
shall apply to partnership taxable years ending after the date
of the enactment of this Act.
SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED BY NOTICE PARTNERS OR
5-PERCENT GROUPS.
(a) In General.--Subsection (b) of section 6226 (relating
to judicial review of final partnership administrative
adjustments) is amended by redesignating paragraph (5) as
paragraph (6) and by inserting after paragraph (4) the
following new paragraph:
``(5) Treatment of premature petitions.--If--
``(A) a petition for a readjustment of
partnership items for the taxable year involved
is filed by a notice partner (or a 5-percent
group) during the 90-day period described in
subsection (a), and
``(B) no action is brought under paragraph
(1) during the 60-day period described therein
with respect to such taxable year which is not
dismissed,
such petition shall be treated for purposes of
paragraph (1) as filed on the last day of such 60-day
period.''.
(b) Effective Date.--The amendment made by this section
shall apply to petitions filed after the date of the enactment
of this Act.
SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN PROCEEDING.
(a) In General.--Subsection (b) of section 7485 (relating
to bonds to stay assessment of collection) is amended--
(1) by inserting ``penalties,'' after ``any
interest,'', and
(2) by striking ``aggregate of such deficiencies''
and inserting ``aggregate liability of the parties to
the action''.
(b) Effective Date.--The amendment made by this section
shall take effect as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of
1982.
SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN COMPUTATIONAL
ADJUSTMENT RESULTING FROM CERTAIN SETTLEMENTS.
(a) In General.--Subsection (c) of section 6601 (relating
to interest on underpayment, nonpayment, or extension of time
for payment, of tax) is amended by adding at the end the
following new sentence: ``In the case of a settlement under
section 6224(c) which results in the conversion of partnership
items to nonpartnership items pursuant to section
6231(b)(1)(C), the preceding sentence shall apply to a
computational adjustment resulting from such settlement in the
same manner as if such adjustmentwere a deficiency and such
settlement were a waiver referred to in the preceding sentence.''.
(b) Effective Date.--The amendment made by this section
shall apply to adjustments with respect to partnership taxable
years beginning after the date of the enactment of this Act.
SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUSTMENT REQUESTS WITH
RESPECT TO BAD DEBTS OR WORTHLESS SECURITIES.
(a) General Rule.--Section 6227 (relating to administrative
adjustment requests) is amended by adding at the end the
following new subsection:
``(e) Requests With Respect to Bad Debts or Worthless
Securities.--In the case of that portion of any request for an
administrative adjustment which relates to the deductibility by
the partnership under section 166 of a debt as a debt which
became worthless, or under section 165(g) of a loss from
worthlessness of a security, the period prescribed in
subsection (a)(1) shall be 7 years from the last day for filing
the partnership return for the year with respect to which such
request is made (determined without regard to extensions).''.
(b) Effective Date.--
(1) In general.--The amendment made by subsection
(a) shall take effect as if included in the amendments
made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
(2) Treatment of requests filed before date of
enactment.--In the case of that portion of any request
(filed before the date of the enactment of this Act)
for an administrative adjustment which relates to the
deductibility of a debt as a debt which became
worthless or the deductibility of a loss from the
worthlessness of a security--
(A) paragraph (2) of section 6227(a) of the
Internal Revenue Code of 1986 shall not apply,
(B) the period for filing a petition under
section 6228 of the Internal Revenue Code of
1986 with respect to such request shall not
expire before the date 6 months after the date
of the enactment of this Act, and
(C) such a petition may be filed without
regard to whether there was a notice of the
beginning of an administrative proceeding or a
final partnership administrative adjustment.
PART III--PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR
WITH RESPECT TO DECEASED PARTNER, ETC.
SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT TO DECEASED
PARTNER, ETC.
(a) General Rule.--Subparagraph (A) of section 706(c)(2)
(relating to disposition of entire interest) is amended to read
as follows:
``(A) Disposition of entire interest.--The
taxable year of a partnership shall close with
respect to a partner whose entire interest in
the partnership terminates (whether by reason
of death, liquidation, or otherwise).''.
(b) Clerical Amendment.--The paragraph heading for
paragraph (2) of section 706(c) is amended to read as follows:
``(2) Treatment of dispositions.--''.
(c) Effective Date.--The amendments made by this section
shall apply to partnership taxable years beginning after
December 31, 1997.
Subtitle D--Provisions Relating to Real Estate Investment Trusts
SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF
SHAREHOLDERS.
(a) Rules Relating to Determination of Ownership.--
(1) Failure to issue shareholder demand letter not
to disqualify reit.--Section 857(a) (relating to
requirements applicable to real estate investment
trusts) is amended by striking paragraph (2) and by
redesignating paragraph (3) as paragraph (2).
(2) Shareholder demand letter requirement;
penalty.--Section 857 (relating to taxation of real
estate investment trusts and their beneficiaries) is
amended by redesignating subsection (f) as subsection
(g) and by inserting after subsection (e) the following
new subsection:
``(f) Real Estate Investment Trusts To Ascertain
Ownership.--
``(1) In general.--Each real estate investment
trust shall each taxable year comply with regulations
prescribed by the Secretary for the purposes of
ascertaining the actual ownership of the outstanding
shares, or certificates of beneficial interest, of such
trust.
``(2) Failure to comply.--
``(A) In general.--If a real estate
investment trust fails to comply with the
requirements of paragraph (1) for a taxable
year, such trust shall pay (on notice and
demand by the Secretary and in the same manner
as tax) a penalty of $25,000.
``(B) Intentional disregard.--If any
failure under paragraph (1) is due to
intentional disregard of the requirement under
paragraph (1), the penalty under subparagraph
(A) shall be $50,000.
``(C) Failure to comply after notice.--The
Secretary may require a real estate investment
trust to take such actions as the Secretary
determines appropriate to ascertain actual
ownership if the trust fails to meet the
requirements of paragraph (1). If the trust
fails to take such actions, the trust shall pay
(on notice and demand by the Secretary and in
the same manner as tax) an additional penalty
equal to the penalty determined under
subparagraph (A) or (B), whichever is
applicable.
``(D) Reasonable cause.--No penalty shall
be imposed under this paragraph with respect to
any failure if it is shown that such failure is
due to reasonable cause and not to willful
neglect.''.
(b) Compliance With Closely Held Prohibition.--
(1) In general.--Section 856 (defining real estate
investment trust) is amended by adding at the end the
following new subsection:
``(k) Requirement That Entity Not Be Closely Held Treated
as Met in Certain Cases.--A corporation, trust, or
association--
``(1) which for a taxable year meets the
requirements of section 857(f)(1), and
``(2) which does not know, or exercising reasonable
diligence would not have known, whether the entity
failed to meet the requirement of subsection (a)(6),
shall be treated as having met the requirement of subsection
(a)(6) for the taxable year.''.
(2) Conforming amendment.--Paragraph (6) of section
856(a) is amended by inserting ``subject to the
provisions of subsection (k),'' before ``which is
not''.
SEC. 1252. DE MINIMIS RULE FOR TENANT SERVICES INCOME.
(a) In General.--Paragraph (2) of section 856(d) (defining
rents from real property) is amended by striking subparagraph
(C) and the last sentence and inserting:
``(C) any impermissible tenant service
income (as defined in paragraph (7)).''.
(b) Impermissible Tenant Service Income.--Section 856(d) is
amended by adding at the end the following new paragraph:
``(7) Impermissible tenant service income.--For
purposes of paragraph (2)(C)--
``(A) In general.--The term `impermissible
tenant service income' means, with respect to
any real or personal property, any amount
received or accrued directly or indirectly by
the real estate investment trust for--
``(i) services furnished or
rendered by the trust to the tenants of
such property, or
``(ii) managing or operating such
property.
``(B) Disqualification of all amounts where
more than de minimis amount.--If the amount
described in subparagraph (A) with respect to a
property for any taxable year exceeds 1 percent
of all amounts received or accrued during such
taxable year directly or indirectly by the real
estate investment trust with respect to such
property, the impermissible tenant service
income of the trust with respect to the
property shall include all such amounts.
``(C) Exceptions.--For purposes of
subparagraph (A)--
``(i) services furnished or
rendered, or management or operation
provided, through an independent
contractor from whom the trust itself
does not derive or receive any income
shall not be treated as furnished,
rendered, or provided by the trust, and
``(ii) there shall not be taken
into account any amount which would be
excluded from unrelated business
taxable income under section 512(b)(3)
if received by an organization
described in section 511(a)(2).
``(D) Amount attributable to impermissible
services.--For purposes of subparagraph (A),
the amount treated as received for any service
(or management or operation) shall not be less
than 150 percent of the direct cost of the
trust in furnishing or rendering the service
(or providing the management or operation).
``(E) Coordination with limitations.--For
purposes of paragraphs (2) and (3) of
subsection (c), amounts described in
subparagraph (A) shall be included in the gross
income of the corporation, trust, or
association.''.
SEC. 1253. ATTRIBUTION RULES APPLICABLE TO STOCK OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership of
stock) is amended by striking ``except that'' and all that
follows and inserting ``except that--
``(A) `10 percent' shall be substituted for
`50 percent' in subparagraph (C) of paragraphs
(2) and (3) of section 318(a), and
``(B) section 318(a)(3)(A) shall be applied
in the case of a partnership by taking into
account only partners who own (directly or
indirectly) 25 percent or more of the capital
interest, or the profits interest, in the
partnership.''.
SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL GAINS.
(a) General Rule.--Paragraph (3) of section 857(b)
(relating to capital gains) is amended by redesignating
subparagraph (D) as subparagraph (E) and by inserting after
subparagraph (C) the following new subparagraph:
``(D) Treatment by shareholders of
undistributed capital gains.--
``(i) Every shareholder of a real
estate investment trust at the close of
the trust's taxable year shall include,
in computing his long-term capital
gains in his return for his taxable
year in which the last day of the
trust's taxable year falls, such amount
as the trust shall designate in respect
of such shares in a written notice
mailed to its shareholders at any time
prior to the expiration of 60 days
after the close of its taxable year (or
mailed to its shareholders or holders
of beneficial interests with its annual
report for the taxable year), but the
amount so includible by any shareholder
shall not exceed that part of the
amount subjected to tax in subparagraph
(A)(ii) which he would have received if
all of such amount had been distributed
as capital gain dividends by the trust
to the holders of such shares at the
close of its taxable year.
``(ii) For purposes of this title,
every such shareholder shall be deemed
to have paid, for his taxable year
under clause (i), the tax imposed by
subparagraph (A)(ii) on the amounts
required by this subparagraph to be
included in respect of such shares in
computing his long-term capital gains
for that year; and such shareholders
shall be allowed credit or refund as
the case may be, for the tax so deemed
to have been paid by him.
``(iii) The adjusted basis of such
shares in the hands of the holder shall
be increased with respect to the
amounts required by this subparagraph
to be included in computing his long-
term capital gains, by the difference
between the amount of such includible
gains and the tax deemed paid by such
shareholder in respect of such shares
under clause (ii).
``(iv) In the event of such
designation, the tax imposed by
subparagraph (A)(ii) shall be paid by
the real estate investment trust within
30 days after the close of its taxable
year.
``(v) The earnings and profits of
such real estate investment trust, and
the earnings and profits of any such
shareholder which is a corporation,
shall be appropriately adjusted in
accordance with regulations prescribed
by the Secretary.
``(vi) As used in this
subparagraph, the terms `shares' and
`shareholders' shall include beneficial
interests and holders of beneficial
interests, respectively.''.
(b) Conforming Amendments.--
(1) Clause (i) of section 857(b)(7)(A) is amended
by striking ``subparagraph (B)'' and inserting
``subparagraph (B) or (D)''.
(2) Clause (iii) of section 852(b)(3)(D) is amended
by striking ``by 65 percent'' and all that follows and
inserting ``by the difference between the amount of
such includible gains and the tax deemed paid by such
shareholder in respect of such shares under clause
(ii).''.
SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT.
(a) General Rule.--Subsection (c) of section 856 (relating
to limitations) is amended--
(1) by adding ``and'' at the end of paragraph (3),
(2) by striking paragraphs (4) and (8), and
(3) by redesignating paragraphs (5), (6), and (7)
as paragraphs (4), (5), and (6), respectively.
(b) Conforming Amendments.--
(1) Subparagraph (G) of section 856(c)(5), as
redesignated by subsection (a), is amended by striking
``and such agreement shall be treated as a security for
purposes of paragraph (4)(A)''.
(2) Paragraph (5) of section 857(b) is amended by
striking ``section 856(c)(7)'' and inserting ``section
856(c)(6)''.
(3) Subparagraph (C) of section 857(b)(6) is
amended by striking ``section 856(c)(6)(B)'' and
inserting ``section 856(c)(5)(B)''.
SEC. 1256. MODIFICATION OF EARNINGS AND PROFITS RULES FOR DETERMINING
WHETHER REIT HAS EARNINGS AND PROFITS FROM NON-REIT
YEAR.
Subsection (d) of section 857 is amended by adding at the
end the following new paragraph:
``(3) Distributions to meet requirements of
subsection (a)(2)(B).--Any distribution which is made
in order to comply with the requirements of subsection
(a)(2)(B)--
``(A) shall be treated for purposes of this
subsection and subsection (a)(2)(B) as made
from the earliest accumulated earnings and
profits (other than earnings and profits to
which subsection (a)(2)(A) applies) rather than
the most recently accumulated earnings and
profits, and
``(B) to the extent treated under
subparagraph (A) as made from accumulated
earnings and profits, shall not be treated as a
distribution for purposes of subsection
(b)(2)(B).''.
SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.
(a) Grace Periods.--
(1) Initial period.--Paragraph (2) of section
856(e) (relating to special rules for foreclosure
property) is amended by striking ``on the date which is
2 years after the date the trust acquired such
property'' and inserting ``as of the close of the 3d
taxable year following the taxable year in which the
trust acquired such property''.
(2) Extension.--Paragraph (3) of section 856(e) is
amended--
(A) by striking ``or more extensions'' and
inserting ``extension'', and
(B) by striking the last sentence and
inserting: ``Any such extension shall not
extend the grace period beyond the close of the
3d taxable year following the last taxable year
in the period under paragraph (2).''.
(b) Revocation of Election.--Paragraph (5) of section
856(e) is amended by striking the last sentence and inserting:
``A real estate investment trust may revoke any such election
for a taxable year by filing the revocation (in the manner
provided by the Secretary) on or before the due date (including
any extension of time) for filing its return of tax under this
chapter for the taxable year. If a trust revokes an election
for any property, no election may be made by the trust under
this paragraph with respect to the property for any subsequent
taxable year.''.
(c) Certain Activities Not To Disqualify Property.--
Paragraph (4) of section 856(e) is amended by adding at the end
the following new flush sentence:
``For purposes of subparagraph (C), property shall not
be treated as used in a trade or business by reason of
any activities of the real estate investment trust with
respect to such property to the extent that such
activities would not result in amounts received or
accrued, directly or indirectly, with respect to such
property being treated as other than rents from real
property.''.
SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.
Section 856(c)(5)(G) (relating to treatment of certain
interest rate agreements), as redesignated by section 1255, is
amended to read as follows:
``(G) Treatment of certain hedging
instruments.--Except to the extent provided by
regulations, any--
``(i) payment to a real estate
investment trust under an interest rate
swap or cap agreement, option, futures
contract, forward rate agreement, or
any similar financial instrument,
entered into by the trust in a
transaction to reduce the interest rate
risks with respect to any indebtedness
incurred or to be incurred by the trust
to acquire or carry real estate assets,
and
``(ii) gain from the sale or other
disposition of any such investment,
shall be treated as income qualifying under
paragraph (2).''.
SEC. 1259. EXCESS NONCASH INCOME.
Section 857(e)(2) (relating to determination of amount of
excess noncash income) is amended--
(1) by striking subparagraph (B),
(2) by striking the period at the end of
subparagraph (C) and inserting a comma,
(3) by redesignating subparagraph (C) (as amended
by paragraph (2)) as subparagraph (B), and
(4) by adding at the end the following new
subparagraphs:
``(C) the amount (if any) by which--
``(i) the amounts includible in
gross income with respect to
instruments to which section 860E(a) or
1272 applies, exceed
``(ii) the amount of money and the
fair market value of other property
received during the taxable year under
such instruments, and
``(D) amounts includible in income by
reason of cancellation of indebtedness.''.
SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.
Clause (iii) of section 857(b)(6)(C) (relating to certain
sales not to constitute prohibited transactions) is amended by
striking ``(other than foreclosure property)'' in subclauses
(I) and (II) and inserting ``(other than sales of foreclosure
property or sales to which section 1033 applies)''.
SEC. 1261. SHARED APPRECIATION MORTGAGES.
(a) Bankruptcy Safe Harbor.--Section 856(j) (relating to
treatment of shared appreciation mortgages) is amended by
redesignating paragraph (4) as paragraph (5) and by inserting
after paragraph (3) the following new paragraph:
``(4) Coordination with 4-year holding period.--
``(A) In general.--For purposes of section
857(b)(6)(C), if a real estate investment trust
is treated as having sold secured property
under paragraph (3)(A), the trust shall be
treated as having held such property for at
least 4 years if--
``(i) the secured property is sold
or otherwise disposed of pursuant to a
case under title 11 of the United
States Code,
``(ii) the seller is under the
jurisdiction of the court in such case,
and
``(iii) the disposition is required
by the court or is pursuant to a plan
approved by the court.
``(B) Exception.--Subparagraph (A) shall
not apply if--
``(i) the secured property was
acquired by the seller with the intent
to evict or foreclose, or
``(ii) the trust knew or had reason
to know that default on the obligation
described in paragraph (5)(A) would
occur.''.
(b) Clarification of Definition of Shared Appreciation
Provision.--Clause (ii) of section 856(j)(5)(A) is amended by
inserting before the period ``or appreciation in value as of
any specified date''.
SEC. 1262. WHOLLY OWNED SUBSIDIARIES.
Section 856(i)(2) (defining qualified REIT subsidiary) is
amended by striking ``at all times during the period such
corporation was in existence''.
SEC. 1263. EFFECTIVE DATE.
The amendments made by this part shall apply to taxable
years beginning after the date of the enactment of this Act.
Subtitle E--Provisions Relating to Regulated Investment Companies
SEC. 1271. REPEAL OF 30-PERCENT GROSS INCOME LIMITATION.
(a) General Rule.--Subsection (b) of section 851 (relating
to limitations) is amended by striking paragraph (3), by adding
``and'' at the end of paragraph (2), and by redesignating
paragraph (4) as paragraph (3).
(b) Technical Amendments.--
(1) The material following paragraph (3) of section
851(b) (as redesignated by subsection (a)) is amended--
(A) by striking out ``paragraphs (2) and
(3)'' and inserting ``paragraph (2)'', and
(B) by striking out the last sentence
thereof.
(2) Subsection (c) of section 851 is amended by
striking ``subsection (b)(4)'' each place it appears
(including the heading) and inserting ``subsection
(b)(3)''.
(3) Subsection (d) of section 851 is amended by
striking ``subsections (b)(4)'' and inserting
``subsections (b)(3)''.
(4) Paragraph (1) of section 851(e) is amended by
striking ``subsection (b)(4)'' and inserting
``subsection (b)(3)''.
(5) Paragraph (4) of section 851(e) is amended by
striking ``subsections (b)(4)'' and inserting
``subsections (b)(3)''.
(6) Section 851 is amended by striking subsection
(g) and redesignating subsection (h) as subsection (g).
(7) Subsection (g) of section 851 (as redesignated
by paragraph (6)) is amended by striking paragraph (3).
(8) Section 817(h)(2) is amended--
(A) by striking ``851(b)(4)'' in
subparagraph (A) and inserting ``851(b)(3)'',
and
(B) by striking ``851(b)(4)(A)(i)'' in
subparagraph (B) and inserting
``851(b)(3)(A)(i)''.
(9) Section 1092(f)(2) is amended by striking
``Except for purposes of section 851(b)(3), the'' and
inserting ``The''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
Subtitle F--Taxpayer Protections
SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES.
(a) Information on Deductible Employee Contributions.--
Subsection (g) of section 6652 (relating to information
required in connection with deductible employee contributions)
is amended by adding at the end the following new sentence:
``No penalty shall be imposed under this subsection on any
failure which is shown to be due to reasonable cause and not
willful neglect.''.
(b) Reports on Status as Qualified Small Business.--
Subsection (k) of section 6652 (relating to failure to make
reports required under section 1202) is amended by adding at
the end the following new sentence: ``No penalty shall be
imposed under this subsection on any failure which is shown to
be due to reasonable cause and not willful neglect.''.
(c) Returns of Personal Holding Company Tax by Foreign
Corporations.--Section 6683 (relating to failure of foreign
corporation to file return of personal holding company tax) is
amended by adding at the end the following new sentence: ``No
penalty shall be imposed under this section on any failure
which is shown to be due to reasonable cause and not willful
neglect.''.
(d) Failure To Make Required Payments.--Subparagraph (A) of
section 7519(f)(4) is amended by adding at the end the
following new sentence: ``No penalty shall be imposed under
this subparagraph on any failure which is shown to be due to
reasonable cause and not willful neglect.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 1282. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR REFUNDS.
(a) In General.--Paragraph (3) of section 6512(b) (relating
to overpayment determined by Tax Court) is amended by adding at
the end the following flush sentence:
``In a case described in subparagraph (B) where the
date of the mailing of the notice of deficiency is
during the third year after the due date (with
extensions) for filing the return of tax and no return
was filed before such date, the applicable period under
subsections (a) and (b)(2) of section 6511 shall be 3
years.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to claims for credit or refund for taxable years
ending after the date of the enactment of this Act.
SEC. 1283. REPEAL OF AUTHORITY TO DISCLOSE WHETHER PROSPECTIVE JUROR
HAS BEEN AUDITED.
(a) In General.--Subsection (h) of section 6103 (relating
to disclosure to certain Federal officers and employees for
purposes of tax administration, etc.) is amended by striking
paragraph (5) and by redesignating paragraph (6) as paragraph
(5).
(b) Conforming Amendment.--Paragraph (4) of section 6103(p)
is amended by striking ``(h)(6)'' each place it appears and
inserting ``(h)(5)''.
(c) Effective Date.--The amendments made by this section
shall apply to judicial proceedings commenced after the date of
the enactment of this Act.
SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS.
(a) In General.--Subsection (a) of section 6501 (relating
to limitations on assessment and collection) is amended by
adding at the end thereof the following new sentence: ``For
purposes of this chapter, the term `return' means the return
required to be filed by the taxpayer (and does not include a
return of any person from whom the taxpayer has received an
item of income, gain, loss, deduction, or credit).''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 1285. AWARDING OF ADMINISTRATIVE COSTS.
(a) Right to Appeal Tax Court Decision.--Subsection (f) of
section 7430 (relating to right of appeal) is amended by adding
at the end the following new paragraph:
``(3) Appeal of tax court decision.--An order of
the Tax Court disposing of a petition underparagraph
(2) shall be reviewable in the same manner as a decision of the Tax
Court, but only with respect to the matters determined in such
order.''.
(b) Period for Applying to IRS for Costs.--Subsection (b)
of section 7430 (relating to limitations) is amended by adding
at the end the following new paragraph:
``(5) Period for applying to irs for administrative
costs.--An award may be made under subsection (a) by
the Internal Revenue Service for reasonable
administrative costs only if the prevailing party files
an application with the Internal Revenue Service for
such costs before the 91st day after the date on which
the final decision of the Internal Revenue Service as
to the determination of the tax, interest, or penalty
is mailed to such party.''.
(c) Period for Petitioning of Tax Court for Review of
Denial of Costs.--Paragraph (2) of section 7430(f) (relating to
right of appeal) is amended--
(1) by striking ``appeal to'' and inserting ``the
filing of a petition for review with'', and
(2) by adding at the end the following new
sentence: ``If the Secretary sends by certified or
registered mail a notice of such decision to the
petitioner, no proceeding in the Tax Court may be
initiated under this paragraph unless such petition is
filed before the 91st day after the date of such
mailing.''.
(d) Effective Date.--The amendments made by this section
shall apply to civil actions or proceedings commenced after the
date of the enactment of this Act.
TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES
SEC. 1301. GIFTS TO CHARITIES EXEMPT FROM GIFT TAX FILING REQUIREMENTS.
(a) In General.--Section 6019 is amended by striking ``or''
at the end of paragraph (1), by adding ``or'' at the end of
paragraph (2), and by inserting after paragraph (2) the
following new paragraph:
``(3) a transfer with respect to which a deduction
is allowed under section 2522 but only if--
``(A)(i) such transfer is of the donor's
entire interest in the property transferred,
and
``(ii) no other interest in such property
is or has been transferred (for less than
adequate and full consideration in money or
money's worth) from the donor to a person, or
for a use, not described in subsection (a) or
(b) of section 2522, or
``(B) such transfer is described in section
2522(d),''.
(b) Effective Date.--The amendment made by this section
shall apply to gifts made after the date of the enactment of
this Act.
SEC. 1302. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF RECOVERY.
(a) Amendment to Section 2207A.--Paragraph (2) of section
2207A(a) (relating to right of recovery in the case of certain
marital deduction property) is amended to read as follows:
``(2) Decedent may otherwise direct.--Paragraph (1)
shall not apply with respect to any property to the
extent that the decedent in his will (or a revocable
trust) specifically indicates an intent to waive any
right of recovery under this subchapter with respect to
such property.''.
(b) Amendment to Section 2207B.--Paragraph (2) of section
2207B(a) (relating to right of recovery where decedent retained
interest) is amended to read as follows:
``(2) Decedent may otherwise direct.--Paragraph (1)
shall not apply with respect to any property to the
extent that the decedent in his will (or a revocable
trust) specifically indicates an intent to waive any
right of recovery under this subchapter with respect to
such property.''.
(c) Effective Date.--The amendments made by this section
shall apply with respect to the estates of decedents dying
after the date of the enactment of this Act.
SEC. 1303. TRANSITIONAL RULE UNDER SECTION 2056A.
(a) General Rule.--In the case of any trust created under
an instrument executed before the date of the enactment of the
Revenue Reconciliation Act of 1990, such trust shall be treated
as meeting the requirements of paragraph (1) of section
2056A(a) of the Internal Revenue Code of 1986 if the trust
instrument requires that all trustees of the trust be
individual citizens of the United States or domestic
corporations.
(b) Effective Date.--The provisions of subsection (a) shall
take effect as if included in the provisions of section
11702(g) of the Revenue Reconciliation Act of 1990.
SEC. 1304. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM OBLIGATIONS
HELD BY NONRESIDENT ALIENS.
(a) In General.--Subsection (b) of section 2105 is amended
by striking ``and'' at the end of paragraph (2), by striking
the period at the end of paragraph (3) and inserting ``, and'',
and by inserting after paragraph (3) the following new
paragraph:
``(4) obligations which would be original issue
discount obligations as defined in section 871(g)(1)
but for subparagraph (B)(i) thereof, if any interest
thereon (were such interest received by the decedent at
the time of his death) would not be effectively
connected with the conduct of a trade or business
within the United States.''.
(b) Effective Date.--The amendment made by this section
shall apply to estates of decedents dying after the date of the
enactment of this Act.
SEC. 1305. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.
(a) In General.--Subpart A of part I of subchapter J
(relating to estates, trusts, beneficiaries, and decedents) is
amended by adding at the end the following new section:
``SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.
``(a) General Rule.--For purposes of this subtitle, if both
the executor (if any) of an estate and the trustee of a
qualified revocable trust elect the treatment provided in this
section, such trust shall be treated and taxed as part of such
estate (and not as a separate trust) for all taxable years of
the estate ending after the date of the decedent's death and
before the applicable date.
``(b) Definitions.--For purposes of subsection (a)--
``(1) Qualified revocable trust.--The term
`qualified revocable trust' means any trust (or portion
thereof) which was treated under section 676 as owned
by the decedent of the estate referred to in subsection
(a) by reason of a power in the grantor (determined
without regard to section 672(e)).
``(2) Applicable date.--The term `applicable date'
means--
``(A) if no return of tax imposed by
chapter 11 is required to be filed, the date
which is 2 years after the date of the
decedent's death, and
``(B) if such a return is required to be
filed, the date which is 6 months after the
date of the final determination of the
liability for tax imposed by chapter 11.
``(c) Election.--The election under subsection (a) shall be
made not later than the time prescribed for filing the return
of tax imposed by this chapter for the first taxable year of
the estate (determined with regard to extensions) and, once
made, shall be irrevocable.''.
(b) Comparable Treatment Under Generation-Skipping Tax.--
Paragraph (1) of section 2652(b) is amended by adding at the
end the following new sentence: ``Such term shall not include
any trust during any period the trust is treated as part of an
estate under section 646.''.
(c) Clerical Amendment.--The table of sections for such
subpart A is amended by adding at the end the following new
item:
``Sec. 646. Certain revocable trusts treated as part of
estate.''.
(d) Effective Date.--The amendments made by this section
shall apply with respect to estates of decedents dying after
the date of the enactment of this Act.
SEC. 1306. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR OF
ESTATE.
(a) In General.--Subsection (b) of section 663 (relating to
distributions in first 65 days of taxable year) is amended by
inserting ``an estate or'' before ``a trust'' each place it
appears.
(b) Conforming Amendment.--Paragraph (2) of section 663(b)
is amended by striking ``the fiduciary of such trust'' and
inserting ``the executor of such estate or the fiduciary of
such trust (as the case may be)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 1307. SEPARATE SHARE RULES AVAILABLE TO ESTATES.
(a) In General.--Subsection (c) of section 663 (relating to
separate shares treated as separate trusts) is amended--
(1) by inserting before the last sentence the
following new sentence: ``Rules similar to the rules of
the preceding provisions of this subsection shall apply
to treat substantially separate and independent shares
of different beneficiaries in an estate having more
than 1 beneficiary as separate estates.'', and
(2) by inserting ``or estates'' after ``trusts'' in
the last sentence.
(b) Conforming Amendment.--The subsection heading of
section 663(c) is amended by inserting ``Estates or'' before
``Trusts''.
(c) Effective Date.--The amendments made by this section
shall apply to estates of decedents dying after the date of the
enactment of this Act.
SEC. 1308. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS RELATED
PERSONS FOR DISALLOWANCE OF LOSSES, ETC.
(a) Disallowance of Losses.--Subsection (b) of section 267
(relating to losses, expenses, and interest with respect to
transactions between related taxpayers) is amended by striking
``or'' at the end of paragraph (11), by striking the period at
the end of paragraph (12) and inserting ``; or'', and by adding
at the end the following new paragraph:
``(13) Except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.''.
(b) Ordinary Income From Gain From Sale of Depreciable
Property.--Subsection (b) of section 1239 is amended by
striking the period at the end of paragraph (2) and inserting
``, and'' and by adding at the end the following new paragraph:
``(3) except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 1309. TREATMENT OF FUNERAL TRUSTS.
(a) In General.--Subpart F of part I of subchapter J of
chapter 1 is amended by adding at the end the following new
section:
``SEC. 685. TREATMENT OF FUNERAL TRUSTS.
``(a) In General.--In the case of a qualified funeral
trust--
``(1) subparts B, C, D, and E shall not apply, and
``(2) no deduction shall be allowed by section
642(b).
``(b) Qualified Funeral Trust.--For purposes of this
subsection, the term `qualified funeral trust' means any trust
(other than a foreign trust) if--
``(1) the trust arises as a result of a contract
with a person engaged in the trade or business of
providing funeral or burial services or property
necessary to provide such services,
``(2) the sole purpose of the trust is to hold,
invest, and reinvest funds in the trust and to use such
funds solely to make payments for such services or
property for the benefit of the beneficiaries of the
trust,
``(3) the only beneficiaries of such trust are
individuals with respect to whom such services or
property are to be provided at their death under
contracts described in paragraph (1),
``(4) the only contributions to the trust are
contributions by or for the benefit of such
beneficiaries,
``(5) the trustee elects the application of this
subsection, and
``(6) the trust would (but for the election
described in paragraph (5)) be treated as owned under
subpart E by the purchasers of the contracts described
in paragraph (1).
``(c) Dollar Limitation on Contributions.--
``(1) In general.--The term `qualified funeral
trust' shall not include any trust which accepts
aggregate contributions by or for the benefit of an
individual in excess of $7,000.
``(2) Related trusts.--For purposes of paragraph
(1), all trusts having trustees which are related
persons shall be treated as 1 trust. For purposes of
the preceding sentence, persons are related if--
``(A) the relationship between such persons
is described in section 267 or 707(b),
``(B) such persons are treated as a single
employer under subsection (a) or (b) of section
52, or
``(C) the Secretary determines that
treating such persons as related is necessary
to prevent avoidance of the purposes of this
section.
``(3) Inflation adjustment.--In the case of any
contract referred to in subsection (b)(1) which is
entered into during any calendar year after 1998, the
dollar amount referred to paragraph (1) shall be
increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year, by substituting `calendar year
1997' for `calendar year 1992' in subparagraph
(B) thereof.
If any dollar amount after being increased under the
preceding sentence is not a multiple of $100, such
dollar amount shall be rounded to the nearest multiple
of $100.
``(d) Application of Rate Schedule.--Section 1(e) shall be
applied to each qualified funeral trust by treating each
beneficiary's interest in each such trust as a separate trust.
``(e) Treatment of Amounts Refunded to Purchaser on
Cancellation.--No gain or loss shall be recognized to a
purchaser of a contract described in subsection (b)(1) by
reason of any payment from such trust to such purchaser by
reason of cancellation of such contract. If any payment
referred to in the preceding sentence consists of property
other than money, the basis of such property in the hands of
such purchaser shall be the same as the trust's basis in such
property immediately before the payment.
``(f) Simplified Reporting.--The Secretary may prescribe
rules for simplified reporting of all trusts having a single
trustee.''.
(b) Clerical Amendment.--The table of sections for subpart
F of part I of subchapter J of chapter 1 is amended by adding
at the end the following new item:
``Sec. 685. Treatment of funeral trusts.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.
SEC. 1310. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S DEATH.
(a) General Rule.--Section 2035 is amended to read as
follows:
``SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS OF
DECEDENT'S DEATH.
``(a) Inclusion of Certain Property in Gross Estate.--If--
``(1) the decedent made a transfer (by trust or
otherwise) of an interest in any property, or
relinquished a power with respect to any property,
during the 3-year period ending on the date of the
decedent's death, and
``(2) the value of such property (or an interest
therein) would have been included in the decedent's
gross estate under section 2036, 2037, 2038, or 2042 if
such transferred interest or relinquished power had
been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any
property (or interest therein) which would have been so
included.
``(b) Inclusion of Gift Tax on Gifts Made During 3 Years
Before Decedent's Death.--The amount of the gross estate
(determined without regard to this subsection) shall be
increased by the amount of any tax paid under chapter 12 by the
decedent or his estate on any gift made by the decedent or his
spouse during the 3-year period ending on the date of the
decedent's death.
``(c) Other Rules Relating to Transfers Within 3 Years of
Death.--
``(1) In general.--For purposes of--
``(A) section 303(b) (relating to
distributions in redemption of stock to pay
death taxes),
``(B) section 2032A (relating to special
valuation of certain farms, etc., real
property), and
``(C) subchapter C of chapter 64 (relating
to lien for taxes),
the value of the gross estate shall include the value
of all property to the extent of any interest therein
of which the decedent has at any time made a
transfer,by trust or otherwise, during the 3-year period ending on the
date of the decedent's death.
``(2) Coordination with section 6166.--An estate
shall be treated as meeting the 35 percent of adjusted
gross estate requirement of section 6166(a)(1) only if
the estate meets such requirement both with and without
the application of paragraph (1).
``(3) Marital and small transfers.--Paragraph (1)
shall not apply to any transfer (other than a transfer
with respect to a life insurance policy) made during a
calendar year to any donee if the decedent was not
required by section 6019 (other than by reason of
section 6019(2)) to file any gift tax return for such
year with respect to transfers to such donee.
``(d) Exception.--Subsection (a) shall not apply to any
bona fide sale for an adequate and full consideration in money
or money's worth.
``(e) Treatment of Certain Transfers From Revocable
Trusts.--For purposes of this section and section 2038, any
transfer from any portion of a trust during any period that
such portion was treated under section 676 as owned by the
decedent by reason of a power in the grantor (determined
without regard to section 672(e)) shall be treated as a
transfer made directly by the decedent.''.
(b) Clerical Amendment.--The table of sections for part III
of subchapter A of chapter 11 is amended by striking ``gifts''
in the item relating to section 2035 and inserting ``certain
gifts''.
(c) Effective Date.--The amendments made by this section
shall apply to the estates of decedents dying after the date of
the enactment of this Act.
SEC. 1311. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES UNDER
QUALIFIED TERMINABLE INTEREST RULES.
(a) In General.--Subparagraph (C) of section 2056(b)(7) is
amended by inserting ``(or, in the case of an interest in an
annuity arising under the community property laws of a State,
included in the gross estate of the decedent under section
2033)'' after ``section 2039''.
(b) Effective Date.--The amendment made by this section
shall apply to estates of decedents dying after the date of the
enactment of this Act.
SEC. 1312. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF FORMS OF
OWNERSHIP WHICH ARE NOT TRUSTS.
(a) In General.--Subsection (c) of section 2056A (defining
qualified domestic trust) is amended by adding at the end the
following new paragraph:
``(3) Trust.--To the extent provided in regulations
prescribed by the Secretary, the term `trust' includes
other arrangements which have substantially the same
effect as a trust.''.
(b) Effective Date.--The amendment made by this section
shall apply to estates of decedents dying after the date of the
enactment of this Act.
SEC. 1313. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 2032A.
(a) General Rule.--Paragraph (3) of section 2032A(d)
(relating to modification of election and agreement to be
permitted) is amended to read as follows:
``(3) Modification of election and agreement to be
permitted.--The Secretary shall prescribe procedures
which provide that in any case in which the executor
makes an election under paragraph (1) (and submits the
agreement referred to in paragraph (2)) within the time
prescribed therefor, but--
``(A) the notice of election, as filed,
does not contain all required information, or
``(B) signatures of 1 or more persons
required to enter into the agreement described
in paragraph (2) are not included on the
agreement as filed, or the agreement does not
contain all required information,
the executor will have a reasonable period of time (not
exceeding 90 days) after notification of such failures
to provide such information or signatures.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to the estates of decedents dying after the date of
the enactment of this Act.
SEC. 1314. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES TRUSTEE FOR
QUALIFIED DOMESTIC TRUSTS.
(a) In General.--Subparagraph (A) of section 2056A(a)(1) is
amended by inserting ``except as provided in regulations
prescribed by the Secretary,'' before ``requires''.
(b) Effective Date.--The amendment made by this section
shall apply to estates of decedents dying after the date of the
enactment of this Act.
TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, TAX-
EXEMPT BONDS, AND OTHER MATTERS
Subtitle A--Excise Tax Simplification
PART I--EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS
SEC. 1401. INCREASE IN DE MINIMIS LIMIT FOR AFTER-MARKET ALTERATIONS
FOR HEAVY TRUCKS AND LUXURY CARS.
(a) In General.--Sections 4003(a)(3)(C) and 4051(b)(2)(B)
(relating to exceptions) are each amended by striking ``$200''
and inserting ``$1,000''.
(b) Effective Date.--The amendments made by subsection (a)
shall apply to installations on vehicles sold after the date of
the enactment of this Act.
SEC. 1402. CREDIT FOR TIRE TAX IN LIEU OF EXCLUSION OF VALUE OF TIRES
IN COMPUTING PRICE.
(a) In General.--Subsection (e) of section 4051 is amended
to read as follows:
``(e) Credit Against Tax for Tire Tax.--If--
``(1) tires are sold on or in connection with the
sale of any article, and
``(2) tax is imposed by this subchapter on the sale
of such tires,
there shall be allowed as a credit against the tax imposed by
this subchapter an amount equal to the tax (if any) imposed by
section 4071 on such tires.''.
(b) Conforming Amendment.--Subparagraph (B) of section
4052(b)(1) is amended by striking clause (iii), by adding
``and'' at the end of clause (ii), and by redesignating clause
(iv) as clause (iii).
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 1998.
PART II--PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER
SEC. 1411. CREDIT OR REFUND FOR IMPORTED BOTTLED DISTILLED SPIRITS
RETURNED TO DISTILLED SPIRITS PLANT.
(a) In General.--Section 5008(c)(1) (relating to distilled
spirits returned to bonded premises) is amended by striking
``withdrawn from bonded premises on payment or determination of
tax'' and inserting ``on which tax has been determined or
paid''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1412. AUTHORITY TO CANCEL OR CREDIT EXPORT BONDS WITHOUT
SUBMISSION OF RECORDS.
(a) In General.--Section 5175(c) (relating to cancellation
of credit of export bonds) is amended by striking ``on the
submission of'' and all that follows and inserting ``if there
is such proof of exportation as the Secretary may by
regulations require.''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1413. REPEAL OF REQUIRED MAINTENANCE OF RECORDS ON PREMISES OF
DISTILLED SPIRITS PLANT.
(a) In General.--Section 5207(c) (relating to preservation
and inspection) is amended by striking ``shall be kept on the
premises where the operations covered by the record are carried
on and''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1414. FERMENTED MATERIAL FROM ANY BREWERY MAY BE RECEIVED AT A
DISTILLED SPIRITS PLANT.
(a) In General.--Section 5222(b)(2) (relating to receipt)
is amended to read as follows:
``(2) beer conveyed without payment of tax from
brewery premises, beer which has been lawfully removed
from brewery premises upon determination of tax, or''.
(b) Clarification of Authority To Permit Removal of Beer
Without Payment of Tax for Use as Distilling Material.--Section
5053 (relating to exemptions) is amended by redesignating
subsection (f) as subsection (i) and by inserting after
subsection (e) the following new subsection:
``(f) Removal for Use as Distilling Material.--Subject to
such regulations as the Secretary may prescribe, beer may be
removed from a brewery without payment of tax to any distilled
spirits plant for use as distilling material.''.
(c) Clarification of Refund and Credit of Tax.--Section
5056 (relating to refund and credit of tax, or relief from
liability) is amended--
(1) by redesignating subsection (c) as subsection
(d) and by inserting after subsection (b) the following
new subsection:
``(c) Beer Received at a Distilled Spirits Plant.--Any tax
paid by any brewer on beer produced in the United States may be
refunded or credited to the brewer, without interest, or if the
tax has not been paid, the brewer may be relieved of liability
therefor, under regulations as the Secretary may prescribe, if
such beer is received on the bonded premises of a distilled
spirits plant pursuant to the provisions of section 5222(b)(2),
for use in the production of distilled spirits.'', and
(2) by striking ``or rendering unmerchantable'' in
subsection (d) (as so redesignated) and inserting
``rendering unmerchantable, or receipt on the bonded
premises of a distilled spirits plant''.
(d) Effective Date.--The amendments made by this section
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1415. REPEAL OF REQUIREMENT FOR WHOLESALE DEALERS IN LIQUORS TO
POST SIGN.
(a) In General.--Section 5115 (relating to sign required on
premises) is hereby repealed.
(b) Conforming Amendments.--
(1) Section 5681(a) is amended by striking ``, and
every wholesale dealer in liquors,'' and by striking
``section 5115(a) or''.
(2) Section 5681(c) is amended--
(A) by striking ``or wholesale liquor
establishment, on which no sign required by
section 5115(a) or'' and inserting ``on which
no sign required by'', and
(B) by striking ``or wholesale liquor
establishment, or who'' and inserting ``or
who''.
(3) The table of sections for subpart D of part II
of subchapter A of chapter 51 is amended by striking
the item relating to section 5115.
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
SEC. 1416. REFUND OF TAX TO WINE RETURNED TO BOND NOT LIMITED TO
UNMERCHANTABLE WINE.
(a) In General.--Section 5044(a) (relating to refund of tax
on unmerchantable wine) is amended by striking ``as
unmerchantable''.
(b) Conforming Amendments.--
(1) Section 5361 is amended by striking
``unmerchantable''.
(2) The section heading for section 5044 is amended
by striking ``UNMERCHANTABLE''.
(3) The item relating to section 5044 in the table
of sections for subpart C of part I of subchapter A of
chapter 51 is amended by striking ``unmerchantable''.
(c) Effective Date.--The amendments made by this section
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1417. USE OF ADDITIONAL AMELIORATING MATERIAL IN CERTAIN WINES.
(a) In General.--Section 5384(b)(2)(D) (relating to
ameliorated fruit and berry wines) is amended by striking
``loganberries, currants, or gooseberries,'' and inserting
``any fruit or berry with a natural fixed acid of 20 parts per
thousand or more (before any correction of such fruit or
berry)''.
(b) Effective Date.--The amendment made by this section
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1418. DOMESTICALLY PRODUCED BEER MAY BE WITHDRAWN FREE OF TAX FOR
USE OF FOREIGN EMBASSIES, LEGATIONS, ETC.
(a) In General.--Section 5053 (relating to exemptions), as
amended by section 1414(b), is amended by inserting after
subsection (f) the following new subsection:
``(g) Removals for Use of Foreign Embassies, Legations,
Etc.--
``(1) In general.--Subject to such regulations as
the Secretary may prescribe--
``(A) beer may be withdrawn from the
brewery without payment of tax for transfer to
any customs bonded warehouse for entry pending
withdrawal therefrom as provided in
subparagraph (B), and
``(B) beer entered into any customs bonded
warehouse under subparagraph (A) may be
withdrawn for consumption in the United States
by, and for the official and family use of,
such foreign governments, organizations, and
individuals as are entitled to withdraw
imported beer from such warehouses free of tax.
Beer transferred to any customs bonded warehouse under
subparagraph (A) shall be entered, stored, and
accounted for in such warehouse under such regulations
and bonds as the Secretary may prescribe, and may be
withdrawn therefrom by such governments, organizations,
and individuals free of tax under the same conditions
and procedures as imported beer.
``(2) Other rules to apply.--Rules similar to the
rules of paragraphs (2) and (3) of section 5362(e)
shall apply for purposes of this subsection.''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1419. BEER MAY BE WITHDRAWN FREE OF TAX FOR DESTRUCTION.
(a) In General.--Section 5053 (relating to exemptions), as
amended by section 1418(a), is amended by inserting after
subsection (g) the following new subsection:
``(h) Removals for Destruction.--Subject to such
regulations as the Secretary may prescribe, beer may be removed
from the brewery without payment of tax for destruction.''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1420. AUTHORITY TO ALLOW DRAWBACK ON EXPORTED BEER WITHOUT
SUBMISSION OF RECORDS.
(a) In General.--The first sentence of section 5055
(relating to drawback of tax on beer) is amended by striking
``found to have been paid'' and all that follows and inserting
``paid on such beer if there is such proof of exportation as
the Secretary may by regulations require.''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1421. TRANSFER TO BREWERY OF BEER IMPORTED IN BULK WITHOUT PAYMENT
OF TAX.
(a) In General.--Part II of subchapter G of chapter 51 is
amended by adding at the end the following new section:
``SEC. 5418. BEER IMPORTED IN BULK.
``Beer imported or brought into the United States in bulk
containers may, under such regulations as the Secretary may
prescribe, be withdrawn from customs custody and transferred in
such bulk containers to the premises of a brewery without
payment of the internal revenue tax imposed on such beer. The
proprietor of a brewery to which such beer is transferred shall
become liable for the tax on the beer withdrawn from customs
custody under this section upon release of the beer from
customs custody, and the importer, or the person bringing such
beer into the United States, shall thereupon be relieved of the
liability for such tax.''.
(b) Clerical Amendment.--The table of sections for such
part II is amended by adding at the end the following new item:
``Sec. 5418. Beer imported in bulk.''.
(c) Effective Date.--The amendments made by this section
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
SEC. 1422. TRANSFER TO BONDED WINE CELLARS OF WINE IMPORTED IN BULK
WITHOUT PAYMENT OF TAX.
(a) In General.--Part II of subchapter F of chapter 51 is
amended by inserting after section 5363 the following new
section:
``SEC. 5364. WINE IMPORTED IN BULK.
``Wine imported or brought into the United States in bulk
containers may, under such regulations as the Secretary may
prescribe, be withdrawn from customs custody and transferred in
such bulk containers to the premises of a bonded wine cellar
without payment of the internal revenue tax imposed on such
wine. The proprietor of a bonded wine cellar to which such wine
is transferred shall become liable for the tax on the wine
withdrawn from customs custody under this section upon release
of the wine from customs custody, and the importer, or the
person bringing such wine into the United States, shall
thereupon be relieved of the liability for such tax.''.
(b) Clerical Amendment.--The table of sections for such
part II is amended by inserting after the item relating to
section 5363 the following new item:
``Sec. 5364. Wine imported in bulk.''.
(c) Effective Date.--The amendments made by this section
shall take effect on the 1st day of the 1st calendar quarter
that begins at least 180 days after the date of the enactment
of this Act.
PART III--OTHER EXCISE TAX PROVISIONS
SEC. 1431. AUTHORITY TO GRANT EXEMPTIONS FROM REGISTRATION
REQUIREMENTS.
(a) In General.--Section 4222(b)(2) (relating to export) is
amended--
(1) by striking ``in the case of any sale or resale
for export,'', and
(2) by striking ``Export'' and inserting ``Under
regulations''.
(b) Effective Date.--The amendments made by subsection (a)
shall take effect on the date of the enactment of this Act.
SEC. 1432. REPEAL OF EXPIRED PROVISIONS.
(a) Piggy-Back Trailers.--Section 4051 (relating to
imposition of tax on heavy trucks and trailers sold at retail)
is amended by striking subsection (d) and by redesignating
subsection (e) as subsection (d).
(b) Deep Seabed Mining.--
(1) In general.--Subchapter F of chapter 36
(relating to tax on removal of hard mineral resources
from deep seabed) is hereby repealed.
(2) Conforming amendment.--The table of subchapters
for chapter 36 is amended by striking the item relating
to subchapter F.
(c) Ozone-Depleting Chemicals.--
(1) Paragraph (1) of section 4681(b) is amended by
striking subparagraphs (B) and (C) and inserting the
following new subparagraph:
``(B) Base tax amount.--The base tax amount
for purposes of subparagraph (A) with respect
to any sale or use during any calendar year
after 1995 shall be $5.35 increased by 45 cents
for each year after 1995.''.
(2) Subsection (g) of section 4682 is amended to
read as follows:
``(g) Chemicals Used as Propellants in Metered-Dose
Inhalers.--
``(1) Exemption from tax.--
``(A) In general.--No tax shall be imposed
by section 4681 on--
``(i) any use of any substance as a
propellant in metered-dose inhalers, or
``(ii) any qualified sale by the
manufacturer, producer, or importer of
any substance.
``(B) Qualified sale.--For purposes of
subparagraph (A), the term `qualified sale'
means any sale by the manufacturer, producer,
or importer of any substance--
``(i) for use by the purchaser as a
propellant in metered dose inhalers, or
``(ii) for resale by the purchaser
to a 2d purchaser for such use by the
2d purchaser.
The preceding sentence shall apply only if the
manufacturer, producer, and importer, and the
1st and 2d purchasers (if any) meet such
registration requirements as may be prescribed
by the Secretary.
``(2) Overpayments.--If any substance on which tax
was paid under this subchapter is used by any person as
a propellant in metered-dose inhalers, credit or refund
without interest shall be allowed to such person in an
amount equal to the tax so paid. Amounts payable under
the preceding sentence with respect to uses during the
taxable year shall be treated as described in section
34(a) for such year unless claim thereof has been
timely filed under this paragraph.''.
SEC. 1433. SIMPLIFICATION OF IMPOSITION OF EXCISE TAX ON ARROWS.
(a) In General.--Subsection (b) of section 4161 (relating
to imposition of tax) is amended to read as follows:
``(b) Bows and Arrows, Etc.--
``(1) Bows.--
``(A) In general.--There is hereby imposed
on the sale by the manufacturer, producer, or
importer of any bow which has a draw weight of
10 pounds or more, a tax equal to 11 percent of
the price for which so sold.
``(B) Parts and accessories.--There is
hereby imposed upon the sale by the
manufacturer, producer, or importer--
``(i) of any part of accessory
suitable for inclusion in or attachment
to a bow described in subparagraph (A),
and
``(ii) of any quiver suitable for
use with arrows described in paragraph
(2),a tax equivalent to 11 percent of
the price for which so sold.
``(2) Arrows.--There is hereby imposed on the sale
by the manufacturer, producer, or importer of any
shaft, point, nock, or vane of a type used in the
manufacture of any arrow which after its assembly--
``(A) measures 18 inches overall or more in
length, or
``(B) measures less than 18 inches overall
in length but is suitable for use with a bow
described in paragraph (1)(A),
a tax equal to 12.4 percent of the price for which so
sold.
``(3) Coordination with subsection (a).--No tax
shall be imposed under this subsection with respect to
any article taxable under subsection (a).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to articles sold by the manufacturer, producer, or
importer after September 30 1997.
SEC. 1434. MODIFICATIONS TO RETAIL TAX ON HEAVY TRUCKS.
(a) Certain Repairs and Modifications Not Treated as
Manufacture.--Section 4052 is amended by redesignating the
subsection defining a long-term lease as subsection (e) and by
adding at the end the following new subsection:
``(f) Certain Repairs and Modifications Not Treated as
Manufacture.--
``(1) In general.--An article described in section
4051(a)(1) shall not be treated as manufactured or
produced solely by reason of repairs or modifications
to the article (including any modification which
changes the transportation function of the article or
restores a wrecked article to a functional condition)
if the cost of such repairs and modifications does not
exceed 75 percent of the retail price of a comparable
new article.
``(2) Exception.--Paragraph (1) shall not apply if
the article (as repaired or modified) would, if new, be
taxable under section 4051 and the article when new was
not taxable under this section or the corresponding
provision of prior law.''.
(b) Simplification of Certification Procedures With Respect
to Sales of Taxable Articles.--
(1) Repeal of registration requirement.--Subsection
(d) of section 4052 is amended by striking ``rules of--
'' and all that follows through ``shall apply'' and
inserting ``rules of subsections (c)and (d) of section
4216 (relating to partial payments) shall apply''.
(2) Requirement to modify regulations.--Section
4052 is amended by adding at the end the following new
subsection:
``(g) Regulations.--The Secretary shall prescribe
regulations which permit, in lieu of any other certification,
persons who are purchasing articles taxable under this
subchapter for resale or leasing in a long-term lease to
execute a statement (made under penalties of perjury) on the
sale invoice that such sale is for resale. The Secretary shall
not impose any registration requirement as a condition of using
such procedure.''.
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 1998.
SEC. 1435. SKYDIVING FLIGHTS EXEMPT FROM TAX ON TRANSPORTATION OF
PERSONS BY AIR.
(a) In General.--Section 4261 (relating to imposition of
tax on transportation of persons by air), as previously amended
by this Act, is amended by redesignating subsection (h) as
subsection (i) and by inserting after subsection (g) the
following new subsection:
``(h) Exemption for Skydiving Uses.--No tax shall be
imposed by this section or section 4271 on any air
transportation exclusively for the purpose of skydiving.''.
(b) Transportation Treated as Noncommercial Aviation.--The
last sentence of section 4041(c)(2) is amended by inserting
before the period ``or by reason of section 4261(h)''.
(c) Effective Dates.--
(1) Subsection (a).--The amendment made by
subsection (a) shall apply to amounts paid after
September 30, 1997.
(2) Subsection (b).--The amendment made by
subsection (b) shall take effect on October 1, 1997.
SEC. 1436. ALLOWANCE OR CREDIT OF REFUND FOR TAX-PAID AVIATION FUEL
PURCHASED BY REGISTERED PRODUCER OF AVIATION FUEL.
(a) In General.--Section 4091 (relating to aviation fuel)
is amended by adding at the end the following new subsection:
``(d) Refund of Tax-Paid Aviation Fuel to Registered
Producer of Fuel.--If--
``(1) a producer of aviation fuel is registered
under section 4101, and
``(2) such producer establishes to the satisfaction
of the Secretary that a prior tax was paid (and not
credited or refunded) on aviation fuel held by such
producer,
then an amount equal to the tax so paid shall be allowed as a
refund (without interest) to such producer in the same manner
as if it were an overpayment of tax imposed by this section.''.
(b) Conforming Amendment.--The last sentence of section
6416(d) is amended by inserting before the period ``or to the
tax imposed by section 4091 in the case of refunds described in
section 4091(d)''.
(c) Effective Date.--The amendments made by this section
shall apply to fuel acquired by the producer after September
30, 1997.
Subtitle B--Tax-Exempt Bond Provisions
SEC. 1441. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS UNDER 1-
YEAR EXCEPTION FROM REBATE.
Subclause (I) of section 148(f)(4)(B)(ii) (relating to
additional period for certain bonds) is amended by striking
``the lesser of 5 percent of the proceeds of the issue or
$100,000'' and inserting ``5 percent of the proceeds of the
issue''.
SEC. 1442. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE DEBT SERVICE
FUND UNDER CONSTRUCTION BOND RULES.
Subparagraph (C) of section 148(f)(4) is amended by adding
at the end the following new clause:
``(xvii) Treatment of bona fide
debt service funds.--If the spending
requirements of clause (ii) are met
with respect to the available
construction proceeds of a construction
issue, then paragraph (2) shall not
apply to earnings on a bona fide debt
service fund for such issue.''.
SEC. 1443. REPEAL OF DEBT SERVICE-BASED LIMITATION ON INVESTMENT IN
CERTAIN NONPURPOSE INVESTMENTS.
Subsection (d) of section 148 (relating to special rules
for reasonably required reserve or replacement fund) is amended
by striking paragraph (3).
SEC. 1444. REPEAL OF EXPIRED PROVISIONS.
(a) Paragraph (2) of section 148(c) is amended by striking
subparagraph (B) and by redesignating subparagraphs (C), (D),
and (E) as subparagraphs (B), (C), and (D), respectively.
(b) Paragraph (4) of section 148(f) is amended by striking
subparagraph (E).
SEC. 1445. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to bonds
issued after the date of the enactment of this Act.
Subtitle C--Tax Court Procedures
SEC. 1451. OVERPAYMENT DETERMINATIONS OF TAX COURT.
(a) Appeal of Order.--Paragraph (2) of section 6512(b)
(relating to jurisdiction to enforce) is amended by adding at
the end the following new sentence: ``An order of the Tax Court
disposing of a motion under this paragraph shall be reviewable
in the same manner as a decision of the Tax Court, but only
with respect to the matters determined in such order.''.
(b) Denial of Jurisdiction Regarding Certain Credits and
Reductions.--Subsection (b) of section 6512 (relating to
overpayment determined by Tax Court) is amended by adding at
the end the following new paragraph:
``(4) Denial of jurisdiction regarding certain
credits and reductions.--The Tax Court shall have no
jurisdiction under this subsection to restrain or
review any credit or reduction made by the Secretary
under section 6402.''.
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION.
(a) In General.--Subsection (c) of section 7481 (relating
to jurisdiction over interest determinations) is amended to
read as follows:
``(c) Jurisdiction Over Interest Determinations.--
``(1) In general.--Notwithstanding subsection (a),
if, within 1 year after the date the decision of the
Tax Court becomes final under subsection (a) in a case
to which this subsection applies, the taxpayer files a
motion in the Tax Court for a redetermination of the
amount of interest involved, then the Tax Court may
reopen the case solely to determine whether the
taxpayer has made an overpayment of such interest or
the Secretary has made an underpayment of such interest
and the amount thereof.
``(2) Cases to which this subsection applies.--This
subsection shall apply where--
``(A)(i) an assessment has been made by the
Secretary under section 6215 which includes
interest as imposed by this title, and
``(ii) the taxpayer has paid the entire
amount of the deficiency plus interest claimed
by the Secretary, and
``(B) the Tax Court finds under section
6512(b) that the taxpayer has made an
overpayment.
``(3) Special rules.--If the Tax Court determines
under this subsection that the taxpayer has made an
overpayment of interest or that the Secretary has made
an underpayment of interest, then that determination
shall be treated under section 6512(b)(1) as a
determination of an overpayment of tax. An order of the
Tax Court redetermining interest, when entered upon the
records of the court, shall be reviewable in the same
manner as a decision of the Tax Court.''.
(b) Effective Date.--The amendment made by this section
shall take effect on the date of the enactment of this Act.
SEC. 1453. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS OF
LITIGATION COSTS.
(a) In General.--Paragraph (4) of section 7430(c) (defining
prevailing party) is amended by adding at the end thereof the
following new subparagraph:
``(D) Special rules for applying net worth
requirement.--In applying the requirements of
section 2412(d)(2)(B) of title 28, United
States Code, for purposes of subparagraph
(A)(iii) of this paragraph--
``(i) the net worth limitation in
clause (i) of such section shall apply
to--
``(I) an estate but shall
be determined as of the date of
the decedent's death, and
``(II) a trust but shall be
determined as of the last day
of the taxable year involved in
the proceeding, and
``(ii) individuals filing a joint
return shall be treated as separate
individuals for purposes of clause (i)
of such section.''.
(b) Effective Date.--The amendment made by this section
shall apply to proceedings commenced after the date of the
enactment of this Act.
SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.
(a) In General.--Subchapter B of chapter 76 (relating to
proceedings by taxpayers and third parties) is amended by
redesignating section 7436 as section 7437 and by inserting
after section 7435 the following new section:
``SEC. 7436. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.
``(a) Creation of Remedy.--If, in connection with an audit
of any person, there is an actual controversy involving a
determination by the Secretary as part of an examination that--
``(1) one or more individuals performing services
for such person are employees of such person for
purposes of subtitle C, or
``(2) such person is not entitled to the treatment
under subsection (a) of section 530 of the Revenue Act
of 1978 with respect to such an individual,
upon the filing of an appropriate pleading, the Tax Court may
determine whether such a determination by the Secretary is
correct. Any such redetermination by the Tax Court shall have
the force and effect of a decision of the Tax Court and shall
be reviewable as such.
``(b) Limitations.--
``(1) Petitioner.--A pleading may be filed under
this section only by the person for whom the services
are performed.
``(2) Time for filing action.--If the Secretary
sends by certified or registered mail notice to the
petitioner of a determination by the Secretary
described in subsection (a), no proceeding may be
initiated under this section with respect to such
determination unless the pleading is filed before the
91st day after the date of such mailing.
``(3) No adverse inference from treatment while
action is pending.--If, during the pendency of any
proceeding brought under this section, the petitioner
changes his treatment for employment tax purposes of
any individual whose employment status as an employee
is involved in such proceeding (or of any individual
holding a substantially similar position) to treatment
as an employee, such change shall not be taken into
account in the Tax Court's determination under this
section.
``(c) Small Case Procedures.--
``(1) In general.--At the option of the petitioner,
concurred in by the Tax Court or a division thereof
before the hearing of the case, proceedings under this
section may (notwithstanding the provisions of section
7453) be conducted subject to the rules of evidence,
practice, and procedure applicable under section 7463
if the amount of employment taxes placed in dispute is
$10,000 or less for each calendar quarter involved.
``(2) Finality of decisions.--A decision entered in
any proceeding conducted under this subsection shall
not be reviewed in any other court andshall not be
treated as a precedent for any other case not involving the same
petitioner and the same determinations.
``(3) Certain rules to apply.--Rules similar to the
rules of the last sentence of subsection (a), and
subsections (c), (d), and (e), of section 7463 shall
apply to proceedings conducted under this subsection.
``(d) Special Rules.--
``(1) Restrictions on assessment and collection
pending action, etc.--The principles of subsections
(a), (b), (c), (d), and (f) of section 6213, section
6214(a), section 6215, section 6503(a), section 6512,
and section 7481 shall apply to proceedings brought
under this section in the same manner as if the
Secretary's determination described in subsection (a)
were a notice of deficiency.
``(2) Awarding of costs and certain fees.--Section
7430 shall apply to proceedings brought under this
section.
``(e) Employment Tax.--The term `employment tax' means any
tax imposed by subtitle C.''.
(b) Conforming Amendments.--
(1) Subsection (d) of section 6511 is amended by
adding at the end the following new paragraph:
``(7) Special period of limitation with respect to
self-employment tax in certain cases.--If--
``(A) the claim for credit or refund
relates to an overpayment of the tax imposed by
chapter 2 (relating to the tax on self-
employment income) attributable to Tax Court
determination in a proceeding under section
7436, and
``(B) the allowance of a credit or refund
of such overpayment is otherwise prevented by
the operation of any law or rule of law other
than section 7122 (relating to compromises),
such credit or refund may be allowed or made if claim
therefor is filed on or before the last day of the
second year after the calendar year in which such
determination becomes final.''.
(2) Subsection (a) of section 7421 is amended by
striking ``and 7429(b)'' and inserting ``7429(b), and
7436''.
(3) Sections 7453 and 7481(b) are each amended by
striking ``section 7463'' and inserting ``section
7436(c) or 7463''.
(4) The table of sections for subchapter B of
chapter 76 is amended by striking the last item and
inserting the following:
``Sec. 7436. Proceedings for determination of employment status.
``Sec. 7437. Cross references.''.
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
Subtitle D--Other Provisions
SEC. 1461. EXTENSION OF DUE DATE OF FIRST QUARTER ESTIMATED TAX PAYMENT
BY PRIVATE FOUNDATIONS.
(a) In General.--Paragraph (3) of section 6655(g) is
amended by adding at the end the following new sentence: ``In
the case of a private foundation, subsection (c)(2) shall be
applied by substituting `May 15' for `April 15'.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply for purposes of determining underpayments of
estimated tax for taxable years beginning after the date of the
enactment of this Act.
SEC. 1462. CLARIFICATION OF AUTHORITY TO WITHHOLD PUERTO RICO INCOME
TAXES FROM SALARIES OF FEDERAL EMPLOYEES.
(a) In General.--Subsection (c) of section 5517 of title 5,
United States Code, is amended by striking ``or territory or
possession'' and inserting ``, territory, possession, or
commonwealth''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect on January 1, 1998.
SEC. 1463. CERTAIN NOTICES DISREGARDED UNDER PROVISION INCREASING
INTEREST RATE ON LARGE CORPORATE UNDERPAYMENTS.
(a) General Rule.--Subparagraph (B) of section 6621(c)(2)
(defining applicable date) is amended by adding at the end the
following new clause:
``(iii) Exception for letters or
notices involving small amounts.--For
purposes of this paragraph, any letter
or notice shall be disregarded if the
amount of the deficiency or proposed
deficiency (or the assessment or
proposed assessment) set forth in such
letter or notice is not greater than
$100,000 (determined by not taking into
account any interest, penalties, or
additions to tax).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply for purposes of determining interest for periods
after December 31, 1997.
TITLE XV--PENSIONS AND EMPLOYEE BENEFITS
Subtitle A--Simplification
SEC. 1501. MATCHING CONTRIBUTIONS OF SELF-EMPLOYED INDIVIDUALS NOT
TREATED AS ELECTIVE EMPLOYER CONTRIBUTIONS.
(a) In General.--Section 402(g) (relating to limitation on
exclusion for elective deferrals) is amended by adding at the
end the following:
``(9) Matching contributions on behalf of self-
employed individuals not treated as elective employer
contributions.--Except as provided in section
401(k)(3)(D)(ii), any matching contribution described
in section 401(m)(4)(A) which is made on behalf of a
self-employed individual (as defined in section 401(c))
shall not be treated as an elective employer
contribution under a qualified cash or deferred
arrangement (as defined in section 401(k)) for purposes
of this title.''.
(b) Conforming Amendment for Simple Retirement Accounts.--
Section 408(p) (relating to simple retirement accounts) is
amended by adding at the end the following:
``(8) Matching contributions on behalf of self-
employed individuals not treated as elective employer
contributions.--Any matching contribution described in
paragraph (2)(A)(iii) which is made on behalf of a
self-employed individual (as defined in section 401(c))
shall not be treated as an elective employer
contribution to a simple retirement account for
purposes of this title.''.
(c) Effective Dates.--
(1) Elective deferrals.--The amendment made by
subsection (a) shall apply to years beginning after
December 31, 1997.
(2) Simple retirement accounts.--The amendment made
by subsection (b) shall apply to years beginning after
December 31, 1996.
SEC. 1502. MODIFICATION OF PROHIBITION OF ASSIGNMENT OR ALIENATION.
(a) Amendment to ERISA.--Section 206(d) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1056(d)) is
amended by adding at the end the following:
``(4) Paragraph (1) shall not apply to any offset of a
participant's benefits provided under an employee pension
benefit plan against an amount that the participant is ordered
or required to pay to the plan if--
``(A) the order or requirement to pay arises--
``(i) under a judgment of conviction for a
crime involving such plan,
``(ii) under a civil judgment (including a
consent order or decree) entered by a court in
an action brought in connection with a
violation (or alleged violation) of part 4 of
this subtitle, or
``(iii) pursuant to a settlement agreement
between the Secretary and the participant, or a
settlement agreement between the Pension
Benefit Guaranty Corporation and the
participant, in connection with a violation (or
alleged violation) of part 4 of this subtitle
by a fiduciary or any other person,
``(B) the judgment, order, decree, or settlement
agreement expressly provides for the offset of all or
part of the amount ordered or required to be paid to
the plan against the participant's benefits provided
under the plan, and
``(C) in a case in which the survivor annuity
requirements of section 205 apply with respect to
distributions from the plan to the participant, if the
participant has a spouse at the time at which the
offset is to be made--
``(i) either--
``(I) such spouse has consented in
writing to such offset and such consent
is witnessed by a notary public or
representative of the plan (or it is
established to the satisfaction of a
plan representative that such consent
may not be obtained by reason of
circumstances described in section
205(c)(2)(B)), or
``(II) an election to waive the
right of the spouse to a qualified
joint and survivor annuity or a
qualified preretirement survivor
annuity is in effect in accordance with
the requirements of section 205(c),
``(ii) such spouse is ordered or required
in such judgment, order, decree, or settlement
to pay an amount to the plan in connection with
a violation of part 4 of this subtitle, or
``(iii) in such judgment, order, decree, or
settlement, such spouse retains the right to
receive the survivor annuity under a qualified
joint and survivor annuity provided pursuant to
section 205(a)(1) and under a qualified
preretirement survivor annuity provided
pursuant to section 205(a)(2), determined in
accordance with paragraph (5).
A plan shall not be treated as failing to meet the requirements
of section 205 solely by reason of an offset under this
paragraph.
``(5)(A) The survivor annuity described in paragraph
(4)(C)(iii) shall be determined as if--
``(i) the participant terminated employment on the
date of the offset,
``(ii) there was no offset,
``(iii) the plan permitted commencement of benefits
only on or after normal retirement age,
``(iv) the plan provided only the minimum-required
qualified joint and survivor annuity, and
``(v) the amount of the qualified preretirement
survivor annuity under the plan is equal to the amount
of the survivor annuity payable under the minimum-
required qualified joint and survivor annuity.
``(B) For purposes of this paragraph, the term `minimum-
required qualified joint and survivor annuity' means the
qualified joint and survivor annuity which is the actuarial
equivalent of the participant's accrued benefit (within the
meaning of section 3(23)) and under which the survivor annuity
is 50 percent of the amount of the annuity which is payable
during the joint lives of the participant and the spouse.''.
(b) Amendment to 1986 Code.--Section 401(a)(13) (relating
to assignment and alienation) is amended by adding at the end
the following:
``(C) Special rule for certain judgments
and settlements.--Subparagraph (A) shall not
apply to any offset of a participant's benefits
provided under a plan against an amount that
the participant is ordered or required to pay
to the plan if--
``(i) the order or requirement to
pay arises--
``(I) under a judgment of
conviction for a crime
involving such plan,
``(II) under a civil
judgment (including a consent
order or decree) entered by a
court in an action brought in
connection with a violation (or
alleged violation) of part 4 of
subtitle B of title I of the
Employee Retirement Income
Security Act of 1974, or
``(III) pursuant to a
settlement agreement between
the Secretary of Labor and the
participant, or a settlement
agreement between the Pension
Benefit Guaranty Corporation
and the participant, in
connection with a violation (or
alleged violation) of part 4 of
such subtitle by a fiduciary or
any other person,
``(ii) the judgment, order, decree,
or settlement agreement expressly
provides for the offset of all or part
of the amount ordered or required to be
paid to the plan against the
participant's benefits provided under
the plan, and
``(iii) in a case in which the
survivor annuity requirements of
section 401(a)(11) apply with respect
to distributions from the plan to the
participant, if the participant has a
spouse at the time at which the offset
is to be made--
``(I) either such spouse
has consented in writing to
such offset and such consent is
witnessed by a notary public or
representative of the plan (or
it is established to the
satisfaction of a plan
representative that such
consent may not be obtained by
reason of circumstances
described in section
417(a)(2)(B)), or an election
to waive the right of the
spouse to either a qualified
joint and survivor annuity or a
qualified preretirement
survivor annuity is in effect
in accordance with the
requirements of section 417(a),
``(II) such spouse is
ordered or required in such
judgment, order, decree, or
settlement to pay an amount to
the plan in connection with a
violation of part 4 of such
subtitle, or
``(III) in such judgment,
order, decree, or settlement,
such spouse retains the right
to receive the survivor annuity
under a qualified joint and
survivor annuity provided
pursuant to section
401(a)(11)(A)(i) and under a
qualified preretirement
survivor annuity provided
pursuant to section
401(a)(11)(A)(ii), determined
in accordance with subparagraph
(D).
A plan shall not be treated as failing to meet
the requirements of this subsection, subsection
(k), section 403(b), or section 409(d) solely
by reason of an offset described in this
subparagraph.
``(D) Survivor annuity.--
``(i) In general.--The survivor
annuity described in subparagraph
(C)(iii)(III) shall be determined as
if--
``(I) the participant
terminated employment on the
date of the offset,
``(II) there was no offset,
``(III) the plan permitted
commencement of benefits only
on or after normal retirement
age,
``(IV) the plan provided
only the minimum-required
qualified joint and survivor
annuity, and
``(V) the amount of the
qualified preretirement
survivor annuity under the plan
is equal to the amount of the
survivor annuity payable under
the minimum-required qualified
joint and survivor annuity.
``(ii) Definition.--For purposes of
this subparagraph, the term `minimum-
required qualified joint and survivor
annuity' means the qualified joint and
survivor annuity which is the actuarial
equivalent of the participant's accrued
benefit (within the meaning of section
411(a)(7)) and under which the survivor
annuity is 50 percent of the amount of
the annuity which is payable during the
joint lives of the participant and the
spouse.''.
(c) Effective Date.--The amendments made by this section
shall apply to judgments, orders, and decrees issued, and
settlement agreements entered into, on or after the date of the
enactment of this Act.
SEC. 1503. ELIMINATION OF PAPERWORK BURDENS ON PLANS.
(a) Elimination of Unnecessary Filing Requirements.--
Section 101(b) of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1021(b)) is amended by striking paragraphs
(1), (2), and (3) and by redesignating paragraphs (4) and (5)
as paragraphs (1) and (2), respectively.
(b) Elimination of Plan Description.--
(1) In general.--Section 102(a) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1022(a)) is amended--
(A) by striking paragraph (2), and
(B) by striking ``(a)(1)'' and inserting
``(a)''.
(2) Conforming amendments.--
(A) Section 102(b) of such Act (29 U.S.C.
1022(b)) is amended by striking ``The plan
description and summary plan description shall
contain'' and inserting ``The summary plan
description shall contain''.
(B) The heading for section 102 of such Act
is amended by striking ``plan description
and''.
(c) Furnishing of Reports.--
(1) In general.--Section 104(a)(1) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1024(a)(1)) is amended to read as follows:
``Sec. 104. (a)(1) The administrator of any employee
benefit plan subject to this part shall file with the Secretary
the annual report for a plan year within 210 days after the
close of such year (or within such time as may be required by
regulations promulgated by the Secretary in order to reduce
duplicative filing). The Secretary shall make copies of such
annual reports available for inspection in the public document
room of the Department of Labor.''.
(2) Secretary may request documents.--
(A) In general.--Section 104(a) of such Act
(29 U.S.C. 1024(a)) is amended by adding at the
end the following:
``(6) The administrator of any employee benefit plan
subject to this part shall furnish to the Secretary, upon
request, any documents relating to the employee benefit plan,
including but not limited to, the latest summary plan
description (including any summaries of plan changes not
contained in the summary plan description), and the bargaining
agreement, trust agreement, contract, or other instrument under
which the plan is established or operated.''.
(B) Penalty.--Section 502(c) of such Act
(29 U.S.C. 1132(c)) is amended by redesignating
paragraph (6) as paragraph (7) and by inserting
after paragraph (5) the following:
``(6) If, within 30 days of a request by the Secretary to a
plan administrator for documents under section 104(a)(6), the
plan administrator fails to furnish the material requested to
the Secretary, the Secretary may assess a civil penalty against
the plan administrator of up to $100 a day from the date of
such failure (but in no event in excess of $1,000 per request).
No penalty shall be imposed under this paragraph for any
failure resulting frommatters reasonably beyond the control of
the plan administrator.''.
(d) Conforming Amendments.--
(1) Section 104(b)(1) of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1024(b)(1)) is
amended by striking ``section 102(a)(1)'' each place it
appears and inserting ``section 102(a)''.
(2) Section 104(b)(2) of such Act (29 U.S.C.
1024(b)(2)) is amended by striking ``the plan
description and'' and inserting ``the latest updated
summary plan description and''.
(3) Section 104(b)(4) of such Act (29 U.S.C.
1024(b)(4)) is amended by striking ``plan
description''.
(4) Section 106(a) of such Act (29 U.S.C. 1026(a))
is amended by striking ``descriptions,''.
(5) Section 107 of such Act (29 U.S.C. 1027) is
amended by striking ``description or''.
(6) Section 108(2)(B) of such Act (29 U.S.C.
1028(2)(B)) is amended by striking ``plan descriptions,
annual reports,'' and inserting ``annual reports''.
(7) Section 502(a)(6) of such Act (29 U.S.C.
1132(a)(6)) is amended by striking ``or (5)'' and
inserting ``(5), or (6)''.
(e) Technical Correction.--Section 1144(c) of the Social
Security Act (42 U.S.C. 1320b-14(c)) is amended by
redesignating paragraph (9) as paragraph (8).
SEC. 1504. MODIFICATION OF 403(B) EXCLUSION ALLOWANCE TO CONFORM TO 415
MODIFICATIONS.
(a) Definition of Compensation.--
(1) In general.--Section 403(b)(3) (defining
includible compensation) is amended by adding at the
end the following: ``Such term includes--
``(A) any elective deferral (as defined in
section 402(g)(3)), and
``(B) any amount which is contributed or
deferred by the employer at the election of the
employee and which is not includible in the
gross income of the employee by reason of
section 125 or 457.''.
(2) Effective date.--The amendment made by this
subsection shall apply to years beginning after
December 31, 1997.
(b) Repeal of Rules in Section 415(e).--The Secretary of
the Treasury shall modify the regulations regardingthe
exclusion allowance under section 403(b)(2) of the Internal Revenue
Code of 1986 to reflect the amendment made by section 1452(a) of the
Small Business Job Protection Act of 1996. Such modification shall take
effect for years beginning after December 31, 1999.
SEC. 1505. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN
NONDISCRIMINATION RULES TO STATE AND LOCAL
GOVERNMENTS.
(a) General Nondiscrimination and Participation Rules.--
(1) Nondiscrimination requirements.--Section
401(a)(5) (relating to qualified pension, profit-
sharing, and stock bonus plans) is amended by adding at
the end the following:
``(G) State and local governmental plans.--
Paragraphs (3) and (4) shall not apply to a
governmental plan (within the meaning of
section 414(d)) maintained by a State or local
government or political subdivision thereof (or
agency or instrumentality thereof).''.
(2) Additional participation requirements.--Section
401(a)(26)(H) (relating to additional participation
requirements) is amended to read as follows:
``(H) Exception for state and local
governmental plans.--This paragraph shall not
apply to a governmental plan (within the
meaning of section 414(d)) maintained by a
State or local government or political
subdivision thereof (or agency or
instrumentality thereof).''.
(3) Minimum participation standards.--Section
410(c)(2) (relating to application of participation
standards to certain plans) is amended to read as
follows:
``(2) A plan described in paragraph (1) shall be
treated as meeting the requirements of this section for
purposes of section 401(a), except that in the case of
a plan described in subparagraph (B), (C), or (D) of
paragraph (1), this paragraph shall apply only if such
plan meets the requirements of section 401(a)(3) (as in
effect on September 1, 1974).''.
(b) Participation and Discrimination Standards for
Qualified Cash or Deferred Arrangements.--Section 401(k)(3)
(relating to application of participation and discrimination
standards) is amended by adding at the end the following:
``(G) A governmental plan (within the
meaning of section 414(d)) maintained by aState
or local government or political subdivision thereof (or agency or
instrumentality thereof) shall be treated as meeting the requirements
of this paragraph.''.
(c) Nondiscrimination Rules for Section 403(b) Plans.--
Section 403(b)(12) (relating to nondiscrimination requirements)
is amended by adding at the end the following:
``(C) State and local governmental plans.--
For purposes of paragraph (1)(D), the
requirements of subparagraph (A)(i) (other than
those relating to section 401(a)(17)) shall not
apply to a governmental plan (within the
meaning of section 414(d)) maintained by a
State or local government or political
subdivision thereof (or agency or
instrumentality thereof).''.
(d) Effective Dates.--
(1) In general.--The amendments made by this
section apply to taxable years beginning on or after
the date of enactment of this Act.
(2) Treatment for years beginning before date of
enactment.--A governmental plan (within the meaning of
section 414(d) of the Internal Revenue Code of 1986)
maintained by a State or local government or political
subdivision thereof (or agency or instrumentality
thereof) shall be treated as satisfying the
requirements of sections 401(a)(3), 401(a)(4),
401(a)(26), 401(k), 401(m), 403 (b)(1)(D) and (b)(12),
and 410 of such Code for all taxable years beginning
before the date of enactment of this Act.
SEC. 1506. CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE STOCK
OWNERSHIP PLANS OF S CORPORATIONS.
(a) Certain Cash Distributions Permitted.--
(1) Paragraph (2) of section 409(h) is amended by
adding at the end the following new subparagraph:
``(B) Exception for certain plans
restricted from distributing securities.--
``(i) In general.--A plan to which
this subparagraph applies shall not be
treated as failing to meet the
requirements of this subsection or
section 401(a) merely because it does
not permit a participant to exercise
the right described in paragraph (1)(A)
if such plan provides that the
participant entitled to a distribution
has a right to receive the distribution
in cash, except that such plan may
distribute employer securities subject
to a requirement that such securities
may be resold to the employer under
terms which meet the requirements of
paragraph (1)(B).
``(ii) Applicable plans.--This
subparagraph shall apply to a plan
which otherwise meets the requirements
of this subsection or section
4975(e)(7) and which is established and
maintained by--
``(I) an employer whose
charter or bylaws restrict the
ownership of substantially all
outstanding employer securities
to employees or to a trust
described in section 401(a), or
``(II) an S corporation.''
(2) Paragraph (2) of section 409(h), as in effect
before the amendment made by paragraph (1), is
amended--
(A) by striking ``A plan which'' in the
first sentence and inserting the following:
``(A) In general.--A plan which'', and
(B) by striking the last sentence.
(b) Certain Shareholder-Employees Not Treated as Owner-
Employees.--
(1) Amendment to 1986 code.--
(A) In general.--Section 4975(f) is amended
by adding at the end the following new
paragraph:
``(6) Exemptions not to apply to certain
transactions.--
``(A) In general.--In the case of a trust
described in section 401(a) which is part of a
plan providing contributions or benefits for
employees some or all of whom are owner-
employees (as defined in section 401(c)(3)),
the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not
apply to a transaction in which the plan
directly or indirectly--
``(i) lends any part of the corpus
or income of the plan to,
``(ii) pays any compensation for
personal services rendered to the plan
to, or
``(iii) acquires for the plan any
property from, or sells any property
to,
any such owner-employee, a member of the family
(as defined in section 267(c)(4)) of any such
owner-employee, or any corporation in which any
such owner-employee owns, directly or
indirectly, 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
of the corporation.
``(B) Special rules for shareholder-
employees, etc.--
``(i) In general.--For purposes of
subparagraph (A), the following shall
be treated as owner-employees:
``(I) A shareholder-
employee.
``(II) A participant or
beneficiary of an individual
retirement plan (as defined in
section 7701(a)(37)).
``(III) An employer or
association of employees which
establishes such an individual
retirement plan under section
408(c).
``(ii) Exception for certain
transactions involving shareholder-
employees.--Subparagraph (A)(iii) shall
not apply to a transaction which
consists of a sale of employer
securities to an employee stock
ownership plan (as defined in
subsection (e)(7)) by a shareholder-
employee, a member of the family (as
defined in section 267(c)(4)) of such
shareholder-employee, or a corporation
in which such a shareholder-employee
owns stock representing a 50 percent or
greater interest described in
subparagraph (A).
``(C) Shareholder-employee.--For purposes
of subparagraph (B), the term `shareholder-
employee' means an employee or officer of an S
corporation who owns (or is considered as
owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of
the corporation on any day during the taxable
year of such corporation.''
(B) Conforming amendments.--Section 4975(d)
is amended--
(i) by striking ``The
prohibitions'' and inserting ``Except
as provided in subsection (f)(6), the
prohibitions'', and
(ii) by striking the last two
sentences thereof.
(2) Amendment to erisa.--Section 408(d) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1108(d)) is amended to read as follows:
``(d)(1) Section 407(b) and subsections (b), (c), and (e)
of this section shall not apply to a transaction in which a
plan directly or indirectly--
``(A) lends any part of the corpus or income of the
plan to,
``(B) pays any compensation for personal services
rendered to the plan to, or
``(C) acquires for the plan any property from, or
sells any property to,
any person who is with respect to the plan an owner-employee
(as defined in section 401(c)(3) of the Internal Revenue Code
of 1986), a member of the family (as defined in section
267(c)(4) of such Code) of any such owner-employee, or any
corporation in which any such owner-employee owns, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of
the corporation.
``(2)(A) For purposes of paragraph (1), the following shall
be treated as owner-employees:
``(i) A shareholder-employee.
``(ii) A participant or beneficiary of an
individual retirement plan (as defined in section
7701(a)(37) of the Internal Revenue Code of 1986).
``(iii) An employer or association of employees
which establishes such an individual retirement plan
under section 408(c) of such Code.
``(B) Paragraph (1)(C) shall not apply to a transaction
which consists of a sale of employer securities to an employee
stock ownership plan (as defined in section 407(d)(6)) by a
shareholder-employee, a member of the family (as defined in
section 267(c)(4) of such Code) of any such owner-employee, or
a corporation in which such a shareholder-employee owns stock
representing a 50 percent or greater interest described in
paragraph (1).
``(3) For purposes of paragraph (2), the term `shareholder-
employee' means an employee or officer of an S corporation (as
defined in section 1361(a)(1) of such Code) who owns (or is
considered as owning within the meaning of section 318(a)(1) of
such Code) more than 5 percent of the outstanding stock of the
corporation on any day during the taxable year of such
corporation.''
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1507. MODIFICATION OF 10-PERCENT TAX FOR NONDEDUCTIBLE
CONTRIBUTIONS.
(a) In General.--Section 4972(c)(6)(B) (relating to
exceptions) is amended to read as follows:
``(B) so much of the contributions to 1 or
more defined contribution plans which are not
deductible when contributed solely because of
section 404(a)(7) as does not exceed the
greater of--
``(i) the amount of contributions
not in excess of 6 percent of
compensation (within the meaning of
section 404(a)) paid or accrued (during
the taxable year for which the
contributions were made) to
beneficiaries under the plans, or
``(ii) the sum of--
``(I) the amount of
contributions described in
section 401(m)(4)(A), plus
``(II) the amount of
contributions described in
section 402(g)(3)(A).''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1508. MODIFICATION OF FUNDING REQUIREMENTS FOR CERTAIN PLANS.
(a) Funding Rules for Certain Plans.--Section 769 of the
Retirement Protection Act of 1994 is amended by adding at the
end the following new subsection:
``(c) Transition Rules for Certain Plans.--
``(1) In general.--In the case of a plan that--
``(A) was not required to pay a variable
rate premium for the plan year beginning in
1996;
``(B) has not, in any plan year beginning
after 1995 and before 2009, merged with another
plan (other than a plan sponsored by an
employer that was in 1996 within the controlled
group of the plan sponsor); and
``(C) is sponsored by a company that is
engaged primarily in the interurban or
interstate passenger bus service,
the transition rules described in paragraph (2) shall
apply for any plan year beginning after 1996 and before
2010.
``(2) Transition rules.--The transition rules
described in this paragraph are as follows:
``(A) For purposes of section 412(l)(9)(A)
of the Internal Revenue Code of 1986 and
section 302(d)(9)(A) of the Employee Retirement
Income Security Act of 1974--
``(i) the funded current liability
percentage for any plan year beginning
after 1996 and before 2005 shall be
treated as not less than 90 percent if
for such plan year the funded current
liability percentage is at least 85
percent, and
``(ii) the funded current liability
percentage for any plan year beginning
after 2004 and before 2010 shall be
treated as not less than 90 percent if
for such plan year the funded current
liability percentage satisfies the
minimum percentage determined according
to the following table:
``In the case of a plan The minimum
year beginning in: percentage is:
2005...................................................... 86
2006...................................................... 87
2007...................................................... 88
2008...................................................... 89
2009 and thereafter....................................... 90.
``(B) Sections 412(c)(7)(E)(i)(I) of such
Code and 302(c)(7)(E)(i)(I) of such Act shall
be applied--
``(i) by substituting `85 percent'
for `90 percent' for plan years
beginning after 1996 and before 2005,
and
``(ii) by substituting the minimum
percentage specified in the table
contained in subparagraph (A)(ii) for
`90 percent' for plan years beginning
after 2004 and before 2010.
``(C) In the event the funded current
liability percentage of a plan is less than 85
percent for any plan year beginning after 1996
and before 2005, the transition rules under
subparagraphs (A) and (B) shall continue to
apply to the plan if contributions for such a
plan year are made to the plan in an amount
equal to the lesser of--
``(i) the amount necessary to
result in a funded current liability
percentage of 85 percent, or
``(ii) the greater of--
``(I) 2 percent of the
plan's current liability as of
the beginning of such plan
year, or
``(II) the amount necessary
to result in a funded current
liability percentage of 80
percent as of the end of such
plan year.
For the plan year beginning in 2005 and for
each of the 3 succeeding plan years, the
transition rules under subparagraphs (A) and
(B) shall continue to apply to the plan for
such planyear only if contributions to the plan
for such plan year equal at least the expected increase in current
liability due to benefits accruing during such plan year.''.
(b) Effective Date.--The amendment made by this section
shall apply to plan years beginning after December 31, 1996.
SEC. 1509. CLARIFICATION OF DISQUALIFICATION RULES RELATING TO
ACCEPTANCE OF ROLLOVER CONTRIBUTIONS.
The Secretary of the Treasury or his delegate shall clarify
that, under the Internal Revenue Service regulations protecting
pension plans from disqualification by reason of the receipt of
invalid rollover contributions under section 402(c) of the
Internal Revenue Code of 1986, in order for the administrator
of the plan receiving any such contribution to reasonably
conclude that the contribution is a valid rollover contribution
it is not necessary for the distributing plan to have a
determination letter with respect to its status as a qualified
plan under section 401 of such Code.
SEC. 1510. NEW TECHNOLOGIES IN RETIREMENT PLANS.
(a) In General.--Not later than December 31, 1998, the
Secretary of the Treasury and the Secretary of Labor shall each
issue guidance which is designed to--
(1) interpret the notice, election, consent,
disclosure, and time requirements (and related
recordkeeping requirements) under the Internal Revenue
Code of 1986 and the Employee Retirement Income
Security Act of 1974 relating to retirement plans as
applied to the use of new technologies by plan sponsors
and administrators while maintaining the protection of
the rights of participants and beneficiaries, and
(2) clarify the extent to which writing
requirements under the Internal Revenue Code of 1986
relating to retirement plans shall be interpreted to
permit paperless transactions.
(b) Applicability of Final Regulations.--Final regulations
applicable to the guidance regarding new technologies described
in subsection (a) shall not be effective until the first plan
year beginning at least 6 months after the issuance of such
final regulations.
Subtitle B--Other Provisions Relating to Pensions and Employee Benefits
SEC. 1521. INCREASE IN CURRENT LIABILITY FUNDING LIMIT.
(a) Amendment to 1986 Code.--Section 412(c)(7) (relating to
full-funding limitation) is amended--
(A) by striking ``150 percent'' in
subparagraph (A)(i)(I) and inserting ``the
applicable percentage'', and
(B) by adding at the end the following:
``(F) Applicable percentage.--For purposes
of subparagraph (A)(i)(I), the applicable
percentage shall be determined in accordance
with the following table:
``In the case of any plan The applicable
year beginning in-- percentage is--
1999 or 2000.............................................. 155
2001 or 2002.............................................. 160
2003 or 2004.............................................. 165
2005 and succeeding years................................. 170.''.
(b) Amendment to ERISA.--Section 302(c)(7) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7))
is amended--
(A) by striking ``150 percent'' in
subparagraph (A)(i)(I) and inserting ``the
applicable percentage'', and
(B) by adding at the end the following:
``(F) Applicable percentage.--For purposes of
subparagraph (A)(i)(I), the applicable percentage shall
be determined in accordance with the following table:
``In the case of any plan The applicable
year beginning in-- percentage is--
1999 or 2000.............................................. 155
2001 or 2002.............................................. 160
2003 or 2004.............................................. 165
2005 and succeeding years................................. 170.''.
(c) Special Amortization Rule.--
(1) Code amendment.--Section 412(b)(2) is amended
by striking ``and'' at the end of subparagraph (C), by
striking the period at the end of subparagraph (D) and
inserting ``, and'', and by inserting after
subparagraph (D) the following:
``(E) the amount necessary to amortize in
equal annual installments (until fully
amortized) over a period of 20 years the
contributions which would be required to be
made under the plan but for the provisions of
subsection (c)(7)(A)(i)(I).''.
(2) ERISA amendment.--Section 302(b)(2) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1082(b)(2)) is amended by striking ``and'' at
the end of subparagraph (C), by striking the period at
the end of subparagraph (D) and inserting ``, and'',
and by inserting after subparagraph (D) the following:
``(E) the amount necessary to amortize in equal
annual installments (until fully amortized) over a
period of 20 years the contributions which would be
required to be made under the plan but for the
provisions of subsection (c)(7)(A)(i)(I).''.
(3) Conforming amendments.--
(A) Section 412(c)(7)(D) is amended by
adding ``and'' at the end of clause (i), by
striking ``, and'' at the end of clause (ii)
and inserting a period, and by striking clause
(iii).
(B) Section 302(c)(7)(D) of the Employee
Retirement Income Security Act of 1974 (29
U.S.C. 1082(c)(7)(D)) is amended by adding
``and'' at the end of clause (i), by striking
``, and'' at the end of clause (ii) and
inserting a period, and by striking clause
(iii).
(d) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to plan years beginning after
December 31, 1998.
(2) Special rule for unamortized balances under
existing law.--The unamortized balance (as of the close
of the plan year preceding the plan's first year
beginning in 1999) of any amortization base established
under section 412(c)(7)(D)(iii) of such Code and
section 302(c)(7)(D)(iii) of such Act (as repealed by
subsection (c)(3)) for any plan year beginning before
1999 shall be amortized in equal annual installments
(until fully amortized) over a period of years equal to
the excess of--
(A) 20 years, over
(B) the number of years since the
amortization base was established.
SEC. 1522. SPECIAL RULES FOR CHURCH PLANS.
(a) In General.--Section 414(e)(5) (relating to special
rules for chaplains and self-employed ministers) is amended--
(1) by striking ``not eligible to participate'' in
subparagraph (C) and inserting ``not otherwise
participating'', and
(2) by adding at the end the following new
subparagraph:
``(E) Exclusion.--In the case of a
contribution to a church plan made on behalf of
a minister described in subparagraph
(A)(i)(II), such contribution shall not be
included in the gross income of the minister to
the extent that such contribution would not be
so included if the minister was an employee of
a church.''.
(b) Effective Date.--The amendments made by this section
shall apply to years beginning after December 31, 1997.
SEC. 1523. REPEAL OF APPLICATION OF UNRELATED BUSINESS INCOME TAX TO
ESOPS.
(a) In General.--Section 512(e) is amended by adding at the
end the following new paragraph:
``(3) Exception for esops.--This subsection shall
not apply to employer securities (within the meaning of
section 409(l)) held by an employee stock ownership
plan described in section 4975(e)(7).''
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 1997.
SEC. 1524. DIVERSIFICATION OF SECTION 401(K) PLAN INVESTMENTS.
(a) Limitations on Investment in Employer Securities and
Employer Real Property by Cash or Deferred Arrangements.--
Section 407(b) of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1107(b)) is amended by redesignating
paragraph (2) as paragraph (3) and by inserting after paragraph
(1) the following new paragraph:
``(2)(A) If this paragraph applies to an eligible
individual account plan, the portion of such plan which
consists of applicable elective deferrals (and earnings
allocable thereto) shall be treated as a separate
plan--
``(i) which is not an eligible individual
account plan, and
``(ii) to which the requirements of this
section apply.
``(B)(i) This paragraph shall apply to any eligible
individual account plan if any portion of the plan's
applicable elective deferrals (or earnings allocable
thereto) are required to be invested in qualifying
employer securities or qualifying employer real
property or both--
``(I) pursuant to the terms of the plan, or
``(II) at the direction of a person other
than the participant on whose behalf such
elective deferrals are made to the plan (or a
beneficiary).
``(ii) This paragraph shall not apply to an
individual account plan for a plan year if, on the last
day of the preceding plan year, the fair market value
of the assets of all individual account plans
maintained by the employer equals not more than 10
percent of the fair market value of the assets of all
pension plans (other than multiemployer plans)
maintained by the employer.
``(iii) This paragraph shall not apply to an
individual account plan that is an employee stock
ownership plan as defined in section 4975(e)(7) of the
Internal Revenue Code of 1986.
``(iv) This paragraph shall not apply to an
individual account plan if, pursuant to the terms of
the plan, the portion of any employee's applicable
elective deferrals which is required to be invested in
qualifying employer securities and qualifying employer
real property for any year may not exceed 1 percent of
the employee's compensation which is taken into account
under the plan in determining the maximum amount of the
employee's applicable elective deferrals for such year.
``(C) For purposes of this paragraph, the term
`applicable elective deferral' means any elective
deferral (as defined in section 402(g)(3)(A) of the
Internal Revenue Code of 1986) which is made pursuant
to a qualified cash or deferred arrangement as defined
in section 401(k) of the Internal Revenue Code of
1986.''
(b) Effective Date.--The amendments made by this section
shall apply to elective deferrals for plan years beginning
after December 31, 1998.
SEC. 1525. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION AND DRAINAGE
ENTITIES.
(a) In General.--Subparagraph (B) of section 401(k)(7)
(relating to rural cooperative plan) is amended--
(1) by striking ``and'' at the end of clause (iii),
by redesignating clause (iv) as clause (v), and by
inserting after clause (iii) the following new clause:
``(iv) any organization which--
``(I) is a mutual
irrigation or ditch company
described in section 501(c)(12)
(without regard to the 85
percent requirement thereof),
or
``(II) is a district
organized under the laws of a
State as a municipal
corporation for the purpose of
irrigation, water conservation,
or drainage, and'', and
(2) in clause (v), as so redesignated, by striking
``or (iii)'' and inserting ``, (iii), or (iv)''.
(b) Effective Date.--The amendments made by subsection (a)
shall apply to years beginning after December 31, 1997.
SEC. 1526. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER GOVERNMENTAL
PENSION PLANS.
(a) In General.--Section 415 (relating to limitations on
benefits and contributions under qualified plans) is amended by
adding at the end the following new subsection:
``(n) Special Rules Relating to Purchase of Permissive
Service Credit.--
``(1) In general.--If an employee makes 1 or more
contributions to a defined benefit governmental plan
(within the meaning of section 414(d)) to purchase
permissive service credit under such plan, then the
requirements of this section shall be treated as met
only if--
``(A) the requirements of subsection (b)
are met, determined by treating the accrued
benefit derived from all such contributions as
an annual benefit for purposes of subsection
(b), or
``(B) the requirements of subsection (c)
are met, determined by treating all such
contributions as annual additions for purposes
of subsection (c).
``(2) Application of limit.--For purposes of--
``(A) applying paragraph (1)(A), the plan
shall not fail to meet the reduced limit under
subsection (b)(2)(C) solely by reason of this
subsection, and
``(B) applying paragraph (1)(B), the plan
shall not fail to meet the percentage
limitation under subsection (c)(1)(B) solely by
reason of this subsection.
``(3) Permissive service credit.--For purposes of
this subsection--
``(A) In general.--The term `permissive
service credit' means service credit--
``(i) recognized by the
governmental plan for purposes of
calculating a participant's benefit
under the plan,
``(ii) which such participant has
not received under such governmental
plan, and
``(iii) which such participant may
receive only by making a voluntary
additional contribution, in an amount
determined under such governmental
plan, which does not exceed the amount
necessary to fund the benefit
attributable to such service credit.
``(B) Limitation on nonqualified service
credit.--A plan shall fail to meet the
requirements of this section if--
``(i) more than 5 years of
permissive service credit attributable
to nonqualified service are taken into
account for purposes of this
subsection, or
``(ii) any permissive service
credit attributable to nonqualified
service is taken into account under
this subsection before the employee has
at least 5 years of participation under
the plan.
``(C) Nonqualified service.--For purposes
of subparagraph (B), the term `nonqualified
service' means service for which permissive
service credit is allowed other than--
``(i) service (including parental,
medical, sabbatical, and similar leave)
as an employee of the Government of the
United States, any State or political
subdivision thereof, or any agency or
instrumentality of any of the foregoing
(other than military service or service
for credit which was obtained as a
result of a repayment described in
subsection (k)(3)),
``(ii) service (including parental,
medical, sabbatical, and similar leave)
as an employee (other than as an
employee described in clause (i)) of an
educational organization described in
section 170(b)(1)(A)(ii) which is a
public, private, or sectarian school
which provides elementary or secondary
education (through grade 12), as
determined under State law,
``(iii) service as an employee of
an association of employees who are
described in clause (i), or
``(iv) military service (other than
qualified military service under
section 414(u)) recognized by such
governmental plan.
In the case of service described in clauses
(i), (ii), or (iii), such service will be
nonqualified service if recognition of such
service would cause a participant to receive a
retirement benefit for the same service under
more than one plan.''
(b) Special Rule for Repayment of Cashouts.--Section 415(k)
(relating to special rules) is amended by adding at the end the
following new paragraph:
``(3) Repayments of cashouts under governmental
plans.--In the case of any repayment of contributions
(including interest thereon) to the governmental plan
with respect to an amount previously refunded upon a
forfeiture of service credit under the plan or under
another governmental plan maintained by a State or
local government employer within the same State, any
such repayment shall not be taken into account for
purposes of this section.''
(c) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to permissive service credit
contributions made in years beginning after December
31, 1997.
(2) Transition rule.--
(A) In general.--In the case of an eligible
participant in a governmental plan (within the
meaning of section 414(d) of the Internal
Revenue Code of 1986), the limitations of
section 415(c)(1) of such Code shall not be
applied to reduce the amount of permissive
service credit which may be purchased to an
amount less than the amount which was allowed
to be purchased under the terms of the plan as
in effect on the date of the enactment of this
Act.
(B) Eligible participant.--For purposes of
subparagraph (A), an eligible participant is an
individual who first became a participant in
the plan before the first plan year beginning
after the last day of the calendar year in
which the next regular session (following the
date of the enactment of this Act) of the
governing body with authority to amend the plan
ends.
SEC. 1527. REMOVAL OF DOLLAR LIMITATION ON BENEFIT PAYMENTS FROM A
DEFINED BENEFIT PLAN MAINTAINED FOR CERTAIN POLICE
AND FIRE EMPLOYEES.
(a) In General.--Subparagraph (G) of section 415(b)(2) is
amended by striking ``participant--'' and all that follows and
inserting ``participant, subparagraph (C) of this paragraph
shall not apply.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to years beginning after December 31, 1996.
SEC. 1528. SURVIVOR BENEFITS FOR PUBLIC SAFETY OFFICERS KILLED IN THE
LINE OF DUTY.
(a) In General.--Section 101 (relating to certain death
benefits) is amended by adding at the end the following new
subsection:
``(h) Survivor Benefits Attributable to Service by a Public
Safety Officer Who Is Killed in the Line of Duty.--
``(1) In general.--Gross income shall not include
any amount paid as a survivor annuity on account of the
death of a public safety officer (as such term is
defined in section 1204 of the Omnibus Crime Control
and Safe Streets Act of 1968) killed in the line of
duty--
``(A) if such annuity is provided, under a
governmental plan which meets the requirements
of section 401(a), to the spouse (or a former
spouse) of the public safety officer or to a
child of such officer; and
``(B) to the extent such annuity is
attributable to such officer's service as a
public safety officer.
``(2) Exceptions.--Paragraph (1) shall not apply
with respect to the death of any public safety officer
if, as determined in accordance with the provisions of
the Omnibus Crime Control and Safe Streets Act of
1968--
``(A) the death was caused by the
intentional misconduct of the officer or by
such officer's intention to bring about such
officer's death;
``(B) the officer was voluntarily
intoxicated (as defined in section 1204 of such
Act) at the time of death;
``(C) the officer was performing such
officer's duties in a grossly negligent manner
at the time of death; or
``(D) the payment is to an individual whose
actions were a substantial contributing factor
to the death of the officer.''.
(b) Effective Date.--The amendments made by this section
shall apply to amounts received in taxable years beginning
after December 31, 1996, with respect to individuals dying
after such date.
SEC. 1529. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED BY FORMER
POLICE OFFICERS OR FIREFIGHTERS.
(a) General Rule.--For purposes of determining whether any
amount to which this section applies is excludable from gross
income under section 104(a)(1) of theInternal Revenue Code of
1986, the following conditions shall be treated as personal injuries or
sickness in the course of employment:
(1) Heart disease.
(2) Hypertension.
(b) Amounts to Which Section Applies.--This section shall
apply to any amount--
(1) which is payable--
(A) to an individual (or to the survivors
of an individual) who was a full-time employee
of any police department or fire department
which is organized and operated by a State, by
any political subdivision thereof, or by any
agency or instrumentality of a State or
political subdivision thereof, and
(B) under a State law (as amended on May
19, 1992) which irrebuttably presumed that
heart disease and hypertension are work-related
illnesses but only for employees separating
from service before July 1, 1992; and
(2) which was received in calendar year 1989, 1990,
or 1991.
(c) Waiver of Statute of Limitations.--If, on the date of
the enactment of this Act (or at any time within the 1-year
period beginning on such date of enactment), credit or refund
of any overpayment of tax resulting from the provisions of this
section is barred by any law or rule of law (including res
judicata), then credit or refund of such overpayment shall,
nevertheless, be allowed or made if claim therefore is filed
before the date 1 year after such date of enactment.
SEC. 1530. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.
(a) In General.--Subparagraph (C) of section 664(d)(1) and
subparagraph (C) of section 664(d)(2) are each amended by
striking the period at the end thereof and inserting ``or, to
the extent the remainder interest is in qualified employer
securities (as defined in subsection (g)(4)), all or part of
such securities are to be transferred to an employee stock
ownership plan (as defined in section 4975(e)(7)) in a
qualified gratuitous transfer (as defined by subsection
(g)).''.
(b) Qualified Gratuitous Transfer Defined.--Section 664 is
amended by adding at the end the following new subsection:
``(g) Qualified Gratuitous Transfer of Qualified Employer
Securities.--
``(1) In general.--For purposes of this section,
the term `qualified gratuitous transfer' means a
transfer of qualified employer securities to an
employee stock ownership plan (as defined in section
4975(e)(7)) but only to the extent that--
``(A) the securities transferred previously
passed from a decedent dying before January 1,
1999, to a trust described in paragraph (1) or
(2) of subsection (d),
``(B) no deduction under section 404 is
allowable with respect to such transfer,
``(C) such plan contains the provisions
required by paragraph (3),
``(D) such plan treats such securities as
being attributable to employer contributions
but without regard to the limitations otherwise
applicable to such contributions under section
404, and
``(E) the employer whose employees are
covered by the plan described in this paragraph
files with the Secretary a verified written
statement consenting to the application of
sections 4978 and 4979A with respect to such
employer.
``(2) Exception.--The term `qualified gratuitous
transfer' shall not include a transfer of qualified
employer securities to an employee stock ownership plan
unless--
``(A) such plan was in existence on August
1, 1996,
``(B) at the time of the transfer, the
decedent and members of the decedent's family
(within the meaning of section 2032A(e)(2)) own
(directly or through the application of section
318(a)) no more than 10 percent of the value of
the stock of the corporation referred to in
paragraph (4), and
``(C) immediately after the transfer, such
plan owns (after the application of section
318(a)(4)) at least 60 percent of the value of
the outstanding stock of the corporation.
``(3) Plan requirements.--A plan contains the
provisions required by this paragraph if such plan
provides that--
``(A) the qualified employer securities so
transferred are allocated to plan participants
in a manner consistent with section 401(a)(4),
``(B) plan participants are entitled to
direct the plan as to the manner in which such
securities which are entitled to vote and are
allocated to the account of such participant
are to be voted,
``(C) an independent trustee votes the
securities so transferred which are not
allocated to plan participants,
``(D) each participant who is entitled to a
distribution from the plan has the rights
described in subparagraphs (A) and (B) of
section 409(h)(1),
``(E) such securities are held in a
suspense account under the plan to be allocated
each year, up to the limitations under section
415(c), after first allocating all other annual
additions for the limitation year, up to the
limitations under sections 415 (c) and (e), and
``(F) on termination of the plan, all
securities so transferred which are not
allocated to plan participants as of such
termination are to be transferred to, or for
the use of, an organization described in
section 170(c).
For purposes of the preceding sentence, the term
`independent trustee' means any trustee who is not a
member of the family (within the meaning of section
2032A(e)(2)) of the decedent or a 5-percent
shareholder. A plan shall not fail to be treated as
meeting the requirements of section 401(a) by reason of
meeting the requirements of this subsection.
``(4) Qualified employer securities.--For purposes
of this section, the term `qualified employer
securities' means employer securities (as defined in
section 409(l)) which are issued by a domestic
corporation--
``(A) which has no outstanding stock which
is readily tradable on an established
securities market, and
``(B) which has only 1 class of stock.
``(5) Treatment of securities allocated by employee
stock ownership plan to persons related to decedent or
5-percent shareholders.--
``(A) In general.--If any portion of the
assets of the plan attributable to securities
acquired by the plan in a qualified gratuitous
transfer are allocated to the account of--
``(i) any person who is related to
the decedent (within the meaning of
section 267(b)) or a member of the
decedent's family (within the meaning
of section 2032A(e)(2)), or
``(ii) any person who, at the time
of such allocation or at any time
during the 1-year period ending on the
date of the acquisition of qualified
employer securities by the plan, is a
5-percent shareholder of the employer
maintaining the plan,
the plan shall be treated as having distributed
(at the time of such allocation) to such person
or shareholder the amount so allocated.
``(B) 5-percent shareholder.--For purposes
of subparagraph (A), the term `5-percent
shareholder' means any person who owns
(directly or through the application of section
318(a)) more than 5 percent of the outstanding
stock of the corporation which issued such
qualified employer securities or of any
corporation which is a member of the same
controlled group of corporations (within the
meaning of section 409(l)(4)) as such
corporation. For purposes of the preceding
sentence, section 318(a) shall be applied
without regard to the exception in paragraph
(2)(B)(i) thereof.
``(C) Cross reference.--
``For excise tax on allocations described in subparagraph (A),
see section 4979A.
``(6) Tax on failure to transfer unallocated
securities to charity on termination of plan.--If the
requirements of paragraph (3)(F) are not met with
respect to any securities,there is hereby imposed a tax
on the employer maintaining the plan in an amount equal to the sum of--
``(A) the amount of the increase in the tax
which would be imposed by chapter 11 if such
securities were not transferred as described in
paragraph (1), and
``(B) interest on such amount at the
underpayment rate under section 6621 (and
compounded daily) from the due date for filing
the return of the tax imposed by chapter 11.''.
(c) Conforming Amendments.--
(1) Section 401(a)(1) is amended by inserting ``or
by a charitable remainder trust pursuant to a qualified
gratuitous transfer (as defined in section
664(g)(1)),'' after ``stock bonus plans),''.
(2) Section 404(a)(9) is amended by inserting after
subparagraph (B) the following new subparagraph:
``(C) A qualified gratuitous transfer (as
defined in section 664(g)(1)) shall have no
effect on the amount or amounts otherwise
deductible under paragraph (3) or (7) or under
this paragraph.''.
(3) Section 415(c)(6) is amended by adding at the
end thereof the following new sentence:
``The amount of any qualified gratuitous transfer (as
defined in section 664(g)(1)) allocated to a
participant for any limitation year shall not exceed
the limitations imposed by this section, but such
amount shall not be taken into account in determining
whether any other amount exceeds the limitations
imposed by this section.''.
(4) Section 415(e) is amended--
(A) by redesignating paragraph (6) as
paragraph (7), and
(B) by inserting after paragraph (5) the
following new paragraph:
``(6) Special rule for qualified gratuitous
transfers.--Any qualified gratuitous transfer of
qualified employer securities (as defined by section
664(g)) shall not be taken into account in calculating,
and shall not be subject to, the limitations provided
in this subsection.''.
(5) Subparagraph (B) of section 664(d)(1) and
subparagraph (B) of section 664(d)(2) are each amended
by inserting ``and other than qualified gratuitous
transfers described in subparagraph (C)'' after
``subparagraph (A)''.
(6) Paragraph (4) of section 674(b) is amended by
inserting before the period ``or to an employeestock
ownership plan (as defined in section 4975(e)(7)) in a qualified
gratuitous transfer (as defined in section 664(g)(1))''.
(7) Section 2055(a) is amended--
(i) by striking ``or'' at the end of
paragraph (3),
(ii) by striking the period at the end of
paragraph (4) and inserting ``; or'', and
(iii) by inserting after paragraph (4) the
following new paragraph:
``(5) to an employee stock ownership plan if such
transfer qualifies as a qualified gratuitous transfer
of qualified employer securities within the meaning of
section 664(g).''.
(8) Paragraph (8) of section 2056(b) is amended to
read as follows:
``(8) Special rule for charitable remainder
trusts.--
``(A) In general.--If the surviving spouse
of the decedent is the only beneficiary of a
qualified charitable remainder trust who is not
a charitable beneficiary nor an ESOP
beneficiary, paragraph (1) shall not apply to
any interest in such trust which passes or has
passed from the decedent to such surviving
spouse.
``(B) Definitions.--For purposes of
subparagraph (A)--
``(i) Charitable beneficiary.--The
term `charitable beneficiary' means any
beneficiary which is an organization
described in section 170(c).
``(ii) ESOP beneficiary.--The term
`ESOP beneficiary' means any
beneficiary which is an employee stock
ownership plan (as defined in section
4975(e)(7)) that holds a remainder
interest in qualified employer
securities (as defined in section
664(g)(4)) to be transferred to such
plan in a qualified gratuitous transfer
(as defined in section 664(g)(1)).
``(iii) Qualified charitable
remainder trust.--The term `qualified
charitable remainder trust' means a
charitable remainder annuity trust or a
charitable remainder unitrust
(described in section 664).''.
(9) Section 4947(b) is amended by inserting after
paragraph (3) the following new paragraph:
``(4) Section 507.--The provisions of section
507(a) shall not apply to a trust which is describedin
subsection (a)(2) by reason of a distribution of qualified employer
securities (as defined in section 664(g)(4)) to an employee stock
ownership plan (as defined in section 4975(e)(7)) in a qualified
gratuitous transfer (as defined by section 664(g)).''.
(10) The last sentence of section 4975(e)(7) is
amended by inserting ``and section 664(g)'' after
``section 409(n)''
(11) Subsection (a) of section 4978 is amended--
(A) by inserting ``or acquired any
qualified employer securities in a qualified
gratuitous transfer to which section 664(g)
applied'' after ``section 1042 applied'', and
(B) by inserting before the comma at the
end of paragraph (2) ``60 percent of the total
value of all employer securities as of such
disposition in the case of any qualified
employer securities acquired in a qualified
gratuitous transfer to which section 664(g)
applied)''.
(12) Paragraph (2) of section 4978(b) is amended--
(A) by inserting ``or acquired in the
qualified gratuitous transfer to which section
664(g) applied'' after ``section 1042
applied'', and
(B) by inserting ``or to which section
664(g) applied'' after ``section 1042 applied''
in subparagraph (A) thereof.
(13) Subsection (c) of section 4978 is amended by
striking ``written statement'' and all that follows and
inserting ``written statement described in section
664(g)(1)(E) or in section 1042(b)(3) (as the case may
be).''.
(14) Paragraph (2) of section 4978(e) is amended by
striking the period and inserting ``; except that such
section shall be applied without regard to subparagraph
(B) thereof for purposes of applying this section and
section 4979A with respect to securities acquired in a
qualified gratuitous transfer (as defined in section
664(g)(1)).''.
(15) Subsection (a) of section 4979A is amended to
read as follows:
``(a) Imposition of Tax.--If--
``(1) there is a prohibited allocation of qualified
securities by any employee stock ownership plan or
eligible worker-owned cooperative, or
``(2) there is an allocation described in section
664(g)(5)(A),
there is hereby imposed a tax on such allocation equal to 50
percent of the amount involved.''.
(16) Subsection (c) of section 4979A is amended to
read as follows:
``(c) Liability for Tax.--The tax imposed by this section
shall be paid by--
``(1) the employer sponsoring such plan, or
``(2) the eligible worker-owned cooperative,
which made the written statement described in section
664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may
be).''.
(17) Section 4979A is amended by redesignating
subsection (d) as subsection (e) and by inserting after
subsection (c) the following new subsection:
``(d) Special Statute of Limitations for Tax Attributable
to Certain Allocations.--The statutory period for the
assessment of any tax imposed by this section on an allocation
described in subsection (a)(2) of qualified employer securities
shall not expire before the date which is 3 years from the
later of--
``(1) the 1st allocation of such securities in
connection with a qualified gratuitous transfer (as
defined in section 664(g)(1)), or
``(2) the date on which the Secretary is notified
of the allocation described in subsection (a)(2).''.
(d) Effective Date.--The amendments made by this section
shall apply to transfers made by trusts to, or for the use of,
an employee stock ownership plan after the date of the
enactment of this Act.
Subtitle C--Provisions Relating to Certain Health Acts
SEC. 1531. AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986 TO IMPLEMENT
THE NEWBORNS' AND MOTHERS' HEALTH PROTECTION ACT OF
1996 AND THE MENTAL HEALTH PARITY ACT OF 1996.
(a) In General.--Subtitle K is amended--
(1) by striking all that precedes section 9801 and
inserting the following:
``Subtitle K--Group Health Plan Requirements
``Chapter 100. Group health plan requirements.
``CHAPTER 100--GROUP HEALTH PLAN REQUIREMENTS
``Subchapter A. Requirements relating to portability, access,
and renewability.
``Subchapter B. Other requirements.
``Subchapter C. General provisions.
``Subchapter A--Requirements Relating to Portability, Access, and
Renewability
``Sec. 9801. Increased portability through limitation on
preexisting condition exclusions.
``Sec. 9802. Prohibiting discrimination against individual
participants and beneficiaries based on health status.
``Sec. 9803. Guaranteed renewability in multiemployer plans and
certain multiple employer welfare arrangements.'',
(2) by redesignating sections 9804, 9805, and 9806
as sections 9831, 9832, and 9833, respectively,
(3) by inserting before section 9831 (as so
redesignated) the following:
``Subchapter C--General Provisions
``Sec. 9831. General exceptions.
``Sec. 9832. Definitions.
``Sec. 9833. Regulations.'', and
(4) by inserting after section 9803 the following:
``Subchapter B--Other Requirements
``Sec. 9811. Standards relating to benefits for mothers and
newborns.
``Sec. 9812. Parity in the application of certain limits to
mental health benefits.
``SEC. 9811. STANDARDS RELATING TO BENEFITS FOR MOTHERS AND NEWBORNS.
``(a) Requirements for Minimum Hospital Stay Following
Birth.--
``(1) In general.--A group health plan may not--
``(A) except as provided in paragraph (2)--
``(i) restrict benefits for any
hospital length of stay in connection
with childbirth for the mother or
newborn child, following a normal
vaginal delivery, to less than 48
hours, or
``(ii) restrict benefits for any
hospital length of stay in connection
with childbirth for the mother or
newborn child, following a caesarean
section, to less than 96 hours; or
``(B) require that a provider obtain
authorization from the plan or the issuer for
prescribing any length of stay required under
subparagraph (A) (without regard to paragraph
(2)).
``(2) Exception.--Paragraph (1)(A) shall not apply
in connection with any group health plan in any case in
which the decision to discharge the mother or her
newborn child prior to the expiration of the minimum
length of stay otherwise required under paragraph
(1)(A) is made by an attending provider in consultation
with the mother.
``(b) Prohibitions.--A group health plan may not--
``(1) deny to the mother or her newborn child
eligibility, or continued eligibility, to enroll or to
renew coverage under the terms of the plan, solely for
the purpose of avoiding the requirements of this
section;
``(2) provide monetary payments or rebates to
mothers to encourage such mothers to accept less than
the minimum protections available under this section;
``(3) penalize or otherwise reduce or limit the
reimbursement of an attending provider because such
provider provided care to an individual participant or
beneficiary in accordance with this section;
``(4) provide incentives (monetary or otherwise) to
an attending provider to induce such provider to
provide care to an individual participant or
beneficiary in a manner inconsistent with this section;
or
``(5) subject to subsection (c)(3), restrict
benefits for any portion of a period within a hospital
length of stay required under subsection (a) in a
manner which is less favorable than the benefits
provided for any preceding portion of such stay.
``(c) Rules of Construction.--
``(1) Nothing in this section shall be construed to
require a mother who is a participant or beneficiary--
``(A) to give birth in a hospital; or
``(B) to stay in the hospital for a fixed
period of time following the birth of her
child.
``(2) This section shall not apply with respect to
any group health plan which does not provide benefits
for hospital lengths of stay in connection with
childbirth for a mother or her newborn child.
``(3) Nothing in this section shall be construed as
preventing a group health plan from imposing
deductibles, coinsurance, or other cost-sharing in
relation to benefits for hospital lengths of stay in
connection with childbirth for a mother or newborn
child under the plan, except that such coinsurance or
other cost-sharing for any portion of a period within a
hospital length of stay required under subsection (a)
may not be greater than such coinsurance or cost-
sharing for any preceding portion of such stay.
``(d) Level and Type of Reimbursements.--Nothing in this
section shall be construed to prevent a group health plan from
negotiating the level and type of reimbursement with a provider
for care provided in accordance with this section.
``(f) Preemption; Exception for Health Insurance Coverage
in Certain States.--The requirements of this section shall not
apply with respect to health insurance coverage if there is a
State law (including a decision, rule, regulation, or other
State action having the effect of law) for a State that
regulates such coverage that is described in any of the
following paragraphs:
``(1) Such State law requires such coverage to
provide for at least a 48-hour hospital length of stay
following a normal vaginal delivery and at least a 96-
hour hospital length of stay following a caesarean
section.
``(2) Such State law requires such coverage to
provide for maternity and pediatric care in accordance
with guidelines established by the American College of
Obstetricians and Gynecologists, the American Academy
of Pediatrics, or other established professional
medical associations.
``(3) Such State law requires, in connection with
such coverage for maternity care, that the hospital
length of stay for such care is left to the decision of
(or required to be made by) the attending provider in
consultation with the mother.
``SEC. 9812. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL
HEALTH BENEFITS.
``(a) In General.--
``(1) Aggregate lifetime limits.--In the case of a
group health plan that provides both medical and
surgical benefits and mental health benefits--
``(A) No lifetime limit.--If the plan does
not include an aggregate lifetime limit on
substantially all medical and surgical
benefits, the plan may not impose any aggregate
lifetime limit on mental health benefits.
``(B) Lifetime limit.--If the plan includes
an aggregate lifetime limit on substantially
all medical and surgical benefits (in this
paragraph referred to as the `applicable
lifetime limit'), the plan shall either--
``(i) apply the applicable lifetime
limit both to the medical and surgical
benefits to which it otherwise would
apply and to mental health benefits and
not distinguish in the application of
such limit between such medical and
surgical benefits and mental health
benefits; or
``(ii) not include any aggregate
lifetime limit on mental health
benefits that is less than the
applicable lifetime limit.
``(C) Rule in case of different limits.--In
the case of a plan that is not described in
subparagraph (A) or (B) and that includes no or
different aggregate lifetime limits on
different categories of medical and surgical
benefits, the Secretary shall establish rules
under which subparagraph (B) is applied to such
plan with respect to mental health benefits by
substituting for the applicable lifetime limit
an average aggregate lifetime limit that is
computed taking into account the weighted
average of the aggregate lifetime limits
applicable to such categories.
``(2) Annual limits.--In the case of a group health
plan that provides both medical and surgical benefits
and mental health benefits--
``(A) No annual limit.--If the plan does
not include an annual limit on substantially
all medical and surgical benefits, the plan may
not impose any annual limit on mental health
benefits.
``(B) Annual limit.--If the plan includes
an annual limit on substantially all medical
and surgical benefits (in this paragraph
referred to as the `applicable annual limit'),
the plan shall either--
``(i) apply the applicable annual
limit both to medical and surgical
benefits to which it otherwise would
apply and to mental health benefits and
not distinguishin the application of
such limit between such medical and surgical benefits and mental health
benefits; or
``(ii) not include any annual limit
on mental health benefits that is less
than the applicable annual limit.
``(C) Rule in case of different limits.--In
the case of a plan that is not described in
subparagraph (A) or (B) and that includes no or
different annual limits on different categories
of medical and surgical benefits, the Secretary
shall establish rules under which subparagraph
(B) is applied to such plan with respect to
mental health benefits by substituting for the
applicable annual limit an average annual limit
that is computed taking into account the
weighted average of the annual limits
applicable to such categories.
``(b) Construction.--Nothing in this section shall be
construed--
``(1) as requiring a group health plan to provide
any mental health benefits; or
``(2) in the case of a group health plan that
provides mental health benefits, as affecting the terms
and conditions (including cost sharing, limits on
numbers of visits or days of coverage, and requirements
relating to medical necessity) relating to the amount,
duration, or scope of mental health benefits under the
plan, except as specifically provided in subsection (a)
(in regard to parity in the imposition of aggregate
lifetime limits and annual limits for mental health
benefits).
``(c) Exemptions.--
``(1) Small employer exemption.--This section shall
not apply to any group health plan for any plan year of
a small employer (as defined in section 4980D(d)(2)).
``(2) Increased cost exemption.--This section shall
not apply with respect to a group health plan if the
application of this section to such plan results in an
increase in the cost under the plan of at least 1
percent.
``(d) Separate Application to Each Option Offered.--In the
case of a group health plan that offers a participant or
beneficiary two or more benefit package options under the plan,
the requirements of this section shall be applied separately
with respect to each such option.
``(e) Definitions.--For purposes of this section:
``(1) Aggregate lifetime limit.--The term
`aggregate lifetime limit' means, with respect to
benefits under a group health plan, a dollar limitation
on the total amount that may be paid with respect to
such benefits under the plan with respect to an
individual or other coverage unit.
``(2) Annual limit.--The term `annual limit' means,
with respect to benefits under a group health plan, a
dollar limitation on the total amount of benefits that
may be paid with respect to such benefits in a 12-month
period under the plan with respect to an individual or
other coverage unit.
``(3) Medical or surgical benefits.--The term
`medical or surgical benefits' means benefits with
respect to medical or surgical services, as defined
under the terms of the plan, but does not include
mental health benefits.
``(4) Mental health benefits.--The term `mental
health benefits' means benefits with respect to mental
health services, as defined under the terms of the
plan, but does not include benefits with respect to
treatment of substance abuse or chemical dependency.
``(f) Sunset.--This section shall not apply to benefits for
services furnished on or after September 30, 2001.''
(b) Conforming Amendments.--
(1) Chapter 100 of such Code is further amended--
(A) in the last sentence of section
9801(c)(1), by striking ``section 9805(c)'' and
inserting ``section 9832(c)'';
(B) in section 9831(b), by striking
``9805(c)(1)'' and inserting ``9832(c)(1)'';
(C) in section 9831(c)(1), by striking
``9805(c)(2)'' and inserting ``9832(c)(2)'';
(D) in section 9831(c)(2), by striking
``9805(c)(3)'' and inserting ``9832(c)(3)'';
and
(E) in section 9831(c)(3), by striking
``9805(c)(4)'' and inserting ``9832(c)(4)''.
(2) Section 4980D of such Code is amended--
(A) in subsection (a), by striking ``plan
portability, access, and renewability'' and
inserting ``plans'';
(B) in subsection (c)(3)(B)(i)(I), by
striking ``9805(d)(3)'' and inserting
``9832(d)(3)'';
(C) in subsection (d)(1), by inserting
``(other than a failure attributable to section
9811)'' after ``on any failure'';
(D) in subsection (d)(3), by striking
``9805'' and inserting ``9832'';
(E) in subsection (f)(1), by striking
``9805(a)'' and inserting ``9832(a)''.
(3) The table of subtitles for such Code is amended
by striking the item relating to subtitle K and
inserting the following new item:
``Subtitle K. Group health plan requirements.''
(c) Effective Date.--The amendments made by this section
shall apply with respect to group health plans for plan years
beginning on or after January 1, 1998.
SEC. 1532. SPECIAL RULES RELATING TO CHURCH PLANS.
(a) In General.--Section 9802 (relating to prohibiting
discrimination against individual participants and
beneficiaries based on health status) is amended by adding at
the end the following new subsection:
``(c) Special Rules for Church Plans.--A church plan (as
defined in section 414(e)) shall not be treated as failing to
meet the requirements of this section solely because such plan
requires evidence of good health for coverage of--
``(1) both any employee of an employer with 10 or
less employees (determined without regard to section
414(e)(3)(C)) and any self-employed individual, or
``(2) any individual who enrolls after the first 90
days of initial eligibility under the plan.
This subsection shall apply to a plan for any year only if the
plan included the provisions described in the preceding
sentence on July 15, 1997, and at all times thereafter before
the beginning of such year.''
(b) Effective Date.--The amendments made by subsection (a)
shall take effect as if included in the amendments made by
section 401(a) of the Health Insurance Portability and
Accountability Act of 1996.
Subtitle D--Provisions Relating to Plan Amendments
SEC. 1541. PROVISIONS RELATING TO PLAN AMENDMENTS.
(a) In General.--If this section applies to any plan or
contract amendment--
(1) such plan or contract shall be treated as being
operated in accordance with the terms of the plan
during the period described in subsection (b)(2)(A),
and
(2) such plan shall not fail to meet the
requirements of section 411(d)(6) of the Internal
Revenue Code of 1986 or section 204(g) of the Employee
RetirementIncome Security Act of 1974 by reason of such
amendment.
(b) Amendments to Which Section Applies.--
(1) In general.--This section shall apply to any
amendment to any plan or annuity contract which is
made--
(A) pursuant to any amendment made by this
title or subtitle H of title X, and
(B) before the first day of the first plan
year beginning on or after January 1, 1999.
In the case of a governmental plan (as defined in
section 414(d) of the Internal Revenue Code of 1986),
this paragraph shall be applied by substituting
``2001'' for ``1999''.
(2) Conditions.--This section shall not apply to
any amendment unless--
(A) during the period--
(i) beginning on the date the
legislative amendment described in
paragraph (1)(A) takes effect (or in
the case of a plan or contract
amendment not required by such
legislative amendment, the effective
date specified by the plan), and
(ii) ending on the date described
in paragraph (1)(B) (or, if earlier,
the date the plan or contract amendment
is adopted),
the plan or contract is operated as if such
plan or contract amendment were in effect, and
(B) such plan or contract amendment applies
retroactively for such period.
TITLE XVI--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB
PROTECTION ACT OF 1996 AND OTHER LEGISLATION
SEC. 1600. COORDINATION WITH OTHER TITLES.
For purposes of applying the amendments made by any title
of this Act other than this title, the provisions of this title
shall be treated as having been enacted immediately before the
provisions of such other titles.
SEC. 1601. AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION ACT OF
1996.
(a) Amendments Related to Subtitle A.--
(1) Amendment related to section 1116.--Paragraph
(1) of section 6050R(c) is amended by striking ``name
and address'' and inserting ``name, address, and phone
number of the information contact''.
(2) Amendment to section 1116.--Paragraphs (1) and
(2)(C) of section 1116(b) of the Small Business Job
Protection Act of 1996 shall each be applied as if the
reference to chapter 68 were a reference to chapter 61.
(b) Amendment Related to Subtitle B.--Subsection (c) of
section 52 is amended by striking ``targeted jobs credit'' and
inserting ``work opportunity credit''.
(c) Amendments Related to Subtitle C.--
(1) Amendment related to section 1302.--
Subparagraph (B) of section 1361(e)(1) is amended by
striking ``and'' at the end of clause (i), striking the
period at the end of clause (ii) and inserting ``,
and'', and adding at the end the following new clause:
``(iii) any charitable remainder
annuity trust or charitable remainder
unitrust (as defined in section
664(d)).''.
(2) Effective date for section 1307.--
(A) Notwithstanding section 1317 of the
Small Business Job Protection Act of 1996, the
amendments made by subsections (a) and (b) of
section 1307 of such Act shall apply to
determinations made after December 31, 1996.
(B) In no event shall the 120-day period
referred to in section 1377(b)(1)(B) of the
Internal Revenue Code of 1986 (as added by such
section 1307) expire before the end of the 120-
day period beginning on the date of the
enactment of this Act.
(3) Amendment related to section 1308.--
Subparagraph (A) of section 1361(b)(3) is amended by
striking ``For purposes of this title'' and inserting
``Except as provided in regulations prescribed by the
Secretary, for purposes of this title''.
(4) Amendments related to section 1316.--
(A) Paragraph (2) of section 512(e) is
amended by striking ``within the meaning of
section 1012'' and inserting ``as defined in
section 1361(e)(1)(C)''.
(B) Paragraph (7) of section 1361(c) is
redesignated as paragraph (6).
(C) Subparagraph (B) of section 1361(b)(1)
is amended by striking ``subsection (c)(7)''
and inserting ``subsection (c)(6)''.
(D) Paragraph (1) of section 512(e) is
amended by striking ``section 1361(c)(7)'' and
inserting ``section 1361(c)(6)''.
(d) Amendments Related to Subtitle D.--
(1) Amendments related to section 1421.--
(A) Subsection (i) of section 408 is
amended in the last sentence by striking ``30
days'' and inserting ``31 days''.
(B) Subparagraph (H) of section 408(k)(6)
is amended by striking ``if the terms of such
pension'' and inserting ``of an employer if the
terms of simplified employee pensions of such
employer''.
(C)(i) Subparagraph (B) of section
408(l)(2) is amended--
(I) by inserting ``and the issuer
of an annuity established under such an
arrangement'' after ``under subsection
(p)'', and
(II) in clause (i), by inserting
``or issuer'' after ``trustee''.
(ii) Paragraph (2) of section 6693(c) is
amended--
(I) by inserting ``or issuer''
after ``trustee'', and
(II) in the heading, by inserting
``and issuer'' after ``trustee''.
(D) Subsection (p) of section 408 is
amended by adding at the end the following new
paragraph:
``(8) Coordination with maximum limitation under
subsection (a).--In the case of any simple retirement
account, subsections (a)(1) and (b)(2) shall be applied
by substituting `the sum ofthe dollar amount in effect
under paragraph (2)(A)(ii) of this subsection and the employer
contribution required under subparagraph (A)(iii) or (B)(i) of
paragraph (2) of this subsection, whichever is applicable' for
`$2,000'.''.
(E) Clause (i) of section 408(p)(2)(D) is
amended by adding at the end the following new
sentence: ``If only individuals other than
employees described in subparagraph (A) or (B)
of section 410(b)(3) are eligible to
participate in such arrangement, then the
preceding sentence shall be applied without
regard to any qualified plan in which only
employees so described are eligible to
participate.''.
(F) Subparagraph (D) of section 408(p)(2)
is amended by adding at the end the following
new clause:
``(iii) Grace period.--In the case
of an employer who establishes and
maintains a plan under this subsection
for 1 or more years and who fails to
meet any requirement of this subsection
for any subsequent year due to any
acquisition, disposition, or similar
transaction involving another such
employer, rules similar to the rules of
section 410(b)(6)(C) shall apply for
purposes of this subsection.''.
(G) Paragraph (5) of section 408(p) is
amended in the text preceding subparagraph (A)
by striking ``simplified'' and inserting
``simple''.
(2) Amendments related to section 1422.--
(A) Clause (ii) of section 401(k)(11)(D) is
amended by striking the period and inserting
``if such plan allows only contributions
required under this paragraph.''.
(B) Paragraph (11) of section 401(k) is
amended by adding at the end the following new
subparagraph:
``(E) Cost-of-living adjustment.--The
Secretary shall adjust the $6,000 amount under
subparagraph (B)(i)(I) at the same time and in
the same manner as under section
408(p)(2)(E).''.
(C) Subparagraph (A) of section 404(a)(3)
is amended--
(i) in clause (i), by striking
``not in excess of'' and all that
follows and insertingthe following:
``not in excess of the greater of--
``(I) 15 percent of the
compensation otherwise paid or
accrued during the taxable year
to the beneficiaries under the
stock bonus or profit-sharing
plan, or
``(II) the amount such
employer is required to
contribute to such trust under
section 401(k)(11) for such
year.'', and
(ii) in clause (ii), by striking
``15 percent'' and all that follows and
inserting the following ``the amount
described in subclause (I) or (II) of
clause (i), whichever is greater, with
respect to such taxable year.''.
(D) Subparagraph (B) of section 401(k)(11)
is amended by adding at the end the following
new clause:
``(iii) Administrative
requirements.--
``(I) In general.--Rules
similar to the rules of
subparagraphs (B) and (C) of
section 408(p)(5) shall apply
for purposes of this
subparagraph.
``(II) Notice of election
period.--The requirements of
this subparagraph shall not be
treated as met with respect to
any year unless the employer
notifies each employee eligible
to participate, within a
reasonable period of time
before the 60th day before the
beginning of such year (and,
for the first year the employee
is so eligible, the 60th day
before the first day such
employee is so eligible), of
the rules similar to the rules
of section 408(p)(5)(C) which
apply by reason of subclause
(I).''.
(3) Amendment related to section 1433.--The heading
of paragraph (11) of section 401(m) is amended by
striking ``Alternative'' and inserting ``Additional
alternative''.
(4) Clarification of section 1450.--
(A) Section 403(b)(11) of the Internal
Revenue Code of 1986 shall not apply with
respect to a distribution from a contract
described in section 1450(b)(1) of such Act to
theextent that such distribution is not
includible in income by reason of--
(i) in the case of distributions
before January 1, 1998, section 403
(b)(8) or (b)(10) of such Code
(determined after the application of
section 1450(b)(2) of such Act), and
(ii) in the case of distributions
on and after such date, such section
403(b)(1).
(B) This paragraph shall apply as if
included in section 1450 of the Small Business
Job Protection Act of 1996.
(5) Amendment related to section 1451.--Clause (ii)
of section 205(c)(8)(A) of the Employee Retirement
Income Security Act of 1974 is amended by striking
``Secretary'' and inserting ``Secretary of the
Treasury''.
(6) Amendments related to section 1461.--
(A) Section 414(e)(5)(A) is amended to read
as follows:
``(A) Certain ministers may participate.--
For purposes of this part--
``(i) In general.--A duly ordained,
commissioned, or licensed minister of a
church is described in paragraph (3)(B)
if, in connection with the exercise of
their ministry, the minister--
``(I) is a self-employed
individual (within the meaning
of section 401(c)(1)(B)), or
``(II) is employed by an
organization other than an
organization which is described
in section 501(c)(3) and with
respect to which the minister
shares common religious bonds.
``(ii) Treatment as employer and
employee.--For purposes of sections
403(b)(1)(A) and 404(a)(10), a minister
described in clause (i)(I) shall be
treated as employed by the minister's
own employer which is an organization
described in section 501(c)(3) and
exempt from tax under section
501(a).''.
(B) Section 403(b)(1)(A) is amended by
striking ``or'' at the end of clause (i), by
inserting ``or'' at the end of clause (ii), and
by adding at the end the following new clause:
``(iii) for the minister described
in section 414(e)(5)(A) by the minister
or by an employer,''.
(7) Amendment related to section 1462.--The
paragraph (7) of section 414(q) added by section 1462
of the Small Business Job Protection Act of 1996 is
redesignated as paragraph (9).
(e) Amendment Related to Subtitle E.--Subparagraph (A) of
section 956(b)(1) is amended by inserting ``to the extent such
amount was accumulated in prior taxable years'' after ``section
316(a)(1)''.
(f) Amendments Related to Subtitle F.--
(1) Amendments related to section 1601.--
(A) The heading of section 30A is amended
to read as follows:
``SEC. 30A. PUERTO RICO ECONOMIC ACTIVITY CREDIT.''.
(B) The table of sections for subpart B of
part IV of subchapter A of chapter 1 is amended
in the item relating to section 30A by striking
``Puerto Rican'' and inserting ``Puerto Rico''.
(C) Paragraph (1) of section 55(c) is
amended by striking ``Puerto Rican'' and
inserting ``Puerto Rico''.
(2) Amendments related to section 1606.--
(A) Clause (ii) of section 9503(c)(2)(A) is
amended by striking ``(or with respect to
qualified diesel-powered highway vehicles
purchased before January 1, 1999)''.
(B) Subparagraph (A) of section 9503(e)(5)
is amended by striking ``; except that'' and
all that follows and inserting a period.
(3) Amendments related to section 1607.--
(A) Subsection (f) of section 4001
(relating to phasedown of tax on luxury
passenger automobiles) is amended--
(i) by inserting ``and section
4003(a)'' after ``subsection (a)'', and
(ii) by inserting ``, each place it
appears,'' before ``the percentage''.
(B) Subsection (g) of section 4001
(relating to termination) is amended by
striking ``tax imposed by this section'' and
inserting ``taxes imposed by this section and
section 4003'' and by striking ``or use'' and
inserting ``, use, or installation''.
(C) The amendments made by this paragraph
shall apply to sales after the date of the
enactment of this Act.
(4) Amendments related to section 1609.--
(A) Subsection (l) of section 4041 is
amended--
(i) by inserting ``or a fixed-wing
aircraft'' after ``helicopter'', and
(ii) in the heading, by striking
``Helicopter''.
(B) The last sentence of section 4041(a)(2)
is amended by striking ``section
4081(a)(2)(A)'' and inserting ``section
4081(a)(2)(A)(i)''.
(C) Subsection (b) of section 4092 is
amended by striking ``section 4041(c)(4)'' and
inserting ``section 4041(c)(2)''.
(D) Subsection (g) of section 4261 (as
redesignated by title X) is amended by
inserting ``on that flight'' after
``dedicated''.
(E) Paragraph (1) of section 1609(h) of
such Act is amended by striking ``paragraph
(3)(A)(i)'' and inserting ``paragraph (3)(A)''.
(F) Paragraph (4) of section 1609(h) of
such Act is amended by inserting before the
period ``or exclusively for the use described
in section 4092(b) of such Code''.
(5) Amendments related to section 1616.--
(A) Subparagraph (A) of section 593(e)(1)
is amended by inserting ``(and, in the case of
an S corporation, the accumulated adjustments
account, as defined in section 1368(e)(1))''
after ``1951,''.
(B) Paragraph (7) of section 1374(d) is
amended by adding at the end the following new
sentence: ``For purposes of applying this
section to any amount includible in income by
reason of section 593(e), the preceding
sentence shall be applied without regard to the
phrase `10-year'.''.
(6) Amendments related to section 1621.--
(A) Subparagraph (A) of section 860L(b)(1)
is amended in the text preceding clause (i) by
striking ``after the startup date'' and
inserting ``on or after the startup date''.
(B) Paragraph (2) of section 860L(d) is
amended by striking ``section 860I(c)(2)'' and
inserting ``section 860I(b)(2)''.
(C) Subparagraph (B) of section 860L(e)(2)
is amended by inserting ``other than
foreclosure property'' after ``any permitted
asset''.
(D) Subparagraph (A) of section 860L(e)(3)
is amended by striking ``if the FASIT'' and all
that follows and inserting the following new
flush text after clause (ii):
``if the FASIT were treated as a REMIC and
permitted assets (other than cash or cash
equivalents) were treated as qualified
mortgages.''.
(E)(i) Paragraph (3) of section 860L(e) is
amended by adding at the end the following new
subparagraph:
``(D) Income from dispositions of former
hedge assets.--Paragraph (2)(A) shall not apply
to income derived from the disposition of--
``(i) an asset which was described
in subsection (c)(1)(D) when first
acquired by the FASIT but on the date
of such dispositionwas no longer
described in subsection (c)(1)(D)(ii), or
``(ii) a contract right to acquire
an asset described in clause (i).''.
(ii) Subparagraph (A) of section 860L(e)(2)
is amended by inserting ``except as provided in
paragraph (3),'' before ``the receipt''.
(g) Amendments Related to Subtitle G.--
(1) Extension of period for claiming refunds for
alcohol fuels.--Notwithstanding section 6427(i)(3)(C)
of the Internal Revenue Code of 1986, a claim filed
under section 6427(f) of such Code for any period after
September 30, 1995, and before October 1, 1996, shall
be treated as timely filed if filed before the 60th day
after the date of the enactment of this Act.
(2) Amendments to sections 1703 and 1704.--Sections
1703(n)(8) and 1704(j)(4)(B) of the Small Business Job
Protection Act of 1996 shall each be applied as if such
sections referred to section 1702 instead of section
1602.
(h) Amendments Related to Subtitle H.--
(1) Amendments related to section 1806.--
(A) Subparagraph (B) of section 529(e)(1)
is amended by striking ``subsection (c)(2)(C)''
and inserting ``subsection (c)(3)(C)''.
(B) Subparagraph (C) of section 529(e)(1)
is amended by inserting ``(or agency or
instrumentality thereof)'' after ``local
government''.
(C) Paragraph (2) of section 1806(c) of the
Small Business Job Protection Act of 1996 is
amended by striking so much of the first
sentence as follows subparagraph (B)(ii) and
inserting the following:
``then such program (as in effect on August 20, 1996)
shall be treated as a qualified State tuition program
with respect to contributions (and earnings allocable
thereto) pursuant to contracts entered into under such
program before the first date on which such program
meets such requirements (determined without regard to
this paragraph) and the provisions of such program (as
so in effect) shall apply in lieu of section 529(b) of
the Internal Revenue Code of 1986 with respect to such
contributions and earnings.''.
(2) Amendments related to section 1807.--
(A) Paragraph (2) of section 23(a) is
amended to read as follows:
``(2) Year credit allowed.--The credit under
paragraph (1) with respect to any expense shall be
allowed--
``(A) in the case of any expense paid or
incurred before the taxable year in which such
adoption becomes final, for the taxable year
following the taxable year during which such
expense is paid or incurred, and
``(B) in the case of an expense paid or
incurred during or after the taxable year in
which such adoption becomes final, for the
taxable year in which such expense is paid or
incurred.''.
(B) Subparagraph (B) of section 23(b)(2) is
amended by striking ``determined--'' and all
that follows and inserting the following:
``determined without regard to sections 911,
931, and 933.''.
(C) Paragraph (1) of section 137(b)
(relating to adoption assistance programs) is
amended by striking ``amount excludable from
gross income'' and inserting ``of the amounts
paid or expenses incurred which may be taken
into account''.
(D)(i) Subparagraph (C) of section
414(n)(3) is amended by inserting ``137,''
after ``132,''.
(ii) Paragraph (2) of section 414(t) is
amended by inserting ``137,'' after ``132,''.
(iii) Paragraph (1) of section 6039D(d) is
amended by striking ``or 129'' and inserting
``129, or 137''.
(i) Amendments Related to Subtitle I.--
(1) Amendment related to section 1901.--Subsection
(b) of section 6048 is amended in the heading by
striking ``Grantor'' and inserting ``Owner''.
(2) Amendments related to section 1903.--
Clauses (ii) and (iii) of section
679(a)(3)(C) are each amended by inserting ``,
owner,'' after ``grantor''.
(3) Amendments related to section 1907.--
(A) Clause (ii) of section 7701(a)(30)(E)
is amended by striking ``fiduciaries'' and
inserting ``persons''.
(B) Subsection (b) of section 641 is
amended by adding at the end the following new
sentence: ``For purposes of this subsection, a
foreign trust or foreign estate shall be
treated as a nonresident alien individual who
is not present in the United States at any
time.''.
(4) Effective date related to subtitle i.--The
Secretary of the Treasury may by regulations or other
administrative guidance provide that the amendments
made by section 1907(a) of the Small Business Job
Protection Act of 1996 shall not apply to a trust with
respect to a reasonable period beginning on the date of
the enactment of such Act, if--
(A) such trust is in existence on August
20, 1996, and is a United States person for
purposes of the Internal Revenue Code of 1986
on such date (determined without regard to such
amendments),
(B) no election is in effect under section
1907(a)(3)(B) of such Act with respect to such
trust,
(C) before the expiration of such
reasonable period, such trust makes the
modifications necessary to be treated as a
United States person for purposes of such Code
(determined with regard to such amendments),
and
(D) such trust meets such other conditions
as the Secretary may require.
(j) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall take
effect as if included in the provisions of the Small
Business Job Protection Act of 1996 to which they
relate.
(2) Certain administrative requirements with
respect to certain pension plans.--The amendment made
by subsection (d)(2)(D) shall apply to calendar years
beginning after the date of the enactment of this Act.
SEC. 1602. AMENDMENTS RELATED TO HEALTH INSURANCE PORTABILITY AND
ACCOUNTABILITY ACT OF 1996.
(a) Amendments Related to Section 301.--
(1) Paragraph (2) of section 26(b) is amended by
striking ``and'' at the end of subparagraph (N), by
striking the period at the end of subparagraph (O) and
inserting ``, and'', and by adding at the end the
following new subparagraph:
``(P) section 220(f)(4) (relating to
additional tax on medical savings account
distributions not used for qualified medical
expenses).''.
(2) Paragraph (3) of section 220(c) is amended by
striking subparagraph (A) and redesignating
subparagraphs (B) through (D) as subparagraphs (A)
through (C), respectively.
(3) Subparagraph (C) of section 220(d)(2) is
amended by striking ``an eligible individual'' and
inserting ``described in clauses (i) and (ii) of
subsection (c)(1)(A)''.
(4) Subsection (a) of section 6693 is amended by
adding at the end the following new sentence:
``This subsection shall not apply to any report which is an
information return described in section 6724(d)(1)(C)(i) or a
payee statement described in section 6724(d)(2)(X).''.
(5) Paragraph (4) of section 4975(c) is amended by
striking ``if, with respect to such transaction'' and
all that follows and inserting the following: ``if
section 220(e)(2) applies to such transaction.''.
(b) Amendment Related to Section 321.--Subparagraph (B) of
section 7702B(c)(2) is amended in the last sentence by
inserting ``described in subparagraph (A)(i)'' after
``chronically ill individual''.
(c) Amendments Related to Section 322.--Subparagraph (B) of
section 162(l)(2) is amended by adding at the end the following
new sentence: ``The preceding sentence shall be applied
separately with respect to--
``(i) plans which include coverage
for qualified long-term care services
(as defined in section 7702B(c)) or are
qualified long-term care insurance
contracts (as defined in section
7702B(b)), and
``(ii) plans which do not include
such coverage and are not such
contracts.''.
(d) Amendments Related to Section 323.--
(1) Paragraph (1) of section 6050Q(b) is amended by
inserting ``, address, and phone number of the
information contact'' after ``name''.
(2)(A) Paragraph (2) of section 6724(d) is amended
by striking so much as follows subparagraph (Q) and
precedes the last sentence, and inserting the following
new subparagraphs:
``(R) section 6050R(c) (relating to returns
relating to certain purchases of fish),
``(S) section 6051 (relating to receipts
for employees),
``(T) section 6052(b) (relating to returns
regarding payment of wages in the form of
group-term life insurance),
``(U) section 6053(b) or (c) (relating to
reports of tips),
``(V) section 6048(b)(1)(B) (relating to
foreign trust reporting requirements),
``(W) section 4093(c)(4)(B) (relating to
certain purchasers of diesel and aviation
fuels),
``(X) section 408(i) (relating to reports
with respect to individual retirement plans) to
any person other than the Secretary with
respect to the amount of payments made to such
person, or
``(Y) section 6047(d) (relating to reports
by plan administrators) to any person other
than the Secretary with respect to the amount
of payments made to such person.''.
(B) Subsection (e) of section 6652 is amended in
the last sentence by striking ``section 6724(d)(2)(X)''
and inserting ``section 6724(d)(2)(Y)''.
(e) Amendment Related to Section 325.--Clauses (ii) and
(iii) of section 7702B(g)(4)(B) are each amended by striking
``Secretary'' and inserting ``appropriate State regulatory
agency''.
(f) Amendments Related to Section 501.--
(1) Paragraph (4) of section 264(a) is amended by
striking subparagraph (A) and all that follows through
``by the taxpayer.'' and inserting the following:
``(A) is or was an officer or employee, or
``(B) is or was financially interested in,
any trade or business carried on (currently or
formerly) by the taxpayer.''.
(2) The last 2 sentences of section
264(d)(2)(B)(ii) are amended to read as follows:
``For purposes of subclause (II), the
term `applicable period' means the 12-
month period beginning on the date the
policy is issued (and each successive
12-month period thereafter) unless the
taxpayer elects a number of months (not
greater than 12) other than such 12-
month period to be its applicable
period. Such an election shall be made
not later than the 90th day after the
date of the enactment of this sentence
and, if made, shall apply to the
taxpayer's first taxable year ending on
or after October 13, 1995, and all
subsequent taxable years unless revoked
with the consent of the Secretary.''.
(3) Subparagraph (B) of section 264(d)(4) is
amended by striking ``the employer'' and inserting
``the taxpayer''.
(4) Subsection (c) of section 501 of the Health
Insurance Portability and Accountability Act of 1996 is
amended by striking paragraph (3).
(5) Paragraph (2) of section 501(d) of such Act is
amended by striking ``no additional premiums'' and all
that follows and inserting the following: ``a lapse
occurring after October 13, 1995, by reason of no
additional premiums being received under the
contract.''.
(g) Amendments Related to Section 511.--
(1) Subparagraph (B) of section 877(d)(2) is
amended by striking ``the 10-year period described in
subsection (a)'' and inserting ``the 10-year period
beginning on the date the individual loses United
States citizenship''.
(2) Subparagraph (D) of section 877(d)(2) is
amended by adding at the end the following new
sentence: ``In the case of any exchange occurring
during such 5 years, any gain recognized under
thissubparagraph shall be recognized immediately after such loss of
citizenship.''.
(3) Paragraph (3) of section 877(d) is amended by
inserting ``and the period applicable under paragraph
(2)'' after ``subsection (a)''.
(4) Subparagraph (A) of section 877(d)(4) is
amended--
(A) by inserting ``during the 10-year
period beginning on the date the individual
loses United States citizenship'' after
``contributes property'' in clause (i),
(B) by inserting ``immediately before such
contribution'' after ``from such property'',
and
(C) by striking ``during the 10-year period
referred to in subsection (a),''.
(5) Subparagraph (C) of section 2501(a)(3) is
amended by striking ``decedent'' and inserting
``donor''.
(6)(A) Clause (i) of section 2107(c)(2)(B) is
amended by striking ``such foreign country in respect
of property included in the gross estate as the value
of the property'' and inserting ``such foreign country
as the value of the property subjected to such taxes by
such foreign country and''.
(B) Subparagraph (C) of section 2107(c)(2) is
amended to read as follows:
``(C) Proportionate share.--In the case of
property which is included in the gross estate
solely by reason of subsection (b), such
property's proportionate share is the
percentage which the value of such property
bears to the total value of all property
included in the gross estate solely by reason
of subsection (b).''.
(h) Amendments Related to Section 512.--
(1) Subpart A of part III of subchapter A of
chapter 61 is amended by redesignating the section
6039F added by section 512 of the Health Insurance
Portability and Accountability Act of 1996 as section
6039G and by moving such section 6039G to immediately
after the section 6039F added by section 1905 of the
Small Business Job Protection Act of 1996.
(2) The table of sections for subpart A of part III
of subchapter A of chapter 61 is amended by striking
the item relating to the section 6039F related to
information on individuals losing United States
citizenship and inserting after the item relating to
the section 6039F related to notice of large gifts
received from foreign persons the following new item:
``Sec. 6039G. Information on individuals losing United States
citizenship.''.
(3) Paragraph (1) of section 877(e) is amended by
striking ``6039F'' and inserting ``6039G''.
(i) Effective Date.--The amendments made by this section
shall take effect as if included in the provisions of the
Health Insurance Portability and Accountability Act of 1996 to
which such amendments relate.
SEC. 1603. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 2.
(a) Amendment Related to Section 1311.--Subsection (b) of
section 4962 is amended by striking ``subchapter A or C'' and
inserting ``subchapter A, C, or D''.
(b) Amendments Related to Section 1312.--
(1)(A) Paragraph (10) of section 6033(b) is amended
by striking all that precedes subparagraph (A) and
inserting the following:
``(10) the respective amounts (if any) of the taxes
imposed on the organization, or any organization
manager of the organization, during the taxable year
under any of the following provisions (and the
respective amounts (if any) of reimbursements paid by
the organization during the taxable year with respect
to taxes imposed on any such organization manager under
any of such provisions):''.
(B) Subparagraph (C) of section 6033(b)(10) is
amended by adding at the end the following: ``except to
the extent that, by reason of section 4962, the taxes
imposed under such section are not required to be paid
or are credited or refunded,''.
(2) Paragraph (11) of section 6033(b) is amended to
read as follows:
``(11) the respective amounts (if any) of--
``(A) the taxes imposed with respect to the
organization on any organization manager, or
any disqualified person, during the taxable
year under section 4958 (relating to taxes on
private excess benefit from certain charitable
organizations), and
``(B) reimbursements paid by the
organization during the taxable year with
respect to taxes imposed under such section,
except to the extent that, by reason of section 4962,
the taxes imposed under such section are not required
to be paid or are credited or refunded,''.
(c) Effective Date.--The amendments made by this section
shall take effect as if included in the provisions of the
Taxpayer Bill of Rights 2 to which such amendments relate.
SEC. 1604. MISCELLANEOUS PROVISIONS.
(a) Amendments Related to Energy Policy Act of 1992.--
(1) Paragraph (1) of section 263(a) is amended by
striking ``or'' at the end of subparagraph (F), by
striking the period at the end of subparagraph (G) and
inserting ``; or'', and by adding at the end the
following new subparagraph:
``(H) expenditures for which a deduction is
allowed under section 179A.''.
(2) Subparagraph (B) of section 312(k)(3) is
amended--
(A) by striking ``179'' in the heading and
the first place it appears in the text and
inserting ``179 or 179A'', and
(B) by striking ``179'' the last place it
appears and inserting ``179 or 179A, as the
case may be''.
(3) Paragraphs (2)(C) and (3)(C) of section 1245(a)
are each amended by inserting ``179A,'' after ``179,''.
(4) The amendments made by this subsection shall
take effect as if included in the amendments made by
section 1913 of the Energy Policy Act of 1992.
(b) Amendments Related to Uruguay Round Agreements Act.--
(1) Paragraph (1) of section 6621(a) is amended in
the last sentence by striking ``subsection (c)(3))''
and inserting ``subsection (c)(3), applied by
substituting `overpayment' for `underpayment')''.
(2)(A) Subclause (II) of section 412(m)(5)(E)(ii)
is amended by striking ``clause (i)'' and inserting
``subclause (I)''.
(B) Subclause (II) of section 302(e)(5)(E)(ii) of
the Employee Retirement Income Security Act of 1974 is
amended by striking ``clause (i)'' and inserting
``subclause (I)''.
(3) Subparagraph (A) of section 767(d)(3) of the
Uruguay Round Agreements Act is amended in the last
sentence by striking ``(except that'' and all that
follows through ``into account)''.
(4) The amendments made by this subsection shall
take effect as if included in the sections of the
Uruguay Round Agreements Act to which they relate.
(c) Amendment Related to Omnibus Budget Reconciliation Act
of 1993.--
(1) Paragraph (6) of section 168(j) (defining
Indian reservation) is amended by adding at the end the
following new flush sentence:
``For purposes of the preceding sentence, such section
3(d) shall be applied by treating the term `former
Indian reservations in Oklahoma' as including only
lands which are within the jurisdictional area of an
Oklahoma Indian tribe (as determined by the Secretary
of the Interior) and are recognized by such Secretary
as eligible for trust land status under 25 CFR Part 151
(as in effect on the date of the enactment of this
sentence).''.
(2) The amendment made by paragraph (1) shall apply
as if included in the amendments made by section 13321
of the Omnibus Budget Reconciliation Act of 1993,
except that such amendment shall not apply--
(A) with respect to property (with an
applicable recovery period under section 168(j)
of the Internal Revenue Code of 1986 of 6 years
or less) held by the taxpayer if the taxpayer
claimed the benefits of section 168(j) of such
Code with respect to such property on a return
filed before March 18, 1997, but only if such
return is the first return of tax filed for the
taxable year in which such property was placed
in service, or
(B) with respect to wages for which the
taxpayer claimed the benefits of section 45A of
such Code for a taxable year on a return filed
before March 18, 1997, but only if such return
was the first return of tax filed for such
taxable year.
(d) Amendments Related to Tax Reform Act of 1986.--
(1) Paragraph (3) of section 1059(d) is amended by
striking ``subsection (a)(2)'' and inserting
``subsection (a)''.
(2)(A) Subparagraph (A) of section 833(b)(1) is
amended--
(i) by inserting before the comma at the
end of clause (i) ``and liabilities incurred
during the taxable year under cost-plus
contracts'', and
(ii) by inserting before the comma at the
end of clause (ii) ``or in connection with the
administration of cost-plus contracts''.
(B) The amendment made by subparagraph (A) shall
take effect as if included in the amendments made by
section 1012 of the Tax Reform Act of 1986.
(e) Amendment Related to Tax Reform Act of 1984.--
(1) Section 267(f) is amended by adding at the end
the following new paragraph:
``(4) Determination of relationship resulting in
disallowance of loss, for purposes of other
provisions.--For purposes of any other section of this
title which refers to a relationship which would result
in a disallowance of losses under this section,
deferral under paragraph (2) shall be treated as
disallowance.''.
(2) Effective date.--The amendment made by
paragraph (1) shall take effect as if included in
section 174(b) of the Tax Reform Act of 1984.
(f) Amendments Related to Balanced Budget Act of 1997.--
(1) The Balanced Budget Act of 1997 is amended--
(A) in the table of contents for title IV,
in the item relating to section 4921, by
striking ``children with'';
(B) in the heading for section 4921, by
striking ``children with''; and
(C) in the section added by section 4921--
(i) in the heading for such
section, by striking ``children with'';
and
(ii) by amending subsection (a) to
read as follows:
``(a) In General.--The Secretary, directly or through
grants, shall provide for research into the prevention and cure
of Type I diabetes.''.
(2)(A) Section 11201(g)(2)(B)(iii) of the Balanced
Budget Act of 1997 shall apply as if the reference in
such section to ``December 31, 2003'' were a reference
to ``December 31, 2001''.
(B) Notwithstanding section 11104(b)(3) of the
Balanced Budget Act of 1997, in carrying out any of the
management reform plans under such section, the head of
a department of the government of the District of
Columbia shall report solely to the District of
Columbia Financial Responsibility and Management
Assistance Authority.
(3) Section 9302 of the Balanced Budget Act of 1997
is amended by adding at the end the following new
subsection:
``(k) Coordination With Tobacco Industry Settlement
Agreement.--The increase in excise taxes collected as a result
of the amendments made by subsections (a), (e), and (g) of this
section shall be credited against the total payments made by
parties pursuant to Federal legislation implementing the
tobacco industry settlement agreement of June 20, 1997.
(4) The provisions of, and amendments made by, this
subsection shall take effect immediately after the sections
referred to in this subsection take effect.
(g) Clerical Amendments.--
(1) Clause (iii) of section 163(j)(2)(B) is amended
by striking ``clause (i)'' and inserting ``clause
(ii)''.
(2) Paragraph (1) of section 665(d) is amended in
the last sentence by striking ``or 669 (d) and (e)''.
(3) Subsection (g) of section 1441 (relating to
cross reference) is amended by striking ``one-half''
and inserting ``85 percent''.
(4) Paragraph (1) of section 2523(g) is amended by
striking ``qualified remainder trust'' and inserting
``qualified charitable remainder trust''.
(5) Subsection (d) of section 9502 is amended by
redesignating the paragraph added by section 806 of the
Federal Aviation Reauthorization Act of 1996 as
paragraph (6).
TITLE XVII--IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM
VETO
SEC. 1701. IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM
VETO.
Section 1021(a)(3) of the Congressional Budget and
Impoundment Control Act of 1974 shall only apply to--
(1) section 101(c) (relating to high risk pools
permitted to cover dependents of high risk
individuals);
(2) section 222 (relating to limitation on
qualified 501(c)(3) bonds other than hospital bonds);
(3) section 224 (relating to contributions of
computer technology and equipment for elementary or
secondary school purposes);
(4) section 312(a) (relating to treatment of
remainder interests for purposes of provision relating
to gain on sale of principal residence);
(5) section 501(b) (relating to indexing of
alternative valuation of certain farm, etc., real
property);
(6) section 504 (relating to extension of treatment
of certain rents under section 2032A to lineal
descendants);
(7) section 505 (relating to clarification of
judicial review of eligibility for extension of time
for payment of estate tax);
(8) section 508 (relating to treatment of land
subject to qualified conservation easement);
(9) section 511 (relating to expansion of exception
from generation-skipping transfer tax for transfers to
individuals with deceased parents);
(10) section 601 (relating to the research tax
credit);
(11) section 602 (relating to contributions of
stock to private foundations);
(12) section 603 (relating to the work opportunity
tax credit);
(13) section 604 (relating to orphan drug tax
credit);
(14) section 701 (relating to incentives for
revitalization of the District of Columbia) to the
extent it amends the Internal Revenue Code of 1986 to
create sections 1400 and 1400A (relating to tax-exempt
economic development bonds);
(15) section 701 (relating to incentives for
revitalization of the District of Columbia) to the
extent it amends the Internal Revenue Code of 1986 to
create section 1400C (relating to first-time homebuyer
credit for District of Columbia);
(16) section 801 (relating to incentives for
employing long-term family assistance recipients);
(17) section 904(b) (relating to uniform rate of
tax on vaccines) as it relates to any vaccine
containing pertussis bacteria, extracted or partial
cell bacteria, or specific pertussis antigens;
(18) section 904(b) (relating to uniform rate of
tax on vaccines) as it relates to any vaccine against
measles;
(19) section 904(b) (relating to uniform rate of
tax on vaccines) as it relates to any vaccine against
mumps;
(20) section 904(b) (relating to uniform rate of
tax on vaccines) as it relates to any vaccine against
rubella;
(21) section 905 (relating to operators of multiple
retail gasoline outlets treated as wholesale
distributors for refund purposes);
(22) section 906 (relating to exemption of electric
and other clean-fuel motor vehicles from luxury
automobile classification);
(23) section 907(a) (relating to rate of tax on
liquefied natural gas determined on basis of BTU
equivalency with gasoline);
(24) section 907(b) (relating to rate of tax on
methanol from natural gas determined on basis of BTU
equivalency with gasoline);
(25) section 908 (relating to modification of tax
treatment of hard cider);
(26) section 914 (relating to mortgage financing
for residences located in disaster areas);
(27) section 962 (relating to assignment of
workmen's compensation liability eligible for exclusion
relating to personal injury liability assignments);
(28) section 963 (relating to tax-exempt status for
certain State worker's compensation act companies);
(29) section 967 (relating to additional advance
refunding of certain Virgin Island bonds);
(30) section 968 (relating to nonrecognition of
gain on sale of stock to certain farmers'
cooperatives);
(31) section 971 (relating to exemption of the
incremental cost of a clean fuel vehicle from the
limits on depreciation for vehicles);
(32) section 974 (relating to clarification of
treatment of certain receivables purchased by
cooperative hospital service organizations);
(33) section 975 (relating to deduction in
computing adjusted gross income for expenses in
connection with service performed by certain officials)
with respect to taxable years beginning before 1991;
(34) section 977 (relating to elective carryback of
existing carryovers of National Railroad Passenger
Corporation);
(35) section 1005(b)(2)(B) (relating to transition
rule for instruments described in a ruling request
submitted to the Internal Revenue Service on or before
June 8, 1997);
(36) section 1005(b)(2)(C) (relating to transition
rule for instruments described on or before June 8,
1997, in a public announcement or in a filing with the
Securities and Exchange Commission) as it relates to a
public announcement;
(37) section 1005(b)(2)(C) (relating to transition
rule for instruments described on or before June 8,
1997, in a public announcement or in a filing with the
Securities and Exchange Commission) as it relates to a
filing with the Securities and Exchange Commission;
(38) section 1011(d)(2)(B) (relating to transition
rule for distributions made pursuant to the terms of a
tender offer outstanding on May 3, 1995);
(39) section 1011(d)(3) (relating to transition
rule for distributions made pursuant to the terms of a
tender offer outstanding on September 13, 1995);
(40) section 1012(d)(3)(B) (relating to transition
rule for distributions pursuant to an acquisition
described in section 355(e)(2)(A)(ii) of the Internal
Revenue Code of 1986 described in a ruling request
submitted to the Internal Revenue Service on or before
April 16, 1997);
(41) section 1012(d)(3)(C) (relating to transition
rule for distributions pursuant to an acquisition
described in section 355(e)(2)(A)(ii) of the Internal
Revenue Code of 1986 described in a public announcement
or filing with the Securities and Exchange Commission)
as it relates to a public announcement;
(42) section 1012(d)(3)(C) (relating to transition
rule for distributions pursuant to an acquisition
described in section 355(e)(2)(A)(ii) of the Internal
Revenue Code of 1986 described in a public announcement
or filing with the Securities and Exchange Commission)
as it relates to a filing with the Securities and
Exchange Commission;
(43) section 1013(d)(2)(B) (relating to transition
rule for distributions or acquisitions after June 8,
1997, described in a ruling request submitted to the
Internal Revenue Service submitted on or before June 8,
1997);
(44) section 1013(d)(2)(C) (relating to transition
rule for distributions or acquisitions after June 8,
1997, described in a public announcement or filing with
the Securities and Exchange Commission on or before
June 8, 1997) as it relates to a public announcement;
(45) section 1013(d)(2)(C) (relating to transition
rule for distributions or acquisitions after June 8,
1997, described in a public announcement or filing with
the Securities and Exchange Commission on or before
June 8, 1997) as it relates to a filing with the
Securities and Exchange Commission;
(46) section 1014(f)(2)(B) (relating to transition
rule for any transaction after June 8, 1997, if such
transaction is described in a ruling request submitted
to the Internal Revenue Service on or before June 8,
1997);
(47) section 1014(f)(2)(C) (relating to transition
rule for any transaction after June 8, 1997, if such
transaction is described in a public announcement or
filing with the Securities and Exchange Commission on
or before June 8, 1997) as it relates to a public
announcement;
(48) section 1014(f)(2)(C) (relating to transition
rule for any transaction after June 8, 1997, if such
transaction is described in a public announcement or
filing with the Securities and Exchange Commission on
or before June 8, 1997) as it relates to a filing with
the Securities and Exchange Commission;
(49) section 1042(b) (relating to special rules for
provision terminating certain exceptions from rules
relating to exempt organizations which provide
commercial-type insurance);
(50) section 1081(a) (relating to termination of
suspense accounts for family corporations required to
use accrual method of accounting) as it relates to the
repeal of Internal Revenue Code section 447(i)(3);
(51) section 1089(b)(3) (relating to reformations);
(52) section 1089(b)(5)(B)(i) (relating to persons
under a mental disability);
(53) section 1171 (relating to treatment of
computer software as FSC export property);
(54) section 1175 (relating to exemption for active
financing income);
(55) section 1204 (relating to travel expenses of
certain Federal employees engaged in criminal
investigations);
(56) section 1236 (relating to extension of time
for filing a request for administrative adjustment);
(57) section 1243 (relating to special rules for
administrative adjustment request with respect to bad
debts or worthless securities);
(58) section 1251 (relating to clarification of
limitation on maximum number of shareholders);
(59) section 1253 (relating to attribution rules
applicable to stock ownership);
(60) section 1256 (relating to modification of
earnings and profits rules for determining whether REIT
has earnings and profits from non-REIT year);
(61) section 1257 (relating to treatment of
foreclosure property);
(62) section 1261 (relating to shared appreciation
mortgages);
(63) section 1302 (relating to clarification of
waiver of certain rights of recovery);
(64) section 1303 (relating to transitional rule
under section 2056A);
(65) section 1304 (relating to treatment for estate
tax purposes of short-term obligations held by
nonresident aliens);
(66) section 1311 (relating to clarification of
treatment of survivor annuities under qualified
terminable interest rules);
(67) section 1312 (relating to treatment of
qualified domestic trust rules of forms of ownership
which are not trusts);
(68) section 1313 (relating to opportunity to
correct failures under section 2032A);
(69) section 1414 (relating to fermented material
from any brewery may be received at a distilled spirits
plant);
(70) section 1417 (relating to use of additional
ameliorating material in certain wines);
(71) section 1418 (relating to domestically
produced beer may be withdrawn free of tax for use of
foreign embassies, legations, etc.);
(72) section 1421 (relating to transfer to brewery
of beer imported in bulk without payment of tax);
(73) section 1422 (relating to transfer to bonded
wine cellars of wine imported in bulk without payment
of tax);
(74) section 1506 (relating to clarification of
certain rules relating to employee stock ownership
plans of S corporations);
(75) section 1507 (relating to modification of 10-
percent tax for nondeductible contributions);
(76) section 1523 (relating to repeal of
application of unrelated business income tax to ESOPs);
(77) section 1530 (relating to gratuitous transfers
for the benefit of employees);
(78) section 1532 (relating to special rules
relating to church plans); and
(79) section 1604(c)(2) (relating to amendment
related to Omnibus Budget Reconciliation Act of 1993).
For consideration of the House bill, and the
Senate amendment, and modifications committed
to conference:
John R. Kasich,
Bill Archer,
Phil Crane,
William M. Thomas,
Dick Armey,
Tom Delay,
Charles B. Rangel,
As additional conferees from the Committee on
Transportation and Infrastructure, for
consideration of secs. 702 and 704 of the
Senate amendment, and modifications committed
to conference:
Bud Shuster,
Susan Molinari,
James L. Oberstar,
As additional conferees from the Committee on
Education and the Workforce, for consideration
of secs. 713-14, 717, 879, 1302, 1304-5, and
1311 of the Senate amendment, and modifications
committed to conference:
Bill Goodling,
Harris W. Fawell,
Donald M. Payne,
Managers on the Part of the House.
From the Committee on Finance:
Bill Roth,
Trent Lott,
Daniel P. Moynihan,
From the Committee on the Budget:
Pete Domenici,
Don Nickles,
Frank R. Lautenberg,
Managers on the Part of the Senate.
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at
the conference on the disagreeing votes of the two Houses on
the amendment of the Senate to the bill (H.R. 2014) to provide
for reconciliation pursuant to subsections (b)(2) and (d) of
section 105 of the concurrent resolution on the budget for
fiscal year 1998, submit the following joint statement to the
House and the Senate in explanation of the effect of the action
agreed upon by the managers and recommended in the accompanying
conference report:
The Senate amendment struck all of the House bill after
the enacting clause and inserted a substitute text.
The House recedes from its disagreement to the amendment
of the Senate with an amendment that is a substitute for the
House bill and the Senate amendment. The differences between
the House bill, the Senate amendment, and the substitute agreed
to in conference are noted below, except for clerical
corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clerical
changes.
I. CHILD AND DEPENDENT CARE TAX CREDIT; HEALTH CARE FOR CHILDREN
A. Child Tax Credit (sec. 101 (a), (c), and (d) of the House bill and
sec. 101 of the Senate amendment)
Present Law
In general
Present law does not provide tax credits based solely on
the taxpayer's number of dependent children. Taxpayers with
dependent children, however, generally are able to claim a
personal exemption for each of these dependents. The total
amount of personal exemptions is subtracted (along with certain
other items) from adjusted gross income (``AGI'') in arriving
at taxable income. The amount of each personal exemption is
$2,650 for 1997, and is adjusted annually for inflation. In
1997, the amount of the personal exemption is phased out for
taxpayers with AGI in excess of $121,200 for single taxpayers,
$151,500 for heads of household, and $181,800 for married
couples filing joint returns. These phaseout thresholds are
adjusted annually for inflation.
Dependent care credit
A nonrefundable credit against income tax liability is
available for up to 30 percent (phased down to 20 percent for
individuals with AGI above $28,000) of a limited dollar amount
of employment-related child and dependent care expenses for
certain qualified individuals: (1) a dependent child under age
13; (2) a dependent physically or mentally unable to care for
him or herself; or (3) a spouse who is physically or mentally
unable to care for him or herself. Eligible employment-related
expenses are limited to $2,400 if there is one qualifying
individual and $4,800 if there are two or more qualifying
individuals. Employment-related expenses are expenses for
household services and the care of a qualifying individual, if
incurred to enable the taxpayer to be gainfully employed.
Employment-related expenses are reduced to the extent the
taxpayer has employer-provided dependent care assistance that
is excludable from gross income.
House Bill
Size of credit
The House bill provides a $500 ($400 for taxable year
1998) nonrefundable tax credit for each qualifying child under
the age of 17.
Qualifying child
A qualifying child is defined as an individual for whom
the taxpayer can claim a dependency exemption and who is a son
or daughter of the taxpayer (or descendent of either), a
stepson or stepdaughter of the taxpayer or an eligible foster
child of the taxpayer.
Savings requirement
No provision.
Reduction for dependent care credit
After 1999, the child credit is reduced by one-half of
the dependent care credit (no reduction with respect to
dependents who are physically or mentally incapable of self-
care). The reduction applies to married individuals with AGI
above $60,000 ($30,000 for married individuals filing
separately). In the case taxpayer's filing as a single or head
of household, the reduction applies to AGI above $33,000.
Phaseout of credit
For taxpayers with modified AGI in excess of certain
thresholds, the sum of the otherwise allowable child credit and
the otherwise allowable dependent care credit is phased out.
The phaseout rate is $25 for each $1,000 of modified AGI (or
fraction thereof) in excess of the threshold. The reduction is
applied first to the child credit and then to the dependent
care credit. For married taxpayers filing joint returns, the
threshold is $110,000. For taxpayers filing single or head of
household returns, the threshold is $75,000. For married
taxpayers filing separate returns, the threshold is $55,000.
These thresholds are not indexed for inflation.
Maximum allowable child credit
The maximum amount of the child credit for each taxable
year (after the reduction, if any, for the dependent care
credit after 2001) could not exceed an amount equal to the
excess of: (1) the taxpayer's regular income tax liability (net
of applicable credits) over (2) the sum of the taxpayer's
tentative minimum tax liability (determined without regard to
the alternative minimum foreign tax credit) and the earned
income credit allowed.
IRS notice and withholding
The House bill provides that the Secretary of the
Treasury shall submit notice to all taxpayers of the passage of
the child tax credit. In addition, it directs the Secretary of
the Treasury to modify the withholding tables for single
taxpayers claiming more than one exemption and for married
taxpayers claiming more than two exemptions to take account of
the effects of the child tax credit. The adjustments to the
withholding tables apply to employees whose annualized wages
from an employer are expected to be at least $30,000, but not
more than $100,000.
Effective date
Generally, the child tax credit is effective for taxable
years beginning after December 31, 1997. The provision to
reduce the other-wise allowable child credit by one-half of the
amount of the taxpayer's dependent care credit is effective for
taxable years beginning after December 31, 2001.
Senate Amendment
Size of credit
The Senate amendment provides a $500 ($250 in 1997 for
children under the age of 13) nonrefundable tax credit for each
qualifying child under the age of 17. For taxable years
beginning after December 31, 2002, the credit is allowed for
each qualifying child under the age of 18.
Qualifying child
Same as the House bill.
Savings requirement
In the case of each child age 13 to 16 (13 to 17 for
taxable years beginning after December 31, 2002), the credit
generally is available only for amounts contributed to savings
for education with respect to that child.
Reduction for dependent care credit
No provision.
Phaseout
Generally the same as the House bill, except the
dependent care credit is not phased out.
Maximum allowable child credit
The maximum amount of the child credit for each taxable
year cannot exceed an amount equal to the excess of: (1) the
taxpayer's regular income tax liability (net of applicable
credits) over (2) the sum of the taxpayer's tentative minimum
tax liability (determined without regard to the alternative
minimum foreign tax credit) and one-half of the earned income
credit allowed.
IRS notice and withholding
No provision.
Effective date
The child tax credit is effective July 1, 1997, for
taxable years beginning after December 31, 1996.
Conference Agreement
Size of credit
The conference agreement provides a $500 ($400 for
taxable year 1998) credit for each qualifying child under the
age of 17.
Qualifying child
The conference agreement follows the House bill and the
Senate amendment. The conference agreement includes a
requirement that the taxpayer include the name and taxpayer
identification number (TIN) for each qualifying child. The
conference agreement also extends the math and clerical error
rule to the child tax credit.
Savings requirement
The conference agreement does not include the Senate
amendment.
Reduction for dependent care credit
The conference agreement does not include the House bill
provision.
Phaseout
The conference agreement follows the House bill and the
Senate amendment with one modification. The modification is to
increase the phaseout rate to $50 for each $1,000 of modified
AGI (or fraction thereof) in excess of the threshold. The
threshold amounts are unchanged from both the House bill and
the Senate amendment.
Maximum allowable child credit
In general, in the case of a taxpayer with qualifying
children, the amount of the child credit equals $500 times the
number of qualifying children.
In the case of a taxpayer with one or two qualifying
children, a portion of the child credit may be treated as a
supplemental child credit amount. This amount equals the excess
of (1) $500 times the number of qualifying children up to the
excess of the taxpayer's income tax liability (net of
applicable credits other than the earned income credit) over
the taxpayer's tentative minimum tax liability (determined
without regard to the alternative minimum foreign tax credit)
over (2) the sum of the taxpayer's regular income tax liability
(net of applicable credits other than the earned income credit)
and the employee share of FICA (and one-half of the taxpayer's
SECA tax liability, if applicable) reduced by any earned income
credit amount. In no case will the total amount of the
allowable child credit exceed the amount that would result from
its calculation as a nonrefundable personal credit.
In the case of a taxpayer with three or more qualifying
children, the maximum amount of the child credit for each
taxable year cannot exceed the greater of: (1) the excess of
the taxpayer's regular tax liability (net of applicable credits
other than the earned income credit) over the taxpayer's
tentative minimum tax liability (determined without regard to
the alternative minimum foreign tax credit), or (2) an amount
equal to the excess of the sum of the taxpayer's regular income
tax liability (net of applicable credits other than the earned
income credit) and the employee share of FICA (and one-half of
the taxpayer's SECA tax liability, if applicable) reduced by
the earned income credit. To the extent that the amount
determined under (1) is greater than the amount determined
under (2), the difference is treated as a supplemental child
credit amount.
The conferees anticipate that the Secretary of the
Treasury will determine whether a simplified method of
calculating the child credit, consistent with the formula
described above, can be achieved.
Refundable child credit amount
In the case of a taxpayer with three or more qualifying
children, if the amount of the allowable child credit as
computed under the computation described immediately above
exceeds the taxpayer's regular tax liability before the
computation, then the excess is a refundable tax credit.
IRS notice and withholding
The conference agreement does not include the House bill
provision.
Effective date
Generally, the child tax credit is effective for taxable
years beginning after December 31, 1997.
B. Expand Definition of High-Risk Individuals with Respect to Tax-
Exempt State-Sponsored Organizations Providing Health Coverage (sec.
101(b) of the House bill)
Present Law
Present law provides tax-exempt status to any membership
organization that is established by a State exclusively to
provide coverage for medical care on a nonprofit basis to
certain high-risk individuals, provided certain criteria are
satisfied. 1 The organization may provide coverage
for medical care either by issuing insurance itself or by
entering into an arrangement with a health maintenance
organization (``HMO'').
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\1\ No inference is intended as to the tax treatment of other types
of State-sponsored organizations.
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High-risk individuals eligible to receive medical care
coverage from the organization must be residents of the State
who, due to a pre-existing medical condition, are unable to
obtain health coverage for such condition through insurance or
an HMO, or are able to acquire such coverage only at a rate
that is substantially higher than the rate charged for such
coverage by the organization. The State must determine the
composition of membership in the organization. For example, a
State could mandate that all organizations that are subject to
insurance regulation by the State must be members of the
organization.
Present law further requires the State or members of the
organization to fund the liabilities of the organization to the
extent that premiums charged to eligible individuals are
insufficient to cover such liabilities. Finally, no part of the
net earnings of the organization can inure to the benefit of
any private shareholder or individual.
House Bill
The House bill expands the definition of high-risk
individuals to include a child of an individual who meets the
present-law definition of a high-risk individual, subject to
certain requirements. The requirements are: (1) the taxpayer is
allowed a deduction for a personal exemption for the child for
the taxable year; (2) the child has not attained the age of 17
as of the close of the calendar year in which the taxable year
of the taxpayer begins; and (3) the child is a son or daughter
or the taxpayer (or a dependent of either), a stepson or
stepdaughter of the taxpayer, or an eligible foster child of
the taxpayer.
Effective date.--Taxable years beginning after December
31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with a
modification to further expand the definition of high-risk
individuals to include the spouse of an individual who meets
the present-law definition of a high-risk individual.
C. Indexing of the Dependent Care Credit; Phase Out for High-Income
Taxpayers (sec. 102 of the House bill)
Present Law
A nonrefundable credit against income tax liability is
available for up to 30 percent of a limited dollar amount of
employment-related child and dependent care expenses. The
credit may be claimed by an individual who maintains a
household that includes one or more qualifying individuals. A
qualifying individual is a dependent of the taxpayer who is
under the age of 13, a physically or mentally incapacitated
dependent, or a physically or mentally incapacitated spouse.
Employment-related expenses are expenses for household
services and the care of a qualifying individual, if incurred
to enable the taxpayer to be gainfully employed. Eligible
employment-related expenses are limited to $2,400 if there is
one qualifying individual, and $4,800 if there are two or more
qualifying individuals.
The 30-percent credit rate is reduced by one percentage
point for each $2,000 (or fraction thereof) of adjusted gross
income (``AGI'') above $10,000. A married couple's combined AGI
is used for purposes of this computation. Individuals with more
than $28,000 of AGI are entitled to a credit equal to 20
percent of allowable employment-related expenses.
House Bill
Dollar limits
Under the House bill, the dollar limits on eligible
employment-related expenses ($2,400 if there is one qualifying
individual and $4,800 if there are two or more qualifying
individuals) are indexed for inflation.
Phaseout
For taxpayers with modified AGI in excess of certain
thresholds, the sum of the otherwise allowable child credit and
the otherwise allowable dependent care credit is phased out.
The phaseout rate is $25 for each $1,000 of modified AGI (or
fraction thereof) in excess of the threshold. The reduction is
applied first to the child credit and then to the dependent
care credit. For married taxpayers filing joint returns, the
threshold is $110,000. For taxpayers filing single or head of
household returns, the threshold is $75,000. For married
taxpayers filing separate returns, the threshold is $55,000.
These thresholds are not indexed for inflation. (See above the
description of the phaseout in the child tax credit.)
Effective date
The provision is effective for taxable years beginning
after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
D. Tax Credit for Employer Expenses for Child Care Facilities (sec. 103
of the Senate amendment)
Present Law
Ordinary and necessary business expenses are deductible
by an employer.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a tax credit equal to 50
percent of an employers' qualified child care expenses for the
taxable year. The maximum credit allowable cannot exceed
$150,000 per year.
Qualified child care expenses are any amounts paid or
incurred: (1) to acquire, construct, rehabilitate or expand
property which is to be used as part of a qualified child care
facility, with respect to which a deduction for depreciation is
allowable, and which is not part of the principal residence of
the taxpayer or an employee of the taxpayer; (2) for the
operating costs of a qualified child care facility; (3) under a
contract with a qualified child care facility to provide child
care services to employees of the taxpayer; (4) under a
contract to provide child care resource and referral services
to employees of the taxpayer; or (5) for the costs of seeking
accreditation for a child care facility. A qualified child care
facility is a facility the principal use of which is to provide
child care assistance and which meets the requirements of all
applicable laws and regulations of the State and local
government in which it is located. A facility is not a
qualified child care facility unless enrollment in the facility
is open to employees of the taxpayer during the year, the
facility is not the principal trade or business of the taxpayer
(unless at least 30 percent of the enrolled are dependents of
employees of the taxpayer) and the use of (or eligibility to
use) the facility does not discriminate in favor of highly
compensated employees.
A recapture of the credit applies if the facility ceases
to operate as a qualified child care facility or the facility
is disposed of.
No deduction or credit is allowed under any other
provision with respect to the amount of credit determined under
this provision. The taxpayer's basis in property is reduced by
the amount of credit determined with respect to such property.
Effective date.--The provision is effective with respect
to taxable years beginning after December 31, 1997, but before
January 1, 2000.
Conference Agreement
The conference agreement does not include the Senate
amendment.
E. Expansion of Coordinated Enforcement Efforts Between the Internal
Revenue Service and the Health and Human Services Office of Child
Support Enforcement (sec. 104 of the Senate amendment)
Present Law
The Internal Revenue Service (``IRS'') and various
Federal departments and agencies have information sharing
agreements. The Secretary of Health and Human Services
(``HHS'') has been directed to create and maintain various data
bases which may be used by the IRS to collect unpaid child
support amounts, to administer the earned income credit and to
verify a claim with respect to employment on a tax return.
House Bill
No provision.
Senate Amendment
The Senate amendment gives the IRS expanded access to
information in the National Directory of New Hires to verify
any information which is required on a tax return. It also
gives the IRS access to the names and social security numbers
of custodial parents in the Federal Case Registry of Child
Support Orders. This information is made available to
administer the Internal Revenue Code provisions which grant tax
benefits based on the support and residence of dependent
children.
Effective date.--The provision is effective on October 1,
1997.
Conference Agreement
The conference agreement does not include the Senate
amendment.
F. Penalty-Free Withdrawals From IRAs for Adoption Expenses (sec. 105
of the Senate amendment)
Present Law
Under present law, amounts held in an individual
retirement arrangement (``IRA'') are includible in income when
withdrawn (except to the extent the withdrawal is a return of
nondeductible contributions). Amounts withdrawn prior to
attainment of age 59\1/2\ are subject to an additional 10-
percent early withdrawal tax, unless the withdrawal is due to
death or disability, is made in the form of certain periodic
payments, is used to pay medical expenses in excess of 7.5
percent of AGI, or is used to purchase health insurance of an
unemployed individual.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that the 10-percent early
withdrawal tax does not apply to distributions from IRAs that
are not in excess of $2,000 if the taxpayer uses the amounts to
pay qualified adoption expenses.
The penalty-free withdrawal is available for ``qualified
adoption expenses,'' meaning reasonable and necessary adoption
fees, court costs, attorney fees, and other expenses which are
directly related to, and the principal purpose of which is for,
the legal adoption of an eligible child by the taxpayer.
Qualified adoption expenses do not include expenses (1)
incurred in violation of State or Federal law, (2) incurred in
carrying out any surrogate parenting arrangement, (3) incurred
in connection with the adoption of a child of a spouse, or (4)
which are reimbursed under an employer program or otherwise.
Effective date.--The provision is effective for
distributions after December 31, 1996.
Conference Agreement
The conference agreement does not include the Senate
amendment.
II. EDUCATION TAX INCENTIVES
A. Tax Benefits Relating to Education Expenses
1. HOPE tax credit and Lifetime Learning tax credit for higher
education tuition expenses (sec. 201 of the House bill and the
Senate amendment)
Present Law
Deductibility of education expenses
Taxpayers generally may not deduct education and training
expenses. However, a deduction for education expenses generally
is allowed under section 162 if the education or training (1)
maintains or improves a skill required in a trade or business
currently engaged in by the taxpayer, or (2) meets the express
requirements of the taxpayer's employer, or requirements of
applicable law or regulations, imposed as a condition of
continued employment (Treas. Reg. sec. 1.162-5). However,
education expenses are not deductible if they relate to certain
minimum educational requirements or to education or training
that enables a taxpayer to begin working in a new trade or
business. In the case of an employee, education expenses (if
not reimbursed by the employer) may be claimed as an itemized
deduction only if such expenses meet the above-described
criteria for deductibility under section 162 and only to the
extent that the expenses, along with other miscellaneous
deductions, exceed 2 percent of the taxpayer's adjusted gross
income (AGI).
Exclusion for employer-provided educational assistance
A special rule allows an employee to exclude from gross
income for income tax purposes and from wages for employment
tax purposes up to $5,250 annually paid by his or her employer
for educational assistance (sec. 127). In order for the
exclusion to apply, certain requirements must be satisfied,
including a requirement that not more than 5 percent of the
amounts paid or incurred by the employer during the year for
educational assistance under a qualified educational assistance
program can be provided for the 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. This special
rule for employer-provided educational assistance expired with
respect to courses beginning after June 30, 1997 (and does not
apply to graduate level courses beginning after June 30, 1996).
For purposes of the special exclusion, educational
assistance means the payment by an employer of expenses
incurred by or on behalf of the employee for education of the
employee including, but not limited to, tuition, fees, and
similar payments, books, supplies, and equipment. Educational
assistance also includes the provision by the employer of
courses of instruction for the employee (including books,
supplies, and equipment). Educational assistance does not
include tools or supplies which may be retained by the employee
after completion of a course or meals, lodging, or
transportation. The exclusion does not apply to any education
involvingsports, games, or hobbies.
In the absence of the special exclusion, employer-
provided educational assistance is excludable from gross income
and wages as a working condition fringe benefit (sec. 132(d))
only to the extent the education expenses would be deductible
under section 162.
Exclusion for interest earned on savings bonds
Another special rule (sec. 135) provides that interest
earned on a qualified U.S. Series EE savings bond issued after
1989 is excludable from gross income if the proceeds of the
bond upon redemption do not exceed qualified higher education
expenses paid by the taxpayer during the taxable
year.2 ``Qualified higher education expenses''
include tuition and fees (but not room and board expenses)
required for the enrollment or attendance of the taxpayer, the
taxpayer's spouse, or a dependent of the taxpayer at certain
colleges, universities, or vocational schools. The exclusion
provided by section 135 is phased out for certain higher-income
taxpayers, determined by the taxpayer's modified AGI during the
year the bond is redeemed. For 1996, the exclusion was phased
out for taxpayers with modified AGI between $49,450 and $64,450
($74,200 and $104,200 for joint returns). To prevent taxpayers
from effectively avoiding the income phaseout limitation
through issuance of bonds directly in the child's name, section
135(c)(1)(B) provides that the interest exclusion is available
only with respect to U.S. Series EE savings bonds issued to
taxpayers who are at least 24 years old.
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\2\ If the aggregate redemption amount (i.e., principal plus
interest) of all Series EE bonds redeemed by the taxpayer during the
taxable year exceeds the qualified education expenses incurred, then
the excludable portion of interest income is based on the ratio that
the education expenses bears to the aggregate redemption amount (sec.
135(b)).
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Qualified scholarships
Section 117 excludes from gross income amounts received
as a qualified scholarship by an individual who is a candidate
for a degree and used for tuition and fees required for the
enrollment or attendance (or for fees, books, supplies, and
equipment required for courses of instruction) at a primary,
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to
scholarship amounts covering regular living expenses, such as
room and board. There is, however, no dollar limitation for the
section 117 exclusion, provided that the scholarship funds are
used to pay for tuition and required fees. In addition to the
exclusion for qualified scholarships, section 117 provides an
exclusion from gross income for qualified tuition reductions
for education below the graduate level provided to employees
(and their spouses and dependents) of certain educational
organizations.3 Section 117(c) specifically provides
that the exclusion for qualified scholarships and qualified
tuition reductions does not apply to any amount received by a
student that represents payment for teaching, research, or
other services by the student required as a condition for
receiving the scholarship or tuition reduction.
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\3\ A special rule provides that qualified tuition reductions under
section 117(d) may be provided for graduate-level courses in cases of
graduate students who are engaged in teaching or research activities
for the educational organization (sec. 117(d)(5)).
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Student loan forgiveness
In the case of an individual, section 108(f) provides
that gross income subject to Federal income tax does not
include any amount from the forgiveness (in whole or in part)
of certain student loans, provided that the forgiveness is
contingent on the student's working for a certain period of
time in certain professions for any of a broad class of
employers (e.g., providing health care services to a nonprofit
organization). Student loans eligible for this special rule
must be made to an individual to assist the individual in
attending an education institution that normally maintains a
regular faculty and curriculum and normally has a regularly
enrolled body of students in attendance at the place where its
education activities are regularly carried on. Loan proceeds
may be used not only for tuition and required fees, but also to
cover room and board expenses (in contrast to tax-free
scholarships under section 117, which are limited to tuition
and required fees). In addition, the loan must be made by (1)
the United States (or an instrumentality or agency thereof),
(2) a State (or any political subdivision thereof), (3) certain
tax-exempt public benefit corporations that control a State,
county, or municipal hospital and whose employees have been
deemed to be public employees under State law, or (4) an
educational organization that originally received the funds
from which the loan was made from the United States, a State,
or a tax-exempt public benefit corporation. Thus, loans made
with private, nongovernmental funds are not qualifying student
loans for purposes of the section 108(f) exclusion. As with
section 117, there is no dollar limitation for the section
108(f) exclusion.
Qualified State prepaid tuition programs
Section 529 (enacted as part of the Small Business Job
Protection Act of 1996) provides tax-exempt status to
``qualified State tuition programs,'' meaning certain programs
established and maintained by a State (or agency or
instrumentality thereof) under which persons may (1) purchase
tuition credits or certificates on behalf of a designated
beneficiary that entitle the beneficiary to a waiver or payment
of qualified higher education expenses of the beneficiary, or
(2) make contributions to an account that is established for
the purpose of meeting qualified higher education expenses of
the designated beneficiary of the account. ``Qualified higher
education expenses'' are defined as tuition, fees, books,
supplies, and equipment required for the enrollment or
attendance at a college or university (or certain vocational
schools). Qualified higher education expenses do not include
room and board expenses. Section 529 also provides that no
amount shall be included in the gross income of a contributor
to, or beneficiary of, a qualified State tuition program with
respect to any distribution from, or earnings under, such
program, except that (1) amounts distributed or educational
benefits provided to a beneficiary (e.g., when the beneficiary
attends college) will be included in the beneficiary's gross
income (unless excludable under another Code section) to the
extent such amounts or the value of the educational benefits
exceed contributions made on behalf of the beneficiary, and (2)
amounts distributed to a contributor (e.g., when a parent
receives a refund) will be included in the contributor's gross
income to the extent such amounts exceed contributions made by
that person.4
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\4\ Specifically, section 529(c)(3)(A) provides that any
distribution under a qualified State tuition program shall be
includible in the gross income of the distributee in the same manner as
provided under present-law section 72 to the extent not excluded from
gross income under any other provision of the Code.
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House Bill
In general
Individual taxpayers are allowed to claim a non-
refundable HOPE credit against Federal income taxes up to
$1,500 per student per year for 50 percent of qualified tuition
and related expenses (but not room and board expenses) paid for
the first two years of the student's post-secondary education
in a degree or certificate program. The qualified tuition and
related expenses must be incurred on behalf of the taxpayer,
the taxpayer's spouse, or a dependent. The HOPE credit is
available with respect to an individual student for two taxable
years, provided that the student has not completed the first
two years of post-secondary education. Beginning in 1998, the
maximum credit amount of $1,500 will be indexed for inflation,
rounded down to the closest multiple of $50.5
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\5\ The HOPE credit may not be claimed against a taxpayer's
alternative minimum tax (AMT) liability.
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The HOPE credit amount that a taxpayer may otherwise
claim is phased out ratably for taxpayers with modified AGI
between $40,000 and $50,000 ($80,000 and $100,000 for joint
returns). Modified AGI includes amounts otherwise excluded with
respect to income earned abroad (or income from Puerto Rico or
U.S. possessions). The income phase-out ranges will be indexed
for inflation occurring after the year 1999, rounded down to
the closest multiple of $5,000. The first taxable year for
which the inflation adjustment could be made to increase the
income phase-out ranges will be 2001.
The HOPE credit is available in the taxable year the
expenses are paid, subject to the requirement that the
education commence or continue during that year or during the
first three months of the next year. Qualified tuition expenses
paid with the proceeds of a loan generally are eligible for the
HOPE credit (rather than repayment of the loan
itself).6
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\6\ The Treasury Department is granted authority to issue
regulations providing that the HOPE credit will be recaptured in cases
where the student or taxpayer receives a refund of tuition and related
expenses with respect to which a credit was claimed in a prior year.
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Dependent students
A taxpayer may claim the HOPE credit with respect to an
eligible student who is not the taxpayer or the taxpayer's
spouse (e.g., in cases where the student is the taxpayer's
child) only if the taxpayer claims the student as a dependent
for the taxable year for which the credit is claimed. If a
student is claimed as a dependent by the parent or other
taxpayer, the eligible student him- or herself is not entitled
to claim a HOPE credit for that taxable year on the student's
own tax return. If a parent (or other taxpayer) claims a
student as a dependent, any qualified tuition and related
expenses paid by the student are treated as paid by the parent
(or other taxpayer) for purposes of the provision.
Election of HOPE credit or proposed deduction for qualified higher
education expenses
For each taxable year, a taxpayer may elect with respect
to an eligible student either the HOPE credit or the proposed
deduction for qualified higher education expenses (described
below). Thus, for example, if a parent claims a child as a
dependent for a taxable year, then all qualified tuition
expenses paid by both the parent and child are deemed paid by
the parent, and the parent may claim the HOPE credit (assuming
that the AGI phaseout does not apply) on the parent's return.
As an alternative, the parent may elect for that taxable year
the deduction for qualified higher education expenses with
respect to the dependent child (as described
below).7 On the other hand, if a child is not
claimed as a dependent by the parent (or by any other taxpayer)
for the taxable year, then the child him- or herself has the
option of electing either the HOPE credit or deduction for
qualified higher education expenses paid during that year.
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\7\ For any taxable year, a taxpayer may claim the HOPE credit for
qualified tuition and related expenses paid with respect to one student
and also claim the proposed deduction (described below) for higher
education expenses paid with respect to one or more other students. If
the HOPE credit is claimed with respect to one student for one or two
taxable years, then the proposed deduction for higher education
expenses may be available with respect to that student for subsequent
taxable years.
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Qualified tuition and related expenses
The HOPE credit is available for ``qualified tuition and
related expenses,'' meaning tuition, fees, and books required
for the enrollment or attendance of an eligible student at an
eligible educational institution. Charges and fees associated
with meals, lodging, student activities, athletics, insurance,
transportation, and similar personal, living or family expenses
are not included. The expenses of education involving sports,
games, or hobbies are not qualified tuition expenses unless
this education is part of the student's degree program.
Qualified tuition and related expenses generally include
only out-of-pocket expenses. Qualified tuition and related
expenses do not include expenses covered by educational
assistance that is not required to be included in the gross
income of either the student or the taxpayer claiming the
credit. Thus, total qualified tuition and related expenses are
reduced by any scholarship or fellowship grants excludable from
gross income under present-law section 117 and any other tax-
free educational benefits received by the student during the
taxable year. No reduction of qualified tuition and related
expenses is required for a gift, bequest, devise, or
inheritance within the meaning of section 102(a). Under the
provision, a HOPE credit is not allowed with respect to any
education expense for which a deduction is claimed under
section 162 or any other section of the Code.8
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\8\ In addition, the bill amends present-law section 135 to provide
that the amount of qualified higher education expenses taken into
account for purposes of that section is reduced by the amount of such
expenses taken into account in determining the HOPE credit claimed by
any taxpayer with respect to the student for the taxable year.
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Eligible students
An eligible student for purposes of the HOPE credit is an
individual who is enrolled in a degree, certificate, or other
program (including a program of study abroad approved for
credit by the institution at which such student is enrolled)
leading to a recognized educational credential at an eligible
educational institution. The student must pursue a course of
study on at least a half-time basis. (In other words, for at
least one academic period which begins during the taxable year,
the student must carry at least one-half the normal full-time
work load for the course of study the student is pursuing.) An
eligible student may not have been convicted of a Federal or
State felony consisting of the possession or distribution of a
controlled substance.
Eligible educational institutions
Eligible educational institutions are defined by
reference to section 481 of the Higher Education Act of 1965.
Such institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, or another recognized post-
secondary credential. Certain proprietary institutions and
post-secondary vocational institutions also are eligible
educational institutions. The institution must be eligible to
participate in Department of Education student aid programs.
Regulations
The Secretary of the Treasury (in consultation with the
Secretary of Education) is granted authority to issue
regulations to implement the provision. The Secretary of the
Treasury will have authority to issue regulations providing
appropriate rules for recordkeeping and information reporting.
These regulations may address the information reports that
eligible educational institutions will be required to file to
assist students and the IRS in calculating the amount of the
HOPE credit potentially available.
Effective date
The provision is effective for expenses paid after
December 31, 1997, for educationfurnished in academic periods
beginning after such date.
Senate Amendment
The Senate amendment is the same as the House bill,
except: (1) the credit rate is 75 percent (rather than 50
percent) for students attending two-year community colleges and
vocational schools; 9 (2) an eligible student must
have earned a high-school diploma (or equivalent degree) prior
to attending any post-secondary classes with respect to which
the HOPE credit is claimed, with the exception of students who
did not receive a high-school degree by reason of enrollment in
an early admission program at a post-secondary institution; and
(3) for a taxable year, a taxpayer may elect with respect to an
eligible student either the HOPE credit or the proposed
exclusion from gross income for certain distributions from a
qualified tuition program or education IRA provided for by the
Senate amendment.
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\9\ Thus, under the Senate amendment, students attending two-year
community colleges or vocational schools may be eligible for the $1,500
maximum HOPE credit if they incur $2,000 of qualified tuition and
related expenses. In contrast, students attending other institutions
(e.g., four-year colleges) may be eligible for the $1,500 maximum HOPE
credit if they incur $3,000 of qualified tuition and related expenses.
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Conference Agreement
In general
The conference agreement follows the House bill, except:
(1) the HOPE credit rate is 100 percent on the first $1,000 of
qualified tuition and fees, and 50 percent on the next $1,000
of qualified tuition and fees; 10 (2) the HOPE
credit is available only for tuition and fees required for the
enrollment or attendance of an eligible student at an eligible
institution, and is not available for expenses incurred to
purchase books; and (3) for a taxable year, a taxpayer may
elect with respect to an eligible student the HOPE credit, the
20-percent ``Lifetime Learning'' credit (as described below),
or the exclusion from gross income for certain distributions
from an education IRA (as provided by the conference
agreement).
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\10\ Thus, an eligible student who incurs $1,000 of qualified
tuition and fees is eligible (subject to the AGI phaseout) for a $1,000
HOPE credit; and if such a student incurs $2,000 of qualified tuition
and fees, then he or she is eligible for a $1,500 HOPE credit.
The maximum HOPE credit amount will be indexed for inflation
occurring after the year 2000, by increasing the cap on qualified
tuition and fees subject to the 100-percent credit rate and the cap on
such tuition and fees subject to the 50-percent credit rate (both caps
rounded down to the closest multiple of $100). The first taxable year
for which the inflation adjustment could be made to increase the cap on
qualified tuition and fees will be 2002. In addition, under the
conference agreement, the income phase-out ranges for the HOPE credit
will be indexed for inflation occurring after the year 2000, rounded
down to the closest multiple of $1,000. The first taxable year for
which the inflation adjustment could be made to increase the income
phase-out ranges will be 2002.
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Lifetime Learning credit for qualified tuition and fees
Allowance of credit.--The conference agreement provides
that individual taxpayers are allowed to claim a nonrefundable
``Lifetime Learning'' credit against Federal income taxes equal
to 20 percent of qualified tuition and fees incurred during the
taxable year on behalf of the taxpayer, the taxpayer's spouse,
or any dependents. For expenses paid after June 30, 1998, and
prior to January 1, 2003, up to $5,000 of qualified tuition and
fees per taxpayer return will be eligible for the 20-percent
Lifetime Learning credit (i.e., the maximum credit per taxpayer
return will be $1,000). For expenses paid after December 31,
2002, up to $10,000 of qualified tuition and fees per taxpayer
return will be eligible for the 20-percent Lifetime Learning
credit (i.e., the maximum credit per taxpayer return will be
$2,000).
In contrast to the HOPE credit, a taxpayer may claim the
Lifetime Learning credit for an unlimited number of taxable
years. Also in contrast to the HOPE credit, the maximum amount
of the Lifetime Learning credit that may be claimed on a
taxpayer's return will not vary based on the number of students
in the taxpayer's family.
The Lifetime Learning credit is phased out ratably over
the same phaseout range that applies for purposes of the HOPE
credit--i.e., taxpayers with modified AGI between $40,000 and
$50,000 ($80,000 and $100,000 for joint returns). The income
phase-out ranges will be indexed for inflation occurring after
the year 2000, rounded down to the closest multiple of $1,000.
The first taxable year for which the inflation adjustment could
be made to increase the income phase-out ranges will be 2002.
The Lifetime Learning credit is available in the taxable
year the expenses are paid, subject to the requirement that the
education commence or continue during that year or during the
first three months of the next year. Qualified tuition and fees
paid with the proceeds of a loan generally are eligible for the
Lifetime Learning credit (rather than repayment of the loan
itself).
Dependent students.--As with the HOPE credit, a taxpayer
may claim the Lifetime Learning credit with respect to a
student who is not the taxpayer or the taxpayer's spouse (e.g.,
in cases where the student is the taxpayer's child) only if the
taxpayer claims the student as a dependent for the taxable year
for which the credit is claimed. If a student is claimed as a
dependent by the parent or other taxpayer, the student him- or
herself is not entitled to claim the Lifetime Learning credit
for that taxable year on the student's own tax return. If a
parent (or other taxpayer) claims a student as a dependent, any
qualified tuition and related expenses paid by the student are
treated as paid by the parent (or other taxpayer) for purposes
of the provision.
Election of Lifetime Learning credit, HOPE credit, or
exclusion from gross income for certain distributions from
education IRAs.--A taxpayer may claim the Lifetime Learning
credit for a taxable year with respect to one or more students,
even though the taxpayer also claims a HOPE credit (or claims
an exclusion from gross income for certain distributions from
qualified State tuition programs or education IRAs) for that
same taxable year with respect to other students. If, for a
taxable year, a taxpayer claims a HOPE credit with respect to a
student (or claims an exclusion for certain distributions from
an education IRA with respect to a student), then the Lifetime
Learning credit will not be available with respect to that same
student for that year (although the Lifetime Learning credit
may be available with respect to that same student for other
taxable years).
Qualified tuition and fees.--The Lifetime Learning credit
is available for ``qualified tuition and fees,'' meaning
tuition and fees required for the enrollment or attendance of
the eligible student at an eligible institution. Charges and
fees associated with meals, lodging, student activities,
athletics, insurance, transportation, and similar personal,
living or family expenses are not included. The 20-percent
credit is not available for expenses incurred to purchase
books. The expenses of education involving sports, games, or
hobbies are not qualified tuition expenses unless this
education is part of the student's degree program.
In contrast to the HOPE credit, qualified tuition and
fees for purposes of the Lifetime Learning credit include
tuition and fees incurred with respect to undergraduate or
graduate-level (and professional degree) courses.11
In addition to allowing a credit for the tuition and fees of a
student who attends classes on at least a half-time basis as
part of a degree or certificate program, the Lifetime Learning
credit also is available with respect to any course of
instruction at an eligible educational institution (whether
enrolled in by the student on a full-time, half-time, or less
than half-time basis) to acquire or improve job skills of the
student.
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\11\ The HOPE credit is available only with respect to the first
two years of a student's undergraduate education.
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Qualified tuition and fees are defined in the same manner
as under the HOPE credit provisions. Thus, qualified tuition
and fees generally include only out-of-pocket expenses.
Qualified tuition and fees do not include expenses covered by
educational assistance that is not required to be included in
the gross income of either the student or the taxpayer claiming
the credit. Thus, total qualified tuition and fees are reduced
by any scholarship or fellowship grants excludable from gross
income under present-law section 117 and any other tax-free
educational benefits received by the student during the taxable
year (such as employer-provided educational assistance
excludable under section 127). No reduction of qualified
tuition and fees is required for a gift, bequest, devise, or
inheritance within the meaning of section 102(a). Under the
provision, a Lifetime Learning credit is not allowed with
respect to any education expense for which a deduction is
claimed under section 162 or any other section of the
Code.12
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\12\ In addition, the conference agreement amends present-law
section 135 to provide that the amount of qualified higher education
expenses taken into account for purposes of that section is reduced by
the amount of such expenses taken into account in determining the
Lifetime Learning credit claimed by any taxpayer with respect to the
student for the taxable year.
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Eligible educational institutions.--Eligible educational
institutions are (as with the HOPE credit) defined by reference
to section 481 of the Higher Education Act of 1965. Such
institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, graduate-level or professional
degree, or another recognized post-secondary credential.
Certain proprietary institutions and post-secondary vocational
institutions also are eligible educational institutions. The
institution must be eligible to participate in Department of
Education student aid programs.
Regulations.--The Secretary of the Treasury (in
consultation with the Secretary of Education) is granted
authority to issue regulations to implement the provision. The
Secretary of the Treasury will have authority to issue
regulations providing appropriate rules for recordkeeping and
information reporting. These regulations may address the
information reports that eligible educational institutions will
be required to file to assist students and the IRS in
calculating the amount of the Lifetime Learning credit
potentially available.
Effective date.--The provision is effective for expenses
paid after June 30, 1998, for education furnished in academic
periods beginning after such date.
2. Tax treatment of qualified State tuition programs and education
IRAs; exclusion for certain distributions from education IRAs
used to pay qualified higher education expenses (secs. 202 (a),
(b), and (d) and 211-212 of the House bill and secs. 211-213 of
the Senate amendment)
Present Law
Deductibility of education expenses
Taxpayers generally may not deduct education and training
expenses. However, a deduction for education expenses generally
is allowed under section 162 if the education or training (1)
maintains or improves a skill required in a trade or business
currently engaged in by the taxpayer, or (2) meets the express
requirements of the taxpayer's employer, or requirements of
applicable law or regulations, imposed as a condition of
continued employment (Treas. Reg. sec. 1.162-5). However,
education expenses are not deductible if they relate to certain
minimum educational requirements or to education or training
that enables a taxpayer to begin working in a new trade or
business. In the case of an employee, education expenses (if
not reimbursed by the employer) may be claimed as an itemized
deduction only if such expenses meet the above-described
criteria for deductibility under section 162 and only to the
extent that the expenses, along with other miscellaneous
deductions, exceed 2 percent of the taxpayer's adjusted gross
income (AGI).
Exclusion for employer-provided educational assistance
A special rule allows an employee to exclude from gross
income for income tax purposes and from wages for employment
tax purposes up to $5,250 annually paid by his or her employer
for educational assistance (sec. 127). In order for the
exclusion to apply, certain requirements must be satisfied,
including a requirement that not more than 5 percent of the
amounts paid or incurred by the employer during the year for
educational assistance under a qualified educational assistance
program can be provided for the 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. This special
rule for employer-provided educational assistance expired with
respect to courses beginning after June 30, 1997 (and does not
apply to graduate level courses beginning after June 30, 1996).
For purposes of the special exclusion, educational
assistance means the payment by an employer of expenses
incurred by or on behalf of the employee for education of the
employee including, but not limited to, tuition, fees, and
similar payments, books, supplies, and equipment. Educational
assistance also includes the provision by the employer of
courses of instruction for the employee (including books,
supplies, and equipment). Educational assistance does not
include tools or supplies which may be retained by the employee
after completion of a course or meals, lodging, or
transportation. The exclusion does not apply to any education
involving sports, games, or hobbies.
In the absence of the special exclusion, employer-
provided educational assistance is excludable from gross income
and wages as a working condition fringe benefit (sec. 132(d))
only to the extent the education expenses would be deductible
under section 162.
Exclusion for interest earned on savings bonds
Another special rule (sec. 135) provides that interest
earned on a qualified U.S. Series EE savings bond issued after
1989 is excludable from gross income if the proceeds of the
bond upon redemption do not exceed qualified higher education
expenses paid by the taxpayer during the taxable
year.13 ``Qualified higher education expenses''
include tuition and fees (but not room and board expenses)
required for the enrollment or attendance of the taxpayer, the
taxpayer's spouse, or a dependent of the taxpayer at certain
colleges, universities, or vocational schools. The exclusion
provided by section 135 is phased out for certain higher-income
taxpayers, determined by the taxpayer's modified AGI during the
year the bond is redeemed. For 1996, the exclusion was phased
out for taxpayers with modified AGI between $49,450 and $64,450
($74,200 and $104,200 for joint returns). To prevent taxpayers
from effectively avoiding the income phaseout limitation
through issuance of bonds directly in the child's name, section
135(c)(1)(B) provides that the interest exclusion is available
only with respect to U.S. Series EE savings bonds issued to
taxpayers who are at least 24 years old.
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\13\ If the aggregate redemption amount (i.e., principal plus
interest) of all Series EE bonds redeemed by the taxpayer during the
taxable year exceeds the qualified education expenses incurred, then
the excludable portion of interest income is based on the ratio that
the education expenses bears to the aggregate redemption amount (sec.
135(b)).
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Qualified scholarships
Section 117 excludes from gross income amounts received
as a qualified scholarship by an individual who is a candidate
for a degree and used for tuition and fees required for the
enrollment or attendance (or for fees, books, supplies, and
equipment required for courses of instruction) at a primary,
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to
scholarship amounts covering regular living expenses, such as
room and board. There is, however, no dollar limitation for the
section 117 exclusion, provided that the scholarship funds are
used to pay for tuition and required fees. In addition to the
exclusion for qualified scholarships, section 117 provides an
exclusion from gross income for qualified tuition reductions
for education below the graduate level provided to employees
(and their spouses and dependents) of certain educational
organizations.14 Section 117(c) specifically
provides that the exclusion for qualified scholarships and
qualified tuition reductions does not apply to any amount
received by a student that represents payment for teaching,
research, or other services by the student required as a
condition for receiving the scholarship or tuition reduction.
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\14\ A special rule provides that qualified tuition reductions
under section 117(d) may be provided for graduate-level courses in
cases of graduate students who are engaged in teaching or research
activities for the educational organization (sec. 117(d)(5)).
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Student loan forgiveness
In the case of an individual, section 108(f) provides
that gross income subject to Federal income tax does not
include any amount from the forgiveness (in whole or in part)
of certain student loans, provided that the forgiveness is
contingent on the student's working for a certain period of
time in certain professions for any of a broad class of
employers (e.g., providing health care services to a nonprofit
organization). Student loans eligible for this special rule
must be made to an individual to assist the individual in
attending an education institution that normally maintains a
regular faculty and curriculum and normally has a regularly
enrolled body of students in attendance at the place where its
education activities are regularly carried on. Loan proceeds
may be used not only for tuition and required fees, but also to
cover room and board expenses (in contrast to tax-free
scholarships under section 117, which are limited to tuition
and required fees). In addition, the loan must be made by (1)
the United States (or an instrumentality or agency thereof),
(2) a State (or any political subdivision thereof), (3) certain
tax-exempt public benefit corporations that control a State,
county, or municipal hospital and whose employees have been
deemed to be public employees under State law, or (4) an
educational organization that originally received the funds
from which the loan was made from the United States, a State,
or a tax-exempt public benefit corporation. Thus, loans made
with private, nongovernmental funds are not qualifying student
loans for purposes of the section 108(f) exclusion. As with
section 117, there is no dollar limitation for the section
108(f) exclusion.
Qualified State prepaid tuition programs
Section 529 (enacted as part of the Small Business Job
Protection Act of 1996) provides tax-exempt status to
``qualified State tuition programs,'' meaning certain programs
established and maintained by a State (or agency or
instrumentality thereof) under which persons may (1) purchase
tuition credits or certificates on behalf of a designated
beneficiary that entitle the beneficiary to a waiver or payment
of qualified higher education expenses of the beneficiary, or
(2) make contributions to an account that is established for
the purpose of meeting qualified higher education expenses of
the designated beneficiary of the account. ``Qualified higher
education expenses'' are defined as tuition, fees, books,
supplies, and equipment required for the enrollment or
attendance at a college or university (or certain vocational
schools). Qualified higher education expenses do not include
room and board expenses. Section 529 also provides that no
amount shall be included in the gross income of a contributor
to, or beneficiary of, a qualified State tuition program with
respect to any distribution from, or earnings under, such
program, except that (1) amounts distributed or educational
benefits provided to a beneficiary (e.g., when the beneficiary
attends college) will be included in the beneficiary's gross
income (unless excludable under another Code section) to the
extent such amounts or the value of the educational benefits
exceed contributions made on behalf of the beneficiary, and (2)
amounts distributed to a contributor (e.g., when a parent
receives a refund) will be included in the contributor's gross
income to the extent such amounts exceed contributions made by
that person.15
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\15\ Specifically, section 529(c)(3)(A) provides that any
distribution under a qualified State tuition program shall be
includible in the gross income of the distributee in the same manner as
provided under present-law section 72 to the extent not excluded from
gross income under any other provision of the Code.
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Estate and gift tax rules
In general, a taxpayer may exclude $10,000 of gifts made
by an individual ($20,000 in the case of a married couple that
elects to split their gifts) to any one donee during a calendar
year (sec. 2503(b)). This annual exclusion does not apply to
gifts of future interests, and thus may not be applicable to
contributions made to a State tuition program.
Contributions made to a qualified State tuition program
are treated as incomplete gifts for Federal gift tax purposes
(sec. 529(c)(2)). Thus, any Federal gift tax consequences are
determined at the time that a distribution is made from an
account under the program. The waiver (or payment) of qualified
higher education expenses of a designated beneficiary by (or
to) an educational institution under a qualified State tuition
program is treated as a qualified transfer for purposes of
present-law section 2503(e). Amounts contributed to a qualified
State tuitionprogram (and earnings thereon) are includible in
the contributor's estate for Federal estate tax purposes in the event
that the contributor dies before such amounts are distributed under the
program (sec. 529(c)(4)).
Individual retirement arrangements (``IRAs'')
An individual may make deductible contributions to an
individual retirement arrangement (``IRA'') for each taxable
year up to the lesser of $2,000 or the amount of the
individual's compensation for the year if the individual is not
an active participant in an employer-sponsored qualified
retirement plan (and, if married, the individual's spouse also
is not an active participant). Contributions may be made to an
IRA for a taxable year up to April 15th of the following year.
An individual who makes excess contributions to an IRA, i.e.,
contributions in excess of $2,000, is subject to an excise tax
on such excess contributions unless they are distributed from
the IRA before the due date for filing the individual's tax
return for the year (including extensions). If the individual
(or his or her spouse, if married) is an active participant,
the $2,000 limit is phased out between $40,000 and $50,000 of
adjusted gross income (``AGI'') for married couples and between
$25,000 and $35,000 of AGI for single individuals.
Present law permits individuals to make nondeductible
contributions (up to $2,000 per year) to an IRA to the extent
an individual is not permitted to (or does not) make deductible
contributions. Earnings on such contributions are includible in
gross income when withdrawn.
An individual generally is not subject to income tax on
amounts held in an IRA, including earnings on contributions,
until the amounts are withdrawn from the IRA. Amounts withdrawn
from an IRA are includible in gross income (except to the
extent of nondeductible contributions). In addition, a 10-
percent additional tax generally applies to distributions from
IRAs made before age 59\1/2\, unless the distribution is made
(1) on account of death or disability, (2) in the form of
annuity payments, (3) for medical expenses of the individual
and his or her spouse and dependents that exceed 7.5 percent of
AGI, or (4) for medical insurance of the individual and his or
her spouse and dependents (without regard to the 7.5 percent of
AGI floor) if the individual has received unemployment
compensation for at least 12 weeks, and the withdrawal is made
in the year such unemployment compensation is received or the
following year.
House Bill
In general
Individual taxpayers are allowed a deduction of up to
$10,000 per student per year for qualified higher education
expenses paid by the taxpayer during the taxable year for
education furnished to the taxpayer, the taxpayer's spouse, or
a dependent. The deduction is allowed regardless of whether the
taxpayer otherwise itemizes deductions or claims the standard
deduction.16 A deduction is not allowed under the
House bill with respect to an otherwise eligible student if the
HOPE credit (as described previously) is claimed with respect
to that student for the same taxable year.17
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\16\ The deduction will be claimed after a taxpayer computes
adjusted gross income (AGI). The deduction is not a preference item for
alternative minimum tax (AMT) purposes.
\17\ If a HOPE credit was claimed with respect to a student for an
earlier taxable year (i.e., the student's first or second year of post-
secondary education), the deduction provided for by the House bill may
be claimed with respect to that student for a subsequent taxable year.
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The deduction is allowed only to the extent that the
taxpayer is required to include in gross income for the taxable
year amounts distributed from a ``qualified tuition program''
or ``education investment account.'' In other words, amounts
distributed from a qualified tuition program or education
investment account that are includible in the taxpayer's gross
income (i.e., earnings) and that are used to pay for qualified
higher education expenses during the taxable year will be
deductible under the provision (subject to a $10,000 annual
limit per student). Amounts distributed from qualified tuition
programs or education investment accounts generally will be
includible in the gross income of the distributee in the same
manner as provided under present-law section 72 (to the extent
not excluded under any other section, such as section 117).
Under the House bill, the deduction is limited to $10,000
per student for each taxable year. Aggregate deductions under
the bill with respect to any one student may not exceed $40,000
for all taxable years. A deduction is not permitted with
respect to a student after he or she completes the equivalent
of the first four years of post-secondary education at an
eligible educational institution.
Dependent students
If a parent (or other taxpayer) claims a student as a
dependent for a taxable year, then only the parent (or other
taxpayer)--and not the student--may claim the deduction for
qualified higher education expenses for that taxable year. In
such a case where the parent claims the proposed deduction for
qualified higher education expenses, amounts includible in
gross income by reason of a distribution from a qualified
tuition program or education investment account will be
includible in the parent's (or other taxpayer's) gross income
for that taxable year.18 If a parent (or other
taxpayer) claims a student as a dependent for a taxable year,
then all qualified higher education expenses paid that year by
both the parent (or other taxpayer) and the student are deemed
to be paid by the parent (or other taxpayer). If the student is
not claimed as a dependent by another taxpayer, then only the
student him- or herself may claim the deduction provided for by
the bill (or, as an alternative, the HOPE credit described
above) on the student's own tax return for the taxable
year.19
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\18\ Such an income inclusion is required on the parent's return
only if the parent both claims the student as a dependent and elects
the deduction provided for by the bill. In contrast, if the parent
claims the student as a dependent but elects the HOPE credit, then, if
there is any distribution from a qualified tuition program or education
investment account during that year, the earnings portion of such
distributions will be includible in the student's (or other
distributee's) gross income, as provided for by present-law section
529(c)(3).
\19\ For example, assume an education investment account (or
qualified tuition program account) has a balance of $20,000, of which
$12,000 represents contributions of principal and $8,000 represents
accumulated earnings. If the student has expenses of $10,000 consisting
of $7,000 tuition and related expenses and $3,000 in room and board, a
distribution of $10,000 from such account to pay these expenses will,
under present-law section 72, be deemed to consist of the pro-rata
share of principal and accumulated earnings in the account--in this
case, $6,000 in principal and $4,000 in accumulated earnings. If the
parent claims the student as a dependent and elects the proposed
deduction for qualified higher education expenses, the parent will
include the $4,000 of accumulated earnings in the parent's gross income
and then is allowed to claim an offsetting deduction for the same
$4,000, thus resulting in no tax liability for the $4,000 in earnings.
Under no circumstances will the principal portion of any distribution
from the account be includible in gross income, nor will a deduction be
allowed under the bill for education expenses paid with such principal.
Alternatively, the parent may elect to claim the HOPE credit (assuming
that the AGI phaseout does not apply and the student is claimed as a
dependent and has not yet completed the first two years of post-
secondary education), and the $4,000 in accumulated earnings will be
includible in the distributee's (i.e., the student's) gross income and
an offsetting deduction will not be available. Additionally, the
qualified expenses for purposes of the HOPE credit will not include
room and board expenses, so only $7,000 in expenses will qualify for
the HOPE credit. The 50-percent HOPE credit rate will then be applied
to this amount, which indicates a credit amount of $3,500, but the
credit that could be claimed will be limited to the statutory maximum
of $1,500 per student. As a final alternative, if the parent does not
claim the student as a dependent, then the student may elect to claim
either the HOPE credit or the deduction as described above.
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Qualified higher education expenses
Under the House bill, the term ``qualified higher
education expenses'' means tuition, fees, books, supplies, and
equipment required for the enrollment or attendance of a
student at an eligible education institution, as well as room
and board expenses (meaning the minimum room and board
allowance applicable to the student as determined by the
institution in calculating costs of attendance for Federal
financial aid programs under sec. 472 of the Higher Education
Act of 1965). Qualified higher education expenses do not
include expenses for any graduate level course of a kind
normally taken by an individual pursuing a program leading to a
law, business, medical, or other advanced academic or
professional degree.
Qualified higher education expenses generally include
only out-of-pocket expenses. Qualified higher education
expenses do not include expenses covered by educational
assistance that is not required to be included in the gross
income of either the student or the taxpayer claiming the
credit. Thus, total qualified higher education expenses are
reduced by any scholarship or fellowship grants excludable from
gross income under present-law section 117 and any other tax-
free educational benefits received by the student during the
taxable year. In addition, no deduction is allowed under the
bill for expenses paid with amounts that are excludible under
section 135. No reduction of qualified tuition expenses is
required for a gift, bequest, devise, or inheritance within the
meaning of section 102(a). If a student's education expenses
for a taxable year are deducted under section 162 or any other
section of the Code, then no deduction is available for such
expenses under the bill.
Eligible students
To be eligible for the deduction provided for by the
bill, a student must be at least a half-time student in a
degree or certificate program at an eligible educational
institution. For this purpose, a student is at least a half-
time student if, during at least one academic period which
begins during the taxable year, he or she is carrying at least
one-half the normal full-time work load for the course of study
the student is pursuing. A student will no longer be an
eligible student once he or she has completed the equivalent of
the first four years of post-secondary education at an eligible
educational institution. An eligible student may not have been
convicted of a Federal or State felony consisting of the
possession or distribution of a controlled substance.
Eligible educational institution
Eligible educational institutions are defined by
reference to section 481 of the Higher Education Act of 1965.
Such institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, or another recognized post-
secondary credential. Certain proprietary institutions and
post-secondary vocational institutions also are eligible
educational institutions. The institution must be eligible to
participate in Department of Education student aid programs.
Qualified tuition programs and education investment accounts
Under the House bill, a ``qualified tuition program''
means any qualified State tuition program, generally as defined
under present-law section 529, as well as any program
established and maintained by one or more eligible educational
institutions (which may be private institutions that are not
State-owned) that satisfy the requirements under section 529
(other than present-law, State ownership rule). An ``education
investment account'' means a trust which is created or
organized in the United States exclusively for the purpose of
paying the qualified higher education expenses of the account
holder and which satisfies certain other requirements.
Contributions to qualified tuition programs or education
investment accounts may be made only in cash.20 Such
contributions may not be made after the designated beneficiary
or account holder reaches age 18. Any balance remaining in a
qualified tuition program or education investment account must
be distributed within 30 days after the earlier of the date
that the beneficiary or account holder becomes 30 years old (or
dies) or the date that the beneficiary or account holder
completes the equivalent of the first four years of post-
secondary education at one or more eligible institutions.
Transfers or rollovers of credits or account balances from one
account benefiting one beneficiary to another account
benefiting another beneficiary will not be considered a
distribution from a qualified tuition program or education
investment account (nor will a change in the designated
beneficiary or account holder) if the new beneficiary is a
member of the family of the old beneficiary.21 In
the case of an education investment account or qualified
tuition program maintained by one or more private educational
institutions, contributions to an account established on behalf
of a particular beneficiary (or to a program on behalf of a
named beneficiary) may not exceed $5,000 per year, with an
aggregate limit of $50,000 for contributions on behalf of that
beneficiary for all years. The $50,000 aggregate contribution
limit per beneficiary is applied by taking into account all
amounts contributed to all education investment accounts for
the beneficiary for the current taxable year and all prior
taxable years, as well as all amounts contributed to all
qualified tuition programs on behalf of such beneficiary for
the current taxable year and all prior taxable
years.22
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\20\ The House bill allows taxpayers to redeem U.S. Savings Bonds
and be eligible for the exclusion under section 135 (as if the proceeds
were used to pay qualified higher education expenses) if the proceeds
from the redemption are contributed to a qualified tuition program or
education investment account on behalf of the taxpayer, the taxpayer's
spouse, or a dependent. In such a case, the beneficiary's or account
holder's basis in the bond proceeds contributed on his or her behalf to
the qualified tuition program or education investment will be the
contributor's basis in the bonds (i.e., the original purchase price
paid by the contributor for such bonds).
The House bill also provides that funds from an education
investment account are deemed to be distributed to pay qualified higher
education expenses if the funds are used to purchase tuition credits
from, or to make contributions to, a qualified tuition program for the
benefit of the account holder.
\21\ For this purpose, a ``member of the family'' means persons
described in paragraphs (1) through (8) of section 152(a), and any
spouse of such persons.
\22\ To the extent contributions exceed the $50,000 aggregate
limit, an excise tax penalty may be imposed on the contributor under
present-law section 4973, unless the excess contributions (and any
earnings thereon) are returned to the contributor before the due date
for the return for the taxable year during which the excess
contribution is made.
State-sponsored qualified tuition programs will continue to be
governed by the rule contained in present-law section 529(b)(7) that
such programs provide adequate safeguards to prevent contributions on
behalf of a designated beneficiary in excess of those necessary to
provide for the qualified higher education expenses of the beneficiary.
State-sponsored qualified tuition programs will not be subject to a
specific dollar cap under section 529 on annual (or aggregate)
contributions that can be made under the program on behalf of a named
beneficiary.
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Qualified tuition programs and education investment
accounts (as separate legal entities) will be exempt from
Federal income tax, other than taxes imposed under the present-
law unrelated business income tax (UBIT) rules.23
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\23\ An interest in a qualified tuition program is not treated as
debt for purposes of the debt-financed property UBIT rules of section
514.
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Under the House bill, an additional tax of 10 percent
will be imposed on distributions from qualified tuition
programs or education investment account to the extent the
distribution exceeds qualified higher education expenses paid
by the taxpayer (and is not made on account of the death,
disability, or scholarship received by the designated
beneficiary or account holder).
Estate and gift tax treatment
For Federal estate and gift tax purposes, any
contribution to a qualified tuition program or education
investment account will be treated as a completed gift of a
present interest from the contributor to the beneficiary at the
time of the contribution. Thus, annual contributions--which
cannot exceed $5,000 per year in the case of an education
investment account or qualified tuition program maintained by
one or more private education institutions--will be eligible
for the present-law gift tax exclusion provided by Code section
2503(b) and also will be excludable for purposes of the
generation-skipping transfer tax (provided that the
contribution, when combined with any other contributions made
by the donor to that same beneficiary, does not exceed the
annual $10,000 gift-tax exclusion limit). Similar gift tax and
generation-skipping tax treatment will apply to contributions
of up to $10,000 per donor per beneficiary made to a State-
sponsored qualified tuition program. Contributions to a
qualified tuition program (either a State-sponsored program or
one maintained by a private education institution) or to an
education investment account will not, however, be eligible for
the educational expense exclusion provided by Code section
2503(e). In no event will a distribution from a qualified
tuition program or education investment account be treated as a
taxable gift.
Transfers or rollovers of credits or account balances
from an account benefiting one beneficiary to an account
benefiting another beneficiary (or a change in the designated
beneficiary) will not be treated as a taxable gift to the
extent that the new beneficiary is: (1) a member of the family
of the old beneficiary (as defined above), and (2) assigned to
the same generation as the old beneficiary (within the meaning
of Code section 2651). In all other cases, a transfer from one
beneficiary to another beneficiary (or a change in the
designated beneficiary) will be treated as a taxable gift from
the old beneficiary to the new beneficiary to the extent it
exceeds the $10,000 present-law gift tax exclusion. Thus, a
transfer of an account from a brother to his sister will not be
treated as a taxable gift, whereas a transfer from a father to
his son will be treated as a taxable gift (to the extent it
exceeds the $10,000 present-law gift tax exclusion).
For estate tax purposes, the value of any interest in a
qualified tuition program or education investment account will
be includible in the estate of the designated beneficiary. In
no event will such interests be includible in the estate of the
contributor.
Effective date
The deduction for qualified higher education expenses,
and the expansion of the definition of qualified higher
education expenses under section 529 to cover room and board
expenses, are effective for expenses paid after December 31,
1997, for education furnished in academic periods beginning
after such date. The provisions governing the tax-exempt status
of qualified tuition plans and education investment accounts
generally are effective after December 31, 1997. The gift tax
provisions are effective for contributions (or transfers) made
after the date of enactment, and the estate tax provisions are
effective for decedents dying after June 8, 1997.
Senate Amendment
In general
Under the Senate amendment, amounts distributed from
qualified tuition programs and certain education investment
accounts (referred to as ``education IRAs'') are excludable
from gross income to the extent that the amounts distributed do
not exceed qualified higher education expenses of an eligible
student incurred during the year the distribution is
made.24 In addition, distributions from education
IRAs (but not qualified tuition programs) in taxable years
beginning in 2001 or later will be excludable from gross income
to the extent that the amounts distributed do not exceed
certain qualified elementary and secondary education expenses.
An exclusion is not allowed under the bill with respect to an
otherwise eligible student if the HOPE credit (as described
previously) is claimed with respect to that student for the
taxable year the distribution is made.25
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\24\ The exclusion will not be a preference item for alternative
minimum tax (AMT) purposes.
\25\ If a HOPE credit was claimed with respect to a student for an
earlier taxable year (i.e., the student's first or second year of post-
secondary education), the exclusion provided for by the bill may be
claimed with respect to that student for a subsequent taxable year.
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Distributions from a qualified tuition program or
education IRA generally will be deemed to consist of
distributions of principal (which, under all circumstances, are
excludable from gross income) and earnings (which may be
excludable from gross income under the Senate amendment) by
applying the ratio that the aggregate amount of contributions
to the program or account for the beneficiary bears to the
total balance (or value) of the program or account for the
beneficiary at the time the distribution is made.26
If the qualified higher education expenses of the student for
the year are at least equal to the total amount of the
distribution (i.e., principal and earnings combined) from a
qualified tuition program or education IRA, then the earnings
in their entirety will be excludable from gross income. If, on
the other hand, the qualified higher education expenses of the
student for the year are less than the total amount of the
distribution (i.e., principal and earnings combined) from a
qualified tuition program or education IRA, then the qualified
higher education expenses will be deemed to be paid from a pro-
rata share of both the principal and earnings components of the
distribution. Thus, in such a case, only a portion of the
earnings will be excludable under the bill (i.e., a portion of
the earnings based on the ratio that the qualified higher
education expenses bear to the total amount of the
distribution) and the remaining portion of the earnings will be
includible in the gross income of the distributee.27
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\26\ Specifically, the Senate amendment provides as a general rule
that distributions from a qualified tuition program or education IRA
are includible in gross income to the extent allocable to income on the
program or account and are not includible in gross income to the extent
allocable to the investment (i.e., contributions) in the program or
account. However, the Senate amendment further provides that, if the
HOPE credit is not claimed with respect to the student for the taxable
year, then a distribution from a qualified tuition program or education
IRA will not be includible in gross income to the extent that the
distribution does not exceed the qualified higher expenses of the
student for the year. If a distribution consists of providing in-kind
education benefits to the student which, if paid for by the student,
would constitute payment of qualified higher education expenses, then
no portion of such distribution will be includible in gross income.
At the time that a final distribution is made from a qualified
tuition program or education IRA, the distribution will be deemed to
include the full amount of any basis remaining with respect to the
program or account.
\27\ For example, if a $1,000 distribution from a qualified tuition
program or education IRA consists of $600 of principal (i.e.,
contributions) and $400 of earnings, and if the student incurs $750 of
qualified higher education expenses during the year, then $300 of the
earnings will be excludable from gross income under the bill (i.e., an
exclusion will be provided for the pro-rata portion of the earnings,
based on the ratio that the $750 of qualified expenses bears to the
$1,000 total distribution) and the remaining $100 of earnings will be
includible in the distributee's gross income.
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Eligible students
To be an eligible student, an individual must be at least
a half-time student in a degree or certificate undergraduate or
graduate program at an eligible educational institution. For
this purpose, a student is at least a half-time student if he
or she is carrying at least one-half the normal full-time work
load for the course of study the student is pursuing. An
eligible student may not have been convicted of a Federal or
State felony consisting of the possession or distribution of a
controlled substance.
Eligible educational institution
Eligible educational institutions are defined by
reference to section 481 of the Higher Education Act of 1965.
Such institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, a graduate-level or professional
degree, or another recognized post-secondary credential.
Certain proprietary institutions and post-secondary vocational
institutions also are eligible institutions. The institution
must be eligible to participate in Department of Education
student aid programs.
Qualified education expenses
``Qualified higher education expenses'' include tuition,
fees, books, supplies, and equipment required for the
enrollment or attendance of a student at an eligible education
institution, as well as room and board expenses (meaning the
minimum room and board allowance applicable to the student as
determined by the institution in calculating costs of
attendance for Federal financial aid programs under sec. 472 of
the Higher Education Act of 1965) for any period during which
the student is at least a half-time student. Qualified higher
education expenses include expenses with respect to
undergraduate or graduate-level courses.
In addition, in taxable years beginning after December
31, 2000, the exclusion is available to the extent that
distributions from an education IRA (but not a qualified
tuition program) do not exceed ``qualified elementary and
secondary education expenses,'' meaning tuition, fees,
tutoring, special needs services, books, supplies, equipment,
transportation, and supplementary expenses (including
homeschooling expenses if the requirements of State or local
law are satisfied with respect to such homeschooling) required
for the enrollment or attendance of a dependent of the taxpayer
at a public, private, or sectarian elementary or secondary
school (through grade 12).
Qualified higher education expenses (and qualified
elementary and secondary education expenses) generally include
only out-of-pocket expenses. Such qualified education expenses
do not include expenses covered by educational assistance that
is not required to be included in the gross income of either
the student or the taxpayer claiming the credit. Thus, total
qualified education expenses are reduced by scholarship or
fellowship grants excludable from gross income under present-
law section 117, as well as any other tax-free educational
benefits, such as employer-provided educational assistance that
is excludable from the employee's gross income under section
127. In addition, qualified education expenses do not include
expenses paid with amounts that are excludible under section
135. No reduction of qualified education expenses is required
for a gift, bequest, devise, or inheritance within the meaning
of section 102(a). If education expenses for a taxable year are
deducted under section 162 or any other section of the Code,
then such expenses are not qualified education expenses under
the Senate amendment.
Qualified tuition programs and education IRAs
Under the Senate amendment, a ``qualified tuition
program'' means any qualified State-sponsored tuition program,
defined under section 529 (as modified by the bill), as well as
any program established and maintained by one or more eligible
educational institutions (which could be private institutions)
that satisfy the requirements under section 529 (other than
present-law State ownership rule). An ``education IRA'' means a
trust (or custodial account) which is created or organized in
the United States exclusively for the purpose of paying the
qualified higher education expenses (and qualified elementary
and secondary education expenses) of the account holder and
which satisfies certain other requirements.
Contributions to qualified tuition programs or education
IRAs may be made only in cash. 28 Such contributions
may not be made after the designated beneficiary or account
holder reaches age 18. Annual contributions to a qualified
tuition program not maintained by a State (i.e., a qualified
tuition program operated by one or more private schools) or to
an education IRA are limited to $2,000 per beneficiary or
account holder, plus the amount of any child credit (as
provided for by the Senate amendment) that is allowed for the
taxable year with respect to the beneficiary or account
holder.29 Thus, in the case of any child with
respect to whom the maximum $500 child credit is allowed for
the taxable year, the contribution limit with respect to such
child for the year will be $2,500.30 Trustees of
qualified tuition programs not maintained by a State and
trustees of education IRAs are prohibited from accepting
contributions to any account on behalf of a beneficiary in
excess of $2,500 for any year (except in cases involving
certain tax-free rollovers, as described below).31
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\28\ The Senate amendment allows taxpayers to redeem U.S. Savings
Bonds and be eligible for the exclusion under section 135 (as if the
proceeds were used to pay qualified higher education expenses) if the
proceeds from the redemption are contributed to a qualified tuition
program or education IRA on behalf of the taxpayer, the taxpayer's
spouse, or a dependent. In such a case, the beneficiary's or account
holder's basis in the bond proceeds contributed on his or her behalf to
the qualified tuition program or education IRA will be the
contributor's basis in the bonds (i.e., the original purchase price
paid by the contributor for such bonds).
The Senate amendment also provides that funds from an education IRA
are deemed to be distributed to pay qualified higher education expenses
if the funds are used to make contributions to (or purchase tuition
credits from) a qualified tuition program for the benefit of the
account holder.
\29\ State-sponsored qualified tuition programs will continue to be
governed by the rule contained in present-law section 529(b)(7) that
such programs provide adequate safeguards to prevent contributions on
behalf of a designated beneficiary in excess of those necessary to
provide for the qualified higher education expenses of the beneficiary.
State-sponsored qualified tuition programs will not be subject to a
specific dollar limit on annual contributions that can be made under
the program on behalf of a designated beneficiary.
\30\ The maximum contribution limit for the year is increased even
if the child is younger than age 13--that is, even in cases where the
parent is not required (under the provision described previously) but
may elect to deposit an amount equal to the child credit into a
qualified tuition program or education IRA on behalf of the child.
\31\ The annual $2,000 to $2,500 contribution limit is applied by
taking into account all contributions made to any qualified tuition
program not maintained by a State and any education IRA on behalf of a
designated individual (but not any contributions made to State-
sponsored qualified tuition programs). To the extent contributions
exceed the annual contribution limit, an excise tax penalty may be
imposed on the contributor under present-law section 4973, unless the
excess contributions (and any earnings thereon) are returned to the
contributor before the due date for the return for the taxable year
during which the excess contribution is made.
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If any balance remaining in an education IRA is not
distributed by the time that the account holder becomes 30
years old, then the account will be deemed to be an IRA Plus
account (as provided for by the bill and described below)
established on behalf of the same account holder.32
The Senate amendment allows (but does not require) tax-free
transfers or rollovers of account balances from a qualified
tuition program to an IRA Plus account when the beneficiary
becomes 30 years old, provided that the funds from the
qualified tuition program account are deposited in the IRA Plus
account within 60 days after being distributed from the
qualified tuition program.33 In addition, the Senate
amendment allows tax-free transfers or rollovers of credits or
account balances from one qualified tuition program or
education IRA account benefiting one beneficiary to another
program or account benefiting another beneficiary (as well as
redesignations of the named beneficiary), provided that the new
beneficiary is a member of the family of the old
beneficiary.34
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\32\ In such cases, the 5-year holding period applicable to IRA
Plus accounts begins with the taxable year in which the education IRA
is deemed to be an IRA Plus account.
\33\ In the event of such a rollover, the 5-year holding period
applicable to IRA Plus accounts begins with the taxable year in which
the rollover occurs.
\34\ For this purpose, a ``member of the family'' means persons
described in paragraphs (1) through (8) of section 152(a), and any
spouse of such persons.
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Qualified tuition programs and education IRAs (as
separate legal entities) will be exempt from Federal income
tax, other than taxes imposed under the present-law unrelated
business income tax (UBIT) rules.35
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\35\ An interest in a qualified tuition program is not treated as
debt for purposes of the debt-financed property UBIT rules of section
514.
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Under the Senate amendment, an additional 10-percent
penalty tax will be imposed on any distribution from a
qualified tuition program not maintained by a State or from an
education IRA to the extent that the distribution exceeds
qualified higher education expenses (or, in the case of an
education IRA, qualified elementary and secondary education
expenses) incurred by the taxpayer (and is not made on account
of the death, disability, or scholarship received by the
designated beneficiary or account holder).36
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\36\ Distributions from State-sponsored qualified tuition programs
will not be subject to this 10-percent additional penalty tax, but will
continue to be governed by the present-law section 529(b)(3) rule that
the State-sponsored programs themselves are required to impose a ``more
than de minimis penalty'' on any refund of earnings not used for
qualified higher education expenses (other than in cases where the
refund is made on account of death or disability of, or receipt of a
scholarship by, the beneficiary).
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Estate and gift tax treatment
Contributions to qualified tuition programs and education
IRAs will not be considered taxable gifts for Federal gift tax
purposes, and in no event will distributions from a qualified
tuition programs or education IRAs be treated as taxable
gifts.37 For estate tax purposes, the value of any
interest in a qualified tuition program or education IRA will
be includible in the estate of the designated beneficiary. In
no event will such an interest be includible in the estate of
the contributor.
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\37\ Contributions to only one State-sponsored qualified tuition
program per beneficiary will be excluded from the gift tax by reason of
the bill (although a contributor may also make contributions excluded
from the gift tax on behalf of other beneficiaries to the same State-
sponsored program or any other State-sponsored program).
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Effective date
The provision applies to distributions made, and
qualified higher education expenses paid, after December 31,
1997, for education furnished in academic periods beginning
after such date. In addition, in the case of education IRAs,
the provision applies to qualified elementary and secondary
expenses paid in taxable years beginning after December 31,
2000. The provisions governing contributions to, and the tax-
exempt status of, qualified tuition plans and education IRAs
generally apply after December 31, 1997. The gift tax
provisions are effective for contributions (or transfers) made
after the date of enactment, and the estate tax provisions are
effective for decedents dying after June 8, 1997.
Conference Agreement
Qualified State tuition programs
The conference agreement makes the following
modifications to present-law section 529, which governs the tax
treatment of qualified State tuition programs.
Room and board expenses.--The conference agreement
expands the definition of ``qualified higher education
expenses'' under section 529(e)(3) to include room and board
expenses (meaning the minimum room and board allowance
applicable to the student as determined by the institution in
calculating costs of attendance for Federal financial aid
programs under sec. 472 of the Higher Education Act of 1965)
for any period during which the student is at least a half-time
student.
Eligible educational institution.--The conference
agreement expands the definition of ``eligible educational
institution'' for purposes of section 529 by defining such term
by reference to section 481 of the Higher Education Act of
1965. Such institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, a graduate-level or professional
degree, or another recognized post-secondary credential.
Certain proprietary institutions and post-secondary vocational
institutions also are eligible institutions. The institution
must be eligible to participate in Department of Education
student aid programs.
Definition of ``member of family''.--The conference
agreement expands the definition of the term ``member of the
family'' for purposes of allowing tax-free transfers or
rollovers of credits or account balances in qualified State
tuition programs (and redesignations of named beneficiaries),
so that the term means persons described in paragraphs (1)
through (8) of section 152(a)--e.g., sons, daughters, brothers,
sisters, nephews and nieces, certain in-laws, etc.--and any
spouse of such persons.38
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\38\ The conference agreement also provides a special rule that, in
the case of any contract issued prior to August 20, 1996 (i.e., the
date of enactment of section 529), section 529(c)(3)(C) will be applied
without regard to the requirement that a distribution be transferred to
a member of the family or the requirement that a change in
beneficiaries may be made only to a member of the family.
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Prohibition against investment direction.--The conference
clarifies the present-law rule contained in section 529(b)(5)
that qualified State tuition programs may not allow
contributors or designated beneficiaries to direct the
investment of contributions to the program (or earnings
thereon) by specifically providing that contributors and
beneficiaries may not ``directly or indirectly'' direct the
investment of contributions to the program (or earnings
thereon).
Interaction with HOPE credit and Lifetime Learning
credit.--Under the conference agreement (as under present law),
no amount will be includible in the gross income of a
contributor to, or beneficiary of, a qualified State tuition
program with respect to any contribution to or earnings on such
a program until a distribution is made from the program, at
which time the earnings portion of the distribution (whether
made in cash or in-kind) will be includible in the gross income
of the distributee. However, to the extent that a distribution
from a qualified State tuition program is used to pay for
qualified tuition and fees, the distributee (or another
taxpayer claiming the distributee as a dependent) will be able
to claim the HOPE credit or Lifetime Learning credit provided
for by the conference agreement with respect to such tuition
and fees (assuming that the other requirements for claiming the
HOPE credit or Lifetime Learning credit are satisfied and the
modified AGI phaseout for those credits does not
apply).39
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\39\ In cases where in-kind benefits are provided to a beneficiary
under a qualified State prepaid tuition program, present-law section
529(c)(3)(B) provides that the provision of such benefits is treated as
a distribution to the beneficiary. Thus, to the extent such in-kind
benefits, if paid for by the beneficiary, would constitute payment of
qualified tuition and fees for purposes of the HOPE credit or Lifetime
Learning credit, the beneficiary (or another taxpayer claiming the
beneficiary as a dependent) may be able to claim the HOPE credit or
Lifetime Learning credit with respect to payments that are deemed to be
made by the beneficiary with respect to the in-kind benefit.
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Effective date.--The modifications to section 529
generally are effective after December 31, 1997. The expansion
of the term ``qualified higher education expenses'' to cover
certain room and board expenses is effective as if included in
the Small Business Job Protection Act of 1996 (enacted on
August 20, 1996).
Education IRAs
The conference agreement generally follows the Senate
amendment with respect to the treatment of education IRAs, with
the following modifications.
Contribution limit.--Under the conference agreement,
annual contributions to education IRAs are limited to $500 per
beneficiary. This $500 annual contribution limit for education
IRAs is phased out ratably for contributors with modified AGI
between $95,000 and $110,000 ($150,000 and $160,000 for joint
returns). Individuals with modified AGI above the phase-out
range are not allowed to make contributions to an education IRA
established on behalf of any other individual.40
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\40\ The conference agreement clarifies that no amount is
includible in the gross income of a beneficiary of an education IRA
with respect to any contribution to or earnings on such account.
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Qualified expenses.--Education IRAs must be created
exclusively for the purpose of paying qualified higher
education expenses, meaning post-secondary tuition, fees,
books, supplies, equipment, and certain room and board
expenses, and not including elementary or secondary school
expenses.
Expansion of exclusion for part-time students.--The
conference agreement provides that distributions from an
education IRA are excludable from gross income to the extent
that the distribution does not exceed qualified higher
education expenses incurred by the beneficiary during the year
the distribution is made, regardless of whether the beneficiary
is enrolled at aneligible educational institution on a full-
time, half-time, or less than half-time basis. However, room and board
expenses (meaning the minimum room and board allowance applicable to
the student as determined by the institution in calculating costs of
attendance for Federal financial aid programs under sec. 472 of the
Higher Education Act of 1965) are qualified higher education expenses
only if the student incurring such expenses is enrolled at an eligible
educational institution on at least a half-time basis.
Termination of education IRAs.--Under the conference
agreement, any balance remaining in an education IRA at the
time a beneficiary becomes 30 years old must be distributed,
and the earnings portion of such a distribution will be
includible in gross income of the beneficiary and subject to an
additional 10-percent penalty tax because the distribution was
not for educational purposes. However, as under the Senate
amendment, prior to the beneficiary reaching age 30, the
conference agreement allows tax-free (and penalty-free)
transfers and rollovers of account balances from one education
IRA benefiting one beneficiary to another education IRA
benefiting a different beneficiary (as well as redesignations
of the named beneficiary), provided that the new beneficiary is
a member of the family of the old beneficiary.41
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\41\ For this purpose, a ``member of the family'' means--as under
the conference agreement modifications to section 529--persons
described in paragraphs (1) through (8) of section 152(a), and any
spouse of such persons.
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Interaction with qualified State tuition programs.--The
conference agreement provides that no contribution may be made
by any person to an education IRA established on behalf of a
beneficiary during any taxable year in which any contributions
are made by anyone to a qualified State tuition program
(defined under sec. 529) on behalf of the same beneficiary.
Interaction with HOPE credit and Lifetime Learning
credit.--The conference agreement provides that, in any taxable
year in which an exclusion from gross income is claimed with
respect to a distribution from an education IRA on behalf of a
beneficiary, neither a HOPE credit nor a Lifetime Learning
credit may be claimed with respect to educational expenses
incurred during that year on behalf of the same beneficiary.
The HOPE credit or Lifetime Learning credit will be available
in other taxable years with respect to that beneficiary
(provided that no exclusion is claimed in such other taxable
years for distributions from an education IRA on behalf of the
beneficiary and provided that the requirements of the HOPE
credit or Lifetime Learning credit are satisfied in such other
taxable years).
Effective date.--The provisions governing education IRAs
apply to taxable years beginning after December 31, 1997.
Estate and gift tax treatment
The conference agreement follows the House bill with
respect to the estate and gift tax treatment of contributions
to qualified State tuition programs and education IRAs, except
that a special rule is provided in the case of contributions
that exceed the annual gift tax exclusion limit (presently
$10,000 in the case of an individual or $20,000 in the case of
a married couple that splits their gifts, but this amount is
scheduled to increase under other provisions of the conference
agreement). For such contributions, the contributor may elect
to have the contribution treated as if made ratably over a
five-year period.
Thus, for Federal estate and gift tax purposes, any
contribution to a qualified tuition program or education IRA
will be treated as a completed gift of a present interest from
the contributor to the beneficiary at the time of the
contribution. Annual contributions are eligible for the
present-law gift tax exclusion provided by Code section 2503(b)
and also are excludable for purposes of the generation-skipping
transfer tax (provided that the contribution, when combined
with any other contributions made by the donor to that same
beneficiary, does not exceed the annual gift-tax exclusion
limit of $10,000, or $20,000 in the case of a married couple).
If a contribution in excess of $10,000 ($20,000 in the
case of a married couple) is made in one year--which, under the
conference agreement, can occur only in the case of a qualified
State tuition program and not an education IRA (which cannot
receive contributions in excess of $500 per year)--the
contributor may elect to have the contribution treated as if
made ratably over five years beginning in the year the
contribution is made. For example, a $30,000 contribution to a
qualified State tuition program would be treated as five annual
contributions of $6,000, and the donor could therefore make up
to $4,000 in other transfers to the beneficiary each year
without payment of gift tax. Under this rule, a donor may
contribute up to $50,000 every five years ($100,000 in the case
of a married couple) with no gift tax consequences, assuming no
other gifts are made from the donor to the beneficiary in the
five-year period. A gift tax return must be filed with respect
to any contribution in excess of the annual gift-tax exclusion
limit, and the election for five-year averaging must be made on
the contributor's gift tax return.
If a donor making an over-$10,000 contribution dies
during the five-year averaging period, the portion of the
contribution that has not been allocated to the years prior to
death is includible in the donor's estate. For example, if a
donor makes a $40,000 contribution, elects to treat the
transfer as being made over a five-year period, and dies the
following year, $8,000 would be allocated to the year of
contribution, another $8,000 would be allocated to the year of
death, and the remaining $24,000 would be includible in the
estate.
If a beneficiary's interest is rolled over to another
beneficiary, there are no transfer tax consequences if the two
beneficiaries are in the same generation. If a beneficiary's
interest is rolled over to a beneficiary in a lower generation
(e.g., parent to child or uncle to niece), the five-year
averaging rule described above may be applied to exempt up to
$50,000 of the transfer from gift tax.
The Federal estate and gift tax treatment of educational
accounts has no effect on the actual rights and obligations of
the parties pursuant to the terms of the contracts under State
law.
Effective date.--The gift tax provisions are effective
for contributions (or transfers) made after the date of
enactment, and the estate tax provisions are effective for
decedents dying after June 8, 1997.
3. Phase out qualified tuition reduction exclusion (sec. 202(c) of the
House bill)
Present Law
Under present law, a ``qualified tuition reduction'' is
excluded from gross income (sec. 117(d)). A ``qualified tuition
reduction'' means any reduction in tuition provided to an
employee of an educational organization for the education of
the employee,42 the employee's spouse, and dependent
children at that organization or another such organization. For
this purpose, qualifying educational organizations are those
that normally maintain a regular faculty and curriculum and
normally have a regularly enrolled body of pupils or students
in attendance at the place where the educational activities are
regularly carried out. In general, the qualified tuition
reduction is limited to education below the graduate level;
however, this limitation does not apply to graduate students
engaged in teaching or research activities. The exclusion does
not apply to any amount that represents payment for teaching,
research, or other services rendered by the student in exchange
for receiving the tuition reduction.
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\42\ Eligible beneficiaries also include retired and disabled
employees, surviving spouses of retired or disabled employees, and
children of deceased employees if the children are under the age of 25.
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House Bill
The House bill phases out the special rule contained in
section 117(d) that excludes qualified tuition reductions from
gross income. For 1998, 80 percent of a qualified tuition
reduction is excludable from gross income. For 1999, the
excludable percentage is 60 percent; for 2000, the excludable
percentage is 40 percent; and for 2001, the excludable
percentage is 20 percent. No exclusion for a qualified tuition
reduction is permitted after 2001.
Effective date.--The provision is effective for qualified
tuition reductions with respect to courses of instruction
beginning after December 31, 1997 (subject to the phaseout
described above).
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
4. Deduction for student loan interest (sec. 202 of the Senate
amendment)
Present Law
The Tax Reform Act of 1986 repealed the deduction for
personal interest. Student loan interest generally is treated
as personal interest and thus is not allowable as an itemized
deduction from income.
Taxpayers generally may not deduct education and training
expenses. However, a deduction for education expenses generally
is allowed under section 162 if the education or training (1)
maintains or improves a skill required in a trade or business
currently engaged in by the taxpayer, or (2) meets the express
requirements of the taxpayer's employer, or requirements of
applicable law or regulations, imposed as a condition of
continued employment (Treas. Reg. sec. 1.162-5). Education
expenses are not deductible if they relate to certain minimum
educational requirements or to education or training that
enables a taxpayer to begin working in a new trade or business.
In the case of an employee, education expenses (if not
reimbursed by the employer) may be claimed as an itemized
deduction only if such expenses relate to the employee's
current job and only to the extent that the expenses, along
with other miscellaneous deductions, exceed 2 percent of the
taxpayer's adjusted gross income (AGI).
House Bill
No provision.
Senate Amendment
Under the Senate amendment, certain individuals who have
paid interest on qualified education loans may claim an above-
the-line deduction for such interest expenses, up to a maximum
deduction of $2,500 per year. The deduction is allowed only
with respect to interest paid on a qualified education loan
during the first 60 months in which interest payments are
required. Months during which the qualified education loan is
in deferral or forbearance do not count against the 60-month
period. No deduction is allowed to an individual if that
individual is claimed as a dependent on another taxpayer's
return for the taxable year. Beginning in 1999, the maximum
deduction of $2,500 is indexed for inflation, rounded down to
the closest multiple of $50.
A qualified education loan generally is defined as any
indebtedness incurred to pay for the qualified higher education
expenses of the taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer as of the time the indebtedness was
incurred in attending (1) post-secondary educational
institutions and certain vocational schools defined by
reference to section 481 of the Higher Education Act of 1965,
or (2) institutions conducting internship or residency programs
leading to a degree or certificate from an institution of
higher education, a hospital, or a health care facility
conducting postgraduate training. Qualified higher education
expenses are defined as the student's cost of attendance as
defined in section 472 of the Higher Education Act of
1965(generally, tuition, fees, room and board, and related expenses),
reduced by (1) any amount excluded from gross income under section 135
(i.e., United States savings bonds used to pay higher education tuition
and fees), (2) any amount distributed from a qualified tuition program
or education investment account and excluded from gross income (under
the provision described above), and (3) the amount of any scholarship
or fellowship grants excludable from gross income under present-law
section 117, as well as any other tax-free educational benefits, such
as employer-provided educational assistance that is excludable from the
employee's gross income under section 127. Such expenses must be paid
or incurred within a reasonable period before or after the indebtedness
is incurred, and must be attributable to a period when the student is
at least a half-time student.
The deduction is phased out ratably for taxpayers with
modified adjusted gross income (AGI) between $40,000 and
$50,000 ($80,000 and $100,000 for joint returns). Modified AGI
includes amounts otherwise excluded with respect to income
earned abroad (or income from Puerto Rico or U.S. possessions),
and is calculated after application of section 86 (income
inclusion of certain Social Security benefits), section 219
(deductible IRA contributions), and section 469 (limitation on
passive activity losses and credits).43 Beginning in
2001, the income phase-out ranges are indexed for inflation,
rounded down to the closest multiple of $5,000.
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\43\ For purposes of sections 86, 135, 219, and 469, adjusted gross
income is determined without regard to the deduction for student loan
interest.
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Any person in a trade or business or any governmental
agency that receives $600 or more in qualified education loan
interest from an individual during a calendar year must provide
an information report on such interest to the IRS and to the
payor.
Effective date.--The provision is effective for payments
of interest due after December 31, 1996, on any qualified
education loan. Thus, in the case of already existing qualified
education loans, interest payments qualify for the deduction to
the extent that the 60-month period has not expired. For
purposes of counting the 60 months, any qualified education
loan and all refinancing (that is treated as a qualified
education loan) of such loan are treated as a single loan.
Conference Agreement
The conference agreement follows the Senate amendment,
except that the maximum deduction is phased in over 4 years,
with a $1,000 maximum deduction in 1998, $1,500 in 1999, $2,000
in 2000, and $2,500 in 2001. The maximum deduction amount is
not indexed for inflation. In addition, the deduction is phased
out ratably for individual taxpayers with modified AGI of
$40,000-$55,000 ($60,000-$75,000 for joint returns); such
income ranges will be indexed for inflation occurring after the
year 2002, rounded down to the closest multiple of $5,000.
Thus, the first taxable year for which the inflation adjustment
could be made will be 2003. For purposes of the deduction,
modified AGI includes amounts excludable from gross income
under section 137 (qualified adoption expenses).44
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\44\ For purposes of section 137, adjusted gross income is
determined without regard to the deduction for student loan interest.
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Qualified higher education expenses are defined as the
student's cost of attendance as defined in section 472 of the
Higher Education Act of 1965 (generally, tuition, fees, room
and board, and related expenses), reduced by (1) any amount
excluded from gross income under section 135, (2) any amount
distributed from an education IRA and excluded from gross
income, and (3) the amount of any scholarship or fellowship
grants excludable from gross income under present-law section
117, as well as any other tax-free educational benefits, such
as employer-provided educational assistance that is excludable
from the employee's gross income under section 127.
The conferees expect that the Secretary of Treasury will
issue regulations setting forth reporting procedures that will
facilitate the administration of this provision. Specifically,
such regulations should require lenders separately to report to
borrowers the amount of interest that constitutes deductible
student loan interest (i.e., interest on a qualified education
loan during the first 60 months in which interest payments are
required). In this regard, the regulations should include a
method for borrower certification to a lender that the loan
proceeds are being used to pay for qualified higher education
expenses.
The provision is effective for interest payments due and
paid after December 31, 1997, on any qualified education loan.
5. Penalty-free withdrawals from IRAs for higher education expenses
(sec. 203 of the House bill and Senate amendment)
Present Law
Under present law, amounts held in an individual
retirement arrangement (``IRA'') are includible in income when
withdrawn (except to the extent the withdrawal is a return of
nondeductible contributions). Amounts withdrawn prior to
attainment of age 59\1/2\ are subject to an additional 10-
percent early withdrawal tax, unless the withdrawal is due to
death or disability, is made in the form of certain periodic
payments, is used to pay medical expenses in excess of 7.5
percent of AGI, or is used to purchase health insurance of an
unemployed individual.
House Bill
The House bill provides that the 10-percent early
withdrawal tax does not apply to distributions from IRAs if the
taxpayer used the amounts to pay qualified higher education
expenses (including those related to graduate level courses) of
the taxpayer, the taxpayer's spouse, or any child, or
grandchild of the individual or the individual's spouse.
The penalty-free withdrawal is available for ``qualified
higher education expenses,'' meaning tuition, fees, books,
supplies, equipment required for enrollment or attendance, and
room and board at a post-secondary educational institution
(defined by reference to sec 481 of the Higher Education Act of
1965). Qualified higher education expenses are reduced by any
amount excludable from gross income under section 135 relating
to the redemption of a qualified U.S. savings bond and certain
scholarships and veterans benefits.
Effective date.--The provision is effective for
distributions made after December 31, 1997, which respect to
expenses paid after such date for education furnished in
academic periods beginning after such date.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
6. Tax credit for expenses for education which supplements elementary
and secondary education (sec. 204 of the House bill)
Present Law
In general, taxpayers may not deduct education and
training expenses that relate to basic elementary or secondary
education. (Treas. reg. sec. 1.162-5). Students who are
employed may be eligible for the special exclusion for
employer-provided educational assistance under section 127. In
addition, qualified scholarships received by such students are
excluded from gross income under section 117, and such students
may be eligible for the special rules for student loan
forgiveness under section 108(f). No tax credit is available
under present law for expenses incurred with respect to
elementary or secondary education.
House Bill
The House bill provides a nonrefundable tax credit equal
to the lesser of (1) $150 or (2) 50 percent of qualified
educational assistance expenses paid with respect to an
eligible student.
Eligible students are children under age 18 enrolled
full-time in elementary or secondary school. Qualified
educational assistance expenses are costs of supplementary
education (e.g., tutoring). Such supplementary education must
be provided with respect to a student's current classes by a
supplementary education service provider that is accredited by
an accreditation organization recognized by the Secretary of
Education. Qualified expenses do not include thecost of courses
that prepare students for college entrance exams.
The credit is phased out for taxpayers with adjusted
gross income between $80,000-$92,000 for joint filers and
between $50,000-$62,000 for individual filers.
Effective date.--The credit is available for taxable
years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
7. Certain teacher education expenses not subject to 2-percent floor on
miscellaneous itemized deductions (sec. 224 of the Senate
amendment)
Present Law
In general, taxpayers are not permitted to deduct
education expenses. However, employees may deduct the cost of
certain work-related education. For costs to be deductible, the
education must either be required by the taxpayer's employer or
by law to retain taxpayer's current job or be necessary to
maintain or improve skills required in the taxpayer's current
job. Expenses incurred for education that is necessary to meet
minimum education requirements of an employee's present trade
or business or that can qualify an employee for a new trade or
business are not deductible.
An employee is allowed to deduct work-related education
and other business expenses only to the extent such expenses
(together with other miscellaneous itemized deductions) exceed
2 percent of the taxpayer's adjusted gross income.
House Bill
No provision.
Senate Amendment
Under the Senate amendment, qualified professional
development expenses incurred by an elementary or secondary
school teacher \45\ with respect to certain courses of
instruction are not subject to the 2-percent floor on
miscellaneous itemized deductions. Qualified professional
development expenses mean expenses for tuition, fees, books,
supplies, equipment and transportation required for enrollment
or attendance in a qualified course, provided that such
expenses are otherwise deductible under present law section
162. A qualified course of instruction means a course at an
institution of higher education (as defined in sec. 481 of the
Higher Education Act of 1965) which is part of a program of
professional development that is approved and certified by the
appropriate local educational agency as furthering the
individual's teaching skills.
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\45\ To be eligible, a teacher must have completed at least two
academic years as a K-12 teacher in an elementary or secondary school
before the qualified professional development expenses are incurred.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Conference Agreement
The conference agreement does not include the Senate
amendment.
B. Other Education-Related Tax Provisions
1. Extension of exclusion for employer-provided educational assistance
(sec. 221 of the House bill and sec. 221 of the Senate
amendment)
Present Law
Under present law, an employee's gross income and wages
do not include amounts paid or incurred by the employer for
educational assistance provided to the employee if such amounts
are paid or incurred pursuant to an educational assistance
program that meets certain requirements. This exclusion is
limited to $5,250 of educational assistance with respect to an
individual during a calendar year. The exclusion does not apply
to graduate-level courses beginning after June 30, 1996. The
exclusion expires with respect to courses of instruction
beginning after June 30, 1997.\46\ In the absence of the
exclusion, educational assistance is excludable from income
only if it is related to the employee's current job.
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\46\ The legislative history reflects congressional intent that the
provision expire with respect to courses beginning after May 31, 1997.
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House Bill
The exclusion for employer-provided educational
assistance is extended through courses beginning on or before
December 31, 1997.
Effective date.--The provision is effective with respect
to taxable years beginning after December 31, 1996.
Senate Amendment
The exclusion for employer-provided educational
assistance is extended permanently. Beginning in 1997, the
exclusion applies to graduate-level courses.
Effective date.--The extension of the exclusion with
respect to undergraduate courses applies with respect to
taxable years beginning after December 31, 1996. The extension
of the exclusion with respect to graduate-level courses applies
to courses beginning after December 31, 1996.
Conference Agreement
The conference agreement follows the House bill, with
modifications. Under the conference agreement, the exclusion
for undergraduate education is extended with respect to courses
beginning before June 1, 2000. As under the House bill, the
exclusion does not apply with respect to graduate-level
courses.
2. Modification of $150 million limit on qualified 501(c)(3) bonds
other than hospital bonds (sec. 222 of the House bill and sec.
222 of the Senate amendment)
Present Law
Interest on State and local government bonds generally is
excluded from income if the bonds are issued to finance
activities carried out and paid for with revenues of these
governments. Interest on bonds issued by these governments to
finance activities of other persons, e.g., private activity
bonds, is taxable unless a specific exception is included in
the Code. One such exception is for private activity bonds
issued to finance activities of private, charitable
organizations described in Code section 501(c)(3) (``section
501(c)(3) organizations'') when the activities do not
constitute an unrelated trade or business.
Present law treats section 501(c)(3) organizations as
private persons; thus, bonds for their use may only be issued
as private activity ``qualified 501(1)(3) bonds,'' subject to
the restrictions of Code section 145. The most significant of
these restrictions limits the amount of outstanding bonds from
which a section 501(c)(3) organization may benefit to $150
million. In applying this ``$150 million limit,'' all section
501(c)(3) organizations under common management or control are
treated as a single organization. The limit does not apply to
bonds for hospital facilities, defined to include only acute
care, primarily inpatient, organizations.
House Bill
Under the House bill, the $150 million limit is increased
annually in $10 million increments until it is $200 million.
Specifically, the limitation is $160 million in 1998, $170
million in 1999, $180 million in 2000, $190 million in 2001,
and $200 million in 2002 and thereafter.
Effective date.--The provision is effective on January 1,
1998.
Senate Amendment
The Senate amendment repeals the $150 million limit for
bonds issued after the date of enactment to finance capital
expenditures incurred after the date of enactment.
Effective date.--The provision is effective for bonds
issued after the date of enactment to finance capital
expenditures incurred after such date.
Conference Agreement
The conference agreement follows the Senate amendment.
Effective date.--The provision is effective for bonds
issued after the date of enactment. Because this provision of
the conference agreement applies only to bonds issued with
respect tocapital expenditures incurred after the date of
enactment, the $150 million limit will continue to govern issuance of
other non-hospital qualified 501(c)(3) bonds (e.g., refunding bonds or
new-money bonds for capital expenditures incurred before the date of
enactment). Thus, the conferees understand that bond issuers will
continue to need Treasury Department guidance on the application of
this limit in the future and expect that the Treasury will continue to
provide interpretative rules on this limit.
3. Enhanced deduction for corporate contributions of computer
technology and equipment (sec. 223 of the House bill)
Present Law
In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair market value
of property contributed to a charitable organization.\47\
However, in the case of a charitable contribution of inventory
or other ordinary-income property, short-term capital gain
property, or certain gifts to private foundations, the amount
of the deduction is limited to the taxpayer's basis in the
property. In the case of a charitable contribution of tangible
personal property, a taxpayer's deduction is limited to the
adjusted basis in such property if the use by the recipient
charitable organization is unrelated to the organization's tax-
exempt purpose (sec. 170(e)(1)(B)(I)).
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\47\ The amount of the deduction allowable for a taxable year with
respect to a charitable contribution may be reduced depending on the
type of property contributed, the type of charitable organization to
which the property is contributed, and the income of the taxpayer
(secs. 170(b) and 170(e)). Corporations are entitled to claim a
deduction for charitable contributions, generally limited to 10 percent
of their taxable income (computed without regard to the contributions)
for the taxable year.
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Special rules in the Code provide augmented deductions
for certain corporate \48\ contributions of inventory property
for the care of the ill, the needy, or infants (sec.
170(e)(3)), and certain corporate contributions of scientific
equipment constructed by the taxpayer, provided the original
use of such donated equipment is by the donee for research or
research training in the United States in physical or
biological sciences (sec. 170(e)(4)).\49\ Under these special
rules, the amount of the augmented deduction available to a
corporation making a qualified contribution is equal to its
basis in the donated property plus one-half of the amount of
ordinary income that would have been realized if the property
had been sold. However, the augmented deduction cannot exceed
twice the basis of the donated property.
---------------------------------------------------------------------------
\48\ S corporations are not eligible donors for purposes of section
170(e)(3) or section 170(e)(4).
\49\ Eligible donees under section 170(e)(4) are limited to post-
secondary educational institutions, scientific research organizations,
and certain other organizations that support scientific research.
---------------------------------------------------------------------------
House Bill
The House bill expands the list of qualified
contributions that would qualify for the augmented deduction
currently available under Code section 170(e)(3) and 170(e)(4).
Under the House bill, qualified contributions mean gifts of
computer technology and equipment (i.e., computer software,
computer or peripheral equipment, and fiber optic cable related
to computer use) to be used within the United States for
educational purposes in any of grades K-12.
Eligible donees are: (1) any educational organization
that normally maintains a regular faculty and curriculum and
has a regularly enrolled body of pupils in attendance at the
place where its educational activities are regularly carried
on; and (2) Code section 501(c)(3) entities that are organized
primarily for purposes of supporting elementary and secondary
education. A private foundation also is an eligible donee,
provided that, within 30 days after receipt of the
contribution, the private foundation contributes the property
to an eligible donee described above.
Qualified contributions are limited to gifts made no
later than two years after the date the taxpayer acquired or
substantially completed the construction of the donated
property. Such donated property could be computer technology or
equipment that is inventory or depreciable trade or business
property in the hands of the donor. The House bill permits
payment by the donee organization of shipping, transfer, and
installation costs.\50\ The special treatment applies only to
donations made by C corporations; as under present law section
170(e)(4), S corporations, personal holding companies, and
service organizations are not eligible donors.
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\50\ In the case of contributions made through private foundations,
the bill permits the payment by the private foundation of shipping,
transfer, and installation costs.
---------------------------------------------------------------------------
Effective date.--The provision is effective for
contributions made in taxable years beginning after 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, except
that the provision is sunset after three years. Thus, the
provision is effective for contributions made in taxable years
beginning after 1997 and before January 1, 2001. In addition,
the conference agreement clarifies that the original use of the
donated property must commence with the donor or the donee.
Accordingly, qualified contributions generally are limited to
property that is no more than two years old.
4. Expansion of arbitrage rebate exception for certain bonds (sec. 223
of the Senate amendment)
Present Law
Generally, all arbitrage profits earned on investments
unrelated to the purpose of the borrowing (``nonpurpose
investments'') when such earnings are permitted must be rebated
to the Federal Government.
An exception is provided for bonds issued by governmental
units having general taxing powers if the governmental unit
(and all subordinate units) issues $5 million or less of
governmental bonds during the calendar year (``the small-issuer
exception''). This exception does not apply to private activity
bonds.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that up to $5 million of
bonds used to finance public school capital expenditures
incurred after December 31, 1997, are excluded from application
of the present-law $5 million limit. Thus, small issuers will
continue to benefit from the small issue exception from
arbitrage rebate if they issue no more than $10 million in
governmental bonds per calendar year and no more than $5
million of the bonds is used to finance expenditures other than
for public school capital expenditures.
Effective date.--The provision is effective for bonds
issued after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
5. Treatment of cancellation of certain student loans (sec. 224 of the
House bill and sec. 225 of the Senate amendment)
Present Law
In the case of an individual, gross income subject to
Federal income tax does not include any amount from the
forgiveness (in whole or in part) of certain student loans,
provided that the forgiveness is contingent on the student's
working for a certain period of time in certain professions for
any of a broad class of employers (sec. 108(f)).
Student loans eligible for this special rule must be made
to an individual to assist the individual in attending an
educational institution that normally maintains a regular
faculty and curriculum and normally has a regularly enrolled
body of students in attendance at the place where its education
activities are regularly carried on. Loan proceeds may be used
not only for tuition and required fees, but also to cover room
and board expenses (in contrast to tax-free scholarships under
section 117, which are limited to tuition and required fees).
In addition, the loan must be made by (1) the United States (or
an instrumentality or agency thereof), (2) a State (or any
political subdivision thereof), (3) certain tax-exempt public
benefit corporations that control a State, county, or municipal
hospital and whose employees have been deemed to be public
employees under State law, or (4) an educational organization
that originally received the funds from which the loan was made
from the United States, a State, or a tax-exempt public benefit
corporation. Thus, loans made with private, nongovernmental
funds are not qualifying student loans for purposes of the
section 108(f) exclusion.
House Bill
The House bill expands section 108(f) so that an
individual's gross income does not include forgiveness of loans
made by tax-exempt charitable organizations (e.g., educational
organizations or private foundations) if the proceeds of such
loans are used to pay costs of attendance at an educational
institution or to refinance outstanding student loans and the
student is not employed by the lender organization. As under
present law, the section 108(f) exclusion applies only if the
forgiveness is contingent on the student's working for a
certain period of time in certain professions for any of a
broad class of employers. In addition, in the case of loans
made by tax-exempt charitable organizations, the student's work
must fulfill a public service requirement. The student must
work in an occupation or area with unmet needs and such work
must be performed for or under the direction of a tax-exempt
charitable organization or a governmental entity.
The exclusion also is expanded to cover forgiveness of
direct student loans made through the William D. Ford Federal
Direct Loan Program where loan repayment and forgiveness are
contingent on the borrower's income level and any unpaid
amounts are forgiven in full by the Secretary of Education at
the end of a 25-year period. Thus, Federal Direct Loan
borrowers who have elected the income-contingent repayment
option and who have not repaid their loans in full at the end
of a 25-year period would not be required to include the
outstanding loan balance in income as a result of the
forgiveness of the loan.
Effective date.--The provision applies to discharges of
indebtedness after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, except thatthe conference agreement does not
include the provision expanding the exclusion to cover forgiveness of
direct student loans made through the William D. Ford Federal Direct
Loan Program where loan repayment and forgiveness are contingent on the
borrower's income level and any unpaid amounts are forgiven in full by
the Secretary of Education at the end of a 25-year period.
6. Tax credit for holders of qualified zone academy bonds
Present Law
Under present law, interest on bonds issued for general
governmental purposes, including public schools, is exempt from
Federal income tax.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
Under the conference agreement, certain financial
institutions (i.e., banks, insurance companies, and
corporations actively engaged in the business of lending money)
that hold ``qualified zone academy bonds'' are entitled to a
nonrefundable tax credit in an amount equal to a credit rate
(set by the Treasury Department) multiplied by the face amount
of the bond. The credit rate applies to all such bonds
purchased in each month. A taxpayer holding a qualified zone
academy bond is entitled to a credit for each year the taxpayer
holds the bond. The credit is includible in gross income, but
may be claimed against regular income tax and AMT liability.
The Treasury Department will set the credit rate each
month so that such bonds can be issued without discount and
without any interest cost to the issuer. The maximum term of
the bond issued in a given month also is determined by the
Treasury Department so that the present value of the obligation
to repay the bond is 50 percent of the face value of the bond.
Such present value will be determined using as a discount rate
the average annual interest rate of tax-exempt obligations with
a term of 10 years or more issued during the month.
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) 95
percent of the proceeds are used for the purpose of renovating,
providing equipment to, developing course materials for use at,
or training teachers and other school personnel in a
``qualified zone academy'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the
school is a public school that provides education and training
below the college level, (2) the school operates a special
academic program in cooperation with businesses to enhance the
academic curriculum and increase graduation and employment
rates, and (3) either (a) the school is located in an
empowerment zone or enterprise community (including empowerment
zones designated or authorized to be designated under the
conference agreement), or (b) it is reasonably expected that at
least 35 percent of the students at the school will be eligible
for free or reduced-cost lunches under the school lunch program
established under the National School Lunch Act.
A total of $400 million of ``qualified zone academy
bonds'' may be issued in each of 1998 and 1999. The $800
million aggregate bond cap will be allocated to the States
according to their respective populations of individuals below
the poverty line. A State may carry over any unused allocation
into subsequent years. Each State, in turn, will allocate the
credit to qualified zone academies within such State.
Effective date.--The provision is effective for bonds
issued after 1997.
III. SAVINGS AND INVESTMENT TAX INCENTIVES
A. Individual Retirement Arrangements
1. Increase deductible IRA phase-out range and modify active
participant rule (sec. 301 of the Senate amendment)
Present Law
If an individual (or, if married, the individual's
spouse) is an active participant in an employer-sponsored
retirement plan, the $2,000 IRA deduction limit is phased out
over the following levels of adjusted gross income (``AGI''):
$25,000 to $35,000 in the case of a single taxpayer and $40,000
to $50,000 in the case of married taxpayers.
House Bill
No provision.
Senate Amendment
An individual is not considered to be an active
participant in an employer-sponsored retirement plan merely
because the individual's spouse is such an active participant.
The income phase-out range for single individuals is
increased as follows: for 1998 and 1999, the phase-out range is
$30,000 to $40,000; for 2000 and 2001, $35,000 to $45,000; for
2002 and 2003, $40,000 to $50,000; and for 2004 and thereafter,
$50,000 to $60,000.
The income phase-out range for married individuals is
increased as follows: for 1998 and 1999, the phase-out range is
$50,000 to $60,000; for 2000 and 2001, $60,000 to $70,000; for
2002 and 2003, $70,000 to $80,000; and 2004 and thereafter,
$80,000 to $100,000.
Effective date.--The provisions are effective for taxable
years beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications.
Under the conference agreement, as under the Senate
amendment, an individual is not considered an active
participant in an employer-sponsored retirement plan merely
because the individual's spouse is an active participant.
However, under the conference agreement, the maximum deductible
IRA contribution for an individual who is not an active
participant, but whose spouse is, is phased out for taxpayers
with AGI between $150,000 and $160,000.
Under the conference agreement, the deductible IRA income
phase-out limits are increased as follows:
------------------------------------------------------------------------
Phase-out range
------------------------------------------------------------------------
Joint Returns
Taxable years beginning in:
1998.......................................... $50,000--$60,000
1999.......................................... $51,000--$61,000
2000.......................................... $52,000--$62,000
2001.......................................... $53,000--$63,000
2002.......................................... $54,000--$64,000
2003.......................................... $60,000--$70,000
2004.......................................... $65,000--$75,000
2005.......................................... $70,000--$80,000
2006.......................................... $75,000--$85,000
2007 and thereafter........................... $80,000--$100,000
Single Taxpayers
Taxable years beginning in:
1998.......................................... $30,000--$40,000
1999.......................................... $31,000--$41,000
2000.......................................... $32,000--$42,000
2001.......................................... $33,000--$43,000
2002.......................................... $34,000--$44,000
2003.......................................... $40,000--$50,000
2004.......................................... $45,000--$55,000
2005 and thereafter........................... $50,000--$60,000
------------------------------------------------------------------------
The following examples illustrate the income phase-out
rules.
Example 1.--Suppose for a year W is an active participant
in an employer-sponsored retirement plan, and W's husband, H,
is not. Further assume that the combined AGI of H and W for the
year is $200,000. Neither W nor H is entitled to make
deductible contributions to an IRA for the year.
Example 2.--Same as example 1, except that the combined
AGI of W and H is $125,000. H can make deductible contributions
to an IRA. However, a deductible contribution could not be made
for W.
2. Tax-free nondeductible IRAs (sec. 301 of the House bill and sec. 302
of the Senate amendment)
Present Law
No provision. However, present law provides that an
individual can make nondeductible contributions to an IRA to
the extent the individual cannot or does not make deductible
contributions. Earnings on nondeductible contributions are
includible in income when withdrawn.
House Bill
In general
The House bill replaces present-law nondeductible IRAs
with new American Dream IRAs (``AD IRAs'') to which individuals
may make nondeductible contributions of up to $2,000 annually.
No income limits apply to AD IRAs, and contributions to AD IRAs
are in addition to other IRA contributions. The $2,000
contribution limit is indexed for inflation in $50 increments.
Taxation of distributions
Qualified distributions from an AD IRA are not includible
in income. Qualified distributions are distributions (1) made
after the 5-taxable year period beginning with the first
taxable year for which a contribution was made to an AD IRA and
(2) which are (a) made on or after the date on which the
individual attains age 59\1/2\, (b) made to a beneficiary on or
after the death of the individual, (c) attributable to the
individual's being disabled, or (d) for a qualified special
purpose distribution. A qualified special purpose distribution
is a distribution for first-time homebuyer expenses.
Conversions of IRAs to AD IRAs
An IRA may be converted to an AD IRA before January 1,
1999. Amounts that would have been includible in income had the
amounts converted been withdrawn are includible in income
ratably over 4 years. The additional tax on early withdrawals
does not apply to conversions of IRAs to AD IRAs.
Effective date
Taxable years beginning after December 31, 1997.
Senate Amendment
In general
Same as the House bill, except that: (1) the new IRAs are
called IRA Plus accounts and (2) no more than $2,000 of annual
contributions can be made to all an individual's IRAs.
Taxation of distributions
Same as the House bill, except that special purpose
distributions also include distributions to long-term
unemployed individuals.
Conversions of IRAs to AD IRAs
Same as the House bill, except that conversions of an IRA
to an IRA Plus can be made at any time. If the conversion is
made before January 1, 1999, the amounts that would have been
includible in income had the amounts converted been withdrawn
are includible in income ratably over 4 years. In any case, the
10-percent tax on early withdrawals does not apply.
Effective date
Same as the House bill.
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications. Under the conference agreement, the new IRA
is called the ``Roth IRA'' rather than the IRA Plus. The
maximum contribution that can be made to a Roth IRA is phased
out for individuals with AGI between $95,000 and $110,000 and
for joint filers with AGI between $150,000 and $160,000. Under
the conference agreement, distributions to long-term unemployed
individuals do not qualify as special purpose distributions.
Thus, only first-time homebuyer expenses (as defined under the
Senate amendment) qualify as special purpose distributions.
Under the conference agreement, only taxpayers with AGI
of less than $100,000 51 are eligible to roll over
or convert an IRA into a Roth IRA.
---------------------------------------------------------------------------
\51\ For this purpose, AGI is determined before any amount
includible in income as a result of the rollover or conversion.
---------------------------------------------------------------------------
The conference agreement retains present-law
nondeductible IRAs. Thus, an individual who cannot (or does
not) make contributions to a deductible IRA or a Roth IRA can
make contributions to a nondeductible IRA. In no case can
contributions to all an individual's IRAs for a taxable year
exceed $2,000.
3. Modifications to early withdrawal tax (sec. 301 of the House bill
and sec. 303 of the Senate amendment)
Present Law
Under present law, a 10-percent additional tax applies to
distributions from an IRA prior to age 59\1/2\, unless an
exception applies.
House Bill
The House bill adds an additional exception to the early
withdrawal tax for AD IRAs only. The early withdrawal tax does
not apply to distributions from an AD IRA for first-time
homebuyer expenses, subject to a $10,000 life-time cap.
Effective date.--Taxable years beginning after December
31, 1997.
Senate Amendment
The early withdrawal tax does not apply to distributions
from any IRA for first-time homebuyer expenses or for long-term
unemployed individuals.
Effective date.--Same as the House bill.
Conference Agreement
The conference agreement follows the Senate amendment but
does not include the provision relating to long-term unemployed
individuals.52
---------------------------------------------------------------------------
\52\ As under the House bill and Senate amendment, the conference
agreement includes a penalty-free withdrawal provision for education
expenses.
---------------------------------------------------------------------------
4. IRA investments in coins and bullion (sec. 304 of the Senate
amendment)
Present Law
IRA assets may not be invested in collectibles. This
prohibition does not apply to certain gold and silver coins or
to coins issued by a State.
House Bill
No provision.
Senate Amendment
IRA assets may be invested in certain platinum coins and
in certain gold, silver, platinum or palladium bullion.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
B. Capital Gains Provisions
1. Maximum rate of tax on net capital gain of individuals (sec. 311 of
the House bill and sec. 311 of the Senate amendment)
Present Law
In general, gain or loss reflected in the value of an
asset is not recognized for income tax purposes until a
taxpayer disposes of the asset. On the sale or exchange of
capital assets, the net capital gain is taxed at the same rate
as ordinary income, except that individuals are subject to a
maximum marginal rate of 28 percent of the net capital gain.
Net capital gain is the excess of the net long-term capital
gain for the taxable year over the net short-term capital loss
for the year. Gain or loss is treated as long-term if the asset
is held for more than one year.
A capital asset generally means any property except (1)
inventory, stock in trade, or property held primarily for sale
to customers in the ordinary course of the taxpayer's trade or
business, (2) depreciable or real property used in the
taxpayer's trade or business, (3) specified literary or
artistic property, (4) business accounts or notes receivable,
or (5) certain U.S. publications. In addition, the net gain
from the disposition of certain property used in the taxpayer's
trade or business is treated as long-term capital gain. Gain
from the disposition of depreciable personal property is not
treated as capital gain to the extent of all previous
depreciation allowances. Gain from the disposition of
depreciable real property is generally not treated as capital
gain to the extent of the depreciation allowances in excess of
the allowances that would have been available under the
straight-line method of depreciation.
House Bill
Under the House bill, the maximum rate of tax on the net
capital gain of an individual is reduced from 28 percent to 20
percent. In addition, any net capital gain which otherwise
would be taxed at a 15-percent rate is taxed at a rate of 10
percent. These rates apply for purposes of both the regular tax
and the minimum tax.
The tax on the net capital gain attributable to any long-
term capital gain from the sale or exchange of collectibles
will remain at a maximum rate of 28 percent; any long-term
capital gain from the sale or exchange of section 1250 property
(i.e., depreciable real estate) to the extent the gain would
have been treated as ordinary income if the property had been
section 1245 property will be taxed at a maximum rate of 26
percent. Gain from the disposition of a collectible which is an
indexed asset (described below) will not be eligible for the
28-percent rate unless the taxpayer elects to forgo indexing.
Effective date.--The provision generally applies to sales
and exchanges (and installment payments received) after May 6,
1997.
Senate Amendment
The Senate amendment is the same as the House bill except
the maximum rate on gain attributable to the depreciation of
section 1250 property is 24 percent (rather than 26 percent).
(Differences in the provisions relating to indexing and small
business stock are described below.)
Effective date.--The effective date is the same as the
House bill.
Conference Agreement
The conference agreement generally follows the House bill
and the Senate amendment. The maximum rate of tax on gain
attributable to the depreciation of section 1250 property will
be 25 percent.
In addition, for taxable years beginning after December
31, 2000, the maximum capital gains rates for assets which are
held more than 5 years, are 8 percent and 18 percent (rather
than 10 percent and 20 percent). The 18-percent rate only
applies to assets the holding period for which begins after
December 31, 2000. A taxpayer holding a capital asset or asset
used in the taxpayer's trade or business on January 1, 2001,
may elect to treat the asset as having been sold on such date
for an amount equal to its fair market value, and as having
been reacquired for an amount equal to such value. If the
election is made, any gain is recognized (and any loss
disallowed). The conference agreement allows the Treasury
Department to issue regulations coordinating the capital gain
provisions with other rules involving the treatment of sales
and exchanges by pass-thru entities and of interests therein.
Under the conference agreement, the lower capital gains
rates do not apply to the sale or exchange of assets held for
18 months or less, effective for amounts properly taken into
account after July 28, 1997. The 28-percent maximum rate will
continue to apply to the sale or exchange of capital assets
held more than 1 year but not more than 18 months.
2. Small business stock (sec. 311 of the House bill and secs. 312 and
313 of the Senate amendment)
Present Law
The Revenue Reconciliation Act of 1993 provided
individuals a 50-percent exclusion for the sale of certain
small business stock acquired at original issue and held for at
least five years. One-half of the excluded gain is a minimum
tax preference.
The amount of gain eligible for the 50-percent exclusion
by an individual with respect to any corporation is the greater
of (1) 10 times the taxpayer's basis in the stock or (2) $10
million.
In order to qualify as a small business, when the stock
is issued, the gross assets of the corporation may not exceed
$50 million. The corporation also must meet an active trade or
business requirement.
House Bill
Under the House bill, the lower capital gains rates do
not apply to the includible portion of the gain from the
qualifying sale of small business stock. Thus, the maximum rate
of regular tax on the sale of small business stock remains at
14 percent.
Senate Amendment
Under the Senate amendment, the 50-percent exclusion will
apply to small business stock (other than stock of a subsidiary
corporation) held by a corporation. The minimum tax preference
is repealed. Under the provision, in the case of a qualifying
sale of small business stock by an individual, the maximum rate
of tax, will be 10 percent.
The Senate amendment increases the size of an eligible
corporation from gross assets of $50 million to gross assets of
$100 million. The Senate amendment also repeals the limitation
on the amount of gain a taxpayer can exclude with respect to
the stock of any corporation.
The Senate amendment provides that certain working
capital must be expended within five years (rather than two
years) in order to be treated as used in the active conduct of
a trade or business. No limit on the percent of the
corporation's assets that are working capital is imposed.
The Senate amendment provides that if the corporation
establishes a business purpose for a redemption of its stock,
that redemption is disregarded in determining whether other
newly issued stock could qualify as eligible stock.
The Senate amendment allows a taxpayer to roll over gain
from the sale or exchange of small business stock held more
than five years where the taxpayer uses the proceeds to
purchase other small business stock within 60 days of the sale
of the original stock. If the taxpayer sells the replacement
stock, any gain attributable to the original stock is treated
as gain from the sale or exchange of small business stock held
more than five years, and any remaining gain will be so treated
after the replacement stock is held for at least five years. In
addition, any gain that otherwise would be recognized from the
sale of the replacement stock can be rolled over to other small
business stock purchased within 60 days.
Effective date.--The increase in the size of corporations
whose stock is eligible for the exclusion applies to stock
issued after the date of the enactment of the proposal. The
remaining provisions apply to stock issued after August 10,
1993 (the original effective date of the small business stock
provision).
Conference Agreement
The conference agreement follows the provisions in the
House bill. The conference agreement reduces the minimum tax
preference from one-half of the excluded gain to 42 percent of
such gain.
In addition, the conference agreement allows an
individual to roll over tax-free gain from the sale or exchange
of qualified small business stock held more than 6 months where
the taxpayer uses the proceeds to purchase other qualified
small business stock within 60 days of the sale. For purposes
of the rollover provision, the replacement stock must meet the
active business requirement for the 6-month period following
the purchase. Generally, the holding period of the stock
purchased will include the holding period of the stock sold,
except for purposes of determining whether the 6-month holding
period is met. The provision applies to sales after the date of
enactment of this Act.
3. Indexing of basis of certain assets for purposes of determining gain
(sec. 312 of the House bill)
Present Law
Under present law, gain or loss from the disposition of
any asset generally is the sales price of the asset is reduced
by the taxpayer's adjusted basis in that asset. The taxpayer's
adjusted basis generally is the taxpayer's cost in the asset
adjusted for depreciation, depletion, and certain other
amounts. No adjustment is allowed for inflation.
House Bill
The House bill generally provides for an inflation
adjustment to (i.e., indexing of) the adjusted basis of certain
assets (called ``indexed assets'') held more than three years
for purposes of determining gain (but not loss) upon a sale or
other disposition of such assets by a taxpayer other than a C
corporation.
Assets eligible for the inflation adjustment generally
include common (but not preferred) stock of C corporations and
tangible property that are capital assets or property used in a
trade or business. A personal residence is not eligible for
indexing. To be eligible for indexing, an asset must be held by
the taxpayer for more than three years.
The inflation adjustment under the provision is computed
by multiplying the taxpayer's adjusted basis in the indexed
asset by an inflation adjustment percentage, based on the
chain-type price index for GDP (``Gross Domestic Product').
Special rules apply to RICS, REITS, partnerships, S
corporations and common trust funds.
Effective date.--The provision applies to property the
holding period of which begins after December 31, 2000. A
taxpayer holding any indexed asset on January 1, 2001, may
elect to treat the indexed asset as having been sold on such
date for an amount equal to its fair market value, and as
having been reacquired for an amount equal to such value. If
the election is made, any gain is recognized (and any loss is
disallowed).
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
4. Exclusion of gain on sale of principal residence (sec. 313 of the
House bill and sec. 314 of the Senate amendment)
Present Law
Under present law, no gain is recognized on the sale of a
principal residence if a new residence at least equal in cost
to the sales price of the old residence is purchased and used
by the taxpayer as his or her principal residence within a
specified period of time (sec. 1034). This replacement period
generally begins two years before and ends two years after the
date of sale of the old residence. The basis of the replacement
residence is reduced by the amount of any gain not recognized
on the sale of the old residence by reason of this gain
rollover rule.
Also, under present law, in general, an individual, on a
one-time basis, may exclude from gross income up to $125,000 of
gain from the sale or exchange of a principal residence if the
taxpayer (1) has attained age 55 before the sale, and (2) has
owned the property and used it as a principal residence for
three or more of the five years preceding the sale (sec. 121).
House Bill
Under the House bill, a taxpayer generally is able to
exclude up to $250,000 ($500,000 if married filing a joint
return) of gain realized on the sale or exchange of a principal
residence. The exclusion is allowed each time a taxpayer
selling or exchanging a principal residence meets the
eligibility requirements, but generally no more frequently than
once every two years. The House bill provides that gain would
be recognized to the extent of any depreciation allowable with
respect to the rental or business use of such principal
residence for periods after May 6, 1997.
To be eligible for the exclusion, a taxpayer must have
owned the residence and occupied it as a principal residence
for at least two of the five years prior to the sale or
exchange. A taxpayer who fails to meet these requirements by
reason of a change of place of employment, health, or other
unforseen circumstances is able to exclude the fraction of the
$250,000 ($500,000 if married filing a joint return) equal to
the fraction of two years that these requirements are met.
In the case of joint filers not sharing a principal
residence, an exclusion of $250,000 is available on a
qualifying sale or exchange of the principal residence of one
of the spouses.Similarly, if a single taxpayer who is otherwise
eligible for an exclusion marries someone who has used the exclusion
within the two years prior to the marriage, the bill would allow the
newly married taxpayer a maximum exclusion of $250,000. Once both
spouses satisfy the eligibility rules and two years have passed since
the last exclusion was allowed to either of them, the taxpayers may
exclude $500,000 of gain on their joint return.
Under the bill, the gain from the sale or exchange of the
remainder interest in the taxpayer's principal residence may
qualify for the otherwise allowable exclusion.
Effective date.--The provision is available for all sales
or exchanges of a principal residence occurring after May 6,
1997, and replaces the present-law rollover and one-time
exclusion provisions applicable to principal residences.
A taxpayer may elect to apply present law (rather than
the new exclusion) to a sale or exchange (1) made before the
date of enactment of the Act, (2) made after the date of
enactment pursuant to a binding contract in effect on such date
or (3) where the replacement residence was acquired on or
before the date of enactment (or pursuant to a binding contract
in effect of the date of enactment) and the rollover provision
would apply. If a taxpayer acquired his or her current
residence in a rollover transaction, periods of ownership and
use of the prior residence would be taken into account in
determining ownership and use of the current residence.
Senate Amendment
The Senate amendment is the same as the House bill with
technical modifications.
Conference Agreement
The conference agreement generally follows the House bill
and the Senate amendment.
The conferees wish to clarify that the provision limiting
the exclusion to only one sale every two years by the taxpayer
does not prevent a husband and wife filing a joint return from
each excluding up to $250,000 of gain from the sale or exchange
of each spouse's principal residence provided that each spouse
would be permitted to exclude up to $250,000 of gain if they
filed separate returns.
5. Corporate capital gains (sec. 321 of the House bill)
Present Law
Under present law, the net capital gain of a corporation
is taxed at the same rate as ordinary income, and subject to
tax at graduated rates up to 35 percent.
House Bill
The House bill provides an maximum rate of tax on the net
capital gain of a corporation to the extent the gain is
attributable to the sale or exchange of property held more than
8 years. The alternative tax is 32 percent on gain attributable
to calendar year 1998; 31 percent on gain attributable to
calendar year 1999; and 30 percent on gain attributable to
calendar years after 1999. The House bill also modifies the
application of the corporate alternative capital gains tax so
that the alternative capital gains tax applies to the lesser of
8-year gain or taxable income. Gain from the disposition of a
collectible or attributable to the depreciation of section 1250
property is not eligible for the lower rate.
Effective date.--The provision applies to taxable years
ending after December 31, 1997. However, the lower rate does
not apply to amounts properly taken into account before January
1, 1998. For fiscal years beginning in 1998 and 1999, the tax
is computed by applying the applicable percentage to the 8-year
gain for the first portion of the year (or, if less, the 8-year
gain for the entire year), but in an amount not to exceed the
taxable income for the entire year and then by applying the
applicable percentage to an amount equal to the 8-year gain for
the entire year (or, if less, taxable income) reduced by the
amount taxed at the applicable percentage for the first portion
of the year.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
The conference agreement provides that the amount of gain
subject to the alternative rate of tax under section 1201(a)(2)
may not exceed the corporation's taxable income. Because the
section 1201 alternative tax does not presently apply, this
change has no effect under the rate structure of present law.
IV. ALTERNATIVE MINIMUM TAX PROVISIONS
A. Increase Exemption Amount Applicable to Individual Alternative
Minimum Tax (sec. 401 of the House bill and sec. 102 of the Senate
amendment)
Present Law
Present law imposes a minimum tax on an individual to the
extent the taxpayer's minimum tax liability exceeds his or her
regular tax liability. This alternative minimum tax is imposed
upon individuals at rates of (1) 26 percent on the first
$175,000 of alternative minimum taxable income in excess of a
phased-out exemption amount and (2) 28 percent on the amount in
excess of $175,000. The exemptions amounts are $45,000 in the
case of married individuals filing a joint return and surviving
spouses; $33,750 in the case of other unmarried individuals;
and $22,500 in the case of married individuals filing a
separate return. These exemption amounts are phased-out by an
amount equal to 25 percent of the amount that the individual's
alternative minimum taxable income exceeds a threshold amount.
These threshold amounts are $150,000 in the case of married
individuals filing a joint return and surviving spouses;
$112,500 in the case of other unmarried individuals; and
$75,000 in the case of married individuals filing a separate
return, estates, and trusts. The exemption amounts, the
threshold phase-out amounts, and the $175,000 break-point
amount are not indexed for inflation.
House Bill
For taxable years beginning in 1999, 2001, 2003, 2005 and
2007, the exemption amounts of the individual alternative
minimum tax are increased as follows for each such year: (1) by
$1,000 in the case of married individuals filing a joint return
and surviving spouses; (2) by $750 in the case of other
unmarried individuals; and (3) by $500 in the case of married
individuals filing a separate return. For taxable years
beginning after 2007, the exemption amounts are indexed for
inflation.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1998.
Senate Amendment
For taxable years beginning after 2000 and before 2003,
the exemption amounts of the individual alternative minimum tax
are increased as follows in each year: (1) by $600 in the case
of married individuals filing a joint return and surviving
spouses; (2) by $450 in the case of other unmarried
individuals; and (3) by $300 in the case of married individuals
filing separate returns. For taxable years beginning after
2003, the exemption amounts of the individual alternative
minimum tax are increased as follows in each year: (1) by $950
in the case of married individuals filing a joint return and
surviving spouses; (2) by $700 in the case of other unmarried
individuals; and (3) by $475 in the case of married individuals
filing separate returns.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2000.
Conference Agreement
The conference agreement contains neither the House bill
nor the Senate amendment.
B. Repeal Alternative Minimum Tax for Small Businesses and Repeal the
Depreciation Adjustment (secs. 402 and 403 of the House bill)
Present Law
Present law imposes a minimum tax on an individual or a
corporation to the extent the taxpayer's minimum tax liability
exceeds its regular tax liability. The individual minimum tax
is imposed at rates of 26 and 28 percent on alternative minimum
taxable income in excess of a phased-out exemption amount; the
corporate minimum tax is imposed at a rate of 20 percent on
alternative minimum taxable income in excess of a phased-out
$40,000 exemption amount. Alternative minimum taxable income
(``AMTI'') is the taxpayer's taxable income increased by
certain preference items and adjusted by determining the tax
treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of
those items. In the case of a corporation, in addition to the
regular set of adjustments and preferences, there is a second
set of adjustments known as the ``adjusted current earnings''
adjustment.
The most significant alternative minimum tax adjustment
relates to depreciation. In computing AMTI, depreciation on
property placed in service after 1986 must be computed by using
the class lives prescribed by the alternative depreciation
system of section 168(g) and either (1) the straight-line
method in the case of property subject to the straight-line
method under the regular tax or (2) the 150-percent declining
balance method in the case of other property. For regular tax
purposes, depreciation on tangible personal property generally
is computed using shorter recovery periods and more accelerated
methods than are allowed for alternative minimum tax purposes.
House Bill
Repeal of the corporate alternative minimum tax for small businesses
The corporate alternative minimum tax is repealed for
small business corporations for taxable years beginning after
December 31, 1997. A corporation that had average gross
receipts of less than $5 million for the three-year period
beginning after December 31, 1994, is a small business
corporation for any taxable year beginning after December 31,
1997. A corporation that meets the $5 million gross receipts
test will continue to be treated as small business corporation
exempt from the alternative minimum tax so long as its average
gross receipts do not exceed $7.5 million. A corporation that
fails to meet the $7.5 million gross receipts test will become
subject to corporate alternative minimum tax only with respect
to preferences and adjustments that relate to transactions and
investments entered into after the corporation loses its status
as a small business corporation.
In addition, the alternative minimum tax credit allowable
to a small business corporation is limited to the amount by
which corporation's regular tax liability (reduced by other
credits) exceeds 25 percent of the excess (if any) of the
corporation's regular tax (reduced by other credits) over
$25,000.
Repeal of the depreciation adjustment
The alternative minimum tax adjustment relating to
depreciation is repealed for all taxpayers for property placed
in service after December 31, 1998.
Effective date
Except as provided above, the provision is effective for
taxable years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement generally follows the House bill
with respect to the repeal of the corporate alternative minimum
tax for small businesses. In addition, for property (including
pollution control facilities) placed in service after December
31, 1998, the conference agreement conforms the recovery
periods used for purposes of the alternative minimum tax
depreciation adjustment to the recovery periods used for
purposes of the regular tax under present law.
C. Repeal AMT Installment Method Adjustment for Farmers (sec. 404 of
the House bill and sec. 732 of the Senate amendment)
Present Law
The installment method allows gain on the sale of
property to be recognized as payments are received. Under the
regular tax, dealers in personal property are not allowed to
defer the recognition of income by use of the installment
method on the installment sale of such property. For this
purpose, dealer dispositions do not include sales of any
property used or produced in the trade or business of farming.
For alternative minimum tax purposes, the installment method is
not available with respect to the disposition of any property
that is the stock in trade of the taxpayer or any other
property of a kind which would be properly included in the
inventory of the taxpayer if held at year end, or property held
by the taxpayer primarily for sale to customers. No explicit
exception is provided for installment sales of farm property
under the alternative minimum tax.
House Bill
The House bill generally provides that for purposes of
the alternative minimum tax, farmers may use the installment
method of accounting.
Effective date.--The provision generally is effective for
dispositions in taxable years beginning after December 31,
1987, with a special rule for dispositions occurring in 1987.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
V. ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
A. Estate and Gift Tax Provisions
1. Increase in estate and gift tax unified credit (sec. 501(a) of the
House bill and sec. 401(a) of the Senate amendment)
Present Law
A gift tax is imposed on lifetime transfers by gift and
an estate tax is imposed on transfers at death. Since 1976, the
gift tax and the estate tax have been unified so that a single
graduated rate schedule applies to cumulative taxable transfers
made by a taxpayer during his or her lifetime and at
death.53 A unified credit of $192,800 is provided
against the estate and gift tax, which effectively exempts the
first $600,000 in cumulative taxable transfers from tax (sec.
2010). For transfers in excess of $600,000, estate and gift tax
rates begin at 37 percent and reach 55 percent on cumulative
taxable transfers over $3 million (sec. 2001(c)). In addition,
a 5-percent surtax is imposed upon cumulative taxable transfers
between $10 million and $21,040,000, to phase out the benefits
of the graduated rates and the unified credit (sec.
2001(c)(2)).54
---------------------------------------------------------------------------
\53\ Prior to 1976, separate tax rate schedules applied to the gift
tax and the estate tax.
\54\ Thus, if a taxpayer has made cumulative taxable transfers
equaling $21,040,000 or more, his or her average transfer tax rate is
55 percent. The phaseout has the effect of creating a 60-percent
marginal transfer tax rate on transfers in the phaseout range.
---------------------------------------------------------------------------
House Bill
The House bill increases the present-law unified credit
beginning in 1998, from an effective exemption of $600,000 to
an effective exemption of $1,000,000 in 2007. The increase in
the effective exemption is phased in according to the following
schedule: the effective exemption is $650,000 for decedents
dying and gifts made in 1998; $750,000 in 1999; $765,000 in
2000; $775,000 in 2001 through 2004; $800,000 in 2005; $825,000
in 2006; $1 million in 2007. After 2007, the effective
exemption is indexed annually for inflation. The indexed
exemption amount is rounded to the next lowest multiple of
$10,000.
Conforming amendments to reflect the increased unified
credit are made (1) to the 5-percent surtax to conform the
phase out of the increased unified credit and graduated rates,
(2) to the general filing requirements for an estate tax return
under section 6018(a), and (3) to the amount of the unified
credit allowed under section 2102(c)(3) with respect to
nonresident aliens with U.S. situs property who are residents
of certain treaty countries.
Effective date.--The provision is effective for decedents
dying, and gifts made, after December 31, 1997.
Senate Amendment
The Senate amendment increases the present-law unified
credit beginning in 1998, from an effective exemption of
$600,000 to an effective exemption of $1,000,000 in 2006. The
increase in the effective exemption is phased in according to
the following schedule: the effective exemption is $625,000 for
decedents dying and gifts made in 1998; $640,000 in 1999;
$660,000 in 2000; $675,000 in 2001; $725,000 in 2002; $750,000
in 2003; $800,000 in 2004; $900,000 in 2005; and $1 million in
2006. After 2006, the effective exemption is indexed annually
for inflation. The indexed exemption amount is rounded to the
next lowest multiple of $10,000.
The Senate amendment includes the same conforming
amendments as were made in the House bill.
Effective date.--The provision is effective for decedents
dying, and gifts made, after December 31, 1997.
Conference Agreement
The conference agreement increases the present-law
unified credit beginning in 1998, from an effective exemption
of $600,000 to an effective exemption of $1,000,000 in 2006.
The increase in the effective exemption is phased in according
to the following schedule: the effective exemption is $625,000
for decedents dying and gifts made in 1998; $650,000 in 1999;
$675,000 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000
in 2004; $950,000 in 2005; and $1 million in 2006 and
thereafter. The conference does not index the effective
exemption for inflation.
The conference agreement includes the conforming
amendments made in the House bill and the Senate amendment.
Effective date.--The provision is effective for decedents
dying, and gifts made, after December 31, 1997.
2. Indexing of certain other estate and gift tax provisions (sec. 501
(b)-(e) of the House bill and sec. 401 (b)-(e) of the Senate
amendment)
Present Law
Annual exclusion for gifts.--A taxpayer may exclude
$10,000 of gifts of present interests in property made by an
individual ($20,000 per married couple) to each donee during a
calendar year (sec. 2503).
Special use valuation.--An executor may elect for estate
tax purposes to value certain qualified real property used in
farming or a closely-held trade or business at its current use
value, rather than its ``highest and best use'' value (sec.
2032A). The maximum reduction in value under such an election
is $750,000.
Generation-skipping transfer (``GST'') tax.--An
individual is allowed an exemption from the GST tax of up to
$1,000,000 for generation-skipping transfers made during life
or at death (sec. 2631).
Installment payment of estate tax.--An executor may elect
to pay the Federal estate tax attributable to an interest in a
closely held business in installments over, at most, a 14-year
period (sec. 6166). The tax on the first $1,000,000 in value of
a closely-held business is eligible for a special 4-percent
interest rate (sec. 6601(j)).
House Bill
The House bill provides that, after 1998, the $10,000
annual exclusion for gifts, the $750,000 ceiling on special use
valuation, the $1,000,000 generation-skipping transfer tax
exemption, and the $1,000,000 ceiling on the value of a
closely-held business eligible for the special low interest
rate (as modified below), are indexed annually for inflation.
Indexing of the annual exclusion is rounded to the next lowest
multiple of $1,000 and indexing of the other amounts is rounded
to the next lowest multiple of $10,000.
Effective date.--The proposal is effective for decedents
dying, and gifts made, after December 31, 1998.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Estate tax exclusion for qualified family-owned businesses (sec. 402
of the Senate amendment)
Present Law
There are no special estate tax rules for qualified
family-owned businesses. All taxpayers are allowed a unified
credit in computing the taxpayer's estate and gift tax, which
effectively exempts a total of $600,000 in cumulative taxable
transfers from the estate and gift tax (sec. 2010). An executor
also may elect, under section 2032A, to value certain qualified
real property used in farming or another qualifying closely-
held trade or business at its current use value, rather than
its highest and best use value (up to a maximum reduction of
$750,000). In addition, an executor may elect to pay the
Federal estate tax attributable to a qualified closely-held
business in installments over, at most, a 14-year period (sec.
6166). The tax attributable to the first $1,000,000 in value of
a closely-held business is eligible for a special 4-percent
interest rate (sec. 6601(j)).
House Bill
No provision.
Senate Amendment
The Senate amendment allows an executor to elect special
estate tax treatment for qualified ``family-owned business
interests'' if such interests comprise more than 50 percent of
a decedent's estate and certain other requirements are met. In
general, the provision excludes the first $1 million of value
in qualified family-owned business interests from a decedent's
taxable estate.
This new exclusion for qualified family-owned business
interests is provided in addition to the unified credit (which
currently effectively exempts $600,000 of taxable transfers
from the estate and gift tax, and will be increased to an
effective exemption of $1,000,000 of taxable transfers under
other provisions of the Senate amendment), the special-use
provisions of section 2032A (which permit the exclusion of up
to $750,000 in value of a qualifying farm or other closely-held
business from a decedent's estate), and the provisions of
section 6166 (which provide for the installment payment of
estate taxes attributable to closely held businesses).
Qualified family-owned business interests
For purposes of the provision, a qualified family-owned
business interest is defined as any interest in a trade or
business (regardless of the form in which it is held) with a
principal place of business in the United States if ownership
of the trade or business is held at least 50 percent by one
family, 70 percent by two families, or 90 percent by three
families, as long as the decedent's family owns at least 30
percent of the trade or business. Under the provision, members
of an individual's family are defined using the same definition
as is used for the special-use valuation rules of section
2032A, and thus include (1) the individual's spouse, (2) the
individual's ancestors, (3) lineal descendants of the
individual, of the individual's spouse, or of the individual's
parents, and (4) the spouses of any such lineal descendants.
For purposes of applying the ownership tests in the case of a
corporation, the decedent and members of the decedent's family
are required to own the requisite percentage of the total
combined voting power of all classes of stock entitled to vote
and the requisite percentage of the total value of all shares
of all classes of stock of the corporation. In the case of a
partnership, the decedent and members of the decedent's family
are required to own the requisite percentage of the capital
interest, and the requisite percentage of the profits interest,
in the partnership.
In the case of a trade or business that owns an interest
in another trade or business (i.e., ``tiered entities''),
special look-through rules apply. Each trade or business owned
(directly or indirectly) by the decedent and members of the
decedent's family is separately tested to determine whether
that trade or business meets the requirements of a qualified
family-owned business interest. In applying these tests, any
interest that a trade or business owns in another trade or
business is disregarded in determining whether the first trade
or business is a qualified family-owned business interest. The
value of any qualified family-owned business interest held by
an entity is treated as being proportionately owned by or for
the entity's partners, shareholders, or beneficiaries. In the
case of a multi-tiered entity, such rules are sequentially
applied to look through each separate tier of the entity.
For example, if a holding company owns interests in two
other companies, each of the three entities will be separately
tested under the qualified family-owned business interest
rules. In determining whether the holding company is a
qualified family-owned business interest, its ownership
interest in the other two companies is disregarded. Even if the
holding company itself does not qualify as a family-owned
business interest, the other two companies still may qualify if
the direct and indirect interests held by the decedent and his
or her family members satisfy the requisite ownership
percentages and other requirements of a qualified family-owned
business interest. If either (or both) of the lower-tier
entities qualify, the value of the qualified family-owned
business interests owned by the holding company are treated as
proportionately owned by the holding company's shareholders.
An interest in a trade or business does not qualify if
the business's (or a related entity's) stock or securities were
publicly-traded at any time within three years of the
decedent's death. An interest in a trade or business also does
not qualify if more than 35 percent of the adjusted ordinary
gross income of the business for the year of the decedent's
death was personal holding company income (as defined in
section 543). This personal holding company restriction does
not apply to banks or domestic building and loan associations.
The value of a trade or business qualifying as a family-
owned business interest is reduced to the extent the business
holds passive assets or excess cash or marketable securities.
Under the provision, the value of qualified family-owned
business interests does not include any cash or marketable
securities in excess of the reasonably expected day-to-day
working capital needs of the trade or business. For this
purpose, it is intended that day-to-day working capital needs
be determined based on a historical average of the business's
working capital needs in the past, using an analysis similar to
that set forth in Bardahl Mfg. Corp., 24 T.C.M. 1030 (1965). It
is further intended that accumulations for capital acquisitions
not be considered ``working capital'' for this purpose. The
value of the qualified family-owned business interests also
does not include certain other passive assets. For this
purpose, passive assets include any assets that: (1) produce
dividends, interest, rents, royalties, annuities and certain
other types of passive income (as described in sec. 543(a));
(2) are an interest in a trust, partnership or REMIC (as
described in sec. 954(c)(1)(B)(ii)); (3) produce no income (as
described in sec. 954(c)(1)(B)(iii)); (4) give rise to income
from commodities transactions or foreign currency gains (as
described in sec. 954(c)(1) (C) and (D)); (5) produce income
equivalent to interest (as described in sec. 954(c)(1)(E)); or
(6) produce income from notional principal contracts or
payments in lieu of dividends (as described in new secs.
954(c)(1) (F) and (G), added elsewhere in the Senate
amendment). In the case of a regular dealer in property, such
property is not considered to produce passive income under
these rules, and thus, is not considered to be a passive asset.
Qualifying estates
A decedent's estate qualifies for the special treatment
only if the decedent was a U.S. citizen or resident at the time
of death, and the aggregate value of the decedent's qualified
family-owned business interests that are passed to qualified
heirs exceeds 50 percent of the decedent's adjusted gross
estate (the ``50-percent liquidity test''). For this purpose,
qualified heirs include any individual who has been actively
employed by the trade or business for at least 10 years prior
to the date of the decedent's death, and members of the
decedent's family. If a qualified heir is not a citizen of the
United States, any qualified family-owned business interest
acquired by that heir must be held in a trust meeting
requirements similar to those imposed on qualified domestic
trusts (under present-law sec. 2056A(a)), or through certain
other security arrangements that meet the satisfaction of the
Treasury Secretary. The 50-percent liquidity test generally is
applied by adding all transfers of qualified family-owned
business interests made by the decedent to qualified heirs at
the time of the decedent's death, plus certain lifetime gifts
of qualified family-owned business interests made to members of
the decedent's family, and comparing this total to the
decedent's adjusted gross estate. To the extent that a decedent
held qualified family-owned business interests in more than one
trade or business, all such interests are aggregated for
purposes of applying the 50-percent liquidity test.
The 50-percent liquidity test is calculated using a
ratio, the numerator and denominator of which are described
below.
The numerator is determined by aggregating the value of
all qualified family-owned business interests that are
includible in the decedent's gross estate and are passed from
the decedent to a qualified heir, plus any lifetime transfers
of qualified business interests that are made by the decedent
to members of the decedent's family (other than the decedent's
spouse), provided such interests have been continuously held by
members of the decedent's family and were not otherwise
includible in the decedent's gross estate. For this purpose,
qualified business interests transferred to members of the
decedent's family during the decedent's lifetime are valued as
of the date of such transfer. This amount is then reduced by
all indebtedness of the estate, except for the following: (1)
indebtedness on a qualified residence of the decedent
(determined in accordance with the requirements for
deductibility of mortgage interest set forth in section
163(h)(3)); (2) indebtedness incurred to pay the educational or
medical expenses of the decedent, the decedent's spouse or the
decedent's dependents; and (3) other indebtedness of up to
$10,000.
The denominator is equal to the decedent's gross estate,
reduced by any indebtedness of the estate, and increased by the
amount of the following transfers, to the extent not already
included in the decedent's gross estate: (1) any lifetime
transfers of qualified business intereststhat were made by the
decedent to members of the decedent's family (other than the decedent's
spouse), provided such interests have been continuously held by members
of the decedent's family, plus (2) any other transfers from the
decedent to the decedent's spouse that were made within 10 years of the
date of the decedent's death, plus (3) any other transfers made by the
decedent within three years of the decedent's death, except non-taxable
transfers made to members of the decedent's family. The Secretary of
Treasury is granted authority to disregard de minimis gifts. In
determining the amount of gifts made by the decedent, any gift that the
donor and the donor's spouse elected to have treated as a split gift
(pursuant to sec. 2513) is treated as made one-half by each spouse for
purposes of this provision.
Participation requirements
To qualify for the beneficial treatment provided under
the Senate amendment, the decedent (or a member of the
decedent's family) must have owned and materially participated
in the trade or business for at least five of the eight years
preceding the decedent's date of death. In addition, each
qualified heir (or a member of the qualified heir's family) is
required to materially participate in the trade or business for
at least five years of any eight-year period within 10 years
following the decedent's death. For this purpose, ``material
participation'' is defined as under present-law section 2032A
(special use valuation) and the regulations promulgated
thereunder. See, e.g., Treas. Reg. sec. 20.2032A-3. Under such
regulations, no one factor is determinative of the presence of
material participation and the uniqueness of the particular
industry (e.g., timber, farming, manufacturing, etc.) must be
considered. Physical work and participation in management
decisions are the principal factors to be considered. For
example, an individual generally is considered to be materially
participating in the business if he or she personally manages
the business fully, regardless of the number of hours worked,
as long as any necessary functions are performed.
If a qualified heir rents qualifying property to a member
of the qualified heir's family on a net cash basis, and that
family member materially participates in the business, the
material participation requirement will be considered to have
been met with respect to the qualified heir for purposes of
this provision.
Recapture provisions
The benefit of the exclusions for qualified family-owned
business interests are subject to recapture if, within 10 years
of the decedent's death and before the qualified heir's death,
one of the following ``recapture events'' occurs: (1) the
qualified heir ceases to meet the material participation
requirements (i.e., if neither the qualified heir nor any
member of his or her family has materially participated in the
trade or business for at least five years of any eight-year
period); (2) the qualified heir disposes of any portion of his
or her interest in the family-owned business, other than by a
disposition to a member of the qualified heir's family or
through a conservation contribution under section 170(h); (3)
the principal place of business of the trade or business ceases
to be located in the United States; or (4) the qualified heir
loses U.S. citizenship. A qualified heir who loses U.S.
citizenship may avoid such recapture by placing the qualified
family-owned business assets into a trust meeting requirements
similar to a qualified domestic trust (as described in present
law sec. 2056A(a)), or through certain other security
arrangements.
If one of the above recapture events occurs, an
additional tax is imposed on the date of such event. As under
section 2032A, each qualified heir is personally liable for the
portion of the recapture tax that is imposed with respect to
his or her interest in the qualified family-owned business.
Thus, for example, if a brother and sister inherit a qualified
family-owned business from their father, and only the sister
materially participates in the business, her participation will
cause both her and her brother to meet the material
participation test. If she ceases to materially participate in
the business within 10 years after her father's death (and the
brother still does not materially participate), the sister and
brother would both be liable for the recapture tax; that is,
each would be liable for the recapture tax attributable to his
or her interest.
The portion of the reduction in estate taxes that is
recaptured would be dependent upon the number of years that the
qualified heir (or members of the qualified heir's family)
materially participated in the trade or business after the
decedent's death. If the qualified heir (or his or her family
members) materially participated in the trade or business after
the decedent's death for less than six years, 100 percent of
the reduction in estate taxes attributable to that heir's
interest is recaptured; if the participation was for at least
six years but less than seven years, 80 percent of the
reduction in estate taxes is recaptured; if the participation
was for at least seven years but less than eight years, 60
percent is recaptured; if the participation was for at least
eight years but less than nine years, 40 percent is recaptured;
and if the participation was for at least nine years but less
than 10 years, 20 percent of the reduction in estate taxes is
recaptured. In general, there is no requirement that the
qualified heir (or members of his or her family) continue to
hold or participate in the trade or business more than 10 years
after the decedent's death. As under present-law section 2032A,
however, the 10-year recapture period may be extended for a
period of up to two years if the qualified heir does not begin
to use the property for a period of up to two years after the
decedent's death.
If a recapture event occurs with respect to any qualified
family-owned business interest (or portion thereof), the amount
of reduction in estate taxes attributable to that interest is
determined on a proportionate basis. For example, if the
decedent's estate included $2 million in qualified family-owned
business interests and $1 million of such interests received
beneficial treatment under this proposal, one-half of the value
of the interest disposed of is deemed to have received the
benefits provided under this proposal.
Effective date
The provision is effective with respect to the estates of
decedents dying after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment,
except that the exclusion forfamily-owned business interests
may be taken only to the extent that the exclusion for family-owned
business interests, plus the amount effectively exempted by the unified
credit, does not exceed $1.3 million.
The conferees clarify that a sale or disposition, in the
ordinary course of business, of assets such as inventory or a
piece of equipment used in the business (e.g., the sale of
crops or a tractor) would not result in recapture of the
benefits of the qualified family-owned business exclusion.
4. Reduction in estate tax for certain land subject to permanent
conservation easement (sec. 403 of the Senate amendment)
Present Law
A deduction is allowed for estate and gift tax purposes
for a contribution of a qualified real property interest to a
charity (or other qualified organization) exclusively for
conservation purposes (secs. 2055(f), 2522(d)). For this
purpose, a qualified real property interest means the entire
interest of the transferor in real property (other than certain
mineral interests), a remainder interest in real property, or a
perpetual restriction on the use of real property (sec.
170(h)). A ``conservation purpose'' is (1) preservation of land
for outdoor recreation by, or the education of, the general
public, (2) preservation of natural habitat, (3) preservation
of open space for scenic enjoyment of the general public or
pursuant to a governmental conservation policy, and (4)
preservation of historically important land or certified
historic structures. Also, a contribution will be treated as
``exclusively for conservation purposes'' only if the
conservation purpose is protected in perpetuity.
A donor making a qualified conservation contribution
generally is not allowed to retain an interest in minerals
which may be extracted or removed by any surface mining method.
However, deductions for contributions of conservation interests
satisfying all of the above requirements will be permitted if
two conditions are satisfied. First, the surface and mineral
estates in the property with respect to which the contribution
is made must have been separated before June 13, 1976 (and
remain so separated) and, second, the probability of surface
mining on the property with respect to which a contribution is
made must be so remote as to be negligible (sec. 170(h)(5)(B)).
The same definition of qualified conservation
contributions also applies for purposes of determining whether
such contributions qualify as charitable deductions for income
tax purposes.
House Bill
No provision.
Senate Amendment
Reduction in estate taxes for certain land subject to permanent
conservation easement
The Senate amendment allows an executor to elect to
exclude from the taxable estate 40 percent of the value of any
land subject to a qualified conservation easement that meets
the following requirements: (1) the land is located within 25
miles of a metropolitan area (as defined by the Office of
Management and Budget) or a national park or wilderness area,
or within 10 miles of an Urban National Forest (as designated
by the Forest Service of the U.S. Department of Agriculture);
(2) the land has been owned by the decedent or a member of the
decedent's family at all times during the three-year period
ending on the date of the decedent's death; and (3) a qualified
conservation contribution (within the meaning of sec. 170(h))
of a qualified real property interest (as generally defined in
sec. 170(h)(2)(C)) was granted by the decedent or a member of
his or her family. For purposes of the provision, preservation
of a historically important land area or a certified historic
structure does not qualify as a conservation purpose. To the
extent that the value of such land is excluded from the taxable
estate, the basis of such land acquired at death is a carryover
basis (i.e., the basis is not stepped-up to its fair market
value at death). Debt-financed property is not eligible for the
exclusion.
The exclusion amount is calculated based on the value of
the property after the conservation easement has been placed on
the property. The exclusion from estate taxes does not extend
to the value of any development rights retained by the decedent
or donor, although payment for estate taxes on retained
development rights may be deferred for up to two years, or
until the disposition of the property, whichever is earlier.
For this purpose, retained development rights are any rights
retained to use the land for any commercial purpose which is
not subordinate to and directly supportive of farming purposes,
as defined in section 6420 (e.g., tree farming, ranching,
viticulture, and the raising of other agricultural or
horticultural commodities).
Maximum benefit allowed
The 40-percent estate tax exclusion for land subject to a
qualified conservation easement (described above) may be taken
only to the extent that the total exclusion for qualified
conservation easements, plus the exclusion for qualified
family-owned business interests (described in V.A.3., above),
does not exceed $1 million. The executor of an estate holding
land subject to a qualified conservation easement and/or
qualified family-owned business interests is required to
designate which of the two benefits is being claimed with
respect to each property on which a benefit is claimed.
If the value of the conservation easement is less than 30
percent of (1) the value of the land without the easement,
reduced by (2) the value of any retained development rights,
then the exclusion percentage is reduced. The reduction in the
exclusion percentage is equal to two percentage points for each
point that the above ratio falls below 30 percent. Thus, for
example, if the value of the easement is 25 percent of the
value of the land before the easement less the value of the
retained development rights, the exclusion percentage is 30
percent (i.e., the 40 percent amount is reduced by twice the
difference between 30 percent and 25 percent). Under this
calculation, if the value of the easement is 10 percent or less
of the value of the land beforethe easement less the value of
the retained development rights, the exclusion percentage is equal to
zero.
Treatment of land subject to a conservation easement for purposes of
special-use valuation
The granting of a qualified conservation easement (as
defined above) is not treated as a disposition triggering the
recapture provisions of section 2032A. In addition, the
existence of a qualified conservation easement does not prevent
such property from subsequently qualifying for special-use
valuation treatment under section 2032A.
Retained mineral interests
The Senate amendment also allows a charitable deduction
(for income tax purposes or estate tax purposes) to taxpayers
making a contribution of a permanent conservation easement on
property where a mineral interest has been retained and surface
mining is possible, but its probability is ``so remote as to be
negligible.'' Present law provides for a charitable deduction
in such a case if the mineral interests have been separated
from the land prior to June 13, 1976. The provision allows such
a charitable deduction to be taken regardless of when the
mineral interests had been separated.
Effective date
The estate tax exclusion applies to decedents dying after
December 31, 1997. The rules with respect to the treatment of
conservation easements under section 2032A and with respect to
retained mineral interests are effective for easements granted
after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment,
except that the maximum exclusion for land subject to a
qualified conservation easement is limited to $100,000 in 1998,
$200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and
$500,000 in 2002 and thereafter. The exclusion for land subject
to a qualified conservation easement may be taken in addition
to the maximum exclusion for qualified family-owned business
interests (i.e., there is no coordination between the two
provisions).
The conference agreement provides that de minimis
commercial recreational activity that is consistent with the
conservation purpose, such as the granting of hunting and
fishing licenses, will not cause the property to fail to
qualify under this provision. It is anticipated that the
Secretary of the Treasury will provide guidance as to the
definition of ``de minimis'' activities. In addition, the
conference agreement makes technical modifications (a) to
provide that the definition of farming for purposes of this
provision is the same as the definition set forth in section
2032A(e)(5), and (b) to clarify that a post-mortem conservation
easement may be placed on the property, as long as the easement
has been made no later than the date of the election.
The conferees clarify that debt-financed property is
eligible for this provision to the extent of the net equity in
the property. For example, if a $1 million property is subject
to an outstanding debt balance of $100,000, it is treated in
the same manner as a $900,000 property that is not debt-
financed.
5. Installment payments of estate tax attributable to closely held
businesses (secs. 502-503 of the House bill and secs. 404-405
of the Senate amendment)
Present Law
In general, the Federal estate tax is due within nine
months of a decedent's death. Under Code section 6166, an
executor generally may elect to pay the estate tax attributable
to an interest in a closely held business in installments over,
at most, a 14-year period. If the election is made, the estate
may pay only interest for the first four years, followed by up
to 10 annual installments of principal and interest. Interest
generally is imposed at the rate applicable to underpayments of
tax under section 6621 (i.e., the Federal short-term rate plus
3 percentage points). Under section 6601(j), however, a special
4-percent interest rate applies to the amount of deferred
estate tax attributable to the first $1,000,000 in value of the
closely-held business.
To qualify for the installment payment election, the
business must be an active trade or business and the value of
the decedent's interest in the closely held business must
exceed 35 percent of the decedent's adjusted gross estate. An
interest in a closely held business includes: (1) any interest
as a proprietor in a business carried on as a proprietorship;
(2) any interest in a partnership carrying on a trade or
business if the partnership has 15 or fewer partners, or if at
least 20 percent of the partnership's assets are included in
determining the decedent's gross estate; or (3) stock in a
corporation if the corporation has 15 or fewer shareholders, or
if at least 20 percent of the value of the voting stock is
included in determining the decedent's gross estate.
House Bill
The House bill extends the period for which Federal
estate tax installments can be made under section 6166 to a
maximum period of 24 years. If the election is made, the estate
pays only interest for the first four years, followed by up to
20 annual installments of principal and interest.
In addition, the House bill provides that no interest is
imposed on the amount of deferred estate tax attributable to
the first $1,000,000 in taxable value of the closely held
business (i.e., the first $1,000,000 in value in excess of the
effective exemption provided by the unified credit).
The interest rate imposed on the amount of deferred
estate tax attributable to the taxable value of the closely
held business in excess of $1,000,000 is reduced to an amount
equal to 45 percent of the rate applicable to underpayments of
tax. The interest paid on estate taxes deferred under section
6166 is not deductible for estate or income tax purposes.
Effective date.--The provision is effective for decedents
dying after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement reduces the 4-percent interest
rate to 2 percent, and makes the interest paid on estate taxes
deferred under section 6166 non-deductible for estate or income
tax purposes. The 2-percent interest rate is imposed on the
amount of deferred estate tax attributable to the first
$1,000,000 in taxable value of the closely held business (i.e.,
the first $1,000,000 in value in excess of the effective
exemption provided by the unified credit and any other
exclusions).55 The interest rate imposed on the
amount of deferred estate tax attributable to the taxable value
of the closely held business in excess of $1,000,000 is reduced
to an amount equal to 45 percent of the rate applicable to
underpayments of tax.
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\55\ The $1,000,000 threshold is indexed under other provisions of
the bill.
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The conference agreement does not include the provision
that extends the repayment period to a maximum period of 24
years or the provision that provides a zero-percent interest
rate for a portion of the deferred estate tax attributable to
closely held businesses.
Effective date.--The provision is effective for decedents
dying after December 31, 1997. Estates deferring estate tax
under current law may make a one-time election to use the lower
interest rates and forego the interest deduction for
installments due after the date of the election (but such
estates do not receive the benefit of the increase in the
amount eligible for the 6601(j) interest rate--i.e., only the
amount that was previously eligible for the 4-percent rate
would be eligible for the 2-percent rate).
6. Estate tax recapture from cash leases of specially-valued property
(sec. 504 of the House bill and sec. 406 of the Senate
amendment)
Present Law
A Federal estate tax is imposed on the value of property
passing at death. Generally, such property is included in the
decedent's estate at its fair market value. Under section
2032A, the executor may elect to value certain ``qualified real
property'' used in farming or other qualifying trade or
business at its current use value rather than its highest and
best use. If, after the special-use valuation election is made,
the heir who acquired the real property ceases to use it in its
qualified use within 10 years (15 years for individuals dying
before 1982) of the decedent's death, an additional estate tax
is imposed in order to ``recapture'' the benefit of the
special-use valuation (sec. 2032A(c)).
Some courts have held that cash rental of specially-
valued property after the death of the decedent is not a
qualified use under section 2032A because the heirs no longer
bear the financial risk of working the property, and,
therefore, results in the imposition of the additional estate
tax under section 2032A(c). See Martin v. Commissioner, 783
F.2d 81 (7th Cir. 1986) (cash lease to unrelated party not
qualified use); Williamson v. Commissioner, 93 T.C. 242 (1989),
aff'd, 974 F.2d 1525 (9th Cir. 1992) (cash lease to family
member not a qualified use); Fisher v. Commissioner, 65 T.C.M.
2284 (1993) (cash lease to family member not a qualified use);
cf. Minter v. U.S., 19 F.3d 426 (8th Cir. 1994) (cash lease to
family's farming corporation is qualified use); Estate of Gavin
v. U.S., 1997 U.S. App. Lexis 10383 (8th Cir. 1997) (heir's
option to pay cash rent or 50 percent crop share is qualified
use).
With respect to a decedent's surviving spouse, a special
rule provides that the surviving spouse will not be treated as
failing to use the property in a qualified use solely because
the spouse rents the property to a member of the spouse's
family on a net cash basis. (sec. 2032A(b)(5)). Under section
2032A, members of an individual's family include (1) the
individual's spouse, (2) the individual's ancestors, (3) lineal
descendants of the individual, of the individual's spouse, or
of the individual's parents, and (4) the spouses of any such
lineal descendants.
House Bill
The House bill provides that the cash lease of specially-
valued real property by a lineal descendant of the decedent to
a member of the lineal descendant's family, who continues to
operate the farm or closely held business, does not cause the
qualified use of such property to cease for purposes of
imposing the additional estate tax under section 2032A(c).
Effective date.--The provision is effective for cash
rentals occurring after December 31, 1976.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
7. Clarify eligibility for extension of time for payment of estate tax
(sec. 505 of the House bill)
Present Law
In general, the Federal estate tax is due within nine
months of a decedent's death. Under Code section 6166, an
executor generally may elect to pay the estate tax attributable
to an interest in a closely held business in installments over,
at most, a 14-year period. If the electionis made, the estate
may pay only interest for the first four years, followed by up to 10
annual installments of principal and interest. To qualify for the
installment payment election, the business must meet certain
requirements. If certain events occur during the repayment period
(e.g., the closely held business is sold), full payment of all deferred
estate taxes is required at that time.
Under present law, there is limited access to judicial
review of disputes regarding initial or continuing eligibility
for the deferral and installment election under section 6166.
If the Commissioner determines that an estate was not initially
eligible for deferral under section 6166, or has lost its
eligibility for such deferral, the estate is required to pay
the full amount of estate taxes asserted by the Commissioner as
being owed in order to obtain judicial review of the
Commissioner's determination.
House Bill
The House bill authorizes the U.S. Tax Court to provide
declaratory judgments regarding initial or continuing
eligibility for deferral under section 6166.
Effective date.--The provision applies to decedents dying
after date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
8. Gifts may not be revalued for estate tax purposes after expiration
of statute of limitations (sec. 506 of the House bill)
Present Law
The Federal estate and gift taxes are unified so that a
single progressive rate schedule is applied to an individual's
cumulative gifts and bequests. The tax on gifts made in a
particular year is computed by determining the tax on the sum
of the taxable gifts made that year and all prior years and
then subtracting the tax on the prior years taxable gifts and
the unified credit. Similarly, the estate tax is computed by
determining the tax on the sum of the taxable estate and prior
taxable gifts and then subtracting the tax on taxable gifts and
the unified credit. Under a special rule applicable to the
computation of the gift tax (sec. 2504(c)), the value of gifts
made in prior years is the value that was used to determine the
prior year's gift tax. There is no comparable rule in the case
of the computation of the estate tax.
Generally, any estate or gift tax must be assessed within
three years after the filing of thereturn. No proceeding in a
court for the collection of an estate or gift tax can be begun without
an assessment within the three-year period. If no return is filed, the
tax may be assessed, or a suit commenced to collect the tax without
assessment, at any time. If an estate or gift tax return is filed, and
the amount of unreported items exceeds 25 percent of the amount of the
reported items, the tax may be assessed or a suit commenced to collect
the tax without assessment, within six years after the return was filed
(sec. 6501).
Commencement of the statute of limitations generally does
not require that a particular gift be disclosed. A special
rule, however, applies to certain gifts that are valued under
the special valuation rules of Chapter 14. The gift tax statute
of limitations runs for such a gift only if it is disclosed on
a gift tax return in a manner adequate to apprise the Secretary
of the Treasury of the nature of the item.
Most courts have permitted the Commissioner to
redetermine the value of a gift for which the statute of
limitations period for the gift tax has expired in order to
determine the appropriate tax rate bracket and unified credit
for the estate tax. See, e.g., Evanson v. United States, 30
F.3d 960 (9th Cir. 1994); Stalcup v. United States, 946 F. 2d
1125 (5th Cir. 1991); Estate of Levin, 1991 T.C. Memo 1991-208,
aff'd 986 F. 2d 91 (4th Cir. 1993); Estate of Smith v.
Commissioner, 94 T.C. 872 (1990). But see Boatman's First
National Bank v. United States, 705 F. Supp. 1407 (W.D. Mo.
1988) (Commissioner not permitted to revalue gifts).
House Bill
The House bill provides that a gift for which the
limitations period has passed cannot be revalued for purposes
of determining the applicable estate tax bracket and available
unified credit. For gifts made in calendar years after the date
of enactment, the House bill also extends the special rule
governing gifts valued under Chapter 14 to all gifts. Thus, the
statute of limitations will not run on an inadequately
disclosed transfer in calendar years after the date of
enactment, regardless of whether a gift tax return was filed
for other transfers in that same year.
It is intended that, in order to revalue a gift that has
been adequately disclosed on a gift tax return, the IRS must
issue a final notice of redetermination of value (a ``final
notice'') within the statute of limitations applicable to the
gift for gift tax purposes (generally, three years). This rule
is applicable even where the value of the gift as shown on the
return does not result in any gift tax being owed (e.g.,
through use of the unified credit). It also is anticipated that
the IRS will develop an administrative appeals process whereby
a taxpayer can challenge a redetermination of value by the IRS
prior to issuance of a final notice.
A taxpayer who is mailed a final notice may challenge the
redetermined value of the gift (as contained in the final
notice) by filing a motion for a declaratory judgment with the
Tax Court. The motion must be filed on or before 90 days from
the date that the final notice was mailed. The statute of
limitations is tolled during the pendency of the Tax Court
proceeding.
Effective date.--The provision generally applies to gifts
made after the date of enactment. The extension of the special
rule under chapter 14 to all gifts applies to gifts made in
calendar years after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
9. Repeal of throwback rules applicable to domestic trusts (sec. 507 of
the House bill)
Present Law
A nongrantor trust is treated as a separate taxpayer for
Federal income tax purposes. Such a trust generally is treated
as a conduit with respect to amounts distributed currently
56 and taxed with respect to any income which is
accumulated in the trust rather than distributed. A separate
graduated tax rate structure applies to trusts which
historically has permitted accumulated trust income to be taxed
at lower rates than the rates applicable to trust
beneficiaries. This benefit often was compounded through the
creation of multiple trusts.
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\56\ The conduit treatment is achieved by allowing the trust a
deduction for amounts distributed to beneficiaries during the taxable
year to the extent of distributable net income and by including such
distributions in the beneficiaries' income.
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The Internal Revenue Code has several rules intended to
limit the benefit that would otherwise occur from using the
lower rates applicable to one or more trusts. Under the so-
called ``throwback'' rules, the distribution of previously
accumulated trust income to a beneficiary will be subject to
tax (in addition to any tax paid by the trust on that income)
where the beneficiary's average top marginal rate in the
previous five years is higher than those of the trust.
Under section 643(f), two or more trusts are treated as
one trust if (1) the trusts have substantially the same grantor
or grantors and substantially the same primary beneficiary or
beneficiaries, and (2) a principal purpose for the existence of
the trusts is to avoid Federal income tax. For trusts that were
irrevocable as of March 1, 1984, section 643(f) applies only to
contributions to corpus after that date.
Under section 644, if property is sold within two years
of its contribution to a trust, the gain that would have been
recognized had the contributor sold the property is taxed at
the contributor's marginal tax rates. In effect, section 644
treats such gains as if the contributor had realized the gain
and then transferred the net after-tax proceeds from the sale
to the trust as corpus.
Sections 665 through 668 apply different rules to
distributions of previously accumulated trust income from a
foreign trust than to distributions of such income from
domestic trusts. If a foreign trust accumulates income, changes
its situs so as to become a domestic trust, and then makes a
distribution that is deemed to have been made in a year in
which the trust was a foreign trust, the distribution is
treated as a distribution from a foreign trust for purposes of
the accumulation distribution rules. Rev. Rul. 91-6, 1991-1
C.B. 89.
House Bill
The House bill exempts from the throwback rules amounts
distributed by a domestic trust after the date of enactment.
The House bill also provides that precontribution gain on
property sold by a domestic trust no longer is subject to
section 644 (i.e., taxed at the contributor's marginal tax
rates).
The treatment of foreign trusts, including the treatment
of foreign trusts that become domestic trusts,57
remains unchanged.
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\57\ Rev. Rul. 91-6, 1991-1 C.B. 89.
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Effective date.--The provision with respect to the
throwback rules is effective for distributions made in taxable
years beginning after the date of enactment. The modification
to section 644 applies to sales or exchanges after the date of
enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, except
that the throwback rules continue to apply with respect to (a)
foreign trusts, (b) domestic trusts that were once treated as
foreign trusts (except as provided in Treasury regulations),
and (c) domestic trusts created before March 1, 1984, that
would be treated as multiple trusts under sec. 643(f) of the
Code.
10. Unified credit of decedent increased by unified credit of spouse
used on split gift included in decedent's gross estate (sec.
508 of the House bill)
Present Law
A gift tax is imposed on transfers by gift during life
and an estate tax is imposed on transfers at death. The gift
and estate taxes are a unified transfer tax system in that one
progressive tax is imposed on the cumulative transfers during
lifetime and at death. The first $10,000 of gifts of present
interests to each donee during any one calendar year are
excluded from Federal gift tax. Under section 2513, one spouse
can elect to treat a gift made by the other spouse to a third
person as made one-half by each spouse (i.e., ``gift-
splitting'').
The amount of estate tax payable generally is determined
by multiplying the applicable tax rate (from the unified rate
schedule) by the cumulative post-1976 taxable transfers made by
the taxpayer and then subtracting any transfer taxes payable
for prior taxable periods. This amount is reduced by any
remaining available unified credit (and other applicable
credits) to determine the estate tax liability. The estate tax
is imposed on all of the assets held by the decedent at his
death, including the value of certain property previously
transferred by the decedent in which the decedent had certain
retained powers or interests. In such circumstances, property
that has been treated as a gift made one-half by each spouse
may be includible in both spouses' estates.
House Bill
With respect to any split-gift property that is
subsequently includible in both spouses' estates, the House
bill increases the unified credit allowable to the decedent's
estate by the amount of the unified credit previously allowed
to the decedent's spouse with respect to the split gift.
Effective date.--The provision applies to gifts made
after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
11. Reformation of defective bequests to spouse of decedent (sec. 509
of the House bill)
Present Law
A ``marital deduction'' generally is allowed for estate
and gift tax purposes for the value of property passing to a
spouse. However, ``terminable interest'' property (i.e., an
interest in property that will terminate or fail) transferred
to a spouse generally will only qualify for the marital
deduction under certain special rules designed to ensure that
there will be an estate or gift tax to the transferee spouse on
unspent transferred proceeds. Thus, the effect of a marital
deduction with the terminable interest rule is to provide only
a method of deferral of the estate or gift tax, not exemption.
One of the special terminable interest rules (Code sec.
2056(b)(5)) provides that the marital deduction is allowed
where the decedent transfers property to a trust that is
required to pay income to the surviving spouse and the
surviving spouse has a general power of appointment at that
spouse's death (under this so-called ``power of appointment
trust,''the power of appointment both provides the surviving
spouse with power to control the ultimate disposition of the trust
assets and assures that the trust assets will be subject to estate or
gift tax). Another special terminable interest rule called the
``qualified terminable interest property'' rule (``QTIP'') generally
permits a marital deduction for transfers by the decedent to a trust
that is required to distribute all of the income to the surviving
spouse at least annually and an election is made to subject the
transferee spouse to transfer tax on the trust property. To qualify for
the marital deduction, a power of appointment trust or QTIP trust must
meet certain specific requirements. If there is a technical defect in
meeting those requirements, the marital deduction may be lost.
House Bill
The House bill allows the marital deduction with respect
to a defective power of appointment or QTIP trust if there is a
``qualified reformation'' of the trust that corrects the
defect. In order to qualify, the reformation must change the
governing instrument in a manner that cures the defects to
qualification of the trust for the marital deduction. In
addition, where a reformation proceeding is commenced after the
due date for the estate tax return (including extensions), the
reformation would qualify only if, prior to reformation, the
governing instrument provides (1) that the surviving spouse is
entitled to all of the income from the property for life, and
(2) no person other than the surviving spouse is entitled to
any distributions during the surviving spouse's life. With
respect to QTIP, an election to qualify must be made by the
executor on the estate tax return as required by section
2056(b)(7)(B)(v).
The determination of whether a marital deduction should
be allowed (i.e., the reformation has cured the defects to
qualification and otherwise qualifies under this provision) is
made either as of the due date for filing the estate or gift
tax return (including any extensions) or the time that changes
are completed pursuant to a reformation proceeding. The statute
of limitations is extended with respect to the estate or gift
tax attributable to the trust property until one year after the
date the Treasury Department is notified that a qualified
reformation has been completed or that the reformation
proceeding has otherwise terminated.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
B. Generation-Skipping Tax Provisions
1. Severing of trusts holding property having an inclusion ratio of
greater than zero (sec. 511 of the House bill)
Present Law
A generation-skipping transfer tax (``GST'' tax)
generally is imposed on transfers, either directly or through a
trust or similar arrangement, to a skip person (i.e., a
beneficiary in more than one generation below that of the
transferor). Transfers subject to the GST tax include direct
skips, taxable terminations and taxable distributions. An
exemption of $1 million is provided for each person making
generation-skipping transfers. The exemption may be allocated
by a transferor (or his or her executor) to transferred
property.
If the value of the transferred property exceeds the
amount of the GST exemption allocated to that property, the GST
tax generally is determined by multiplying a flat tax rate
equal to the highest estate tax rate (i.e., currently 55
percent) by the ``inclusion percentage'' and the value of the
taxable property at the time of the taxable event. The
``inclusion percentage'' is the number one minus the
``exclusion percentage''. The exclusion percentage generally is
calculated by dividing the amount of the GST exemption
allocated to the property by the value of the property.
Under Treasury regulations, trusts that are included in
the transferor's gross estate or created under the transferor's
will may be validly severed only if (1) the trust is severed
according to a direction in the governing instrument; or (2)
the trust is severed pursuant to the trustee's discretionary
powers, but only if certain other conditions are satisfied
(e.g., the severance occurs or a reformation proceeding begins
before the estate tax return is due). Treas. Reg. 26.2654-1(b).
House Bill
If a trust with an inclusion ratio of greater than zero
is severed into two separate trusts, the House bill allows the
trustee to elect to treat one of the separate trusts as having
an inclusion ratio of zero and the other separate trust as
having an inclusion ratio of one. To qualify for this
treatment, the separate trust with the inclusion ratio of one
must receive an interest in each property held by the single
trust (prior to severance) equal to the single trust's
inclusion ratio, except to the extent otherwise provided by
regulation. The remaining interests in each property will be
transferred to the separate trust with the inclusion ratio of
zero. The election must be irrevocable, and must be made at a
time and in a manner prescribed by the Treasury Department.
Effective date.--The provision is effective for
severances of trusts occurring after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
2. Modification of generation-skipping transfer tax for transfers to
individuals with deceased parents (sec. 512 of the House bill
and sec. 407 of the Senate amendment)
Present Law
Under the ``predeceased parent exception'', a direct skip
transfer to a transferor's grandchild is not subject to the
generation-skipping transfer (``GST'') tax if the child of the
transferor who was the grandchild's parent is deceased at the
time of the transfer (sec. 2612(c)(2)). This ``predeceased
parent exception'' to the GST tax is not applicable to (1)
transfers to collateral heirs, e.g., grandnieces or
grandnephews, or (2) taxable terminations or taxable
distributions.
House Bill
The House bill extends the predeceased parent exception
to transfers to collateral heirs, provided that the decedent
has no living lineal descendants at the time of the transfer.
For example, the exception would apply to a transfer made by an
individual (with no living lineal heirs) to a grandniece where
the transferor's nephew or niece who is the parent of the
grandniece is deceased at the time of the transfer.
In addition, the House bill extends the predeceased
parent exception (as modified by the change in the preceding
paragraph) to taxable terminations and taxable distributions,
provided that the parent of the relevant beneficiary was dead
at the earliest time that the transfer (from which the
beneficiary's interest in the property was established) was
subject to estate or gift tax. For example, where a trust was
established to pay an annuity to a charity for a term for years
with a remainder interest granted to a grandson, the
termination of the term for years would not be a taxable
termination subject to the GST tax if the grandson's parent
(who is the son or daughter of the transferor) is deceased at
the time the trust was created and the transfer creating the
trust was subject to estate or gift tax.
Effective date.--The provision is effective for
generation skipping transfers occurring after December 31,
1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
VI. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS
A. Research Tax Credit (sec. 601 of the House bill and sec. 501 of the
Senate amendment)
Present Law
General rule
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenditures for a taxable year exceeded its base amount for
that year. The research tax credit expired and generally will
not apply to amounts paid or incurred after May 31,
1997.1
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\1\ When originally enacted, the research tax credit applied to
qualified expenses incurred after June 30, 1981. The credit was
modified several times and was extended through June 30, 1995. The
credit later was extended for the period July 1, 1996, through May 31,
1997 (with a special 11-month extension for taxpayers that elect to be
subject to the alternative incremental research credit regime).
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A 20-percent research tax credit also applied to the
excess of (1) 100 percent of corporate cash expenditures
(including grants or contributions) paid for basic research
conducted by universities (and certain nonprofit scientific
research organizations) over (2) the sum of (a) the greater of
two minimum basic research floors plus (b) an amount reflecting
any decrease in nonresearch giving to universities by the
corporation as compared to such giving during a fixed-base
period, as adjusted for inflation. This separate credit
computation is commonly referred to as the ``university basic
research credit'' (see sec. 41(e)).
Computation of allowable credit
Except for certain university basic research payments
made by corporations, the research tax credit applies only to
the extent that the taxpayer's qualified research expenditures
for the current taxable year exceed its base amount. The base
amount for the current year generally is computed by
multiplying the taxpayer's ``fixed-base percentage'' by the
average amount of the taxpayer's gross receipts for the four
preceding years. If a taxpayer both incurred qualified research
expenditures and had gross receipts during each of at least
three years from 1984 through 1988, then its ``fixed-base
percentage'' is the ratio that its total qualified research
expenditures for the 1984-1988 period bears to its total gross
receipts for that period (subject to a maximum ratio of .16).
All other taxpayers (so-called ``start-up firms'') are assigned
a fixed-base percentage of 3 percent.2
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\2\ The Small Business Job Protection Act of 1996 expanded the
definition of ``start-up firms'' under section 41(c)(3)(B)(I) to
include any firm if the first taxable year in which such firm had both
gross receipts and qualified research expenses began after 1983.
A special rule (enacted in 1993) is designed to gradually recompute
a start-up firm's fixed-base percentage based on its actual research
experience. Under this special rule, a start-up firm will be assigned a
fixed-base percentage of 3 percent for each of its first five taxable
years after 1993 in which it incurs qualified research expenditures. In
the event that the research credit is extended beyond the scheduled
expiration date, a start-up firm's fixed-base percentage for its sixth
through tenth taxable years after 1993 in which it incurs qualified
research expenditures will be a phased-in ratio based on its actual
research experience. For all subsequent taxable years, the taxpayer's
fixed-base percentage will be its actual ratio of qualified research
expenditures to gross receipts for any five years selected by the
taxpayer from its fifth through tenth taxable years after 1993 (sec.
41(c)(3)(B)).
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In computing the credit, a taxpayer's base amount may not
be less than 50 percent of its current-year qualified research
expenditures.
To prevent artificial increases in research expenditures
by shifting expenditures among commonly controlled or otherwise
related entities, a special aggregation rule provides that all
members of the same controlled group of corporations are
treated as a single taxpayer (sec. 41(f)(1)). Special rules
apply for computing the credit when a major portion of a
business changes hands, under which qualified research
expenditures and gross receipts for periods prior to the change
of ownership of a trade or business are treated as transferred
with the trade or business that gave rise to those expenditures
and receipts for purposes of recomputing a taxpayer's fixed-
base percentage (sec. 41(f)(3)).
Alternative incremental research credit regime
As part of the Small Business Job Protection Act of 1996,
taxpayers are allowed to elect an alternative incremental
research credit regime. If a taxpayer elects to be subject to
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 1.65 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of 1 percent
(i.e., the base amount equals 1 percent of the taxpayer's
average gross receipts for the four preceding years) but do not
exceed a base amount computed by using a fixed-base percentage
of 1.5 percent. A credit rate of 2.2 percent applies to the
extent that a taxpayer's current-year research expenses exceed
a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a
fixed-base percentage of 2 percent. A credit rate of 2.75
percent applies to the extent that a taxpayer's current-year
research expenses exceed a base amount computed by using a
fixed-base percentage of 2 percent. An election to be subject
to this alternative incremental credit regime may be made only
for a taxpayer's first taxable year beginning after June 30,
1996, and before July 1, 1997, and such an election applies to
that taxable year and all subsequent years (in the event that
the credit subsequently is extended by Congress) unless revoked
with the consent of the Secretary of the Treasury. If a
taxpayer elects the alternative incremental research credit
regime for its first taxable year beginning after June 30,
1996, and before July 1, 1997, then all qualified research
expenses paid or incurred during the first 11 months of such
taxable year are treated as qualified research expenses for
purposes of computing the taxpayer's credit.
Eligible expenditures
Qualified research expenditures eligible for the research
tax credit consist of: (1) ``in-house'' expenses of the
taxpayer for wages and supplies attributable to qualified
research; (2) certain time-sharing costs for computer use in
qualified research; and (3) 65 percent of amounts paid by the
taxpayer for qualified research conducted on the taxpayer's
behalf (so-called ``contract research expenses'').3
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\3\ Under a special rule enacted as part of the Small Business Job
Protection Act of 1996, 75 percent of amounts paid to a research
consortium for qualified research is treated as qualified research
expenses eligible for the research credit (rather than 65 percent under
the general rule under section 41(b)(3) governing contract research
expenses) if (1) such research consortium is a tax-exempt organization
that is described in section 501(c)(3) (other than a private
foundation) or section 501(c)(6) and is organized and operated
primarily to conduct scientific research, and (2) such qualified
research is conducted by the consortium on behalf of the taxpayer and
one or more persons not related to the taxpayer.
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To be eligible for the credit, the research must not only
satisfy the requirements of present-law section 174 (described
below) but must be undertaken for the purpose of discovering
information that is technological in nature, the application of
which is intended to be useful in the development of a new or
improved business component of the taxpayer, and must pertain
to functional aspects, performance, reliability, or quality of
a business component. Research does not qualify for the credit
if substantially all of the activities relate to style, taste,
cosmetic, or seasonal design factors (sec. 41(d)(3)). In
addition, research does not qualify for the credit if conducted
after the beginning of commercial production of the business
component, if related to the adaptation of an existing business
component to a particular customer's requirements, if related
to the duplication of an existing business component from a
physical examination of the component itself or certain other
information, or if related to certain efficiency surveys,
market research or development, or routine quality control
(sec. 41(d)(4)).
Expenditures attributable to research that is conducted
outside the United States do not enter into the credit
computation. In addition, the credit is not available for
research in the social sciences, arts, or humanities, nor is it
available for research to the extent funded by any grant,
contract, or otherwise by another person (or governmental
entity).
Relation to deduction
Under section 174, taxpayers may elect to deduct
currently the amount of certain research or experimental
expenditures incurred in connection with a trade or business,
notwithstanding the general rule that business expenses to
develop or create an asset that has a useful life extending
beyond the current year must be capitalized. However,
deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year. Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed (sec. 280C(c)(3)).
House Bill
The research tax credit is extended for 19 months--i.e.,
generally for the period June 1, 1997, through December 31,
1998.
Under the House bill, taxpayers are permitted to elect
the alternative incremental research credit regime under
section 41(c)(4) for any taxable year beginning after June 30,
1996, and such election will apply to that taxable year and all
subsequent taxable years unless revoked with the consent of the
Secretary of the Treasury.
Effective date.--The provision generally is effective for
qualified research expenditures paid or incurred during the
period June 1, 1997, through December 31, 1998. A special rule
provides that, notwithstanding the general termination date for
the research credit of December 31, 1998, if a taxpayer elects
to be subject to the alternative incremental research credit
regime for its first taxable year beginning after June 30,
1996, and before July 1, 1997, the alternative incremental
research credit will be available during the entire 30-month
period beginning with the first month of such taxable year--
i.e., the equivalent of the 11-month extension provided for by
the Small Business Job Protection Act of 1996 plus an
additional 19-month extension provided for by this bill.
However, to prevent taxpayers from effectively obtaining more
than 30 months of research credits from the Small Business Job
Protection Act of 1996 and this bill, the 30-month period for
taxpayers electing the alternative incremental research credit
regime is reduced by the number of months (if any) after June
1996 with respect to which the taxpayer claimed research credit
amounts under the regular, 20-percent research credit rules.
Senate Amendment
The research tax credit is extended for 24 months--i.e.,
generally for the period June 1, 1997, through May 31, 1999.
Under the Senate amendment, taxpayers are permitted to
elect the alternative incremental research credit regime under
section 41(c)(4) for any taxable year beginning after June 30,
1996, and such election will apply to that taxable year and all
subsequent taxable years unless revoked with the consent of the
Secretary of the Treasury.
Effective date.--The provision generally is effective for
qualified research expenditures paid or incurred during the
period June 1, 1997, through December 31, 1999. A special rule
provides that, notwithstanding the general termination date for
the research credit of December 31, 1999, if a taxpayer elects
to be subject to the alternative incremental research credit
regime for its first taxable year beginning after June 30,
1996, and before July 1, 1997, the alternative incremental
research credit will be available during the entire 35-month
period beginning with the first month of such taxable year--
i.e., the equivalent of the 11-month extension provided for by
the Small Business Job Protection Act of 1996 plus an
additional 24-month extension provided for by the Senate
amendment. However, to prevent taxpayers from effectively
obtaining more than 35 months of research credits from the
Small Business Job Protection Act of 1996 and this bill, the
35-month period for taxpayers electing the alternative
incremental research credit regime is reduced by the number of
months (if any) after June 1996 with respect to which the
taxpayer claimed research credit amounts under the regular, 20-
percent research credit rules.
Conference Agreement
Under the conference agreement, the research tax credit
is extended for 13 months--i.e., generally for the period June
1, 1997, through June 30, 1998.
Under the provision, taxpayers are permitted to elect the
alternative incremental research credit regime under section
41(c)(4) for any taxable year beginning after June 30, 1996,
and such election will apply to that taxable year and all
subsequent taxable years unless revoked with the consent of the
Secretary of the Treasury.
Effective date.--The provision generally is effective for
qualified research expenditures paid or incurred during the
period June 1, 1997, through June 30, 1998. A special rule
provides that, notwithstanding the general termination date for
the research credit of June 30, 1998, if a taxpayer elects to
be subject to the alternative incremental research credit
regime for its first taxable year beginning after June 30,
1996, and before July 1, 1997, the alternative incremental
research credit will be available during the entire 24-month
period beginning with the first month of such taxable year--
i.e., the equivalent of the 11-month extension provided for by
the Small Business Job Protection Act of 1996 plus an
additional 13-month extension provided for by the conference
agreement. However, to prevent taxpayers from effectively
obtaining more than 24 months of research credits from the
Small Business Job Protection Act of 1996 and this bill, the
24-month period for taxpayers electing the alternative
incremental research credit regime is reduced by the number of
months (if any) after June 1996 with respect to which the
taxpayer claimed research credit amounts under the regular, 20-
percent research credit rules.
B. Contributions of Stock to Private Foundations (sec. 602 of the House
bill and sec. 502 of the Senate amendment)
Present Law
In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair market value
of property contributed to a charitable
organization.4 However, in the case of a charitable
contribution of short-term gain, inventory, or other ordinary
income property, the amount of the deduction generally is
limited to the taxpayer's basis in the property. In the case of
a charitable contribution of tangible personal property, the
deduction is limited to the taxpayer's basis in such property
if the use by the recipient charitable organization is
unrelated to the organization's tax-exempt purpose.5
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\4\ The amount of the deduction allowable for a taxable year with
respect to a charitable contribution may be reduced depending on the
type of property contributed, the type of charitable organization to
which the property is contributed, and the income of the taxpayer
(secs. 170(b) and 170(e)).
\5\ As part of the Omnibus Budget Reconciliation Act of 1993,
Congress eliminated the treatment of contributions of appreciated
property (real, personal, and intangible) as a tax preference for
alternative minimum tax (AMT) purposes. Thus, if a taxpayer makes a
gift to charity of property (other than short-term gain, inventory, or
other ordinary income property, or gifts to private foundations) that
is real property, intangible property, or tangible personal property,
the use of which is related to the donee's tax-exempt purpose, the
taxpayer is allowed to claim the same fair-market-value deduction for
both regular tax and AMT purposes (subject to present-law percentage
limitations).
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In cases involving contributions to a private foundation
(other than certain private operating foundations), the amount
of the deduction is limited to the taxpayer's basis in the
property. However, under a special rule contained in section
170(e)(5), taxpayers are allowed a deduction equal to the fair
market value of ``qualified appreciated stock'' contributed to
a private foundation prior to May 31, 1997.6
Qualified appreciated stock is defined as publicly traded stock
which is capital gain property. The fair-market-value deduction
for qualified appreciated stock donations applies only to the
extent that total donations made by the donor to private
foundations of stock in a particular corporation did not exceed
10 percent of the outstanding stock of that corporation. For
this purpose, an individual is treated as making all
contributions that were made by any member of the individual's
family.
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\6\ The special rule contained in section 170(e)(5), which was
originally enacted in 1984, expired January 1, 1995. The Small Business
Job Protection Act of 1996 reinstated the rule for 11 months--for
contributions of qualified appreciated stock made to private
foundations during the period July 1, 1996, through May 31, 1997.
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House Bill
The House bill extends the special rule contained in
section 170(e)(5) for contributions of qualified appreciated
stock made to private foundations during the period June 1,
1997, through December 31, 1998.
Effective date.--The provision is effective for
contributions of qualified appreciated stock to private
foundations made during the period June 1, 1997, through
December 31, 1998.
Senate Amendment
The Senate amendment extends the special rule contained
in section 170(e)(5) for contributions of qualified appreciated
stock made to private foundations during the period June 1,
1997, through May 31, 1999.
Effective date.--The provision is effective for
contributions of qualified appreciated stock to private
foundations made during the period June 1, 1997, through May
31, 1999.
Conference Agreement
The conference agreement provides that the special rule
contained in section 170(e)(5) is extended for the period June
1, 1997, through June 30, 1998. The provision is effective for
contributions of qualified appreciated stock to private
foundations made during the period June 1, 1997, through June
30, 1998.
C. Work Opportunity Tax Credit (sec. 603 of the House bill and sec. 503
of the Senate amendment)
Present Law
In general
The work opportunity tax credit is available on an
elective basis for employers hiring individuals from one or
more of seven targeted groups. The credit generally is equal to
35 percent of qualified wages. Generally, qualified wages
consist of wages attributable to service rendered by a member
of a targeted group during the one-year period beginning with
the day the individual begins work for the employer.
Generally, no more than $6,000 of wages during the first
year of employment is permitted to be taken into account with
respect to any individual. Thus, the maximum credit per
individual is $2,100. With respect to qualified summer youth
employees, the maximum credit is 35 percent of up to $3,000 of
qualified first-year wages, for a maximum credit of $1,050.
The deduction for wages is reduced by the amount of the
credit.
Targeted groups eligible for the credit
(1) Families receiving AFDC
An eligible recipient is an individual certified by the
designated local employment agency as being a member of a
family eligible to receive benefits under AFDC or its successor
program for a period of at least nine months part of which is
during the 9-month period ending on the hiring date. For these
purposes, members of the family are defined to include only
those individuals taken into account for purposes of
determining eligibility for the AFDC or its successor program.
(2) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under any State or Federal
law, (2) being a member of a family that had an income during
the six months before the earlier of the date of determination
or the hiring date which on an annual basis is 70 percent or
less of the Bureau of Labor Statistics lower living standard,
and (3) having a hiring date within one year of release from
prison or date of conviction.
(3) High-risk youth
A high-risk youth is an individual certified as being at
least 18 but not yet 25 on the hiring date and as having a
principal place of abode within an empowerment zone or
enterprise community (as defined under Subchapter U of the
Internal Revenue Code). Qualified wages will not include wages
paid or incurred for services performed after the individual
moves outside an empowerment zone or enterprise community.
(4) Vocational rehabilitation referral
Vocational rehabilitation referrals are those individuals
who have a physical or mental disability that constitutes a
substantial handicap to employment and who have been referred
to the employer while receiving, or after completing,
vocational rehabilitation services under an individualized,
written rehabilitation plan under a State plan approved under
the Rehabilitation Act of 1973 or under a rehabilitation plan
for veterans carried out under Chapter 31 of Title 38, U.S.
Code. Certification will be provided by the designated local
employment agency upon assurances from the vocational
rehabilitation agency that the employee has met the above
conditions.
(5) Qualified summer youth employee
Qualified summer youth employees are individuals: (1) who
perform services during any 90-day period between May 1 and
September 15, (2) who are certified by the designated local
agency as being 16 or 17 years of age on the hiring date, (3)
who have not been an employee of that employer before, and (4)
who are certified by the designated local agency as having a
principal place of abode within an empowerment zone or
enterprise community (as defined under Subchapter U of the
Internal Revenue Code). As with high-risk youths, no credit is
available on wages paid or incurred for service performed after
the qualified summer youth moves outside of an empowerment zone
or enterprise community. If, after the end of the 90-day
period, the employer continues to employ a youth who was
certified during the 90-day period as a member of another
targeted group, the limit on qualified first-year wages will
take into account wages paid to the youth while a qualified
summer youth employee.
(6) Qualified veteran
A qualified veteran is a veteran who is a member of a
family certified as receiving assistance under: (1) AFDC for a
period of at least nine months part of which is during the 12-
month period ending on the hiring date, or (2) a food stamp
program under the Food Stamp Act of 1977 for a period of at
least three months part of which is during the 12-month period
ending on the hiring date. For these purposes, members of a
family are defined to include only those individuals taken into
account for purposes of determining eligibility for: (i) the
AFDC or its successor program, and (ii) a food stamp program
under the Food Stamp Act of 1977, respectively.
Further, a qualified veteran is an individual who has
served on active duty (other than for training) in the Armed
Forces for more than 180 days or who has been discharged or
released from active duty in the Armed Forces for a service-
connected disability. However, any individual who has served
for a period of more than 90 days during which the individual
was on active duty (other than for training) is not an eligible
employee if any of this active duty occurredduring the 60-day
period ending on the date the individual was hired by the employer.
This latter rule is intended to prevent employers who hire current
members of the armed services (or those departed from service within
the last 60 days) from receiving the credit.
(7) Families receiving food stamps
An eligible recipient is an individual aged 18 but not
yet 25 certified by a designated local employment agency as
being a member of a family receiving assistance under a food
stamp program under the Food Stamp Act of 1977 for a period of
at least six months ending on the hiring date. In the case of
families that cease to be eligible for food stamps under
section 6(o) of the Food Stamp Act of 1977, the six-month
requirement is replaced with a requirement that the family has
been receiving food stamps for at least three of the five
months ending on the date of hire. For these purposes, members
of the family are defined to include only those individuals
taken into account for purposes of determining eligibility for
a food stamp program under the Food Stamp Act of 1977.
Minimum employment period
No credit is allowed for wages paid unless the eligible
individual is employed by the employer for at least 180 days
(20 days in the case of a qualified summer youth employee) or
400 hours (120 hours in the case of a qualified summer youth
employee).
Expiration date
The credit is effective for wages paid or incurred to a
qualified individual who begins work for an employer after
September 30, 1996, and before October 1, 1997.
House Bill
Extension
The House bill provides a one-year extension of the work
opportunity tax credit.
Targeted categories
The bill extends eligibility to members of families
receiving AFDC benefits for any nine months during the eighteen
month period ending on the hiring date.
Minimum employment period
The minimum employment period is reduced from 400 to 120
hours.
Credit percentage
The House bill provides a credit percentage of 25 percent
for employment of less than 400 hours of employment and 40
percent for employment of 400 or more hours.
Alternative minimum tax (AMT)
The House bill allows the credit against the AMT.
Effective date
Generally, the provision is effective for wages paid or
incurred to qualified individuals who begin work for the
employer after September 30, 1997, and before October 1, 1998.
The provision allowing the credit against the AMT is effective
for taxable years beginning after December 31, 1997.
Senate Amendment
Extension
The Senate amendment provides a 20-month extension of the
work opportunity tax credit.
Targeted categories
Same as the House bill, except the Senate amendment adds
SSI beneficiaries as a new category of workers for which the
credit is available.
Minimum employment period
Same as the House bill.
Credit percentage
Same as the House bill.
Alternative minimum tax (AMT)
No provision.
Effective date
The provision is effective for wages paid or incurred to
qualified individuals who begin work for the employer after
September 30, 1997, and before June 1, 1999.
Conference Agreement
Extension
The conference agreement provides for a 9-month extension
of the work opportunity tax credit.
Targeted categories
The conference agreement follows the Senate amendment.
Minimum employment period
The conference agreement follows the House bill and the
Senate amendment.
Credit percentage
The conference agreement follows the House bill and the
Senate amendment.
Alternative minimum tax (AMT)
The conference agreement does not include the House bill
provision.
Effective date
The conference agreement is generally effective for wages
paid to qualified individuals who begin work for an employer
after September 30, 1997, and before July 1, 1998.
D. Orphan Drug Tax Credit (sec. 604 of the House bill and sec. 504 of
the Senate amendment)
Present Law
A 50-percent nonrefundable tax credit is allowed for
qualified clinical testing expenses incurred in testing of
certain drugs for rare diseases or conditions, generally
referred to as ``orphan drugs.'' Qualified testing expenses are
costs incurred to test an orphan drug after the drug has been
approved for human testing by the Food and Drug Administration
(``FDA'') but before the drug has been approved for sale by the
FDA. A rare disease or condition is defined as one that (1)
affects less than 200,000 persons in the United States, or (2)
affects more than 200,000 persons, but for which there is no
reasonable expectation that businesses could recoup the costs
of developing a drug for such disease or condition from U.S.
sales of the drug. These rare diseases and conditions include
Huntington's disease, myoclonus, ALS (Lou Gehrig's disease),
Tourette's syndrome, and Duchenne's dystrophy (a form of
muscular dystrophy).
As with other general business credits (sec. 38),
taxpayers are allowed to carry back unused credits to three
years preceding the year the credit is earned (but not to a
taxable year ending before July 1, 1996) and to carry forward
unused credits to 15 years following the year the credit is
earned. The credit cannot be used to offset a taxpayer's
alternative minimum tax liability.
The orphan drug tax credit expired and does not apply to
expenses paid or incurred after May 31, 1997.7
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\7\ The orphan drug tax credit originally was enacted in 1983 and
was extended on several occasions. The credit expired on December 31,
1994, and later was reinstated for the period July 1, 1996, through May
31, 1997.
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House Bill
The orphan drug tax credit provided for by section 45C is
permanently extended.
Effective date.--The provision is effective for qualified
clinical testing expenses paid or incurred after May 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and
Senate amendment--i.e., the orphan drug tax credit is
permanently extended.
VII. DISTRICT OF COLUMBIA TAX INCENTIVES
(secs. 701-702 of the House bill and sec. 601 of the Senate amendment)
Present Law
Empowerment zones and enterprise communities
In general
Pursuant to the Omnibus Budget Reconciliation Act of 1993
(OBRA 1993), the Secretaries of the Department of Housing and
Urban Development (HUD) and the Department of Agriculture
designated a total of nine empowerment zones and 95 enterprise
communities on December 21, 1994. As required by law, six
empowerment zones are located in urban areas (with aggregate
population for the six designated urban empowerment zones
limited to 750,000) and three empowerment zones are located in
rural areas.8 Of the enterprise communities, 65 are
located in urban areas and 30 are located in rural areas (sec.
1391). Designated empowerment zones and enterprise communities
were required to satisfy certain eligibility criteria,
including specified poverty rates and population and geographic
size limitations (sec. 1392). Portions of the District of
Columbia were designated as an enterprise community.
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\8\ The six designated urban empowerment zones are located in New
York City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-
Camden (New Jersey). The three designated rural empowerment zones are
located in Kentucky Highlands (Clinton, Jackson, and Wayne counties,
Kentucky), Mid-Delta Mississippi (Bolivar, Holmes, Humphreys, Leflore
counties, Mississippi), and Rio Grande Valley Texas (Cameron, Hidalgo,
Starr, and Willacy counties, Texas).
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The following tax incentives are available for certain
businesses located in empowerment zones: (1) an annual 20-
percent wage credit for the first $15,000 of wages paid to a
zone resident who works in the zone; (2) an additional $20,000
of expensing under Code section 179 for ``qualified zone
property'' placed in service by an ``enterprise zone business''
(accordingly, certain businesses operating in empowerment zones
are allowed up to $38,000 of expensing for 1997; the allowable
amount will increase to $38,500 for 1998); and (3) special tax-
exempt financing for certain zone facilities (described in more
detail below).
The 95 enterprise communities are eligible for the
special tax-exempt financing benefits but not the other tax
incentives available in the nine empowerment zones. In addition
to these tax incentives, OBRA 1993 provided that Federal grants
would be made to designated empowerment zones and enterprise
communities.
The tax incentives for empowerment zones and enterprise
communities generally will be available during the period that
the designation remains in effect, i.e., a 10-year period.
Definition of ``qualified zone property''
Present-law section 1397C defines ``qualified zone
property'' as depreciable tangible property (including
buildings), provided that: (1) the property is acquired by the
taxpayer (from an unrelated party) after the zone or community
designation took effect; (2) the original use of the property
in the zone or community commences with the taxpayer; and (3)
substantially all of the use of the property is in the zone or
community in the active conduct of a trade or business by the
taxpayer in the zone or community. In the case of property
which is substantially renovated by the taxpayer, however, the
property need not be acquired by the taxpayer after zone or
community designation or originally used by the taxpayer within
the zone or community if, during any 24-month period after zone
or community designation, the additions to the taxpayer's basis
in the property exceed the greater of 100 percent of the
taxpayer's basis in the property at the beginning of the
period, or $5,000.
Definition of ``enterprise zone business''
Present-law section 1397B defines the term ``enterprise
zone business'' as a corporation or partnership (or
proprietorship) if for the taxable year: (1) the sole trade or
business of the corporation or partnership is the active
conduct of a qualified business within an empowerment zone or
enterprise community; (2) at least 80 percent of the total
gross income is derived from the active conduct of a
``qualified business'' within a zone or community; (3)
substantially all of the business's tangible property is used
within a zone or community; (4) substantially all of the
business's intangible property is used in, and exclusively
related to, the active conduct of such business; (5)
substantially all of the services performed by employees are
performed within a zone or community; (6) at least 35 percent
of the employees are residents of the zone or community; and
(7) no more than 5 percent of the average of the aggregate
unadjusted bases of the property owned by the business is
attributable to (a) certain financial property, or (b)
collectibles not held primarily for sale to customers in the
ordinary course of an active trade or business.
A ``qualified business'' is defined as any trade or
business other than a trade or business that consists
predominantly of the development or holding of intangibles for
sale or license. 9 In addition, the leasing of real
property that is located within the empowerment zone or
community to others is treated as a qualified business only if
(1) the leased property is not residential property, and (2) at
least 50 percent of the gross rental income from the real
property is from enterprise zone businesses. The rental of
tangible personal property to others is not a qualified
business unless substantially all of the rental of such
property is by enterprise zone businesses or by residents of an
empowerment zone or enterprise community.
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\9\ Also, a qualified business does not include certain facilities
described in section 144(c)(6)(B) (e.g., massage parlor, hot tub
facility, or liquor store) or certain large farms.
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Tax-exempt financing rules
Tax-exempt private activity bonds may be issued to
finance certain facilities in empowerment zones and enterprise
communities. These bonds, along with most private activity
bonds, are subject to an annual private activity bond State
volume cap equal to $50 per resident of each State, or (if
greater) $150 million per State.
Qualified enterprise zone facility bonds are bonds 95
percent or more of the net proceeds of which are used to
finance (1) ``qualified zone property'' (as defined above) the
principal user of which is an ``enterprise zone business''
(also defined above 10), or (2) functionally related
and subordinate land located in the empowerment zone or
enterprise community. These bonds may only be issued while an
empowerment zone or enterprise community designation is in
effect.
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\10\ For purposes of the tax-exempt financing rules, an
``enterprise zone business'' also includes a business located in a zone
or community which would qualify as an enterprise zone business if it
were separately incorporated.
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The aggregate face amount of all qualified enterprise
zone bonds for each qualified enterprise zone business may not
exceed $3 million per zone or community. In addition, total
qualified enterprise zone bond financing for each principal
user of these bonds may not exceed $20 million for all zones
and communities.
Taxation of capital gains
In general, gain or loss reflected in the value of an
asset is not recognized for income tax purposes until a
taxpayer disposes of the asset. On the sale or exchange of
capital assets, the net capital gain generally is taxed at the
same rate as ordinary income, except that the maximum rate of
tax is limited to 28 percent of the net capital
gain.11 Net capital gain is the excess of the net
long-term capital gain for the taxable year over the net short-
term capital loss for the year. Gain or loss is treated as
long-term if the asset is held for more than one year.
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\11\ The Revenue Reconciliation Act of 1993 added Code section
1202, which provides a 50-percent exclusion for gain from the sale of
certain small business stock acquired at original issue and held for at
least five years.
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Capital losses generally are deductible in full against
capital gains. In addition, individual taxpayers may deduct
capital losses against up to $3,000 of ordinary income in each
year. Any remaining unused capital losses may be carried
forward indefinitely to another taxable year.
A capital asset generally means any property except (1)
inventory, stock in trade, or property held primarily for sale
to customers in the ordinary course of the taxpayer's trade or
business, (2) depreciable or real property used in the
taxpayer's trade or business, (3) specified literary or
artistic property, (4) business accounts or notes receivable,
and (5) certain publications of the Federal Government.
In addition, the net gain from the disposition of certain
property used in the taxpayer's trade or business is treated as
long-term capital gain. Gain from the disposition of
depreciable personal property is not treated as capital gain to
the extent of all previous depreciation allowances. Gain from
the disposition of depreciable real property generally is not
treated as capital gain to the extent of the depreciation
allowances in excess of the allowances that would have been
available under the straight-line method.
Individual tax rates
To determine tax liability, an individual taxpayer
generally must apply the tax rate schedules (or the tax tables)
to his or her taxable income. The rate schedules are broken
into several ranges of income, known as income brackets, and
the marginal tax rate increases as a taxpayer's income
increases. Separate rate schedules apply based on an
individual's filing status. For 1997, the individual income tax
rate schedules are as follows:
------------------------------------------------------------------------
If taxable income is-- Then income tax equals
------------------------------------------------------------------------
Single individuals
$0 to $24,650.......................... 15 percent of taxable income
$24,651 to $59,750..................... $3,698, plus 28% of the amount
over $24,650
$59,751 to $124,650.................... $13,526, plus 31% of the amount
over $59,750
$124,651 to $271,050................... $33,645, plus 36% of the amount
over $124,650
Over $271,050.......................... $86,349, plus 39.6% of the
amount over $271,050
Heads of households
$0 to $33,050.......................... 15 percent of taxable income
$33,051 to $85,350..................... $4,958, plus 28% of the amount
over $33,050
$85,351 to $138,200.................... $19,602 plus 31% of the amount
over $85,350
$138,201 to $271,050................... $35,985, plus 36% of the amount
over $138,200
Over $271,050.......................... $83,811, plus 39.6% of the
amount over $271,050
Married individuals filing joint returns
$0 to $41,200.......................... 15 percent of taxable income
$41,201 to $99,600..................... $6,180, plus 28% of the amount
over $41,200
$99,601 to $151,750.................... $22,532, plus 31% of the amount
over $99,600
$151,751 to $271,050................... $38,698, plus 36% of the amount
over $151,750
Over $271,050.......................... $81,646, plus 39.6% of the
amount over $271,050
Married individuals filing separate returns
$0 to $20,600.......................... 15 percent of taxable income
$20,601 to $49,800..................... $3,090, plus 28% of the amount
over $20,600
$49,801 to $75,875..................... $11,266, plus 31% of the amount
over $49,800
$75,876 to $135,525.................... $19,349, plus 36% of the amount
over $75,875
Over $135,525.......................... $40,823 plus 39.6% of the
amount over $135,525
------------------------------------------------------------------------
House Bill
Designation of D.C. Enterprise Zone
Certain economically depressed census tracts within the
District of Columbia are designated as the ``D.C. Enterprise
Zone,'' within which businesses and individual residents are
eligible for special tax incentives. The census tracts that
compose the D.C. Enterprise Zone are (1) all census tracts that
presently are part of the D.C. enterprise community designated
under section 1391 (i.e., portions of Anacostia, Mt. Pleasant,
Chinatown, and the easternmost part of the District) and (2)
all additional census tracts within the District of Columbia
where the poverty rate is at least 35 percent. The D.C.
Enterprise Zone designation generally will remain in effect for
five years for the period from January 1, 1998, through
December 31, 2002.12
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\12\ The status of certain census tracts within the District as an
enterprise community designated under section 1391 also terminates on
December 31, 2002.
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The following tax incentives will take effect only if,
prior to January 1, 1998, a Federal law is enacted creating a
District of Columbia economic development corporation that is
an instrumentality of the District of Columbia
government.13
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\13\ In addition, the House bill assumes the enactment of certain
modifications to Federal law (other than Federal tax laws contained in
the Internal Revenue Code) similar to those proposed by the
Administration that would clarify and expand the District's authority
to issue revenue bonds.
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Business development incentives
Empowerment zone wage credit, expensing, and tax-exempt
financing
The following tax incentives that are available under
present law in empowerment zones would be available in the D.C.
Enterprise Zone (modified as described below): (1) a 20-percent
wage credit for the first $15,000 of wages paid to D.C.
Enterprise Zone residents who work in the D.C. Enterprise Zone;
(2) an additional $20,000 of expensing under Code section 179
for qualified zone property; and (3) special tax-exempt
financing for certain zone facilities.
In general, the wage credit for certain D.C. Enterprise
Zone residents who work in the D.C. Enterprise Zone is the same
as is available in empowerment zones under present law.However,
the wage credit rate remains at 20 percent for the D.C. Enterprise Zone
for the period 1998 through 2002 (and does not phase down to 15 percent
in the year 2002 as under present-law section 1396). The wage credit is
effective for wages paid (or incurred) to a qualified individual after
December 31, 1997, and before January 1, 2003.
The increased expensing under Code section 179 is
effective for property placed in service in taxable years
beginning after December 31, 1997, and before January 1, 2003.
Thus, qualified D.C. Zone property placed in service in taxable
years beginning in 1998 is eligible for up to $38,500 of
expensing.
A qualified D.C. Zone business (defined as under present
law section 1394(b)(3)) is permitted to borrow proceeds from
the issuance of qualified enterprise zone facility bonds. Such
bonds can be issued only by a newly created economic
development corporation and are subject to the requirements
applicable under present law to enterprise zone facility bonds,
except that the amount of outstanding bond proceeds that can be
borrowed by any qualified District business cannot exceed $15
million (rather than $3 million). The special tax-exempt bond
provisions apply to bonds issued after December 31, 1997, and
prior to January 1, 2003.
Tax credits for equity investments in and loans to
businesses located in the District of Columbia
A newly created economic development corporation is
authorized to allocate $75 million in tax credits to taxpayers
that make certain equity investments in, or loans to,
businesses (either corporations or partnerships) engaged in an
active trade or business in the District of Columbia. The
business need not be located in the D.C. Enterprise Zone,
although factors to be considered in the allocation of credits
include whether the project would provide job opportunities for
low and moderate income residents of the D.C. Enterprise Zone
and whether the business is located in the D.C. Enterprise
Zone. Eligible businesses are not be required to satisfy the
criteria of a qualified D.C. Zone business, described above.
Such credits are nonrefundable and can be used to offset a
taxpayer's alternative minimum tax (AMT) liability.
Under the House bill, the amount of credit cannot exceed
25 percent of the amount invested (or loaned) by the taxpayer.
Thus, the economic development corporation may allocate the
full $75 million in tax credits to no less than $300 million in
equity investments in, or loans, to eligible businesses.
Under the House bill, credits may be allocated to loans
made to an eligible business only if the business uses the loan
proceeds to purchase depreciable tangible property and any
functionally related and subordinate land. Credits may be
allocated to equity investments only if the equity interest was
acquired for cash. Any credits allocated to a taxpayer making
an equity investment are subject to recapture if the equity
interest is disposed of by the taxpayer within five years. A
taxpayer's basis in an equity investment is reduced by the
amount of the credit.
The House bill applies to credit amounts allocated for
taxable years beginning after December 31, 1997, and before
January 1, 2003.14
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\14\ As a general business credit, the credit can be carried back
three years (but not before January 1, 1998) and forward for 15 years.
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Zero-percent capital gains rate
The House bill provides a zero-percent capital gains rate
for capital gains from the sale of certain qualified ``D.C.
Zone assets'' held for more than five years. In general,
qualified ``D.C. Zone assets'' mean stock or partnership
interests held in or tangible property held by a D.C. Zone
business. For this purpose, a qualified D.C. Zone business is
defined as an enterprise zone business under present-law
section 1397B.
``D.C. Zone business stock'' is stock in a domestic
corporation originally issued after December 31, 1997, that, at
the time of issuance 15 and during substantially all
of the taxpayer's holding period, was a qualified D.C. Zone
business, provided that such stock was acquired by the taxpayer
on original issue from the corporation solely in exchange for
cash before January 1, 2003.16 A ``D.C. Zone
partnership interest'' is a domestic partnership interest
originally issued after December 31, 1997, that is acquired by
the taxpayer from the partnership solely in exchange for cash
before January 1, 2003, provided that, at the time such
interest was acquired 17 and during substantially
all of the taxpayer's holding period, the partnership was a
qualified D.C. Zone business. Finally, ``D.C. Zone business
property'' is tangible property acquired by the taxpayer by
purchase (within the meaning of present law section 179(d)(2))
after December 31, 1997, and before January 1, 2003, provided
that the original use of such property in the D.C. Enterprise
Zone commences with the taxpayer and substantially all of the
use of such property during substantially all of the taxpayer's
holding period was in a qualified D.C. Zone business of the
taxpayer.
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\15\ In the case of a new corporation, it is sufficient if the
corporation is being organized for purposes of being a qualified D.C.
Zone business.
\16\ D.C. Zone business stock does not include any stock acquired
from a corporation which made a substantial stock redemption or
distribution (without a bona fide business purpose therefore) in an
attempt to avoid the purposes of the provision. A similar rule applies
with respect to D.C. Zone partnership interests.
\17\ In the case of a new partnership, it is sufficient if the
partnership is being formed for purposes of being a qualified D.C. Zone
business.
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A special rule provides that, in the case of business
property that is ``substantially renovated,'' such property
need not be acquired by the taxpayer after December 31, 1997,
nor need the original use of such property in the D.C.
Enterprise Zone commence with the taxpayer. For these purposes,
property is treated as ``substantially renovated'' if, prior to
January 1, 2003, additions to basis with respect to such
property in the hands of the taxpayer during any 24-month
period beginning after December 31, 1997, exceed the greater of
(1) an amount equal to the adjusted basis at the beginning of
such 24-month period in the hands of the taxpayer, or (2)
$5,000. Thus, substantially renovated real estate located in
the D.C. Enterprise Zone may constitute D.C. Zone business
property. However, the House bill specifically excludes land
that is not an integral part of a qualified D.C. Zone business
from the definition of D.C. Zone business property.
In addition, qualified D.C. Zone assets include property
that was a qualified D.C. Zone asset in the hands of a prior
owner, provided that at the time of acquisition, and during
substantially all of the subsequent purchaser's holding period,
either (1) substantially all of the use of the property is in a
qualified D.C. Zone business, or (2) the property is an
ownership interest in a qualified D.C. Zone
business.18
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\18\ The termination of the D.C. Zone designation will not, by
itself, result in property failing to be treated as a qualified D.C.
Zone asset. However, capital gain eligible for the zero-percent capital
gains rate does not include any gain attributable to periods after
December 31, 2007.
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In general, gain eligible for the zero-percent tax rate
means gain from the sale or exchange of a qualified D.C. Zone
asset that is (1) a capital asset or (2) property used in the
trade or business as defined in section 1231(b). Gain
attributable to periods before December 31, 1997, and after
December 31, 2007, is not qualified capital gain. No gain
attributable to real property, or an intangible asset, which is
not an integral part of a qualified D.C. Zone business
qualifies for the zero-percent rate.
The House bill provides that property that ceases to be a
qualified D.C. Zone asset because the property is no longer
used in (or no longer represents an ownership interest in) a
qualified D.C. Zone business after the five-year period
beginning on the date the taxpayer acquired such property would
continue to be treated as a qualified D.C. Zone asset. Under
this rule, the amount of gain eligible for the zero-percent
capital gains rate cannot exceed the amount which would be
qualified capital gain had the property been sold on the date
of such cessation.
Special rules are provided for pass-through entities
(i.e., partnerships, S corporations, regulated investment
companies, and common trust funds). In the case of a sale or
exchange of an interest in a pass-through entity that was not a
qualified D.C. Zone business during substantially all of the
period that the taxpayer held the interest, the zero-percent
capital gains rate applies to the extent that the gain is
attributable to amounts that would have been qualified capital
gain had the assets been sold for their fair market value on
the date of the sale or exchange of the interest in the pass-
through entity. This rule applies only if the interest in the
pass-through entity were held by the taxpayer for more than
five years. In addition, the rule applies only to qualified
D.C. Zone assets that were held by the pass-through entity for
more than five years, and throughout the period that the
taxpayer held the interest in the pass-through entity.
The House bill also provides that in the case of a
transfer of a qualified D.C. Zone asset by gift, at death, or
from a partnership to a partner that held an interest in the
partnership at the time that the qualified D.C. Zone asset was
acquired, (1) the transferee is to be treated as having
acquired the asset in the same manner as the transferor, and
(2) the transferee's holding period includes that of the
transferor. In addition, rules similar to those contained in
section 1202(i)(2) regarding treatment of contributions to
capital after the original issuance date and section 1202(j)
regarding treatment of certain short positions apply.
Individual resident tax rate reduction
Individuals who have their principal place of abode in
any census tract that is part of the D.C. Enterprise Zone are
entitled to a 10-percent tax rate on all taxable income that
currently is subject to a 15-percent Federal income tax rate.
Thus, using the 1997 tax rate schedule, a single taxpayer who
resides in the D.C. Enterprise Zone with $24,650 or more of
taxable income will receive a Federal income tax reduction of
$1,233 under the House bill. Married taxpayers who reside in
the D.C. Enterprise Zone and file a joint return with taxable
income of $41,200 or more of taxable income will receive a
Federal income tax reduction of $2,060 under the House bill.
The special 10-percent rate provision is in effect for
the period 1998-2007.
Effective date
The D.C. tax incentives generally are effective January
1, 1998, and remain in effect for five years until the
termination of the D.C. Enterprise Zone designation on December
31, 2002. However, the zero-percent tax rate for capital gains
and the special 10-percent rate bracket are effective for the
period 1998-2007. All of the D.C. tax incentives are contingent
upon the enactment of a Federal law, prior to January 1, 1998,
creating a District of Columbia economic development
corporation that is an instrumentality of the District of
Columbia government.
Senate Amendment
First-time homebuyer credit
The Senate amendment provides first-time homebuyers of a
principal residence in the District a tax credit of up to
$5,000 of the amount of the purchase price. The $5,000 maximum
credit amount applies both to individuals and married couples.
Married individuals filing separately can claim a maximum
credit of $2,500 each. The Secretary of Treasury is directed to
prescribe regulations allocating the credit among unmarried
purchasers of a residence.19
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\19\ The provision of the Senate amendment that excludes sales of
certain personal residences from the real estate transaction reporting
requirement would not apply to sales of personal residences in the
District of Columbia. In addition, the Senate amendment anticipates
that the Secretary of Treasury will require such information as may be
necessary to verify eligibility for the D.C. first-time homebuyer
credit.
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To qualify as a ``first-time homebuyer,'' neither the
individual (nor the individual's spouse, if married) can have
had a present ownership interest in a principal residence in
the District for the one-year period prior to the date of
acquisition of the principal residence.20
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\20\ Special rules apply to members of the Armed Forces and certain
individuals with tax homes outside the United States with respect to
whom the rollover period available under section 1034 (as in effect
prior to the enactment of the bill) is suspended pursuant to section
1034 (h) or (k).
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A taxpayer will be treated as a first-time homebuyer with
respect to only one residence--i.e., the credit may be claimed
one time only. The date of acquisition is the date on which a
binding contract to purchase the principal residence is entered
into or the date on which construction or reconstruction of
such residence commences.
The credit applies to purchases after the date of
enactment and before January 1, 2002. Any excess credit may be
carried forward indefinitely to succeeding taxable years.
Tax credits for equity investments in and loans to businesses located
in the District of Columbia
The Senate amendment is the same as the House bill,
except that the economic development corporation is authorized
to allocate $60 million (rather than $75 million) in credits.
Zero-percent capital gains rate
Like the House bill, the Senate amendment provides a
zero-percent capital gains rate for capital gains from the sale
of certain qualified D.C. assets held for more than five years.
In general, qualified D.C. assets mean stock or partnership
interests held in, or tangible property held by, a qualified
D.C. business. However; the Senate amendment provides that
capital gain from the sale of any D.C. asset acquired during
calendar year 1998 shall be subject to tax at a 10 percent
rate. A special rule provides that if the basis of any D.C.
asset is determined in whole or part by reference to a D.C.
asset acquired in 1998, all gain from the sale or exchange of
such asset is taxed at the 10 percent rate.
Qualified D.C. business
A ``qualified D.C. business'' generally is required to
satisfy the requirements of an ``enterprise zone business''
under present law, applied as if the District (in its entirety)
were an empowerment zone. Thus, a corporation or partnership is
a qualified D.C. business if: (1) its sole trade or business is
the active conduct of a ``qualified business'' within the
District; (2) at least 80 percent of the total gross income is
derived from the active conduct of a ``qualified business''
within the District; (3) substantially all of the business's
tangible property is used within the District; (4)
substantially all of the business's intangible property is used
in, and exclusively related to, the active conduct of such
business; (5) substantially all of the services performed by
employees are performed within the District; and (6) no more
than 5 percent of the average of the aggregate unadjusted bases
of the property owned by the business is attributable to (a)
certain financial property, or (b) collectibles not held
primarily for sale to customers in the ordinary course of an
active trade or business.21 A ``qualified business''
means any trade or business other than a trade or business that
consists predominantly of the development or holding of
intangibles for sale or license.22 In addition, the
leasing of real property that is located within the District to
others is treated as a qualified business only if (1) the
leased property is not residential property, and (2) at least
50 percent of the gross rental income from the real property is
from qualified D.C. businesses. The rental of tangible personal
property to others is not a qualified business unless
substantially all of the rental of such property is by
qualified D.C. businesses or by residents of the District.
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\21\ The requirement under present-law section 1397B(b)(6) that at
least 35 percent of the employees of the business be zone residents
does not apply when determining whether an entity is a qualified D.C.
business.
\22\ Also, as under present law, a qualified business does not
include certain facilities described in section 144(c)(6)(B) (e.g.,
massage parlor, hot tub facility, or liquor store) or certain large
farms.
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Qualified D.C. assets
For purposes of the Senate amendment, qualified ``D.C.
assets'' include (1) D.C. business stock, (2) D.C. partnership
interests, and (3) D.C. business property.
``D.C. business stock'' means stock in a domestic
corporation originally issued after December 31, 1997, that, at
the time of issuance 23 and during substantially all
of the taxpayer's holding period, was a qualified D.C.
business, provided that such stock was acquired by the taxpayer
on original issue from the corporation solely in exchange for
cash before January 1, 2003.24 A ``D.C. partnership
interest'' means a domestic partnership interest originally
issued after December 31, 1997, that is acquired by the
taxpayer from the partnership solely in exchange for cash
before January 1, 2003, provided that, at the time such
interest was acquired 25 and during substantially
all of the taxpayer's holding period, the partnership was a
qualified D.C. business. Finally, ``D.C. business property''
means tangible property acquired by the taxpayer by purchase
(within the meaning of present law section 179(d)(2)) after
December 31, 1997, and before January 1, 2003, provided that
the original use of such property in the District commences
with the taxpayer and substantially all of the use of such
property during substantially all of the taxpayer's holding
period was in a qualified D.C. business of the taxpayer.
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\23\ In the case of a new corporation, it is sufficient if the
corporation is being organized for purposes of being a qualified D.C.
business.
\24\ As under section 1202(c)(3), D.C. business stock does not
include any stock acquired from a corporation which made a substantial
stock redemption or distribution (without a bona fide business purpose
therefore) in an attempt to avoid the purposes of the provision. A
similar rule applies with respect to D.C. partnership interests.
\25\ In the case of a new partnership, it is sufficient if the
partnership is being formed for purposes of being a qualified D.C.
business.
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A special rule provides that, in the case of business
property that is ``substantially renovated,'' such property
need not be acquired by the taxpayer after December 31, 1997,
nor need the original use of such property in the District
commence with the taxpayer. For these purposes, property is
treated as ``substantially renovated'' if, prior to January 1,
2003, additions to basis with respect to such property in the
hands of the taxpayer during any 24-month period beginning
after December 31, 1997, exceed the greater of (1) an amount
equal to the adjusted basis at the beginning of such 24-month
period in the hands of the taxpayer, or (2) $5,000. Thus,
substantially renovated real estate located in the District can
constitute D.C. business property. However, the bill
specifically excludes land that is not an integral part of a
qualified D.C. business from the definition of D.C. business
property.
In addition, qualified D.C. assets include property that
was a qualified D.C. asset in the hands of a prior owner,
provided that at the time of acquisition, and during
substantially all of the subsequent purchaser's holding period,
either (1) substantially all of the use of the property is in a
qualified D.C. business, or (2) the property is an ownership
interest in a qualified D.C. business.
In general, gain eligible for the zero-percent tax rate
means gain from the sale or exchange of a qualified D.C. asset
that is (1) a capital asset or (2) property used in the trade
or business as defined in section 1231(b). Gain attributable to
periods before December 31, 1997, is not qualified capital
gain. No gain attributable to real property, or an intangible
asset, which is not an integral part of a qualified D.C.
business qualifies for the zero-percent rate.
The Senate amendment provides that property that ceases
to be a qualified D.C. asset because the property is no longer
used in (or no longer represents an ownership interest in) a
qualified D.C. business after the five-year period beginning on
the date the taxpayer acquired such property continues to be
treated as a qualified D.C. asset. Under this rule, the amount
of gain eligible for the zero-percent capital gains rate cannot
exceed the amount which would be qualified capital gain had the
property been sold on the date of such cessation.
Special rules are provided for pass-through entities
(i.e., partnerships, S corporations, regulated investment
companies, and common trust funds). In the case of a sale or
exchange of an interest in a pass-through entity that was not a
qualified D.C. business during substantially all of the period
that the taxpayer held the interest, the zero-percent capital
gains rate applies to the extent that the gain is attributable
to amounts that would have been qualified capital gain had the
underlying assets been sold for their fair market value on the
date of the sale or exchange of the interest in the pass-
through entity. This rule applies only if the interest in the
pass-through entity were held by the taxpayer for more than
five years. In addition, the rule applies only to qualified
D.C. assets that were held by the pass-through entity for more
than five years, and throughout the period that the taxpayer
held the interest in the pass-through entity.
The Senate amendment also provides that, in the case of a
transfer of a qualified D.C. asset by gift, at death, or from a
partnership to a partner that held an interest in the
partnership at the time that the qualified D.C. asset was
acquired, (1) the transferee is to be treated as having
acquired the asset in the same manner as the transferor, and
(2) the transferee's holding period includes that of the
transferor. In addition, rules similar to those contained in
section 1202(i)(2) regarding treatment of contributions to
capital after the original issuance date and section 1202(j)
regarding treatment of certain short positions apply.
Trust fund for D.C. schools
The Senate amendment provides for a total of $50 million
($5 million for each year 1998 through 2007) to be transferred
from Federal income taxes paid by District individual residents
to a Trust Fund for D.C. schools. Amounts in the Trust Fund are
to be used to pay debt service on qualified D.C. school bonds,
which are taxable bonds issued after March 31, 1998, by the
District to finance the rehabilitation and repair of District
schools.
Effective dates
The D.C. first-time homebuyer credit is effective for
purchases after the date of enactment and before January 1,
2002. The tax credit for equity investments and loans applies
to credit amounts allocated for taxable years beginning after
December 31, 1997, and before January 1, 2003. The zero-percent
tax rate for capital gains is effective for qualified D.C.
assets purchased (or substantially renovated) during the period
January 1, 1998, through December 31, 2002, for any gain
accruing with respect to such assets after the date or purchase
(or substantial renovation). The Trust Fund for D.C. schools
will be funded $5 million per year for 1998 through 2007.
Conference Agreement
The conference agreement follows the House bill in part
and the Senate amendment in part.
Designation of D.C. Enterprise Zone
The conference agreement includes the House bill
provision that designates certain economically depressed census
tracts within the District of Columbia as the ``D.C. Enterprise
Zone,'' within which businesses and individual residents are
eligible for special tax incentives. Under the conference
agreement, however, the census tracts that compose the D.C.
Enterprise Zone for purposes of the wage credit, expensing, and
tax-exempt financing incentives are expanded to include census
tracts within the District of Columbia where the poverty rate
is not less than 20 percent. Thus, the D.C. Enterprise Zone
consists of (1) all census tracts that presently are part of
the D.C. enterprise community designated under Code section
1391 (i.e., portions of Anacostia, Mt. Pleasant, Chinatown, and
the easternmost part of the District) and (2) all additional
census tracts within the District of Columbia where the poverty
rate is not less than 20 percent. As under the House bill, the
D.C. Enterprise Zone designation generally will remain in
effect for five years for the period from January 1, 1998,
through December 31, 2002.
Empowerment zone wage credit, expensing, and tax-exempt financing
The conference agreement includes the House bill
provision with respect to the tax incentives that are available
in the D.C. Enterprise Zone, modified to provide that the wage
credit is available with respect to all residents of the
District and is not limited to residents of the D.C. Enterprise
Zone and to eliminate the requirement that 35 percent of the
employees of a qualified ``D.C. Zone business'' must be
residents of the D.C. Enterprise Zone.26 Thus, the
following tax incentives that are available under present law
in empowerment zones generally will be available in the D.C.
Enterprise Zone: (1) a 20-percent wage credit for the first
$15,000 of wages paid to D.C. residents who work in the D.C.
Enterprise Zone; (2) an additional $20,000 of expensing under
Code section 179 for qualified zone property; and (3) special
tax-exempt financing for certain zone facilities.27
The conference agreement does not include the provision
limiting the special tax-exempt financing benefits to bonds
issued by the Economic Development Corporation.
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\26\ The provision of the conference agreement that authorizes the
designation of additional empowerment zones also modifies the
definition of an enterprise zone business to provide that, in addition
to satisfying the other requirements of section 1397B, at least 50
percent (as opposed to 80 percent under present law) of the total gross
income of a qualified enterprise zone business must be derived from the
active conduct of a ``qualified business'' within a zone or community.
The conference agreement makes certain other modifications to the
definition of an enterprise zone business as well. This modified
definition of enterprise zone business, determined without regard to
the 35-percent zone resident employee requirement, generally applies
for purposes of the increased expensing and tax-exempt financing
available in the D.C. Enterprise Zone.
\27\ The provision of the conference agreement that authorizes the
designation of additional empowerment zones contains certain
modifications to the rules applicable to present-law empowerment zone
facility bonds. Such modifications (not including the exception to the
volume cap) will apply in the D.C. Enterprise Zone as well.
---------------------------------------------------------------------------
Zero-percent capital gains rate
The conference agreement includes the House bill
provision that provides a zero-percent capital gains rate for
capital gains from the sale of certain qualified D.C Zone
assets held for more than five years. For purposes of the zero-
percent capital gains rate, the D.C. Enterprise Zone is defined
to include all census tracts within the District of Columbia
where the poverty rate is not less than 10 percent.
For purposes of the zero-percent capital gains rate, the
definition of qualified ``D.C. Zone business'' generally is the
same as the definition applicable for purposes of the increased
expensing described above. However, solely for purposes of the
zero-percent capital gains rate, a qualified ``D.C. Zone
business'' must derive at least 80 percent (as opposed to 50
percent) of its total gross income from the active conduct of a
``qualified business'' within the D.C. Enterprise Zone.
First-time homebuyer tax credit
The conference agreement includes the Senate amendment
provision that allows first-time homebuyers of a principal
residence in the District a tax credit of up to $5,000 of the
amount of the purchase price, except that the credit phases out
for individual taxpayers with adjusted gross income between
$70,000 and $90,000 ($110,000-$130,000 for joint filers). The
conference agreement clarifies that the credit is available
with respect to purchases of existing property as well as new
construction, and specifies that a taxpayer's basis in a
property is reduced by the amount of any homebuyer tax credit
claimed with respect to such property. In addition, the
conference agreement sunsets the credit after December 31,
2000. Thus, the credit is available with respect to property
purchased after the date of enactment and before January 1,
2001.
VIII. WELFARE-TO-WORK TAX CREDIT
(sec. 801 of the House bill)
Present Law
The work opportunity tax credit is available on an
elective basis for employers hiring individuals from one or
more of seven targeted groups. The credit generally is equal to
35 percent of qualified wages. Generally, qualified wages
consist of wages attributable to service rendered by a member
of a targeted group during the one-year period beginning with
the day the individual begins work for the employer.
For purposes of the work opportunity tax credit, the
targeted groups for which the credit is available include: (1)
families receiving Aid to Families with Dependent Children
(``AFDC'); (2) qualified ex-felons; (3) high-risk youth; (4)
vocational rehabilitation referrals; (5) qualified summer youth
employees; (6) qualified veterans; and (7) families receiving
food stamps.
Generally, no more than $6,000 of wages during the first
year of employment is permitted to be taken into account with
respect to any individual. Thus, the maximum credit per
individual is $2,100. With respect to qualified summer youth
employees, the maximum credit is 35 percent of up to $3,000 of
qualified first-year wages, for a maximum credit of $1,050.
The deduction for wages is reduced by the amount of the
credit.
The work opportunity tax credit is effective for wages
paid or incurred to a qualified individual who begins work for
an employer after September 30, 1996, and before October 1,
1997.
House Bill
The House bill provides to employers a tax credit on the
first $20,000 of eligible wages paid to qualified long-term
family assistance (AFDC or its successor program) recipients
during the first two years of employment. The credit is 35
percent of the first $10,000 of eligible wages in the first
year of employment and 50 percent of the first $10,000 of
eligible wages in the second year of employment. The maximum
credit is $8,500 per qualified employee.
Qualified long-term family assistance recipients are: (1)
members of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2)
members of a family that has received family assistance for a
total of at least 18 months (whether or not consecutive) after
the date of enactment of this credit if they are hired within 2
years after the date that the 18-month total is reached; and
(3) members of a family who are no longer eligible for family
assistance because of either Federal or State time limits, if
they are hired within 2 years after the Federal or State time
limits made the family ineligible for family assistance.
Eligible wages include cash wages paid to an employee
plus amounts paid by the employer for the following: (1)
educational assistance excludable under a section 127 program
(or that would be excludable but for the expiration of sec.
127); (2) health plan coverage for the employee, but not more
than the applicable premium defined under section 4980B(f)(4);
and (3) dependent care assistance excludable under section 129.
Effective date.--The provision is effective for wages
paid or incurred to a qualified individual who begins work for
an employer on or after January 1, 1998 and before May 1, 1999.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
IX. MISCELLANEOUS PROVISIONS
A. Excise Tax Provisions
1. Repeal excise tax on diesel fuel used in recreational motorboats
(sec. 901 of the House bill and sec. 701 of the Senate
amendment)
Present Law
Before a temporary suspension through December 31, 1997
was enacted in 1996, diesel fuel used in recreational
motorboats was subject to the 24.3-cents-per-gallon diesel fuel
excise tax. Revenues from this tax were retained in the General
Fund.
House Bill
The House bill repeals the application of the diesel fuel
tax to fuel used in recreational motorboats.
Effective date.--The provision is effective for fuel sold
after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Continued application of tax on imported recycled halon-1211 (sec.
902 of the House bill)
Present Law
An excise tax is imposed on the sale or use by the
manufacturer or importer of certain ozone-depleting chemicals
(Code sec. 4681). The amount of tax generally is determined by
multiplying the base tax amount applicable for the calendar
year by an ozone-depleting factor assigned to each taxable
chemical. The base tax amount is $6.25 per pound in 1997, and
is scheduled to increase by 45 cents per pound per year
thereafter. The ozone-depleting factors for taxable halons are
3 for halon-1211, 10 for halon-1301, and 6 for halon-2402.
Taxable chemicals that are recovered and recycled within
the United States are exempt from tax. In addition, exemption
is provided for imported recycled halon-1301 and halon-2402 if
such chemicals are imported from countries that are signatories
to the Montreal Protocol on Substances that Deplete the Ozone
Layer. Present law further provides that exemption is to
beprovided for imported recycled halon-1211, for such chemicals
imported from countries that are signatories to the Montreal Protocol
on Substances that Deplete the Ozone Layer after December 31, 1997.
House Bill
The House bill repeals the present-law exemption for
imported recycled halon-1211.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
3. Transfer of General Fund highway fuels tax revenues to the Highway
Trust Fund (sec. 704 of the Senate amendment)
Present Law
The Highway Trust Fund receives revenues from taxes on
gasoline and special motor fuels (14 cents per gallon) and
diesel fuel (20 cents per gallon) used in highway vehicles,
through September 30, 1999. These fuels also are subject to an
additional, permanent 4.3-cents-per-gallon rate. Revenues from
the 4.3-cents-per-gallon rate are retained in the General Fund.
Excise taxes imposed on these three motor fuels
(gasoline, diesel fuel, and special motor fuels) generally must
be paid to the Treasury in semi-monthly deposits, which are
credited to tax liability that is reported on quarterly
returns. Subject to special rules for deposits attributable to
taxes for the period September 16-26, deposits generally must
be made 9 days after the end of each semi-monthly period (14
days in the case of gasoline and diesel fuel taxes deposited
electronically).
House Bill
No provision.
Senate Amendment
Transfer of revenues to Highway Trust Fund.--Revenues
from the General Fund 4.3-cents-per-gallon tax (net of 0.5-
cent-per-gallon transferred to a new Intercity Passenger Rail
Fund under sec. 702 of the Senate amendment for the period,
October 1, 1997-April 15, 2001) are transferred to the Highway
Trust Fund. Of such amounts transferred to the Highway Trust
Fund, 20 percent are to be credited to the Mass Transit Account
and 80 percent to the Highway Account.
Conforming amendments ensure that no direct spending
increases will occur as a result of the provision.
Deposit rules for highway motor fuels taxes.--No
provision.
Effective date.--October 1, 1997.
Conference Agreement
Transfer of revenues to Highway Trust Fund.--The
conference agreement follows the Senate amendment with a
modification to reflect deletion from the agreement of the
Senate amendment provision transferring 0.5 cents per gallon of
these revenues to a new Intercity Passenger Rail Fund. As under
the Senate amendment, revenues from the 4.3-cents-per-gallon
tax will be divided between the Highway Trust Fund's Highway
Account (3.45 cents per gallon) and Mass Transit Account (0.85
cents per gallon).
Deposit rules for highway motor fuels taxes.--The
conference agreement provides that the excise taxes imposed on
gasoline (sec. 4081), diesel fuel (sec. 4081), special motor
fuels (sec. 4041), and kerosene (sec. 4081) that otherwise
would be required to be deposited with the Treasury after July
31, 1998, and before September 30, 1998, are not required to be
deposited until October 5, 1998.
4. Tax certain alternative fuels based on energy equivalency to
gasoline (sec. 705 of the Senate amendment)
Present Law
Special motor fuels are subject to an 18.3-cents-per-
gallon excise tax: 14 cents per gallon of the tax is dedicated
to the Highway Trust Fund, and the remaining 4.3 cents per
gallon is retained in the General Fund. Special motor fuels
include propane, methanol derived from natural gas, liquefied
natural gas, and compressed natural gas. Reduced tax rates
apply to methanol from natural gas and compressed natural gas.
House Bill
No provision.
Senate Amendment
The Senate amendment adjusts the aggregate tax rates
imposed on propane, liquefiednatural gas, and methanol derived
from natural gas to reflect the energy content of these fuels relative
to gasoline. The revised tax rates per gallon (through September 30,
1999) are--
Propane.............................................. 13.6 cents.
Methanol............................................. 9.15 cents.
Liquified natural gas................................ 11.9 cents.
After September 30, 1999, these three fuels will be taxed
based on Btu equivalency to gasoline's 4.3-cents-per-gallon
rate. No change is made to the current reduced tax rate on
compressed natural gas.
Effective date.--October 1, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
5. Extend and modify tax benefits for ethanol (sec. 605 of the House
bill and sec. 707 of the Senate amendment)
Present Law
Ethanol used as a fuel is eligible for a 54-cents-per-
gallon tax benefit. The benefit may be claimed either as an
income tax credit, through reduced excise tax on sales of
gasoline that is blended with ethanol, or by expedited refunds
of tax paid on such gasoline. This benefit is scheduled to
expire after September 30, 1999. However, provisions relating
to excise taxes dedicated to trust funds generally are assumed
to be permanent for budget scorekeeping purposes.
House Bill
The House bill provides that preferential excise tax
rates (and associated credits and refunds) that statutorily are
scheduled to expire are not assumed to be permanent for budget
scorekeeping purposes.
Senate Amendment
The Senate amendment extends the ethanol tax benefit
through 2007, and modifies the benefit rate per gallon of
alcohol, as follows: 2001 and 2002--53 cents; 2003 and 2004--52
cents; and 2005, 2006, and 2007--51 cents.
Effective date.--Date of enactment.
Conference Agreement
No provision (i.e., the conference agreement does not
include either the House bill or the Senate amendment
provision).
6. Treat certain gasoline ``chain retailers'' as wholesale distributors
under the gasoline excise tax refund rules (sec. 904 of the
House bill)
Present Law
Gasoline is taxed at 18.3 cents per gallon upon removal
from a registered pipeline or barge terminal facility. The
position holder in the terminal at the time of removal is
liable for payment of the tax. Certain uses of gasoline,
including use by States and local governments, are exempt from
tax. In general, these exemptions are realized by refunds to
the exempt users of tax paid by the party that removed the
gasoline from a terminal facility. Present law includes an
exception to the general rule that refunds are made to
consumers in the case of gasoline sold to States and local
governments and certain other exempt users. In those cases,
wholesale distributors sell the gasoline net of tax previously
paid and receive the refunds. The term wholesale distributor
includes only persons that sell gasoline to producers,
retailers, or to users in bulk quantities. Retailers that are
not also wholesale distributors do not qualify, regardless of
their size.
House Bill
The definition of wholesale distributor is expanded to
include certain ``chain retailers''--retailers who own and make
retail sales from 10 or more retail gasoline outlets. This
modification conforms the definition of wholesale distributor
to that which existed before 1987 when the point of collection
of the gasoline tax was moved from the wholesale distribution
level to removal from a terminal facility.
Effective date.--The provision is effective after
September 30, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
7. Exemption of electric and other clean-fuel motor vehicles from
luxury automobile classification (sec. 905 of the House bill)
Present Law
Present law imposes an excise tax on the sale of
automobiles whose price exceeds a designated threshold,
currently $36,000. The excise tax is imposed at a rate of 8
percent for 1997 on the excess of the sales price above the
designated threshold. The 8-percent rate declines by one
percentage point per year until reaching 3 percent in 2002, and
no tax thereafter. The $36,000 threshold is indexed for
inflation. The present-law indexed threshold of $36,000 is the
result of adjusting a $30,000 threshold specified in the Code
for inflation occurring after 1990 (sec. 4001(e)).
The tax generally applies only to the first retail sale
after manufacture, production, or importation of an automobile.
It does not apply to subsequent sales of taxable automobiles. A
10-percent tax is imposed on the separate purchase of parts and
accessories for a vehicle within six months of the first retail
sale when the sum of the separate purchases of the vehicle,
parts, and accessories exceeds the luxury tax threshold (sec.
4003).28
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\28\ The rate of tax under section 4003 is not determined by
reference to section 4001. However, a technical correction under the
bill (Title XV) conforms the tax rate applicable under section 4003 to
that applicable under section 4001.
---------------------------------------------------------------------------
The tax under section 4001 applies to sales before
January 1, 2003. The tax under section 4003 has no termination
date.29
---------------------------------------------------------------------------
\29\ A technical correction under both the House bill (Title XV)
and the Senate amendment (Title XIV) conforms the expiration date of
the tax under section 4003 to the expiration date under section 4001.
---------------------------------------------------------------------------
House Bill
The House bill modifies the threshold above which the
luxury excise tax on automobiles will apply for each of two
identified classes of automobiles both in the case of a
purchase of a vehicle and in the case of the separate purchase
of a vehicle and parts and accessories therefor. First, for an
automobile that is not a clean-burning fuel vehicle to which
retrofit parts and components are installed to make the vehicle
a clean-burning vehicle, the threshold would be $30,000, as
adjusted for inflation under present law, plus an amount equal
to the increment to the retail value of the automobile
attributable to the retrofit parts and components installed.
In the case of a passenger vehicle designed to be
propelled primarily by electricity and built by an original
equipment manufacturer, the threshold applicable for any year
is modified to equal 150 percent of $30,000, with the result
increased for inflation occurring after 1990 and rounded to the
next lowest multiple of $2,000.
Effective date.--The provision is effective for sales and
installations occurring on or after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with a
modification to the effective date that provides that the
provision is effective for sales and installations occurring
after the date of enactment.
8. Reduce rate of alcohol excise tax on certain hard ciders (sec. 703
of the Senate amendment)
Present Law
Distilled spirits are taxed at a rate of $13.50 per proof
gallon; beer is taxed at a rate of $18 per barrel
(approximately 58 cents per gallon); and still wines of 14
percent alcohol or less are taxed at a rate of $1.07 per wine
gallon. Higher rates of tax are applied to wines with greater
alcohol content and to sparkling wines (champagne).
Certain small wineries may claim a credit against the
excise tax on wine of 90 cents per wine gallon on the first
100,000 gallons of wine produced annually (i.e., net tax rate
of 17 cents per wine gallon). Certain small breweries pay a
reduced tax of $7.00 per barrel (approximately 22.6 cents per
gallon) on the first 60,000 barrels of beer produced annually.
Apple cider containing alcohol (``hard cider'') is
classified and taxed as wine.
House Bill
No provision.
Senate Amendment
The Senate amendment adjusts the tax rate on apple cider
having an alcohol content of no more than 7 percent to 22.6
cents per gallon for those persons who produce more than
100,000 gallons of ``hard cider'' during a calendar year. The
tax rate applicable to hard cider produced by persons who
produce 100,000 gallons or less in a calendar year will remain
as under present law and those persons may continue to claim
the 90 cents per wine gallon credit permitted for small
wineries. Hard cider production will continue to be counted in
determining whether other production of a producer qualifies
for the tax credit for small producers. The Senate amendment
does not change the classification of qualifying hard cider as
wine.
Effective date.--The provision is effective for hard
cider removed after September 30, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
9. Study feasibility of moving collection point for distilled spirits
excise tax (sec. 706 of the Senate amendment)
Present Law
Distilled spirits are subject to tax at $13.50 per proof
gallon. (A proof gallon is a liquid gallon consisting of 50
percent alcohol.) In the case of domestically produced
distilled spirits and distilled spirits imported into the
United States in bulk containers for domestic bottling, the tax
is imposed on removal of the beverage from the distillery
(without regard to whether a sale occurs at that time). Bottled
distilled spirits that are imported into the United States
comprise approximately 15 percent of the current market for
these beverages; tax is imposed on these imports when the
distilled spirits are removed from the first customs bonded
warehouse in which they are deposited upon entry into the
United States.
In the case of certain distilled spirits products, a tax
credit for alcohol derived from fruit is allowed. This credit
reduces the effective tax paid on those beverages. The credit
is determined when the tax is paid (i.e., at the distillery or
on importation).
House Bill
No provision.
Senate Amendment
The Treasury Department is directed to study options for
changing the point at which the distilled spirits excise tax is
collected. One of the options evaluated should be collecting
the tax at the point at which the distilled spirits are removed
from registered wholesale warehouses. As part of this study,
the Treasury is to focus on administrative issues associated
with the identified options, including the effects on tax
compliance. For example, the Treasury is to evaluate the actual
compliance record of wholesale dealers that currently pay the
excise tax on imported bottled distilled spirits, and the
compliance effects of allowing additional wholesale dealers to
be distilled spirts taxpayers. The study also is to address the
number of taxpayers involved, the types of financial
responsibility requirements that might be needed, and any
special requirements regarding segregation of non-tax-paid
distilled spirits from other products carried by thepotential
new taxpayers. The study further is to review the effects of the
options on Treasury staffing and other budgetary resources as well as
projections of the time between when tax currently is collected and the
time when tax otherwise would be collected.
The study is required to be completed and transmitted to
the Senate Committee on Finance and the House Committee on Ways
and Means no later than January 31, 1998.
Conference Agreement
The conference agreement follows the Senate amendment
with a modification delaying the due date of the study to March
31, 1998.
10. Codify Treasury Department regulations regulating wine labels (sec.
708 of the Senate amendment)
Present Law
The Code includes provisions regulating the labeling of
wine when it is removed from a winery for marketing. In
general, the regulations under these provisions allow the use
of semi-generic names for wine that reflect geographic
identifications understood in the industry, provided that the
labels include clear indication of any deviation from that
which is generally understood in the source of the grapes or
the process by which the wine is produced.
House Bill
No provision.
Senate Amendment
The current Treasury Department regulations governing the
use of semi-generic wine designations which reflect geographic
origin are codified into the Code's wine labeling provisions.
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement follows the Senate amendment
with a modification deleting the Secretary of the Treasury's
discretion to eliminate currently listed semi-generic names.
11. Uniform rate of excise tax on vaccines (sec. 903 of the House bill
and sec. 844 of the Senate amendment)
Present Law
A manufacturer's excise tax is imposed on the following
vaccines routinely recommended for administration to children:
DPT (diphtheria, pertussis, tetanus,), $4.56 per dose; DT
(diphtheria, tetanus), $0.06 per dose; MMR (measles, mumps, or
rubella), $4.44 per dose; and polio, $0.29 per dose. In
general, if any vaccine is administered by combining more than
one of the listed taxable vaccines, the amount of tax imposed
is the sum of the amounts of tax imposed for each taxable
vaccine. However, in the case of MMR and its components, any
component vaccine of MMR is taxed at the same rate as the MMR-
combined vaccine.
Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund to
finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain
injuries following administration of the taxable vaccines.
House Bill
The House bill replaces the present-law excise tax rates,
that differ by vaccine, with a single rate tax of $0.84 per
dose on any listed vaccine component. Thus, the House bill
provides that the tax applied to any vaccine that is a
combination of vaccine components is 84 cents times the number
of components in the combined vaccine. For example, the MMR
vaccine is to be taxed at a rate of $2.52 per dose and the DT
vaccine is to be taxed at rate of $1.68 per dose.
In addition, the House bill adds three new taxable
vaccines to the present-law taxable vaccines: (1) HIB
(haemophilus influenza type B); (2) Hepatitis B; and (3)
varicella (chickenpox). The three newly listed vaccines also
are subject to the 84-cents per dose excise tax.
Effective date.--The provision is effective for vaccine
purchases after September 30, 1997. No tax is to be collected
or refunds permitted for amounts held for sale on October 1,
1997.
Senate Amendment
The Senate amendment is the same as the House bill
regarding rates of tax and taxable vaccines. In addition, the
committee report on the Senate amendment directs the Secretary
of the Treasury to undertake a study of the efficacy of the new
flat-rate vaccine tax system as a means to finance the Vaccine
Injury Compensation Trust Fund. Results of the Treasury study
are to be submitted to the Senate Committee on Finance and the
House Committee on Ways and Means by September 30, 1999.
Effective date.--The provision is effective for vaccine
purchases after September 30, 1997. No floor stocks tax is to
be collected or refunds permitted for amounts held for sale on
October 1, 1997. Returns to the manufacturer occurring on or
after October 1, 1997, are assumed to be returns of vaccines to
which the new rates of tax apply.
Conference Agreement
The conference agreement generally follows the House bill
and the Senate amendment by imposing a uniform rate of tax, but
at a rate of $0.75 per dose on any listed vaccine component.
The conference agreement also adds the HIB (haemophilus
influenza type B), Hepatitis B, and varicella (chickenpox)
vaccines to the list of taxable vaccines.
The conference agreement does not require the Secretary
to study the new vaccine tax structure.
Effective date.--The provision is effective for sales
after the date of enactment. No floor stocks tax is to be
collected, or floor stocks refunds permitted, for vaccines held
on the effective date. For the purpose of determining the
amount of refund of tax on a vaccine returned to the
manufacturer or importer, for vaccines returned after the date
of enactment and before January 1, 1999, the amount of tax
assumed to have been paid on the initial purchase of the
returned vaccine shall not exceed $0.75 per dose.
B. Disaster Relief Provisions
1. Authority to postpone certain tax-related deadlines by reason of
presidentially declared disaster (sec. 921 of the House bill)
Present Law
In the case of a Presidentially declared disaster, the
Secretary of the Treasury has the authority to postpone some
(but not all) tax-related deadlines.
House Bill
The House bill provides that, in the case of a taxpayer
determined to be affected by a Presidentially declared
disaster, the Secretary may specify that, for a period of up to
90 days, certain taxpayer deadlines are postponed. The
deadlines that may be postponed are the same as are postponed
by reason of service in a combat zone. The provision does not
apply for purposes of determining interest on any overpayment
or underpayment.
Effective date.--The provision is effective for any
period for performing an act that has not expired before the
date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, except
that it is applicable to all deadlines (not just taxpayer
deadlines).
2. Use of certain appraisals to establish amount of disaster loss (sec.
922 of the House bill)
Present Law
In order to claim a disaster loss, a taxpayer must
establish the amount of the loss. This may, for example, be
done through the use of an appraisal.
House Bill
The House bill provides that nothing in the Code should
be construed to prohibit Treasury from issuing guidance
providing that an appraisal for the purpose of obtaining a
Federal loan or Federal loan guarantee as the result of a
Presidentially declared disaster may be used to establish the
amount of a disaster loss.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
3. Treatment of livestock sold on account of weather-related conditions
(sec. 923 of the House bill and sec. 721 of the Senate
amendment)
Present Law
In general, cash-method taxpayers report income in the
year it is actually or constructively received. However,
present law contains two special rules applicable to livestock
sold on account of drought conditions. Code section 451(e)
provides that a cash-method taxpayer whose principal trade or
business is farming who is forced to sell livestock due to
drought conditions may elect to include income from the sale of
the livestock in the taxable year following the taxable year of
the sale. This elective deferral of income is available only if
the taxpayer establishes that, under the taxpayer's usual
business practices, the sale would not have occurred but for
drought conditions that resulted in the area being designated
as eligible for Federal assistance. This exception is generally
intended to put taxpayers who receive an unusually high amount
of income in one year in the position they would have been in
absent the drought.
In addition, the sale of livestock (other than poultry)
that is held for draft, breeding, or dairy purposes in excess
of the number of livestock that would have been sold but for
drought conditions is treated as an involuntary conversion
under section 1033(e). Consequently, gain from the sale of such
livestock could be deferred by reinvesting the proceeds of the
sale in similar property within a two-year period.
House Bill
The House bill amends Code section 451(e) to provide that
a cash-method taxpayer whose principal trade or business is
farming and who is forced to sell livestock due not only to
drought (as under present law), but also to floods or other
weather-related conditions, may elect to include income from
the sale of the livestock in the taxable year following the
taxable year of the sale. This elective deferral of income is
available only if the taxpayer establishes that, under the
taxpayer's usual business practices, the sale would not have
occurred but for the drought, flood or other weather-related
conditions that resulted in the area being designated as
eligible for Federal assistance.
In addition, the bill amends Code section 1033(e) to
provide that the sale of livestock (other than poultry) that
are held for draft, breeding, or dairy purposes in excess of
the number of livestock that would have been sold but for
drought (as under present law), flood or other weather-related
conditions is treated as an involuntary conversion.
Effective date.--The provision applies to sales and
exchanges after December 31, 1996.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Mortgage bond financing for residences located in Presidentially
declared disaster areas (sec. 924 of the House bill and sec.
723 of the Senate amendment)
Present Law
Qualified mortgage bonds are private activity tax-exempt
bonds issued by States and local governments acting as conduits
to provide mortgage loans to first-time home buyers who satisfy
specified income limits and who purchase homes that cost less
than statutory maximums.
Present law waives the three buyer targeting requirements
for a portion of the loans made with proceeds of a qualified
mortgage bond issue if the loans are made to finance homes in
statutorily prescribed economically distressed areas.
House Bill
The House bill waives the first-time homebuyer
requirement, the income limits, and the purchase price limits
for loans to finance homes in certain Presidentially declared
disaster areas. The waiver applies only during the one-year
period following the date of the disaster declaration.
Effective date.--The provision applies to loans financed
with bonds issued after December 31, 1996, and before January
1, 2000.
Senate Amendment
The Senate amendment is the same as the House bill except
for the effective date.
Effective date.--The provision applies to loans financed
with bonds issued after December 31, 1996, and before January
1, 1999.
Conference Agreement
The conference agreement allows the waivers of the first-
time homebuyer requirement, the income limits, and the purchase
price limits for loans to finance homes in certain
Presidentially declared disaster areas. The waiver applies only
during the two-year period following the date of disaster
declaration.
Effective date.--The provision applies to loans financed
with bonds issued after December 31, 1996 and before January 1,
1999 (i.e., is the same as the Senate amendment).
5. Rules relating to denial of earned income credit on basis of
disqualified income (sec. 722 of the Senate amendment)
Present Law
For taxable years beginning after December 31, 1995, an
individual is not eligible for the earned income credit if the
aggregate amount of ``disqualified income'' of the taxpayer for
the taxable year exceeds $2,200. This threshold is indexed for
inflation. Disqualified income is the sum of:
(1) interest (taxable and tax-exempt);
(2) dividends;
(3) net rent and royalty income (if greater than zero);
(4) capital gain net income and;
(5) net passive income (if greater than zero) that is not
self-employment income.
House Bill
No provision.
Senate Amendment
The Senate amendment clarifies that gain or loss from the
sale of livestock (as defined under sec.1231(b)(3) of the Code)
is disregarded for purposes of the calculation of capital gain
net income under the disqualified income test of the earned
income credit.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1995.
Conference Agreement
The conference agreement does not include the Senate
amendment.
6. Penalty-free withdrawals from IRAs for disaster-related expenses
(sec. 724 of the Senate amendment)
Present Law
Under present law, amounts held in an individual
retirement arrangement (``IRA'') are includible in income when
withdrawn (except to the extent the withdrawal is a return of
nondeductible contributions). Amounts withdrawn prior to
attainment of age 59-1/2 are subject to an additional 10-
percent early withdrawal tax, unless the withdrawal is due to
death or disability, is made in the form of certain periodic
payments, is used to pay medical expenses in excess of 7.5
percent of AGI, or is used to purchase health insurance of an
unemployed individual.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that the 10-percent early
withdrawal tax does not apply to distributions from IRAs made
to a taxpayer for qualified disaster-related expenses.
The penalty-free withdrawal is available for ``qualified
disaster-related distributions'' meaning distributions made to
pay for the repair or replacement of tangible property which
was located in a disaster area and was destroyed or
substantially damaged as a result of the disaster. The term
``disaster area'' means an area determined by the President of
the United States during 1997 to warrant assistance by the
Federal Government under the Robert T. Stafford Disaster Relief
and Emergency Assistance Act.
The penalty-free withdrawal rule only applies to
qualified disaster distributions that (1) are made within the
2-year period beginning on the date the determination is made
that the area is a disaster area, (2) are used by the taxpayer
within 60 days of the payment or distribution to pay for the
disaster-related expenses, and (3) do not exceed $10,000 during
the 2-year period.
Effective date.--The provision is effective for
distributions after December 31, 1996, with respect to
disasters occurring after such date.
Conference Agreement
The conference agreement does not include the Senate
amendment.
7. Elimination of 10-percent floor for casualty losses resulting from
Presidentially declared disaster (sec. 725 of the Senate
amendment)
Present Law
Non-business casualty and theft losses are deductible as
an itemized deduction only to the extent each loss is more than
$100 and the total of all losses during the year is more than
10 percent of adjusted gross income (``AGI'').
House Bill
No provision.
Senate Amendment
The Senate amendment eliminates the 10 percent of AGI
floor for casualty losses resulting from a Presidentially
declared disaster that occurs in 1997.
Effective date.--Disasters occurring in 1997.
Conference Agreement
The conference agreement does not include the Senate
amendment.
8. Requirement to abate interest by reason of Presidentially declared
disaster (sec. 726 of the Senate amendment)
Present Law
In the case of a Presidentially declared disaster, the
Secretary of the Treasury has the authority to postpone some
tax-related deadlines, but there is no authority to abate
interest.
House Bill
No provision.
Senate Amendment
The Senate amendment requires the IRS to abate interest
for the same period of time for which the IRS has provided an
extension of time to file tax returns and pay taxes for
individuals located in Presidentially declared disaster areas
during 1997.
Effective date.--Disasters occurring in 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
C. Provisions Relating to Employment Taxes
1. Employment tax status of distributors of bakery products (sec. 931
of the House bill)
Present Law
Under a special statutory rule, bakery distributors are
treated as employees for Social Security payroll tax purposes
(even if they are independent contractors for income tax
purposes) if: (1) their services are part of a continuing
relationship with the person for whom they are performed; (2)
the distributor's service contract contemplates that he or she
will perform substantially all of the services personally; and
(3) the distributor does not have a substantial investment in
facilities used in the performance of services, excluding
facilities used for transportation. Bakery drivers generally
take the position that they are not employees under the
statutory rule.
House Bill
The House bill deletes distributors of bakery products
from the list of product and service distributors treated as
statutory employees for Social Security payroll tax purposes.
Thus, the status of such workers is determined under the
generally applicable rules.
Effective date.--The provision is effective for services
performed after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
2. Clarification of standard to be used in determining tax status of
retail securities brokers (sec. 932 of the House bill and sec.
779 of the Senate amendment)
Present Law
Under present law, whether a worker is an employee or
independent contractor generally is determined under a common-
law facts and circumstances test. An employer-employee
relationship is generally found to exist if the service
recipient has not only the right to control the result to be
accomplished by the work, but also the means by which the
result is to be accomplished. Whether such control exists is
determined based on the relevant facts and circumstances. The
IRS training manual provides that if a business requires its
workers to comply with rules established by a third party
(e.g., municipal building codes related to construction), the
fact that such rules are imposed should be given little weight
in determining the worker's status.
House Bill
Under the House bill, in determining the status of a
registered representative of a broker-dealer for Federal tax
purposes, no weight is to be given to instructions from the
service recipient which are imposed only in compliance with
governmental investor protection standards or investor
protection standards imposed by a governing body pursuant to a
delegation by a Federal or State agency.
Effective date.--Services performed after December 31,
1997. No inference is intended that the provision is not
present law.
Senate Amendment
Same as the House bill, except that the provision applies
only for Federal income tax purposes.
Effective date.--Same as the House bill.
Conference Agreement
The conference agreement follows the House bill.
3. Clarification of exemption from self-employment tax for certain
termination payments received by former insurance salesmen
(sec. 933 of the House bill)
Present Law
Under the self-employment contributions act (``SECA''),
taxes are imposed on an individual's net earnings from self
employment. In general, net earnings from self employment means
the gross income derived by an individual from any trade or
business carried on by such individual, less the deductions
allowed which are attributable to such trade or business. The
SECA tax rate is the same as the combined employer and employee
FICA rates (i.e., 12.4 percent for old age, survivors, and
disability income (OASDI) and 2.9 percent for Medicare Hospital
Insurance taxes) and the maximum amount of earnings subject to
the OASDI portion of SECA taxes is coordinated with and is set
at the same level as the maximum level of wages and salaries
subject to the OASDI portion of FICA taxes ($65,400 for 1997).
There is no limit on the amount of self-employment income
subject to the HI portion of the tax.
Certain insurance salesmen are independent contractors
and therefore subject to tax under SECA. Under case law,
certain payments received by a former insurance salesmen who
had sold insurance as an independent contractor are not net
earnings from self employment and thereforeare not subject to
SECA. See, e.g., Jackson v. Comm'r, 108 TC No. 10 (1997); Gump v. U.S.,
86 F. 3d 1126 (CA FC 1996); Milligan v. Comm'r, 38 F. 3d 1094 (9th Cir.
1994).
House Bill
The House bill codifies case law by providing that net
earnings from self employment do not include any amount
received during the taxable year from an insurance company on
account of services performed by such individual as an
insurance salesman for such company if (1) such amount is
received after termination of the individual's agreement to
perform services for the company, (2) the individual performs
no services for the company after such termination and before
the close of the taxable year, (3) the amount of the payment
depends solely on policies sold by the individual during the
last year of the agreement and the extent to which such
policies remain in force for some period after such
termination, and does not depend on the length of service or
overall earnings from services performed for the company, and
(4) the payments are conditioned upon the salesman agreeing not
to compete with the company for at least one year following
such termination.
The House bill also amends the Social Security Act to
provide that such termination payments are not treated as
earnings for purposes of determining social security benefits.
No inference is intended with respect to the SECA tax
treatment of payments that are not described in the proposal.
Effective date.--The provision is effective with respect
to payments after December 31, 1997. No inference is intended
that the proposal is not present law.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with
clarifications with respect to the requirement as to the amount
of the payments. The conference agreement clarifies that the
provision applies if the amount of the payment depends
primarily on policies sold by or credited to the account of the
individual during the last year of the service agreement and/or
the extent to which such policies remain in force for some
period after such termination and does not depend on length of
service or overall earnings. The conference agreement clarifies
that the eligibility for the payment can be based on length of
service or overall earnings.
4. Safe harbor for independent contractors (sec. 934 of the House bill)
Present Law
Under present law, whether a worker is an employee or
independent contractor is generally determined under a common-
law facts and circumstances test. An employer-employee
relationship is generally found to exist if the service
recipient has not only the right to control the result to be
accomplished by the work, but also the means by which the
result is to be accomplished. The Internal Revenue Service
(``IRS'') has developed a set of 20 factors for use in applying
the common-law test.
Under a special safe harbor rule (section 530 of the
Revenue Act of 1978), a service recipient may treat a worker as
an independent contractor for employment tax purposes even
though the worker is in fact an employee if the service
recipient has a reasonable basis for treating the worker as an
independent contractor and certain other requirements are met.
Section 530 does not apply to the worker and does not apply for
income tax purposes. Section 530 does not apply to technical
services personnel.
House Bill
In general
The House bill provides a statutory safe harbor for
determining worker classification for Federal tax purposes. If
the standards set forth in the bill are met, the worker is not
treated as an employee and the service recipient (or payor) is
not treated as an employer. If the safe harbor is not
satisfied, the determination of the worker's status is made
under the present-law rules.
Standards for determining whether individuals are not employees
Under the House bill, the following three sets of
requirements have to be satisfied in order for a worker not to
be treated as an employee: (1) worker requirements regarding
the service recipient; (2) worker requirements regarding
others; and (3) documentation requirements. The requirements
regarding the worker are satisfied if, in connection with
performing the services, the worker: (1) has a significant
investment in assets and/or training; (2) incurs significant
unreimbursed expenses; (3) agrees to perform the services for a
particular amount of time or to complete a specific result and
is liable for damages for early termination without cause; (4)
is paid primarily on a commissioned basis; or (5) purchases
products for resale.
The requirements regarding others are satisfied if one of
the following two requirements is met: (1) a place of business
requirement; or (2) a services available to the public
requirement. The place of business requirement is satisfied if
the worker: (1) has a principal place of business; (2) does not
primarily perform services in the service recipient's place of
business; or (3) pays a fair market rent for use of the service
recipient's place of business. The services available to the
public requirement is satisfied if the worker is not required
to perform services exclusively for the service recipient, and
during the year (or the preceding or subsequent year) the
worker: (1) has performed a significant amount of services for
other persons; (2) has offered to perform services for other
persons through advertising, individual written or oral
solicitations, listings with agencies, brokers, or other
organizations that provide referrals, or other similar
activities; or (3) provides service under a business name that
is registered with (or licensed by) a State or apolitical
subdivision (or an agency or instrumentality of a State or political
subdivision).
The documentation requirement is satisfied if the
services performed by the worker are performed pursuant to a
written contract between the worker and the service recipient
(or payor) and the contract provides that the worker will not
be treated as an employee.
If the service recipient (or payor) fails to file the
appropriate Federal tax returns (including information returns)
with respect to a worker for a taxable year, the safe harbor is
not available for such year.
Effective date
The provision is effective with respect to services
performed after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
5. Combined employment tax reporting demonstration project (sec. 769 of
the Senate amendment)
Present Law
Traditionally, Federal tax forms are filed with the
Federal Government and State tax forms are filed with
individual states. This necessitates duplication of items
common to both returns. Some States have recently been working
with the IRS to implement combined State and Federal reporting
of certain types of items on one form as a way of reducing the
burdens on taxpayers. The State of Montana and the IRS have
cooperatively developed a system to combine State and Federal
employment tax reporting on one form. The one form would
contain exclusively Federal data, exclusively State data, and
information common to both: the taxpayer's name, address, TIN,
and signature.
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431). No tax
information may be furnished by the Internal Revenue Service
(``IRS'') to another agency unless the other agency establishes
procedures satisfactory to the IRS for safeguarding the tax
information it receives (sec. 6103(p)).
Implementation of the combined Montana-Federal employment
tax reporting project has been hindered because the IRS
interprets section 6103 to apply that provision's restrictions
on disclosure to information common to both the State and
Federal portions of the combined form, although these
restrictions would not apply to the State with respect to the
State's use of State-requested information if that information
were supplied separately to both the State and the IRS.
House Bill
No provision.
Senate Amendment
The Senate amendment permits implementation of a
demonstration project to assess the feasibility and
desirability of expanding combined reporting in the future.
There are several limitations on the demonstration project.
First, it is limited to the State of Montana and the IRS.
Second, it is limited to employment tax reporting. Third, it is
limited to disclosure of the name, address, TIN, and signature
of the taxpayer, which is information common to both the
Montana and Federal portions of the combined form. Fourth, it
is limited to a period of five years.
Effective date.--The provision is effective on the date
of enactment, and will expire on the date five years after the
date of enactment.
Conference Agreement
The conference agreement follows the Senate amendment,
with a technical modification providing a cross-reference to
the provision in section 6103 of the Code.
D. Provisions Relating to Small Business
1. Delay imposition of penalties for failure to make payments
electronically through EFTPS (sec. 941 of the House bill and
sec. 731 of the Senate amendment)
Present Law
Employers are required to withhold income taxes and FICA
taxes from wages paid to their employees. Employers also are
liable for their portion of FICA taxes, excise taxes, and
estimated payments of their corporate income tax liability.
The Code requires the development and implementation of
an electronic fund transfer system to remit these taxes and
convey deposit information directly to the Treasury (Code sec.
6302(h) 30). The Electronic Federal Tax Payment
System (``EFTPS'') was developed by Treasury in response to
this requirement.31 Employers must enroll with one
of two private contractors hired by the Treasury. After
enrollment, employers generally initiate deposits either by
telephone or by computer.
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\30\ This requirement was enacted in 1993 (sec. 523 of P.L. 103-
182).
\31\ Treasury had earlier developed TAXLINK as the prototype for
EFTPS. TAXLINK has been operational for several years; EFTPS is
currently operational. Employers currently using TAXLINK will
ultimately be required to participate in EFTPS.
---------------------------------------------------------------------------
The new system is phased in over a period of years by
increasing each year the percentage of total taxes subject to
the new EFTPS system. For fiscal year 1994, 3 percent of the
total taxes are required to be made by electronic fund
transfer. These percentages increased gradually for fiscal
years 1995 and 1996. For fiscal year 1996, the percentage was
20.1 percent (30 percent for excise taxes and corporate
estimated tax payments). For fiscal year 1997, these
percentages increased significantly, to 58.3 percent (60
percent for excise taxes and corporate estimated tax payments).
The specific implementation method required to achieve the
target percentages is set forth in Treasury regulations.
Implementation began with the largest depositors.
Treasury had originally implemented the 1997 percentages
by requiring that all employers who deposit more than $50,000
in 1995 must begin using EFTPS by January 1, 1997. The Small
Business Job Protection Act of 1996 provided that the increase
in the required percentages for fiscal year 1997 (which,
pursuant to Treasury regulations, was to take effect on January
1, 1997) will not take effect until July 1, 1997.32
This was done to provide additional time prior to
implementation of the 1997 requirements so that employers could
be better informed about their responsibilities.
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\32\ Sec. 1809 of P.L. 104-188.
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On June 2, 1997, the IRS announced 33 that it
will not impose penalties through December 31, 1997, on
businesses that make timely deposits using paper Federal tax
deposit coupons while converting to the EFTPS system.
---------------------------------------------------------------------------
\33\ IR-97-32.
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House Bill
The House bill provides that no penalty shall be imposed
solely by reason of a failure to use EFTPS prior to January 1,
1999, if the taxpayer was first required to use the EFTPS
system on or after July 1, 1997.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill,
except it applies to penalties for failures to use EFTPS prior
to July 1, 1998.
Conference Agreement
The conference agreement follows the Senate amendment.
2. Home office deduction: clarification of definition of principal
place of business (sec. 942 of the House bill)
Present Law
A taxpayer's business use of his or her home may give
rise to a deduction for the business portion of expenses
related to operating the home (e.g., a portion of rent or
depreciation and repairs). Code section 280A(c)(1) provides,
however, that business deductions generally are allowed only
with respect to a portion of a home that is used exclusively
and regularly in one of the following ways: (1) as the
principal place of business for a trade or business; (2) as a
place of business used to meet with patients, clients, or
customers in the normal course of the taxpayer's trade or
business; or (3) in connection with the taxpayer's trade or
business, if the portion so used constitutes a separate
structure not attached to the dwelling unit. In the case of an
employee, the Code further requires that the business use of
the home must be for the convenience of the employer (sec.
280A(c)(1)).34 These rules apply to houses,
apartments, condominiums, mobile homes, boats, and other
similar property used as the taxpayer's home (sec. 280A(f)(1)).
Under Internal Revenue Service (IRS) rulings, the deductibility
of expenses incurred for local transportation between a
taxpayer's home and a work location sometimes depends on
whether the taxpayer's home office qualifies under section
280A(c)(1) as a principal place of business (see Rev. Rul. 94-
47, 1994-29 I.R.B. 6).
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\34\ If an employer provides access to suitable space on the
employer's premises for the conduct by an employee of particular
duties, then, if the employee opts to conduct such duties at home as a
matter of personal preference, the employee's use of the home office is
not ``for the convenience of the employer.'' See, e.g., W. Michael
Mathes, (1990) T.C. Memo 1990-483.
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Prior to 1976, expenses attributable to the business use
of a residence were deductible whenever they were ``appropriate
and helpful'' to the taxpayer's business. In 1976, Congress
adopted section 280A, in order to provide a narrower scope for
the home office deduction, but did not define the term
``principal place of business.'' In Commissioner v. Soliman,
113 S.Ct. 701 (1993), the Supreme Court reversed lower court
rulings and upheld an IRS interpretation of section 280A that
disallowed a home office deduction for a self-employed
anesthesiologist who practiced at several hospitals but was not
provided office space at the hospitals. Although the
anesthesiologist used a room in his home exclusively to perform
administrative and management activities for his profession
(i.e., he spent two or three hours a day in his home office on
bookkeeping, correspondence, reading medical journals, and
communicating with surgeons, patients, and insurance
companies), the Supreme Court upheld the IRS position that the
``principal place of business'' for the taxpayer was not the
home office, because the taxpayer performed the ``essence of
the professional service'' at the hospitals.35
Because the taxpayer did not meet with patients at his home
office and the room was not a separate structure, a deduction
was not available under the second or third exception under
section 280A(c)(1) (described above).
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\35\ In response to the Supreme Court's decision in Soliman, the
IRS revised its Publication 587, Business Use of Your Home, to more
closely follow the comparative analysis used in Soliman by focusing on
the following two primary factors in determining whether a home office
is a taxpayer's principal place of business: (1) the relative
importance of the activities performed at each business location; and
(2) the amount of time spent at each location.
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Section 280A(c)(2) contains a special rule that allows a
home office deduction for business expenses related to a space
within a home that is used on a regular (even if not exclusive)
basis as a storage unit for the inventory or product samples of
the taxpayer's trade or business of selling products at retail
or wholesale, but only if the home is the sole fixed location
of such trade or business.
Home office deductions may not be claimed if they create
(or increase) a net loss from a business activity, although
such deductions may be carried over to subsequent taxable years
(sec. 280A(c)(5)).
House Bill
Section 280A is amended to specifically provide that a
home office qualifies as the ``principal place of business'' if
(1) the office is used by the taxpayer to conduct
administrative or management activities of a trade or business
and (2) there is no other fixed location of the trade or
business where the taxpayer conducts substantial administrative
or management activities of the trade or business. As under
present law, deductions will be allowed for a home office
meeting the above two-part test only if the office is
exclusively used on a regular basis as a place of business by
the taxpayer and, in the case of an employee, only if such
exclusive use is for the convenience of the employer.
Thus, under the House bill, a home office deduction is
allowed (subject to the present-law ``convenience of the
employer'' rule governing employees) if a portion of a
taxpayer's home is exclusively and regularly used to conduct
administrative or management activities for a trade or business
of the taxpayer, who does not conduct substantial
administrative or management activities at any other fixed
location of the trade or business, regardless of whether
administrative or management activities connected with his
trade or business (e.g., billing activities) are performed by
others at other locations. The fact that a taxpayer also
carries out administrative or management activities at sites
that are not fixed locations of the business, such as a car or
hotel room, will not affect the taxpayer's ability to claim a
home office deduction under the bill. Moreover, if a taxpayer
conducts some administrative or management activities at a
fixed location of the business outside the home, the taxpayer
still is eligible to claim a deduction so long as the
administrative or management activities conducted at any fixed
location of the business outside the home are not substantial
(e.g., the taxpayer occasionally does minimal paperwork at
another fixed location of the business). In addition, a
taxpayer's eligibility to claim a home office deduction under
the bill will not be affected by the fact that the taxpayer
conducts substantial non-administrative or non-management
business activities at a fixed location of the business outside
the home (e.g., meeting with, or providing services to,
customers, clients, or patients at a fixed location of the
business away from home).
If a taxpayer in fact does not perform substantial
administrative or management activities at any fixed location
of the business away from home, then the second part of the
test will be satisfied, regardless of whether or not the
taxpayer opted not to use an office away from home that was
available for the conduct of such activities. However, in the
case of an employee, the question whether an employee chose not
to use suitable space made available by the employer for
administrative activities is relevant to determining whether
the present-law ``convenience of the employer'' test is
satisfied. In cases where a taxpayer's use of a home office
does not satisfy the provision's two-part test, the taxpayer
nonetheless may be able to claim a home office deduction under
the present-law ``principal place of business'' exception or
any other provision of section 280A.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, except
that the provision is effective for taxable years beginning
after December 31, 1998.
3. Increase deduction for health insurance costs of self-employed
individuals (sec. 733 of the Senate amendment)
Present Law
Under present law, self-employed individuals are entitled
to deduct the amount paid for health insurance for the self-
employed individual and the individual's spouse and dependents
as follows: the deduction is 40 percent in 1997; 45 percent in
1998 through 2002; 50 percent in 2003; 60 percent in 2004; 70
percent in 2005; and 80 percent in 2006 and thereafter. The
deduction for health insurance expenses of self-employed
individuals is not available for any month in which the
taxpayer is eligible to participate in a subsidized health plan
maintained by the employer of the taxpayer or the taxpayer's
spouse.
Under present law employees can exclude from income 100
percent of employee-provided health insurance.
House Bill
No provision.
Senate Amendment
The Senate amendment permits self-employed individuals to
deduct a higher percentage of the amount paid for health
insurance as follows: the deduction is 50 percent in 1997 and
1998; 60 percent in 1999 through 2002; 70 percent in 2003; 80
percent in 2004; 85 percent in 2005; 90 percent in 2006; and
100 percent in 2007 and all years thereafter.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications. Under the conference agreement, the self-
employed health deduction is phased up as follows: the
deduction is 40 percent in 1997, 45 percent in 1998 and 1999,
50 percent in 2000 and 2001, 60 percent in 2002, 80 percent in
2003 through 2005, 90 percent in 2006, and 100 percent in 2007
and thereafter.
E. Other Provisions
1. Shrinkage estimates for inventory accounting (sec. 951 of the House
bill and sec. 1013 of the Senate amendment)
Present Law
Section 471(a) provides that ``(w)henever in the opinion
of the Secretary the use of inventories is necessary in order
clearly to determine the income of any taxpayer, inventories
shall be taken by such taxpayer on such basis as the Secretary
may prescribe as conforming as nearly as may be to the best
accounting practice in the trade or business and as most
clearly reflecting income.'' Where a taxpayer maintains book
inventories in accordance with a sound accounting system, the
net value of the inventory will be deemed to be the cost basis
of the inventory, provided that such book inventories are
verified by physical inventories at reasonable intervals and
adjusted to conform therewith.36 The physical count
is used to determine and adjust for certain items; such as
undetected theft, breakage, and bookkeeping errors;
collectively referred to as ``shrinkage''.
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\36\ Treas. reg. sec. 1.471-2(d).
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Some taxpayers verify and adjust their book inventories
by a physical count taken on the last day of the taxable year.
Other taxpayers may verify and adjust their inventories by
physical counts taken at other times during the year. Still
other taxpayers take physical counts at different locations at
different times during the taxable year (cycle counting).
If a physical inventory is taken at year-end, the amount
of shrinkage for the year is known. If a physical inventory is
not taken at year-end, shrinkage through year-end will have to
be based on an estimate, or not taken into account until the
following year. In the first decision in Dayton Hudson v.
Commissioner,37 the U.S. Tax Court held that a
taxpayer's method of accounting may include the use of an
estimate of shrinkage occurring through year-end, provided the
method is sound and clearly reflects income. In the second
decision in Dayton Hudson v. Commissioner,38 the
U.S. Tax Court adhered to this holding. However, the U.S. Tax
Court in the second decision determined that this taxpayer had
not established that its method of accounting clearly reflected
income. Other cases decided by the U.S. Tax Court 39
have held that taxpayers' methods of accounting that included
shrinkage estimates do clearly reflect income.
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\37\ 101 T.C. 462 (1993).
\38\ T.C. Memo 1997-260.
\39\ Wal-Mart v. Commissioner, T.C. Memo 1997-1 and Kroger v.
Commissioner, T.C. Memo 1997-2.
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The U.S. Tax Court in the second Dayton Hudson opinion
noted that ``(I)n most cases, generally accepted accounting
principles (GAAP), consistently applied, will pass muster for
tax purposes. The Supreme Court has made clear, however, that
GAAP does not enjoy a presumption of accuracy that must be
rebutted by the Commissioner.''
House Bill
The House bill provides that a method of keeping
inventories will not be considered unsound, or to fail to
clearly reflect income, solely because it includes an
adjustment for the shrinkage estimated to occur through year-
end, based on inventories taken other than at year-end. Such an
estimate must be based on actual physical counts. Where such an
estimate is used in determining ending inventory balances, the
taxpayer is required to take a physical count of inventories at
each location on a regular and consistent basis. A taxpayer is
required to adjust its ending inventory to take into account
all physical counts performed through the end of its taxable
year.
Effective date.--The provision is effective for taxable
years ending after the date of enactment.
A taxpayer is permitted to change its method of
accounting by this section if the taxpayer is currently using a
method that does not utilize estimates of inventory shrinkage
and wishes to change to a method for inventories that includes
shrinkage estimates based on physical inventories taken other
than at year-end. Such a change is treated as a voluntary
change in method of accounting, initiated by the taxpayer with
the consent of the Secretary of the Treasury, provided the
taxpayer changes to a permissible method of accounting. The
period for taking into account any adjustment required under
section 481 as a result of such a change in method is 4 years.
No inference is intended by the adoption of this
provision with regard to whether any particular method of
accounting for inventories is permissible under present law.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with the following clarifications regarding
safe harbor methods for the estimation of inventory shrinkage.
In general.--The conferees expect that the Secretary of
the Treasury will issue guidance establishing one or more safe
harbor methods for the estimation of inventory shrinkage that
will be deemed to result in a clear reflection of income,
provided such safe harbor method is consistently applied and
the taxpayer's inventory methods otherwise satisfy the clear
reflection of income standard.
Safe harbors applicable to retail trade.--In the case of
taxpayers primarily engaged in retail trade (the resale of
personal property to the general public), where physical
inventories are normally taken at each location at least
annually, the conferees anticipate that a safe harbor method
will be established that will use a historical ratio of
shrinkage to sales, multiplied by total sales between the date
of the last physical inventory and year-end. This historical
ratio is based on the actual shrinkage established by all
physical inventories taken during the most recent three taxable
years and the sales for related periods. The historical ratio
should be separately determined for each store or department in
a store of the taxpayer. The historical ratio, or estimated
shrinkage determined using the historical ratio, cannot be
adjusted by judgmental or other factors (e.g., floors or caps).
The conferees expect that estimated shrinkage determined in
accordance with the consistent application of the safe harbor
method will not be required to be recalculated, through a
lookback adjustment or otherwise, to reflect the results of
physical inventories taken after year-end.
In the case of a new store or department in a store that
has not verified shrinkage by a physical inventory in each of
the most recent three taxable years, the historical ratio is
the average of the historical ratios of the retailer's other
stores or departments. Retailers using last in, first out
(LIFO) methods of inventory are expected to be required to
allocate shrinkage among their various inventory pools in a
reasonable and consistent manner.
The conferees expect that procedures will be provided
allowing an automatic election of such method of accounting for
a taxpayer's first taxable year ending after the date of
enactment. Any adjustment required by section 481 as a result
of the change in method of accounting generally will be taken
into account over a period of four years.
2. Treatment of workmen's compensation liability under rules for
certain personal injury liability assignments (sec. 952 of the House
bill)
Present Law
Under present law, an exclusion from gross income is
provided for amounts received for agreeing to a qualified
assignment to the extent that the amount received does not
exceed the aggregate cost of any qualified funding asset (sec.
130). A qualified assignment means any assignment of a
liability to make periodic payments as damages (whether by suit
or agreement) on account of a personal injury or sickness (in a
case involving physical injury or physical sickness), provided
the liability is assumed from a person who is a party to the
suit or agreement, and the terms of the assignment satisfy
certain requirements. Generally, these requirements are that:
(1) the periodic payments are fixed as to amount and time; (2)
the payments cannot be accelerated, deferred, increased, or
decreased by the recipient; (3) the assignee's obligation is no
greater than that of the assignor; and (4) the payments are
excludable by the recipient under section 104(a)(2) as damages
on account of personal injuries or sickness. Present law
provides a separate exclusion under section 104(a)(1) for the
recipient of amounts received underworkmen's compensation acts
as compensation for personal injuries or sickness, but a qualified
assignment under section 130 does not include the assignment of a
liability to make such payments.
House Bill
The House bill extends the exclusion for qualified
assignments under Code section 130 to amounts assigned for
assuming a liability to pay compensation under any workmen's
compensation act. The provision requires that the assignee
assume the liability from a person who is a party to the
workmen's compensation claim, and requires that the periodic
payment be excludable from the recipient's gross income under
section 104(a)(1), in addition to the requirements of present
law.
Effective date.--Effective for workmen's compensation
claims filed after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
3. Tax-exempt status for certain State workmen's compensation act
companies (sec. 953 of the House bill and sec. 761 of the
Senate amendment)
Present Law
In general, the Internal Revenue Service (``IRS'') takes
the position that organizations that provide insurance for
their members or other individuals are not considered to be
engaged in a tax-exempt activity. The IRS maintains that such
insurance activity is either (1) a regular business of a kind
ordinarily carried on for profit, or (2) an economy or
convenience in the conduct of members' businesses because it
relieves the members from obtaining insurance on an individual
basis.
Certain insurance risk pools have qualified for tax
exemption under Code section 501(c)(6). In general, these
organizations (1) assign any insurance policies and
administrative functions to their member organizations
(although they may reimburse their members for amounts paid and
expenses), (2) serve an important common business interest of
their members, and (3) must be membership organizations
financed, at least in part, by membership dues.
State insurance risk pools may also qualify for tax
exempt status under section 501(c)(4) as a social welfare
organizations or under section 115 as serving an essential
governmental function of a State. In seeking qualification
under section 501(c)(4), insurance organizations generally are
constrained by the restrictions on the provision of
``commercial-type insurance'' contained in section 501(m).
Section 115 generally provides that gross income does not
include income derived from the exercise of any essential
governmental function and accruing to a State or any political
subdivision thereof.
House Bill
The House bill clarifies the tax-exempt status of any
organization that is created by State law, and organized and
operated exclusively to provide workmen's compensation
insurance and related coverage that is incidental to workmen's
compensation insurance, 40 and that meets certain
additional requirements. The workmen's compensation insurance
must be required by State law, or be insurance with respect to
which State law provides significant disincentives if it is not
purchased by an employer (such as loss of exclusive remedy or
forfeiture of affirmative defenses such as contributory
negligence). The organization must provide workmen's
compensation to any employer in the State (for employees in the
State or temporarily assigned out-of-State) seeking such
insurance and meeting other reasonable requirements. The State
must either extend its full faith and credit to debt of the
organization or provide the initial operating capital of such
organization. For this purpose, the initial operating capital
can be provided by providing the proceeds of bonds issued by a
State authority; the bonds may be repaid through exercise of
the State's taxing authority, for example. For periods after
the date of enactment, the assets of the organization must
revert to the State upon dissolution. Finally, the majority of
the board of directors (or comparable oversight body) of the
organization must be appointed by an official of the executive
branch of the State or by the State legislature, or by both.
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\40\ Related coverage that is incidental to workmen's compensation
insurance includes liability under Federal workmen's compensation laws,
for example.
---------------------------------------------------------------------------
Effective date.--Taxable years beginning after December
31, 1997. No inference is intended as to the status of such
organizations under present law.
Senate Amendment
The Senate amendment is the same as the House bill. The
Senate Finance committee report clarifies that related coverage
that is incidental to workmen's compensation insurance includes
liability under Federal workmen's compensation laws, the Jones
Act, and the Longshore and Harbor Workers Compensation Act, for
example. The Senate Finance committee report also clarifies
that many organizations described in the provision have been
operating as tax-exempt organizations. No inference is intended
that organizations described in the provision are not tax-
exempt under present law.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with modifications.
The conference agreement modifies the full-faith-and-
credit portion of the requirement that the State must extend
its full faith and credit to debt of the organization (or
provide the initial operating capital of such organization).
Under the conference agreement, the State must extend its full
faith and credit to the initial debt of the organization.
The conference agreement also modifies the requirement
relating to reversion of assets to the State upon dissolution.
The conference agreement requires that, in the case of periods
after the date of enactment, either the assets of the
organization must revert to the State upon dissolution, or
State law must not permit the dissolution of the organization,
absent an act of the State legislature. Should dissolution of
the organization become permissible under applicable State law,
then the requirement that the assets of the organization revert
to the State upon dissolution applies.
Many organizations described in the provision have been
operating as organizations that are exempt from tax (e.g., as
an organization that is exempt from tax because it is serving
an essential governmental function of a State). No inference is
intended that organizations described in the provision are not
exempt from tax under present law. In addition, no inference is
intended that the benefit plans of such organizations are not
properly maintained by the organization. It is anticipated that
Federal regulatory agencies will take appropriate action to
address transition issues faced by organizations to conform to
their benefit plans under the provision. For example, it is
intended that an organization that has been maintaining a
section 457 plan as an agency or instrumentality of a State
could (without creating any inference with respect to present-
law treatment) freeze future contributions to the section 457
plan and establish a retirement arrangement (e.g., a section
401(k) plan) that is consistent with the treatment of the
organization as a tax-exempt employer under the provision.
4. Election for 1987 partnerships to continue exception from treatment
of publicly traded partnerships as corporations (sec. 954 of
the House bill and sec. 762 of the Senate amendment)
Present Law
A publicly traded partnership generally is treated as a
corporation for Federal tax purposes (sec. 7704). An exception
to the rule treating the partnership as a corporation applies
if 90 percent of the partnership's gross income consists of
``passive-type income,'' which includes (1) interest (other
than interest derived in a financial or insurance business, or
certain amounts determined on the basis of income or profits),
(2) dividends, (3) real property rents (as defined for purposes
of the provision), (4) gain from the sale or other disposition
of real property, (5) income and gains relating to minerals and
natural resources (as defined for purposes of the provision),
and (6) gain from the sale or disposition of a capital asset
(or certain trade or business property) held for the production
of income of the foregoing types (subject to an exception for
certain commodities income).
The exception for publicly traded partnerships with
``passive-type income'' does not apply to any partnership that
would be described in section 851(a) of the Code (relating to
regulated investment companies, or ``RICs''), if that
partnership were a domestic corporation. Thus, a publicly
traded partnership that is registered under the Investment
Company Act of 1940 generally is treated as a corporation under
the provision. Nevertheless, if a principal activity of the
partnership consists of buying and selling of commodities
(other than inventory or property held primarily for sale to
customers) or futures, forwards and options with respect to
commodities, and 90 percent of the partnership's income is such
income, then the partnership is not treated as a corporation.
A publicly traded partnership is a partnership whose
interests are (1) traded on an established securities market,
or (2) readily tradable on a secondary market (or the
substantial equivalent thereof).
Treasury regulations provide detailed guidance as to when
an interest is treated as readily tradable on a secondary
market or the substantial equivalent. Generally, an interest is
so treated ``if, taking into account all of the facts and
circumstances, the partners are readily able to buy, sell, or
exchange their partnership interests in a manner that is
comparable, economically, to trading on an established
securities market'' (Treas. Reg. sec. 1.7704-1(c)(1)).
When the publicly traded partnership rules were enacted
in 1987, a 10-year grandfather rule provided that the
provisions apply to certain existing publicly traded
partnerships only for taxable years beginning after December
31, 1997. 41 An existing publicly traded partnership
is any partnership, if (1) it was a publicly traded partnership
on December 17, 1987, (2) a registration statement indicating
that the partnership was to be a publicly traded partnership
was filed with the Securities and Exchange Commission with
respect to the partnership on or before December 17, 1987, or
(3) with respect to the partnership, an application was filed
with a State regulatory commission on or before December 17,
1987, seeking permission to restructure a portion of a
corporation as a publicly traded partnership. A partnership
that otherwise would be treated as an existing publicly traded
partnership ceases to be so treated as of the first day after
December 17, 1987, on which there has been an addition of a
substantial new line of business with respect to such
partnership. A rule is provided to coordinate this grandfather
rule with the exception to the rule treating the partnership as
a corporation applies if 90 percent of the partnership's gross
income consists of passive-type income. The coordination rule
provides that passive-type income exception applies only after
the grandfather rule ceases to apply (whether by passage of
time or because the partnership ceases to qualify for the
grandfather rule).
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\41\ Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) (the
``1987 Act''), sec. 10211(c).
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House Bill
Under the House bill, in the case of an existing publicly
traded partnership that elects under the provision to be
subject to a tax on gross income from the active conduct of a
trade or business, the rule of present law treating a publicly
traded partnership as a corporation does not apply. An existing
publicly traded partnership is any publicly traded partnership
that is not treated as a corporation, so long as such treatment
is not determined under the passive-type income exception of
Code section 7704(c)(1). The election to be subject to the tax
on gross trade or business income, once made, remains in effect
until revoked by the partnership, and cannot be reinstated.
The tax is 15 percent of the partnership's gross income
from the active conduct of a trade or business. The
partnership's gross trade or business income includes its share
of gross trade or business income of any lower-tier
partnership. The tax imposed under the provision may not be
offset by tax credits.
Effective date.--Taxable years beginning after December
31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill,
except that the tax is 3.5 percent of the partnership's gross
income from the active conduct of a trade or business.
Conference Agreement
The conference agreement follows the Senate amendment,
with technical modifications. The conference agreement
clarifies that the provision applies to any electing 1987
partnership, which means any publicly traded partnership, if
(1) it is an existing partnership within the meaning of section
10211(c)(2) of the 1987 Act, (2) it has not been treated as a
corporation for taxable years beginning after December 31,
1987, and before January 1, 1998 (and would not have been
treated as a corporation even without regard to section
7704(c), the exception for partnerships with ``passive-type''
income), and (3) the partnership elects under the provision to
be subject to a tax on gross income from the active conduct of
a trade or business. An electing 1987 partnership ceases to be
treated as such as of the first day after December 31, 1997, on
which there has been the addition of a substantial new line of
business with respect to the partnership.
5. Exclusion from UBIT for certain corporate sponsorship payments (sec.
955 of the House bill and sec. 763 of the Senate amendment)
Present Law
Although generally exempt from Federal income tax, tax-
exempt organizations are subject to the unrelated business
income tax (``UBIT'') on income derived from a trade or
business regularly carried on that is not substantially related
to the performance of the organization's tax-exempt functions
(secs. 511-514). Contributions or gifts received by tax-exempt
organizations generally are not subject to the UBIT. However,
present-law section 513(c) provides that an activity (such as
advertising) does not lose its identity as a separate trade or
business merely because it is carried on within a larger
complex of other endeavors.42 If a tax-exempt
organization receives sponsorship payments in connection with
an event or other activity, the solicitation and receipt of
such sponsorship payments may be treated as a separate
activity. The Internal Revenue Service (IRS) has taken the
position that, under some circumstances, such sponsorship
payments are subject to the UBIT.43
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\42\ See United States v. American College of Physicians, 475 U.S.
834 (1986)(holding that activity of selling advertising in medical
journal was not substantially related to the organization's exempt
purposes and, as a separate business under section 513(c), was subject
to tax).
\43\ See Prop.Treas. Reg. sec. 1.513-4 (issued January 19, 1993,
EE-74-92, IRB 1993-7, 71). These proposed regulations generally exclude
from the UBIT financial arrangements under which the tax-exempt
organization provides so-called ``institutional'' or ``good will''
advertising to a sponsor (i.e., arrangements under which a sponsor's
name, logo, or product line is acknowledged by the tax-exempt
organization). However, specific product advertising (e.g.,
``comparative or qualitative descriptions of the sponsor's products'')
provided by a tax-exempt organization on behalf of a sponsor is not
shielded from the UBIT under the proposed regulations.
---------------------------------------------------------------------------
House Bill
Under the House bill, qualified sponsorship payments
received by a tax-exempt organization (or State college or
university described in section 511(a)(2)(B)) are exempt from
the UBIT.
``Qualified sponsorship payments'' are defined as any
payment made by a person engaged in a trade or business with
respect to which the person will receive no substantial return
benefit other than the use or acknowledgment of the name or
logo (or product lines) of the person's trade or business in
connection with the organization's activities.44
Such a use or acknowledgment does not include advertising of
such person's products or services--meaning qualitative or
comparative language, price information or other indications of
savings or value, or an endorsement or other inducement to
purchase, sell, or use such products or services. Thus, for
example, if, in return for receiving a sponsorship payment, an
organization promises to use the sponsor's name or logo in
acknowledging the sponsor's support for an educational or
fundraising event conducted by the organization, such payment
will not be subject to the UBIT. In contrast, if the
organization provides advertising of a sponsor's products, the
payment made to the organization by the sponsor in order to
receive such advertising will be subject to the UBIT (provided
that the other, present-law requirements for UBIT liability are
satisfied).
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\44\ In determining whether a payment is a qualified sponsorship
payment, it is irrelevant whether the sponsored activity is related or
unrelated to the organization's exempt purpose.
---------------------------------------------------------------------------
The House bill specifically provides that a qualified
sponsorship payment does not include any payment where the
amount of such payment is contingent, by contract or otherwise,
upon the level of attendance at an event, broadcast ratings, or
other factors indicating the degree of public exposure to an
activity. However, the fact that a sponsorship payment is
contingent upon an event actually taking place or being
broadcast, in and of itself, will not cause the payment to fail
to be a qualified sponsorship payment. Moreover, mere
distribution or display of a sponsor's products by the sponsor
or the tax-exempt organization to the general public at a
sponsored event, whether for free or for remuneration, will be
considered to be ``use or acknowledgment'' of the sponsor's
product lines (as opposed to advertising), and thus will not
affect the determination of whether a payment made by the
sponsor is a qualified sponsorship payment.
The provision does not apply to the sale of advertising
or acknowledgments in tax-exempt organization periodicals. For
this purpose, the term ``periodical'' means regularly scheduled
and printed material published by (or on behalf of) the payee
organization that is not related to and primarily distributed
in connection with a specific event conducted by the payee
organization. For example, the provision will not apply to
payments that lead to acknowledgments in a monthly journal, but
will apply if a sponsor receives an acknowledgment in a program
or brochure distributed at a sponsored event.
The provision specifically provides that, to the extent
that a portion of a payment would (if made as a separate
payment) be a qualified sponsorship payment, such portion of
the payment will be treated as a separate payment. Thus, if a
sponsorship payment made to a tax-exempt organization entitles
the sponsor to both product advertising and use or
acknowledgment of the sponsor's name or logo by the
organization, then the UBIT will not apply to the amount of
such payment that exceeds the fair market value of the product
advertising provided to the sponsor. Moreover, the provision of
facilities, services or other privileges by an exempt
organization to a sponsor or the sponsor's designees (e.g.,
complimentary tickets, pro-am playing spots in golf
tournaments, or receptions for major donors) in connection with
a sponsorship payment will not affect the determination of
whether the payment is a qualified sponsorship payment. Rather,
the provision of such goods or services will be evaluated as a
separate transaction in determining whether the organization
has unrelated business taxable income from the event. In
general, if such services or facilities do not constitute a
substantial return benefit or if the provision of such services
or facilities is a related business activity, then the payments
attributable to such services or facilities will not be subject
to the UBIT. Moreover, just as the provision of facilities,
services or other privileges by a tax-exempt organization to a
sponsor or the sponsor's designees (complimentary tickets, pro-
am playing spots in golf tournaments, or receptions for major
donors) will be treated as a separate transaction that does not
affect the determination of whether a sponsorship payment is a
qualified sponsorship payment, a sponsor's receipt of a license
to use an intangible asset (e.g., trademark, logo, or
designation) of the tax-exempt organization likewise will be
treated as separate from the qualified sponsorship transaction
in determining whether the organization has unrelated business
taxable income.
The exemption provided by the provision will be in
addition to other present-law exceptions from the UBIT (e.g.,
the exceptions for activities substantially all the work for
which is performed by volunteers and for activities not
regularly carried on). No inference is intended as to whether
any sponsorship payment received prior to 1998 was subject to
the UBIT.
Effective date.--The provision applies to qualified
sponsorship payments solicited or received after December 31,
1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and
Senate amendment, except that the conference agreement
clarifies that the qualified sponsorship payment provision does
not apply to payments that entitle the payor to the use or
acknowledgment of the payor's trade or business name or logo
(or product lines) in tax-exempt organization periodicals.
Similarly, the qualified sponsorship payment provision does not
apply to payments made in connection with ``qualified
convention or trade show activities,'' as defined in present-
law section 513(d)(3). Such payments are outside the qualified
sponsorship payment provision's safe-harbor exclusion, and,
therefore, will be governed by present-law rules that determine
whether the payment is subject to the UBIT. Thus, for example,
payments that entitle the payor to a depiction of the payor's
name or logo in a tax-exempt organization periodical may or may
not be subject to the UBIT depending on the application of
present-law rules regarding periodical advertising and
nontaxable donor recognition.45
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\45\ For guidance regarding the treatment of periodical advertising
under the UBIT, see section 513(c); United States v. American College
of Physicians, 475 U.S. 834 (1986); Treas. Reg. 1.513-1(d)(4)(iv),
Example 7; Rev. Rul. 82-139, 1982-2 C.B. 108; Rev. Rul. 74-38, 1974-1
C.B. 144; PLR 9137049; and PLR 9234002. For guidance regarding the
treatment of donor acknowledgments under the UBIT, see Rev. Rul. 76-93,
1976-1 C.B. 170; PLR 8749085; and PLR 9044071. In the interest of
administrative convenience, the conferees encourage the Treasury
Department to permit tax-exempt entities to provide combined reporting
of payments that are both qualified sponsorship payments and nontaxable
payments made in exchange for donor acknowledgments in a periodical or
in connection with a qualified convention or trade show. In addition,
to the extent tax-exempt entities are required to allocate portions of
payments, the conferees encourage the Treasury Department to minimize
the reporting burden associated with any such allocation.
---------------------------------------------------------------------------
As a further clarification, the conferees intend that, as
provided under Prop. Treas. Reg. sec. 1.513-4, the use of
promotional logos or slogans that are an established part of
the sponsor's identity would not, by itself, constitute
advertising for purposes of determining whether a payment is a
qualified sponsorship payment.
6. Timeshare associations (sec. 956 of the House bill and sec. 764 of
the Senate amendment)
Present Law
Taxation of homeowners associations making the section
528 election.--Under present law (sec. 528), condominium
management associations and residential real estate management
associations may elect to be taxable at a 30-percent rate on
their ``homeowners association income'' if they meet certain
income, expenditure, and organizational requirements.
``Homeowners association income'' is the excess of the
association's gross income, excluding ``exempt function
income,'' over allowable deductions directly connected with
nonexempt function gross income. ``Exempt function income''
includes membership dues, fees, and assessments for a common
activity undertaken by association members or owners of
residential units in the condominium or subdivision. Homeowners
association income includes passive income (e.g., interest and
dividends) earned on reserves and fees for use of association
property (e.g., swimming pools, meeting rooms, etc.).
For an association to qualify for this treatment: (1) at
least 60 percent of the association's gross income must consist
of membership dues, fees, or assessments on owners; (2) at
least 90 percent of its expenditures must be for the
acquisition, management, maintenance, or care of ``association
property;'' and (3) no part of its net earnings can inure to
the benefit of any private shareholder. ``Association
property'' means: (1) property held by the association; (2)
property commonly held by association members; (3) property
within the association privately held by association members;
and (4) property held by a governmental unit for the benefit of
association members. In addition to these statutory
requirements, Treasury regulations require that the units of
the association be used for residential purposes. Use is not a
residential use if the unit is occupied by a person or series
of persons less than 30 days for more than half of the
association's taxable year. Treas. Reg. sec. 1.528-4(d).
Taxation of homeowners associations not making the
section 528 election.--Homeowners associations that do not (or
cannot) make the section 528 election are taxed either as a
tax-exempt social welfare organization under section 501(c)(4)
or as a regular C corporation. In order for an organization to
qualify as a tax-exempt social welfare organization, the
organization must meet the following three requirements: (1)
the association must serve a ``community'' which bears a
reasonable, recognizable relationship to an area ordinarily
identified as a governmental subdivision or unit; (2) the
association may not conduct activities directed to exterior
maintenance of any private residence, and (3) common areas of
association facilities must be for the use and enjoyment of the
general public (Rev. Rul. 74-99, 1974-1 C.B. 131).
Non-exempt homeowners associations are taxed as C
corporations, except that: (1) the association may exclude
excess assessments that it refunds to its members or applies to
the subsequent year's assessments (Rev. Rul. 70-604, 1970-2
C.B. 9); (2) gross income does not include special assessments
held in a special bank account (Rev. Rul. 75-370, 75-2 C.B.
25); and (3) assessments for capital improvements are treated
as non-taxable contributions to capital (Rev. Rul. 75-370,
1975-2 C.B. 25).
Taxation of timeshare associations.--Under present law,
timeshare associations are taxed as regular C corporations
because (1) they cannot meet the requirement of the Treasury
regulations for the section 528 election that the units be used
for residential purposes (i.e., the 30-day rule) and they have
relatively large amount of services performed for its owners
(e.g., maid and janitorial services) and (2) they cannot meet
any of requirements of Rev. Rul. 74-99 for tax-exempt status
under section 501(c)(4).
House Bill
In general.--The House bill amends section 528 to permit
timeshare associations to qualify for taxation under that
section. Timeshare associations will have to meet the
requirements of section 528 (e.g., the 60-percent gross income,
90-percent expenditure, and the non-profit organizational and
operational requirements). Timeshare associations electing to
be taxed under section 528 are subject to a tax on their
``timeshare association income'' at a rate of 32 percent.
60-percent test.--A qualified timeshare association must
receive at least 60 percent of its income from membership dues,
fees and assessments from owners of either (a) timeshare rights
to use of, or (b) timeshare ownership in, property the
timeshare association.
90-percent test.--At least 90 percent of the expenditures
of the timeshare association must be for the acquisition,
management, maintenance, or care of ``association property,''
and activities provided by the association to, or on behalf of,
members of the timeshare association. ``Activities provided to
or on behalf of members of the [timeshare] association''
includes events located on association property (e.g., member's
meetings at the association's meeting room, parties at the
association's swimming pool, golf lessons on association's golf
range, transportation to and from association property, etc.).
Organizational and operational tests.--No part of the net
earnings of the timeshare association can inure to the benefit
(other than by acquiring, constructing, or providing
management, maintenance, and care of property of the timeshare
association or rebate of excess membership dues, fees, or
assessments) of any private shareholder or individual. A member
of a qualified timeshare association must hold a timeshare
right to use (or timeshare ownership in) real property of the
association. A qualified timeshare association cannot be a
condominium management association. Lastly, the timeshare
association must elect to be taxed under section 528.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Senate Amendment
The Senate amendment is the same as the House bill,
except that the Senate amendment provides that association
property includes property in which a timeshare association or
members of the association have rights arising out of recorded
easements, covenants, and other recorded instruments to use
property related to the timeshare project.
Effective date.--The provision applies to taxable years
beginning after December 31, 1996.
Conference Agreement
The conference agreement follows the Senate amendment.
7. Deferral of gain on certain sales of farm product refiners and
processors (sec. 958 of the House bill)
Present Law
Under present law, if certain requirements are satisfied,
a taxpayer may defer recognition of gain on the sale of
qualified securities to an employee stock ownership plan
(``ESOP'') or an eligible worker-owned cooperative to the
extent that the taxpayer reinvests the proceeds in qualified
replacement property (sec. 1042). Gain is recognized when the
taxpayer disposes of the qualified replacement property. One of
the requirements that must be satisfied for deferral to apply
is that, immediately after the sale, the ESOP must own at least
30 percent of the stock of the corporation issuing the
qualified securities. In general, qualified securities are
securities issued by a domestic C corporation that has no stock
outstanding that is readily tradeable on an established
securities market. Deferral treatment does not apply to gain on
the sale of qualified securities by a C corporation.
House Bill
The House bill extends the deferral provided under
section 1042 to the sale of stock of a qualified refiner or
processor to an eligible farmer's cooperative. A qualified
refiner or processor is a domestic corporation substantially
all of the activities of which consist of the active conduct of
the trade or business of refining or processing agricultural or
horticultural products and which purchases more than one-half
of such products to be refined or processed from farmers who
make up the cooperative which is purchasing the stock of the
cooperative. An eligible farmers' cooperative is an
organization which is treated as a cooperative for Federal
income tax purposes and which is engaged in the marketing of
agricultural or horticultural products.
The deferral of gain is available only if, immediately
after the sale, the eligible farmers' cooperative owns 100
percent of the qualified refiner or processor. The provision
applies even if the stock of the qualified refiner or processor
is publicly traded. In addition, the House bill applies to gain
on the sale of stock by a C corporation.
Effective date.--The provision applies to sales after
December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with the
modification that the requirement that the refiner or processor
purchase more than one-half of the products to be refined or
processed from farmers who make up the cooperative which is
purchasing the stock or the cooperative must be satisfied for
at least one year prior to the sale.
8. Exception from real estate reporting requirements for certain sales
of principal residences (sec. 959 of the House bill and secs.
314(c) and 601 of the Senate amendment)
Present Law
Persons who close real estate transactions are required
to file information returns with the IRS. These returns, filed
on Form 1099S, are required to show the name and address of the
seller of the real estate, details with regard to the gross
proceeds of the sale, and the portion of any real property tax
which is treated as a tax imposed on the purchaser. Code
section 6045(e) also provides for reporting whether any
financing of the seller was federally-subsidized indebtedness,
but Treasury regulations do not currently require the reporting
of this information.
House Bill
The House bill excludes sales of personal residences with
a gross sales price of $500,000 or less ($250,000 or less in
the case of a seller who is not married) from the real estate
transaction reporting requirement. In order to be eligible for
this exclusion, the person who would otherwise be required to
file the information return must obtain written assurances from
the seller of the real estate, in a form acceptable to the
Secretary of the Treasury, that any gain will be exempt from
Federal income tax under section 121(a) and that no financing
of the seller was federally-subsidized indebtedness.
Effective date.--The provision is effective with regard
to sales or exchanges occurring after the date of enactment.
Senate Amendment
The Senate amendment follows the House bill, with two
modifications.
First, the requirement that the person who would
otherwise be required to file the information return obtain
written assurances that no financing of the seller was
federally-subsidized indebtedness does not apply until such
time as the Secretary of the Treasury requires this information
to be included in information returns reporting real estate
transactions.
Second, the Senate amendment does not exclude from the
information reporting requirement any sale of a personal
residence in the District of Columbia, if such sale is required
to be reported for the purpose of verifying eligibility for the
D.C. first-time homeowner credit. The Senate amendment
separately establishes a credit of $5,000 for first-time home
buyers in the District of Columbia. The Senate amendment
anticipates that the Secretary of the Treasury will require
such information as is necessary to verify eligibility for the
D.C. first-time home buyer credit.
Effective date.--Same as the House bill.
Conference Agreement
The conference agreement follows the Senate amendment
with one modification, allowing the Secretary of the Treasury
the discretion to increase the dollar thresholds if he
determines that such an increase will not materially reduce
revenues to the Treasury.
9. Increased deduction for business meals for individuals operating
under Department of Transportation hours of service limitations
(sec. 960 of the House bill and sec. 765 of the Senate
amendment)
Present Law
Ordinary and necessary business expenses, as well as
expenses incurred for the production of income, are generally
deductible, subject to a number of restrictions and
limitations. Generally, the amount allowable as a deduction for
food and beverage is limited to 50 percent of the otherwise
deductible amount. Exceptions to this 50 percent rule are
provided for food and beverages provided to crew members of
certain vessels and offshore oil or gas platforms or drilling
rigs.
House Bill
The House bill increases to 80 percent the deductible
percentage of the cost of food and beverages consumed while
away from home by an individual during, or incident to, a
period of duty subject to the hours of service limitations of
the Department of Transportation.
Individuals subject to the hours of service limitations
of the Department of Transportation include:
(1) certain air transportation employees such as
pilots, crew, dispatchers, mechanics, and control tower
operators pursuant to Federal Aviation Administration
regulations,
(2) interstate truck operators and interstate bus
drivers pursuant to Department of Transportation
regulations,
(3) certain railroad employees such as engineers,
conductors, train crews, dispatchers and control
operations personnel pursuant to Federal Railroad
Administration regulations, and
(4) certain merchant mariners pursuant to Coast
Guard regulations.
The increase in the deductible percentage is phased in
according to the following schedule:
Taxable years beginning in-- Deductible percentage
1998, 1999........................................................ 55
2000, 2001........................................................ 60
2002, 2003........................................................ 65
2004, 2005........................................................ 70
2006, 2007........................................................ 75
2008 and thereafter............................................... 80
Effective date.--The provision is effective for taxable
years beginning after 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
10. Deductibility of meals provided for the convenience of the employer
and provided by remote seafood processors (secs. 765 and 778 of
the Senate amendment)
Present Law
In general, subject to several exceptions, only 50
percent of business meal and entertainment expenses are allowed
as a deduction (sec. 274(n)). Under one exception, the value of
meals that are excludable from employees' incomes as a de
minimis fringe benefit (sec. 132) are fully deductible by the
employer.
In addition, the courts that have considered the issue
have held that if meals are provided for the convenience of the
employer pursuant to section 119 they are fully deductible
pursuant to section 274(n)(2)(B) provided they satisfy the
relevant section 132 requirements. (Boyd Gaming Corp. v.
Commissioner \46\ and Gold Coast Hotel & Casino v. I.R.S.\47\).
---------------------------------------------------------------------------
\46\ 106 T.C. No. 19 (May 23, 1996).
\47\ U.S.D.C. Nev. CV-5-94-1146-HDM(LRL) (September 26, 1996).
---------------------------------------------------------------------------
Exceptions to this 50-percent rule are also provided for
food and beverages provided to crew members of certain vessels
and offshore oil or gas platforms or drilling rigs.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that meals that are
excludable from employees' incomes because they are provided
for the convenience of the employer pursuant to section 119 of
the Code are excludable as a de minimis fringe benefit and
therefore are fully deductible by the employer, provided they
satisfy the relevant section 132 requirements. No inference is
intended as to whether such meals are fully deductible under
present law.
The Senate amendment also increases to 80 percent the
deductible percentage of the cost of food and beverages
consumed by workers at remote seafood processing facilities
located in the United States north of 53 degrees north
latitude. A seafood processing facility is remote when there
are insufficient eating facilities in the vicinity of the
employer's premises.\48\
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\48\ See Treas. Reg. Sec. 1.119-1(a)(2)(ii)(c) and 1.119-1(f)
(Example 7).
---------------------------------------------------------------------------
The increase in the deductible percentage is phased in
according to the following schedule:
Taxable years beginning in-- Deductible percentage
1998, 1999........................................................ 55
2000, 2001........................................................ 60
2002, 2003........................................................ 65
2004, 2005........................................................ 70
2006, 2007........................................................ 75
2008 and thereafter............................................... 80
Effective dates.--The provisions are effective for
taxable years beginning after 1997.
Conference Agreement
The conference agreement follows the Senate amendment as
to meals provided pursuant to section 119. Because food and
beverages consumed by workers at these specified remote seafood
processing facilities are provided for the convenience of the
employer pursuant to section 119 and therefore will be
deductible under the Senate amendment provision as to meals
provided pursuant to section 119 (provided they satisfy the
relevant section 132 requirements), the conference agreement
does not include the Senate amendment provision relating to
remote seafood processors because it is subsumed by the section
119 provision.
11. Deduction of traveling expenses while working away from home on
qualified construction projects (sec. 775 of the Senate
amendment)
Present Law
A taxpayer is allowed, subject to limitations, to deduct
the ordinary and necessary expenses of carrying on a trade or
business, including the trade or business of being an employee.
Expenses of carrying on the trade or business of being an
employee are miscellaneous itemized deductions, deductible only
to the extent they exceed 2 percent of adjusted gross income.
Deductible expenses include travel expenses (including
amounts expended for meals and lodging) while temporarily away
from home in pursuit of a trade or business. In the absence of
facts and circumstances indicating otherwise, a taxpayer is
considered to be temporarily away from home if the period of
employment away from home does not exceed one year. If the
period of employment away from home exceeds one year, the
taxpayer is considered to be on an indefinite or permanent work
assignment, and travel expenses (including amounts expended for
meals and lodging) are not deductible.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that, in the absence of
facts and circumstances indicating otherwise, taxpayers
employed on qualified construction projects will be considered
to be temporarily away from home if the period of their
employment away from home does not exceed 18 months (24 months
if the qualified construction project is in a remote location),
rather than one year as under present law. A qualified
construction project is one that is identifiable and that has a
completion date that is reasonably expected to occur within
five years of its starting date. A qualified construction
project is considered to be in a remote location if it is
located in an area which lacks adequate housing, educational,
medical or other facilities necessary for families.
These revised standards for workers on qualified
construction projects apply only to taxpayers who continue to
maintain a household, and therefore incur duplicative expenses,
at their place of principal residence.
Effective date.--The provision is effective for amounts
paid or incurred in taxable years beginning after December 31,
1997.
Conference Agreement
The conference agreement does not include the Senate
amendment.
12. Provide above-the-line deduction for certain business expenses
(sec. 766 of the Senate amendment)
Present Law
Under present law, individuals may generally deduct
ordinary and necessary business expenses in determining
adjusted gross income (``AGI''). This deduction does not apply
in the case of an individual performing services as an
employee. Employee business expenses are generally deductible
only as a miscellaneous itemized deduction, i.e., only to the
extent all the taxpayer's miscellaneous itemized deductions
exceed 2 percent of the taxpayer's AGI. Employee business
expenses are not allowed as a deduction for alternative minimum
tax purposes.
House Bill
No provision.
Senate Amendment
Employee business expenses relating to service as an
official of a State or local government (or political
subdivision thereof) are deductible in computing AGI (``above
the line''), provided the official is compensated in whole or
in part on a fee basis. Consequently, such expenses are also
deductible for minimum tax purposes.
Effective date.--The provision applies to expenses paid
or incurred in taxable years beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
Effective date.--The conference agreement is effective
with respect to expenses paid or incurred in taxable years
beginning after December 31, 1986.
13. Increase in standard mileage rate for purposes of computing
charitable deduction (sec. 767 of the Senate amendment)
Present Law
In general, individuals who itemize their deductions may
deduct charitable contributions. For purposes of computing the
charitable deduction for the use of a passenger automobile, the
standard mileage rate is 12 cents per mile (sec. 170(i)).
House Bill
No provision.
Senate Amendment
The Senate amendment increases this mileage rate to 15
cents per mile. This rate is indexed for inflation, rounded
down to the nearest whole cent.
Effective date.--The increase to 15 cents is effective
for taxable years beginning after December 31, 1997. The
indexation is effective for inflation occurring after 1997.
Accordingly, the first adjustment for indexing will occur in
1999 to reflect inflation in 1998.
Conference Agreement
The conference agreement increases this mileage rate to
14 cents per mile (not indexed for inflation), effective for
taxable years beginning after December 31, 1997.
14. Expensing of environmental remediation costs (``brownfields'')
(sec. 768 of the Senate amendment)
Present Law
Code section 162 allows a deduction for ordinary and
necessary expenses paid or incurred in carrying on any trade or
business. Treasury Regulations provide that the cost of
incidental repairs which neither materially add to the value of
property nor appreciably prolong its life, but keep it in an
ordinarily efficient operating condition, may be deducted
currently as a business expense. Section 263(a)(1) limits the
scope of section 162 by prohibiting a current deduction for
certain capital expenditures. Treasury Regulations define
``capital expenditures'' as amounts paid or incurred to
materially add to the value, or substantially prolong the
useful life, of property owned by the taxpayer, or to adapt
property to a new or different use. Amounts paid for repairs
and maintenance do not constitute capital expenditures. The
determination of whether an expense is deductible or
capitalizable is based on the facts and circumstances of each
case.
Treasury regulations provide that capital expenditures
include the costs of acquiring or substantially improving
buildings, machinery, equipment, furniture, fixtures and
similar property having a useful life substantially beyond the
current year. In INDOPCO, Inc. v. Commissioner, 112 S. Ct. 1039
(1992), the Supreme Court required the capitalization of legal
fees incurred by a taxpayer in connection with a friendly
takeover by one of its customers on the grounds that the merger
would produce significant economic benefits to the taxpayer
extending beyond the currentyear; capitalization of the costs
thus would match the expenditures with the income produced. Similarly,
the amount paid for the construction of a filtration plant, with a life
extending beyond the year of completion, and as a permanent addition to
the taxpayer's mill property, was a capital expenditure rather than an
ordinary and necessary current business expense. Woolrich Woolen Mills
v. United States, 289 F.2d 444 (3d Cir. 1961).
Although Treasury regulations provide that expenditures
that materially increase the value of property must be
capitalized, they do not set forth a method of determining how
and when value has been increased. In Plainfield-Union Water
Co. v. Commissioner, 39 T.C. 333 (1962), nonacq., 1964-2 C.B.
8, the U.S. Tax Court held that increased value was determined
by comparing the value of an asset after the expenditure with
its value before the condition necessitating the expenditure.
The Tax Court stated that ``an expenditure which returns
property to the state it was in before the situation prompting
the expenditure arose, and which does not make the relevant
property more valuable, more useful, or longer-lived, is
usually deemed a deductible repair.''
In several Technical Advice Memoranda (TAM), the Internal
Revenue Service (IRS) declined to apply the Plainfield Union
valuation analysis, indicating that the analysis represents
just one of several alternative methods of determining
increases in the value of an asset. In TAM 9240004 (June 29,
1992), the IRS required certain asbestos removal costs to be
capitalized rather than expensed. In that instance, the
taxpayer owned equipment that was manufactured with insulation
containing asbestos; the taxpayer replaced the asbestos
insulation with less thermally efficient, non-asbestos
insulation. The IRS concluded that the expenditures resulted in
a material increase in the value of the equipment because the
asbestos removal eliminated human health risks, reduced the
risk of liability to employees resulting from the
contamination, and made the property more marketable.
Similarly, in TAM 9411002 (November 19, 1993), the IRS required
the capitalization of expenditures to remove and replace
asbestos in connection with the conversion of a boiler room to
garage and office space. However, the IRS permitted deduction
of costs of encapsulating exposed asbestos in an adjacent
warehouse.
In 1994, the IRS issued Rev. Rul. 94-38, 1994-1 C.B. 35,
holding that soil remediation expenditures and ongoing water
treatment expenditures incurred to clean up land and water that
a taxpayer contaminated with hazardous waste are deductible. In
this ruling, the IRS explicitly accepted the Plainfield Union
valuation analysis.49 However, the IRS also held
that costs allocable to constructing a groundwater treatment
facility are capital expenditures.
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\49\ Rev. Rul. 94-38 generally rendered moot the holding in TAM
9315004 (December 17, 1992) requiring a taxpayer to capitalize certain
costs associated with the remediation of soil contaminated with
polychlorinated biphenyls (PCBs).
---------------------------------------------------------------------------
In 1995, the IRS issued TAM 9541005 (October 13, 1995)
requiring a taxpayer to capitalize certain environmental study
costs, as well as associated consulting and legal fees. The
taxpayer acquired the land and conducted activities causing
hazardous waste contamination. After the contamination, but
before it was discovered, the company donated the land to the
county to be developed into a recreational park. After the
county discovered the contamination, it reconveyed the land to
the company for $1. The company incurred the costs in
developing a remediation strategy. The IRS held that the costs
were not deductible under section 162 because the company
acquired the land in a contaminated state when it purchased the
land from the county. In January, 1996, the IRS revoked and
superseded TAM 9541005 (PLR 9627002). Noting that the company's
contamination of the land and liability for remediation were
unchanged during the break in ownership by the county, the IRS
concluded that the break in ownership should not, in and of
itself, operate to disallow a deduction under section 162.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that taxpayers could elect
to treat certain environmental remediation expenditures that
would otherwise be chargeable to capital account as deductible
in the year paid or incurred. The deduction applies for both
regular and alternative minimum tax purposes. The expenditure
must be incurred in connection with the abatement or control of
hazardous substances at a qualified contaminated site. In
general, any expenditure for the acquisition of depreciable
property used in connection with the abatement or control of
hazardous substances at a qualified contaminated site does not
constitute a qualified environmental remediation expenditure.
However, depreciation deductions allowable for such property
which would otherwise be allocated to the site under the
principles set forth in Comm'r v. Idaho Power Co.50
and section 263A are treated as qualified environmental
remediation expenditures.
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\50\ Comm'r v. Idaho Power Co., 418 U.S. 1 (1974) (holding that
equipment depreciation allocable to the taxpayer's construction of
capital facilities must be capitalized under section 263(a)(1)).
---------------------------------------------------------------------------
A ``qualified contaminated site'' generally is any
property that (1) is held for use in a trade or business, for
the production of income, or as inventory; (2) is certified by
the appropriate State environmental agency to be located within
a targeted area; and (3) contains (or potentially contains) a
hazardous substance (so-called ``brownfields''). Targeted areas
would mean (1) empowerment zones and enterprise communities (as
designated under present law, including any supplemental zone
designated on December 21, 1994); and (2) sites announced
before February, 1997, as being subject to one of the 76
Environmental Protection Agency (EPA) Brownfields Pilots.
Both urban and rural sites qualify. However, sites that
are identified on the national priorities list under the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA) cannot be targeted areas.
Appropriate State environmental agencies are designated by the
EPA; if no State agency is designated, the EPA is responsible
for providing thecertification. Hazardous substances generally
are defined by reference to sections 101(14) and 102 of CERCLA, subject
to additional limitations applicable to asbestos and similar substances
within buildings, certain naturally occurring substances such as radon,
and certain other substances released into drinking water supplies due
to deterioration through ordinary use.
The Senate amendment further provides that, in the case
of property to which a qualified environmental remediation
expenditure otherwise would have been capitalized, any
deduction allowed under the bill would be treated as a
depreciation deduction and the property would be treated as
subject to section 1245. Thus, deductions for qualified
environmental remediation expenditures would be subject to
recapture as ordinary income upon sale or other disposition of
the property.
Effective date.--The provision applies to eligible
expenditures incurred after the date of enactment.
Conference Agreement
The conference agreement follows the Senate amendment,
except that the definition of ``targeted areas'' is expanded to
include population census tracts with a poverty rate of 20
percent or more and certain industrial and commercial areas
that are adjacent to such census tracts. Thus, targeted areas
generally would include: (1) empowerment zones and enterprise
communities as designated under present law and under the
conference agreement 51 (including any supplemental
empowerment zone designated on December 21, 1994); (2) sites
announced before February 1997, as being subject to one of the
76 Environmental Protection Agency (EPA) Brownfields Pilots;
(3) any population census tract with a poverty rate of 20
percent or more; and (4) certain industrial and commercial
areas that are adjacent to tracts described in (3) above.
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\51\ Thus, the 20 additional empowerment zones authorized to be
designated under the conference agreement as well as the D.C.
Enterprise Zone established under the conference agreement are
``targeted areas'' for purposes of this provision.
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With respect to certification of targeted areas, the
conference agreement provides that the chief executive officer
of a State may, in consultation with the Administrator of the
EPA, designate an appropriate State environmental agency. If no
State environmental agency is so designated within 60 days of
the date of enactment, the appropriate environmental agency for
such State shall be designated by the Administrator of the EPA.
In addition, the conference agreement sunsets the
provision after three years. Thus, the provision applies only
to eligible expenditures incurred in taxable years ending after
date of enactment and before January 1, 2001.
Finally, the conferees wish to clarify that providing
current deductions for certain environmental remediation
expenditures under the conference agreement creates no
inference as to the proper treatment of other remediation
expenditures not described in the agreement.
15. Treatment of consolidation of certain mutual savings bank life
insurance departments (sec. 962 of the House bill)
Present Law
Special rules for mutual savings banks with life insurance business
Present law provides for special treatment of a mutual
savings bank conducting a life insurance business in a separate
life insurance department (Code sec. 594). Under the special
rule, the insurance and noninsurance businesses of such banks
are bifurcated, and the tax imposed is the sum of the partial
taxes computed on (a) the taxable income of the mutual savings
bank determined without regard to items properly allocable to
the life insurance business, and (b) the income of the life
insurance department, calculated in accordance with the rules
applicable to life insurance companies (subchapter L of the
Code). This special treatment applies so long as the mutual
savings bank is authorized under State law to engage in the
business of issuing life insurance contracts, the life
insurance business is conducted in a separate department the
accounts of which are maintained separately from the other
accounts of the mutual savings bank, and the life insurance
department would qualify as a life insurance company under Code
section 816 if it were treated as a separate corporation.
Rules for corporate reorganizations
Present law provides that certain corporate
reorganization transactions, including recapitalizations,
generally are treated as tax-free transactions (sec.
368(a)(1)(E)). No gain or loss is recognized if stock or
securities in a corporation that is a party to a reorganization
are (in pursuance of the plan of reorganization) exchanged
solely for stock or securities in that corporation or in
another corporation that is a party to the reorganization,
except that gain (if any) to the recipient is recognized to the
extent the principal amount of securities received exceeds the
principal amount of the securities surrendered (secs. 354,
356(a)(1)). If such an exchange has the effect of distribution
of a dividend, then the portion of the distributee's gain that
does not exceed his ratable share of the corporation's earnings
and profits is treated as a dividend (sec. 356(a)(2)).
Rules for life insurance companies
A life insurance company generally is permitted to deduct
the amount of policyholder dividends paid or accrued during the
taxable year (sec. 808). In the case of a mutual life insurance
company, the amount of the deduction for policyholder dividends
is reduced (but not below zero) by the differential earnings
amount (sec. 809). The term policyholder dividend includes (1)
any amount paid or credited (including as an increase in
benefits) if the amount is not fixed in the contract but
depends on the experience of the company or the discretion of
the management; (2) excess interest; (3) premium adjustments;
and (4) experience-rated refunds.
House Bill
The House bill provides that the consolidation of two or
more life insurance departments of mutual savings banks into a
single life insurance company by requirement of State law is
treated as a tax-free reorganization described in section
368(a)(1)(E) (i.e., a recapitalization). Any payments required
to be made to policyholders in connection with the
consolidation are treated as policyholder dividends deductible
by the company under section 808, provided that certain
requirements are met. The requirements are: (1) the payments
are only with respect to policies in effect immediately before
the consolidation; (2) the payments are only with respect to
policies that are participating (i.e., on which policyholder
dividends are paid) before and after the consolidation; (3) the
payments cease with respect to any policy if the policy lapses
after the consolidation; (4) the policyholders before the
consolidation had no divisible right to the surplus of any life
insurance department and had no right to vote; and (5) the
approval of the policyholders was not required for the
consolidation. No inference is intended as to the tax treatment
of (1) consolidation, demutualization or other transactions
involving, or (2) payments to policyholders of, any insurer or
financial institution other than the life insurance departments
of mutual savings banks.
Effective date.--The provision takes effect on December
31, 1991.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
16. Offset of past-due, legally enforceable State tax obligations
against Federal overpayments (sec. 963 of the House bill)
Present Law
Overpayments of Federal tax are credited against any
liability in respect of an internal revenue tax on the part of
the person who made the overpayment. Any overpayment not so
credited may be offset against any past-due support payments
and past-due legally enforceable debts owed to Federal agencies
of the person making the overpayment. Any remaining overpayment
is refunded to the person making the overpayment.
House Bill
The House bill provides that an overpayment of Federal
tax could be offset by the amount of any past-due, legally
enforceable State tax obligation, provided the person making
the overpayment has shown on the return establishing the
overpayment an address that is within the State seeking the
offset. For this purpose, a past-due, legally enforceable State
tax obligation is a debt which resulted from a judgement
rendered by a court of competent jurisdiction, or a
determination after an administrative hearing, which determined
an amount of State tax to be due and which is no longer subject
to judicial review, as well as from an assessment the time for
which redetermination has expired that has not been delinquent
for more than 10 years. A State tax obligation includes any
local tax administered by the chief tax administration agency
of the State.
The offset for a past-due, legally enforceable State tax
obligation of a State resident will apply after the offsets
provided in present law for internal revenue tax liabilities,
past-due support, and past-due, legally enforceable obligations
owed a Federal agency.
The Secretary of the Treasury is authorized to issue
regulations establishing procedures for the implementation of
this proposal, including regulations prescribing the time and
manner in which States may submit notices of past-due, legally
enforceable State tax obligations. The Secretary of the
Treasury may require States to pay a fee to reimburse the
Secretary for the cost of applying the offset procedure.
Effective date.--The provision is effective for refunds
payable after December 31, 1998.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
17. Modify limits on depreciation of luxury automobiles for certain
clean-burning fuel and electric vehicles (sec. 964 of the House
bill)
Present Law
The amount the taxpayer may claim as a depreciation
deduction for any passenger automobile is limited to: $2,560
for the first taxable year in the recovery period; $4,100 for
the second taxable year in the recovery period; $2,450 for the
third taxable year in the recovery period; and $1,475 for each
succeeding taxable year in the recovery period. Each of the
dollar limitations is indexed for inflation after October 1987
by automobile component of the Consumer Price Index.
Consequently, the limitations applicable for 1997 are $3,160,
$5,000, $3,050, and $1,775.
House Bill
The House bill modifies the present-law limitation on
depreciation in the case of qualified clean-burning fuel
vehicles and certain electric vehicles. With respect to
qualified clean-burningfuel vehicles, those that are modified
to permit such vehicle to be propelled by a clean burning fuel, the
bill generally modifies present-law by applying the current limitation
to that portion of the vehicles cost not represented by the installed
qualified clean-burning fuel property. The taxpayer may claim an amount
otherwise allowable as a depreciation deduction on the installed
qualified clean-burning fuel, without regard to the present-law
limitation. Generally, this has the same effect as only subjecting the
cost of the vehicle before modification to the present-law limitations.
In the case of a passenger vehicle designed to be
propelled primarily by electricity and built by an original
equipment manufacturer, the base-year limitation amounts of
$2,560 for the first taxable year in the recovery period,
$4,100 for the second taxable year in the recovery period,
$2,450 for the third taxable year in the recovery period, and
$1,475 for each succeeding taxable year in the recovery period
are tripled to $7,680, $12,300, $7,350, and $4,425,
respectively, and then adjusted for inflation after October
1987 by the automobile component of the Consumer Price Index.
Effective date.--The provision is effective for property
placed in service on or after the date of enactment and before
January 1, 2005.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with a
modification to the effective date that provides that the
provision is effective for property placed in service after the
date of enactment and before January 1, 2005.
18. Survivor benefits of public safety officers killed in the line of
duty (sec. 965 of the House bill and sec. 784 of the Senate
amendment)
Present Law
Survivors of military service personnel (such as those
killed in combat) are generally entitled to survivor benefits
(38 U.S.C. sec. 1310). These survivor benefits are generally
exempt from income taxation (38 U.S.C. sec. 5301). ``Survivor''
means the surviving spouse or surviving dependent child of the
military service personnel.
Survivor annuity benefits paid under a governmental
retirement plan to a survivor of a law enforcement officer
killed in the line of duty are generally includible in income
except to the extent the benefits are a return of after-tax
employee contributions. Survivor benefits paid under a
government plan only to survivors of officers who died as a
result of injuries sustained in the line of duty are in the
nature of workers'' compensation and are generally excludable
from income.
House Bill
The House bill generally provides that an amount paid as
a survivor annuity on account of the death of a law enforcement
officer who is killed in the line of duty is excludable from
income to the extent the survivor annuity is attributable to
the officer's service as a law enforcement officer. The
survivor annuity must be provided under a governmental plan to
the surviving spouse (or former spouse) of the law enforcement
officer or to a child of the officer.
Effective date.--The provision applies to amounts
received in taxable years beginning after December 31, 1996,
with respect to individuals dying after that date.
Senate Amendment
The Senate amendment is the same as the House bill except
that the provision applies to public safety officers killed in
the line of duty. Public safety officers include law
enforcement officers, firefighters, rescue squad or ambulance
crew.
Conference Agreement
The conference agreement follows the Senate amendment.
The conference agreement clarifies that the provision does not
apply with respect to the death of a public safety officer if
it is determined by the appropriate supervising authority that
(1) the death was caused by the intentional misconduct of the
officer or by the officers intention to bring about the death,
(2) the officer was voluntarily intoxicated at the time of
death, (3) the officer was performing his or her duties in a
grossly negligent manner at the time of death, or (4) the
actions of the individual to whom payment is to be made were a
substantial contributing factor to the death of the officer.
19. Temporary suspension of income limitations on percentage depletion
for production from marginal wells (sec. 966 of the House bill
and sec. 772 of the Senate amendment)
Present Law
The Code permits taxpayers to recover their investments
in oil and gas wells through depletion deductions. In the case
of certain properties, the deductions may be determined using
the percentage depletion method. Certain limitations apply in
calculating percentage depletion deductions. One limitation is
a restriction that these deductions may not exceed 65 percent
of the taxpayer's taxable income. Another limitation is a
restriction that the amount deducted may not exceed 100 percent
of the net income from that property in any year.
Specific percentage depletion rules apply to oil and gas
production from ``marginal'' properties. Marginal production is
defined as domestic crude oil and natural gas production from
stripper well property or from property from which
substantially all of the production during the calendar year is
heavy oil. Stripper well property is property from which the
average daily production is 15 barrel equivalents or less,
determined by dividing the average daily production ofdomestic
crude oil and domestic natural gas from producing wells on the property
for the calendar year by the number of wells.
House Bill
The 65-percent-of-net-income limitation is suspended for
domestic oil and gas production from marginal properties during
taxable years beginning after December 31, 1997, and before
January 1, 2000.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The 100-percent-of-net-income property limitation with
respect to oil and gas produced from marginal properties does
not apply for any taxable year beginning in a calendar year in
which the annual average wellhead price for crude oil (within
the meaning of section 29(d)(2)(C)) is below $14 per barrel.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Conference Agreement
The 100-percent-of-net-income property limitation is
suspended for domestic oil and gas production from marginal
properties during taxable years beginning after December 31,
1997, and before January 1, 2000.
Effective date.--The provision is effective on the date
of enactment.
20. Extend production credit for electricity produced from wind and
``closed loop'' biomass (sec. 771 of the Senate amendment)
Present Law
An income tax credit is allowed for the production of
electricity from either qualified wind energy or qualified
``closed-loop'' biomass facilities. The credit is equal to 1.5
cents (plus adjustments for inflation since 1992) per kilowatt
hour of electricity produced from these qualified sources
during the 10-year period after the facility is placed in
service.
The credit applies to electricity produced by qualified
wind or closed-loop biomass facilities placed in service before
July 1, 1999. In order to claim the credit, a taxpayer must own
the facility and sell the electricity produced by the facility
to an unrelated party.
House Bill
No provision.
Senate Amendment
The Senate amendment extends the income tax credit for
electricity produced from wind and closed-loop biomass for two
years. Thus, the credit is available for qualifying electricity
produced from facilities placed in service before July 1, 2001.
As under present law, the credit is allowable for a period of
10 years after the facility is placed in service.
Effective date.--The provision is effective as of the
date of enactment.
Conference Agreement
The conference agreement does not include the provision
in the Senate amendment.
21. Modification of advance refunding rules for certain tax-exempt
bonds issued by the Virgin Islands (sec. 957 of the House bill)
Present Law
Advance refundings
Generally, a governmental bond originally issued after
December 31, 1985, may be advance refunded one time. An advance
refunding is any refunding where all of the refunded bonds are
not redeemed within 90 days after the refunding bonds are
issued.
Virgin Island bonds
Under present law, the Virgin Islands is required to
secure its bonds with a priority first lien claim on specified
revenue streams rather than being permitted to issue multiple
bond issues secured on a parity basis by a common pool of
revenues. Under a proposed non-tax law change, the priority
lien requirement would be repealed.
House Bill
Under the House bill, one additional advance refunding
would be allowed for governmental bonds issued by the Virgin
Islands that were advance refunded before June 9, 1997, if the
Virgin Islands debt provisions are changed to repeal the
current priority first lien requirement.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
22. Qualified small-issue bonds (sec. 770 of the Senate amendment)
Present Law
Interest on certain small issues of private activity
bonds issued by State or local governments (``qualified small-
issue bonds'') is excluded from gross income if certain
conditions are met. First, at least 95 percent of the bond
proceeds must be used to finance manufacturing facilities or
certain agricultural land or equipment. Second, the bond issue
must have an aggregate face amount of $1 million or less, or
alternatively, the aggregate face amount of the issue, together
with the aggregate amount of certain related capital
expenditures during the six-year period beginning three years
before the date of the issue and ending three years after that
date, must not exceed $10 million. (The maximum face amount of
bonds would not be increased over present-law amounts.)
Issuance of qualified small-issue bonds, like most other
private activity bonds, is subject to annual State volume
limitations and to other rules.
House Bill
No provision.
Senate Amendment
The Senate amendment increases the maximum capital
expenditure limit under present law from $10 million to $20
million. The maximum amount of bonds is not increased over
present-law amounts.
Effective date.--The provision is effective for bonds
issued after December 31, 1997.
Conference Agreement
The conference agreement does not include the Senate
amendment.
23. Treatment of bonds issued by the Federal Home Loan Bank Board under
the Federal guarantee rules (sec. 774 of the Senate amendment)
Present Law
Generally, interest on bonds which are Federally
guaranteed do not qualify for tax-exemption for Federal income
tax purposes. Certain exceptions are provided including
otherwise qualifying bonds guaranteed by the Federal Housing
Administration, the Veterans' Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Government National Mortgage Association.
House Bill
No provision.
Senate Amendment
Under the Senate amendment, bonds guaranteed by the
Federal Home Loan Bank Board are not treated as Federally
guaranteed for purposes of the Federal guarantee prohibition
generally applicable to tax-exempt bonds.
Effective date.--The provision is effective for bonds
issued after the date of enactment.
Conference Agreement
The conference agreement does not include the Senate
amendment.
24. Current refundings of certain bonds issued by Indian tribal
governments (sec. 789 of the Senate amendment)
Present Law
Indian tribal governments are permitted to issue tax-
exempt bonds for essential government functions. Since 1987,
this term has been defined to include only those activities
that traditionally are carried out as governmental functions by
State governments.
Before 1987, some Indian tribes issued tax-exempt bonds
to acquire existing businesses as investments. Under present
law, tax-exempt bonds may not be issued for this purpose, and
outstanding pre-1987 bonds issued for such acquisitions may not
be refunded.
House Bill
No provision.
Senate Amendment
The Senate amendment allows pre-1987 tax-exempt bonds
issued by Indian tribal governments for business acquisitions
to be refunded if:
(1) the refunded bonds are redeemed within 90 days
after the refunding bonds are issued;
(2) the outstanding principal amount of the bonds
is not increased; and
(3) the maturity date of the bonds is not extended.
Effective date.--The provision applies to bonds issued
after the date of enactment.
Conference Agreement
The conference agreement does not include the Senate
amendment.
25. Purchasing of receivables by tax-exempt hospital cooperative
service organizations (sec. 773 of the Senate amendment)
Present Law
Section 501(e) provides that an organization organized on
a cooperative basis by tax-exempt hospitals will itself be tax-
exempt if the organization is operated solely to perform, on a
centralized basis, one or more of certain enumerated services
for its members. These services are: data processing,
purchasing (including the purchase of insurance on a group
basis), warehousing, billing and collection, food, clinical,
industrial engineering, laboratory, printing, communications,
record center, and personnel services. An organization does not
qualify under section 501(e) if it performs services other than
the enumerated services. (Treas. reg. sec. 1.501(e)(-1(c)).
House Bill
No provision.
Senate Amendment
The Senate amendment clarifies that, for purposes of
section 501(e), billing and collection services include the
purchase of patron accounts receivable on a recourse basis.
Thus, hospital cooperative service organizations are permitted
to advance cash on the basis of member accounts receivable,
provided that each member hospital retains the risk of non-
payment with respect to its accounts receivable.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996. No inference is
intended with respect to taxable years prior to the effective
date.
Conference Agreement
The conference agreement follows the Senate amendment.
26. Charitable contribution deduction for certain expenses incurred in
support of Native Alaskan subsistence whaling (sec. 776 of the
Senate amendment)
Present Law
In computing taxable income, individuals who do not elect
the standard deduction may claim itemized deductions, including
a deduction (subject to certain limitations) for charitable
contributions or gifts made during the taxable year to a
qualified charitable organization or governmental entity (sec.
170). Individuals who elect the standard deduction may not
claim a deduction for charitable contributions made during the
taxable year.
No charitable contribution deduction is allowed for a
contribution of services. However, unreimbursed expenditures
made incident to the rendition of services to an organization,
contributions to which are deductible, may constitute a
deductible contribution (Treas. Reg. sec. 1.170A-1(g)).
Specifically, section 170(j) provides that no charitable
contribution deduction is allowed for traveling expenses
(including amounts expended for meals and lodging) while away
from home, whether paid directly or by reimbursement, unless
there is no significant element of personal pleasure,
recreation, or vacation in such travel.
House Bill
No provision.
Senate Amendment
The Senate amendment allows individuals to claim a
deduction under section 170 not exceeding $7,500 per taxable
year for certain expenses incurred in carrying out sanctioned
whaling activities. The deduction is available only to an
individual who is recognized by the Alaska Eskimo Whaling
Commission as a whaling captain charged with the responsibility
of maintaining and carrying out sanctioned whaling activities.
The deduction is available for reasonable and necessary
expenses paid by the taxpayer during the taxable year for (1)
the acquisition and maintenance of whaling boats, weapons, and
gear used in sanctioned whaling activities, (2) the supplying
of food for the crew and other provisions for carrying out such
activities, and (3) storage and distribution of the catch from
such activities.
For purposes of the provision, the term ``sanctioned
whaling activities'' means subsistence bowhead whale hunting
activities conducted pursuant to the management plan of the
Alaska Eskimo Whaling Commission. No inference is intended
regarding the deductibility of any whaling expenses incurred in
a taxable year ending before the date of enactment.
Effective date.--The provision is effective for taxable
years ending after the date of enactment.
Conference Agreement
The conference agreement does not include the Senate
amendment.
27. Designation of additional empowerment zones; modification of
empowerment zone and enterprise community criteria (sec. 777 of
the Senate amendment)
Present Law
In general
Pursuant to the Omnibus Budget Reconciliation Act of 1993
(OBRA 1993), the Secretaries of the Department of Housing and
Urban Development (HUD) and the Department of Agriculture
designated a total of nine empowerment zones and 95 enterprise
communities on December 21, 1994. As required by law, six
empowerment zones are located in urban areas (with aggregate
population for the six designated urban empowerment zones
limited to 750,000) and three empowerment zones are located in
rural areas.\52\ Of the enterprise communities, 65 are located
in urban areas and 30 are located in rural areas (sec. 1391).
Designated empowerment zones and enterprise communities were
required to satisfy certain eligibility criteria, including
specified poverty rates and population and geographic size
limitations (sec. 1392).
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\52\ The six designated urban empowerment zones are located in New
York City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-
Camden (New Jersey). The three designated rural empowerment zones are
located in Kentucky Highlands (Clinton, Jackson, and Wayne counties,
Kentucky), Mid-Delta Mississippi (Bolivar, Holmes, Humphreys, Leflore
counties, Mississippi), and Rio Grande Valley Texas (Cameron, Hidalgo,
Starr, and Willacy counties, Texas).
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The following tax incentives are available for certain
businesses located in empowerment zones: (1) A 20-percent wage
credit for the first $15,000 of wages paid to a zone resident
who works in the zone; (2) an additional $20,000 of section 179
expensing for ``qualified zone property'' placed in service by
an ``enterprise zone business'' (accordingly, certain
businesses operating in empowerment zones are allowed up to
$38,000 of expensing for 1997); and (3) special tax-exempt
financing for certain zone facilities (described in more detail
below).
The 95 enterprise communities are eligible for the
special tax-exempt financing benefits but not the other tax
incentives available in the nine empowerment zones. In addition
to these tax incentives, OBRA 1993 provided that Federal grants
would be made to designated empowerment zones and enterprise
communities.
The tax incentives for empowerment zones and enterprise
communities generally will be available during the period that
the designation remains in effect, i.e., a 10-year period.
Definition of ``qualified zone property''
Present-law section 1397C defines ``qualified zone
property'' as depreciable tangible property (including
buildings), provided that: (1) The property is acquired by the
taxpayer (from an unrelated party) after the zone or community
designation took effect; (2) the original use of the property
in the zone or community commences with the taxpayer; and (3)
substantially all of the use of the property is in the zone or
community in the active conduct of a trade or business by the
taxpayer in the zone or community. In the case of property
which is substantially renovated by the taxpayer, however, the
property need not be acquired by the taxpayer after zone or
community designation or originally used by the taxpayer within
the zone or community if, during any 24-month period after zone
or community designation, the additions to the taxpayer's basis
in the property exceed 100 percent of the taxpayer's basis in
the property at the beginning of the period, or $5,000
(whichever is greater).
Definition of ``enterprise zone business''
Present-law section 1397B defines the term ``enterprise
zone business'' as a corporation or partnership (or
proprietorship) if for the taxable year: (1) The sole trade or
business of the corporation or partnership is the active
conduct of a qualified business within an empowerment zone or
enterprise community; (2) at least 80 percent of the total
gross income is derived from the active conduct of a
``qualified business'' within a zone or community; (3)
substantially all of the business's tangible property is used
within a zone or community; (4) substantially all of the
business's intangible property is used in, and exclusively
related to, the active conduct of such business; (5)
substantially all of the services performed by employees are
performed within a zone or community; (6) at least 35 percent
of the employees are residents of the zone or community; and
(7) no more than five percent of the average of the aggregate
unadjusted bases of the property owned by the business is
attributable to (a) certain financial property, or (b)
collectibles not held primarily for sale to customers in the
ordinary course of an active trade or business.
A ``qualified business'' is defined as any trade or
business other than a trade or business that consists
predominantly of the development or holding of intangibles for
sale or license. 53 In addition, the leasing of real
property that is located within the empowerment zone or
community to others is treated as a qualified business only if
(1) the leased property is not residential property, and (2) at
least 50 percent of the gross rental income from the real
property is from enterprise zone businesses. The rental of
tangible personal property to others is not a qualified
business unless substantially all of the rental of such
property is by enterprise zone businesses or by residents of an
empowerment zone or enterprise community.
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\53\ Also, a qualified business does not include certain facilities
described in section 144(c)(6)(B) (e.g., massage parlor, hot tub
facility, or liquor store) or certain large farms.
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Tax-exempt financing rules
Tax-exempt private activity bonds may be issued to
finance certain facilities in empowerment zones and enterprise
communities. These bonds, along with most private activity
bonds, are subject to an annual private activity bond State
volume cap equal to $50 per resident of each State, or (if
greater) $150 million per State.
Qualified enterprise zone facility bonds are bonds 95
percent or more of the net proceeds of which are used to
finance (1) ``qualified zone property'' (as defined above) the
principal user of which is an ``enterprise zone business''
(also defined above 54), or (2) functionally related
and subordinate land located in the empowerment zone or
enterprise community. These bonds may only be issued while an
empowerment zone or enterprise community designation is in
effect.
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\54\ For purposes of the tax-exempt financing rules, an
``enterprise zone business'' also includes a business located in a zone
or community which would qualify as an enterprise zone business if it
were separately incorporated.
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The aggregate face amount of all qualified enterprise
zone bonds for each qualified enterprise zone business may not
exceed $3 million per zone or community. In addition, total
qualified enterprise zone bond financing for each principal
user of these bonds may not exceed $20 million for all zones
and communities.
House Bill
No provision.
Senate Amendment
The Senate amendment modifies the present-law empowerment
zone and enterprise community designation criteria under
section 1392 so that, in the event that additional empowerment
zones or enterprise communities are authorized to be designated
in the future, any zones or communities designated in the
States of Alaska or Hawaii will not be subject to the general
size limitations under section 1392(a)(3), nor will such zones
or communities be subject to the general poverty-rate criteria
under section 1392(a)(4). Instead, nominated areas in either
State will be eligible for designation as an empowerment zone
or enterprise community if, for each census tract or block
group within such area, at least 20 percent of the families
have incomes which are 50 percent or less of the State-wide
median family income. Such zones and communities will be
subject to the population limitations under present-law section
1392(a)(1).
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement follows the Senate amendment. In
addition, the conference agreement provides for the designation
of 20 additional empowerment zones pursuant to slightly
expanded eligibility criteria, and includes certain
modifications to the definition of an enterprise zone business
and the tax-exempt financing rules.
Two additional empowerment zones with same tax incentives as previously
designated empowerment zones
Under the conference agreement, the Secretary of HUD is
authorized to designate two additional empowerment zones
located in urban areas (thereby increasing to eight the total
number of empowerment zones located in urban areas) with
respect to which generally apply the same tax incentives (i.e.,
the wage credit, additional expensing, and special tax-exempt
financing) as are available within the empowerment zones
authorized by the Omnibus Budget Reconciliation Act of 1993
(OBRA 1993). The wage credit available in the two new urban
empowerment zones is modified slightly to provide that the
percentage of wages taken into account for purposes of
determining the wage credit is 20 percent for 2000-2004, 15
percent for 2005, 10 percent for 2006, and 5 percent for 2007.
No wage credit is available in the two new urban empowerment
zones after 2007.
The two additional empowerment zones are subject to the
same eligibility criteria under present-law section 1392 that
applies to the original six urban empowerment zones. In order
to permit designation of these two additional empowerment
zones, the conference agreement increases the present-law
750,000 aggregate population cap applicable to empowerment
zones located in urban areas to a cap of 1,000,000 aggregate
population for the eight urban empowerment zones.
The two empowerment zones must be designated within 180
days after the date of enactment. However, the designations
will not take effect before January 1, 2000, and generally will
remain in effect for 10 years.
Designation of additional empowerment zones
The conference agreement authorizes the Secretaries of
HUD and Agriculture to designate an additional 20 empowerment
zones (no more than 15 in urban areas and no more than five in
rural areas).55 With respect to these additional
empowerment zones, the present-law eligibility criteria are
expanded slightly. First, the square mileage limitations of
present law (i.e., 20 square miles for urban areas and 1,000
for rural areas) are expanded to allow the empowerment zones to
include an additional 2,000 acres. This additional acreage,
which could be developed for commercial or industrial purposes,
is not subject to the poverty rate criteria and could be
divided among up to three noncontiguous parcels. In addition,
the present-law requirement that at least half of the nominated
area consist of census tracts with poverty rates of 35 percent
or more does not apply. Thus, under present-law section
1392(a)(4), at least 90 percent of the census tracts within a
nominated area must have a poverty rate of 25 percent or more,
and the remaining census tracts must have a poverty rate of 20
percent or more.56 For this purpose, census tracts
with populations under 2,000 are treated as satisfying the 25-
percent poverty rate criteria if (1) at least 75 percent of the
tract is zoned for commercial or industrial use and (2) the
tract is contiguous to one or more other tracts that actually
have a poverty rate of 25 percent or more.
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\55\ Under the conference agreement, areas located within Indian
reservations are eligible for designation as empowerment zones.
\56\ In lieu of the poverty criteria, outmigration may be taken
into account in designating one rural empowerment zone.
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Within the 20 additional empowerment zones, qualified
``enterprise zone businesses'' are eligible to receive up to
$20,000 of additional section 179 expensing 57 and
to utilize special tax-exempt financing benefits. The
``brownfields'' tax incentive provided under the conference
agreement also is available within all designated empowerment
zones. Businesses within the 20 additional empowerment zones
are not, however, eligible to receive the present-law wage
credit available within the 11 other designated empowerment
zones (i.e., the wage credit would be available only in the
nine present-law zones and two new urban empowerment zones
designated under the conference agreement).
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\57\ However, the additional section 179 expensing is not available
within the additional 2,000 acres allowed to be included under the
conference agreement within an empowerment zone.
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The 20 additional empowerment zones are required to be
designated before 1999, and the designations generally will
remain in effect for 10 years.
Modification of definition of enterprise zone business
The conference agreement modifies the present-law
requirement of section 1397B that an entity may qualify as an
``enterprise zone business'' only if (in addition to the other
present-law criteria) at least 80 percent of the total gross
income of such entity is derived from the active conduct of a
qualified business within an empowerment zone or enterprise
community. The conference agreement liberalizes this present-
law requirement by reducing the percentage threshold so that an
entity could qualify as an enterprise zone business if at least
50 percent of the total gross income of such entity is derived
from the active conduct of a qualified business within an
empowerment zone or enterprise community (assuming that the
other criteria of section 1397B are satisfied).
In addition, section 1397B is modified so that rather
than requiring that ``substantially all'' tangible and
intangible property (and employee services) of an enterprise
zone business be used (and performed) within a designated zone
or community, a ``substantial portion'' of tangible and
intangible property (and employee services) of an enterprise
zone business would be required to be used (and performed)
within a designated zone or community. Moreover, the conference
agreement further amends the section 1397B rule governing
intangible assets so that a substantial portion of an entity's
intangible property must be used in the active conduct of a
qualified business within a zone or community, but there is no
need (as under present law) to determine whether the use of
such assets is ``exclusively related to'' such business.
However, the present-law rule of section 1397B(d)(4) continues
to apply, such that a ``qualified business'' would not include
any trade or business consisting predominantly of the
development or holding or intangibles for sale or license. The
conference agreement also clarifies that an enterprise zone
business that leases to others commercial property within a
zone or community may rely on a lessee's certification that the
lessee is an enterprise zone business. Finally, the conference
agreement provides that the rental to others of tangible
personal property shall be treated as a qualified business if
and only if at least 50 percent of the rental of such property
is by enterprise zone businesses or by residents of a zone or
community (rather than the present-law requirement that
``substantially all'' tangible personal property rentals of an
enterprise zone business satisfy this test).
This modified ``enterprise zone business'' definition
applies to all previously designated empowerment zones and
enterprise communities, the two urban empowerment zones
designated under the conference agreement, as well as to the 20
additional empowerment zones authorized to be designated
pursuant to the conference agreement. 58
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\58\ In addition, the modifications to the enterprise zone business
definition will apply for purposes of defining a ``D.C. Zone business''
under certain provisions of the conference agreement that provide
certain tax incentives for the District of Columbia.
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Tax-exempt financing rules
Exceptions to volume cap
The conference agreement allows ``new empowerment zone
facility bonds'' to be issued for qualified enterprise zone
businesses in the 20 additional empowerment zones. These bonds
are not subject to the State private activity bond volume caps
or the special limits on issue size applicable to qualified
enterprise zone facility bonds under present law. The maximum
amount of these bonds that can be issued is limited to $60
million per rural zone, $130 million per urban zone with a
population of less than 100,000, and $230 million per urban
zone with a population of 100,000 or more.
Changes to certain rules applicable to both empowerment
zone facility bonds and qualified enterprise
community facility bonds
Qualified enterprise zone businesses located in newly
designated empowerment zones, as well as those located in
previously designated empowerment zones and enterprise
communities, would be eligible for special tax-exempt bond
financing under present-law rules, subject to the modifications
described below (and the exception to the volume cap described
above for newly designated empowerment zones).
The conference agreement waives until the end of a
``startup period'' the requirement that 95 percent or more of
the proceeds of bond issue be used by a qualified enterprise
zone business. With respect to each property, the startup
period ends at the beginning of the first taxable year
beginning more than two years after the later of (1) the date
of the bond issue financing such property, or (2) the date the
property was placed in service (but in no event more than three
years after the date of bond issuance). This waiver is only
available if, at the beginning of the startup period, there is
a reasonable expectation that the use by a qualified enterprise
zone business would be satisfied at the end of the startup
period and the business makes bona fide efforts to satisfy the
enterprise zone business definition.
The conference agreement also waives the requirements of
an enterprise zone business (other than the requirement that at
least 35 percent of the business' employees be residents of the
zone or community) for all years after a prescribed testing
period equal to first three taxable years after the startup
period.
Finally, the conference agreement relaxes the
rehabilitation requirement for financing existing property with
qualified enterprise zone facility bonds. In the case of
property which is substantially renovated by the taxpayer, the
property need not be acquired by the taxpayer after zone or
community designation or originally used by the taxpayer within
the zone if, during any 24-month period after zone or community
designation, the additions to the taxpayer's basis in the
property exceeded 15 percent of the taxpayer's basis at the
beginning of the period, or $5,000 (whichever is greater).
Effective date
The two additional urban empowerment zones (within which
generally are available the same tax incentives as are
available in the empowerment zones designated pursuant to OBRA
1993) must be designated within 180 days after enactment, but
the designation will not take effect before January 1, 2000.
The 20 additional empowerment zones (within which the wage
credit is not available) are to be designated after enactment
but prior to January 1, 1999. For purposes of the additional
section 179 expensing available within empowerment zones, the
modifications to the definition of ``enterprise zone business''
are effective for taxable years beginning on or after the date
of enactment.
The changes to the tax-exempt financing rules are
effective for qualified enterprise zone facility bonds and the
new empowerment zone facility bonds issued after the date of
enactment.
28. Conducting of certain games of chance not treated as unrelated
trade or business (sec. 783 of the Senate amendment)
Present Law
Although generally exempt from Federal income tax, tax-
exempt organizations are subject to the unrelated business
income tax (UBIT) on income derived from a trade or business
regularly carried on that is not substantially related to the
performance of the organization's tax-exempt functions (secs.
511-514).59 Certain income, however, is exempted
from the UBIT (such as interest, dividends, royalties, and
certain rents), unless derived from debt-financed property
(sec. 512(b)). Other exemptions from the UBIT are provided for
activities in which substantially all the work is performed by
volunteers and for income from the sale of donated goods (sec.
513(a)).
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\59\ The UBIT applies not only to private, tax-exempt entities but
also to colleges and universities that are agencies or
instrumentalities of (or are owned or operated by) a State or local
government or Indian tribal government (secs. 511(a)(2)(B) and
7871(a)(5)). In the case of such a college or university, the
``substantially related'' test is applied by determining whether the
trade or business activity at issue is substantially related to the
exercise or performance of any purpose or function described in section
501(c)(3) (see sec. 513(a)).
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A specific exemption from the UBIT is provided for
certain bingo games 60 conducted by tax-exempt
organizations, provided that the conducting of the bingo games
is not an activity ordinarily carried out on a commercial basis
and the conducting of which does not violate any State or local
law (sec. 513(f)).61 In addition, a specific
exemption from the UBIT is provided for qualified public
entertainment activities (meaning entertainment or recreation
activities of a kind traditionally conducted at fairs or
expositions promoting agricultural and educational purposes)
conducted by an organization described in section 501 (c)(3),
(c)(4), or (c)(5) which regularly conducts an agricultural and
educational fair or exposition as one of its substantial exempt
purposes (sec. 513(d)).62
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\60\ For purposes of this exemption, the term ``bingo game'' is
defined as any game of bingo of a type in which usually (1) the wagers
are placed, (2) the winners are determined, and (3) the distribution of
prizes or other property is made in the presence of all persons placing
wagers in such game (sec. 513(f)(2)). See Julius M. Israel Lodge of
B'nai B'rith v. Comm'r, No. 96-60087 (Fifth Cir., October 25, 1996)
(holding that ``instant bingo'' game did not fall within sec. 513(f)
exemption, because each player's participation in the game is wholly
independent of any other's and requires only that the player remove a
pull-tab to determine whether he or she has a winning card).
\61\ In 1978, at the same time that Congress enacted section
513(f), section 527 was modified to provide that bingo income of
political organizations is to be treated as ``exempt function income''
and, thus, not subject to Federal income tax if such income is used for
certain political purposes (sec. 527(c)(3)(D)).
\62\ In addition, section 311 of the Deficit Reduction Act of 1984
(as modified by the Tax Reform Act of 1986) provides a special, off-
Code exemption from the UBIT for games of chance conducted by nonprofit
organizations in the State of North Dakota.
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In South End Italian Independent Club, Inc. v.
Commissioner, 87 T.C. 168 (1986), acq. 1987-2 C.B. 1, the Tax
Court held that gambling profits of a social club described in
section 501(c)(7) that were required by State law to be used
for charitable purposes were fully deductible under section 162
in computing the UBIT liability of the social club. The effect
of this decision was to exempt gambling income of that social
club from UBIT. The IRS has indicated that, until further
guidance is available with respect to this issue, the issue of
the deductibility of amounts required under State law to be
used for charitable or other so-called ``lawful'' purposes
should be resolved consistent with the South End case,
regardless of whether the gaming proceeds are donated to other
charitable organizations or spent internally on the
organization's own charitable activities.63
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\63\ See IRS, Exempt Organizations: Technical Instruction Program
for FY 1996 (Training 4277-048 (7-95)) at page 96.
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House Bill
No provision.
Senate Amendment
The Senate amendment provides that the UBIT will not
apply to income from a ``qualified game of chance,'' meaning
any game of chance (other than a bingo game exempt under
present-law sec. 513(f)) conducted by a tax-exempt organization
if (1) such organization is licensed pursuant to State law to
conduct such game, (2) only organizations which are organized
as nonprofit corporations or are exempt from Federal income tax
under section 501(a) may be so licensed to conduct such game
within the State, and (3) the conduct of such game does not
violate State or local law.
No inference is intended regarding the treatment for
purposes of the UBIT of games of chance conducted by tax-exempt
organizations prior to the date of enactment.
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement does not include the Senate
amendment.
29. Exclusion from income of certain severance payments (sec. 788(a) of
the Senate amendment)
Present Law
Severance payments are includible in income.
House Bill
No provision.
Senate Amendment
Under the Senate amendment, certain severance payments
are excludable from income. The provision applies to payments
of up to $2,000 received by an individual who was separated
from service in connection with a reduction in the work force
of the employer and who does not attain employment within 6
months of the separation from service at a compensation level
that is at least 95 percent of the compensation the individual
was receiving before the separation from service. The exclusion
does not apply if the total separation payments received by the
individual exceed $125,000.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997, and before July 1, 2002.
Conference Agreement
The conference agreement does not include the Senate
amendment.
30. Special rule for thrift institutions that became large banks (sec.
790 of the Senate amendment)
Present Law
A provision of the Small Business Job Protection Act of
1996 repealed the percentage-of-taxable-income method of
determining bad debt deductions of thrift institutions for
taxable years beginning after 1995. A large bank (i.e., one
with assets in excess of $500 million as of the end of its 1995
taxable year) that was required to change its method of
accounting by reason of the provision generally is required to
recapture its post-1987 bad debt reserve over a 6-year period.
The amount of recapture for a small bank generally is reduced
to the extent the bank's reserve for bad debts determined under
the experience method applicable to such institutions exceeded
its pre-1988 reserve.
House Bill
No provision.
Senate Amendment
The Senate amendment allows a thrift institution that
first became a large bank in its first taxable year beginning
after 1994 to be treated as a small bank for purposes of the
Small Business Job Protection Act provision. In addition, such
institutions may apply the required change in accounting method
on a cut-off basis.
Effective date.--The provision is effective as if
included in the Small Business Job Protection Act of 1996.
Conference Agreement
The conference agreement does not include the Senate
amendment.
31. Income averaging for farmers (sec. 792 of the Senate amendment)
Present Law
The ability for an individual taxpayer to reduce his or
her tax liability by averaging his or her income over a number
of years was repealed by the Tax Reform Act of 1986.
House Bill
No provision.
Senate Amendment
An individual taxpayer is allowed to elect to compute his
or her current year tax liability by averaging, over the prior
three-year period, all or a portion of his or her taxable
income from the trade of business of farming.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment and before January
1, 2001.
Conference Agreement
The conference agreement includes the Senate amendment
with modifications. The conference agreement clarifies that the
provision operates such that an electing eligible taxpayer (1)
designates all or a portion of his or her taxable income from
the trade or business of farming from the current year as
``elected farm income;'' (2) allocates one-third of such
``elected farm income'' to each of the prior three taxable
years; and (3) determines his or her current year section 1 tax
liability by determining the sum of (a) his or her current year
section 1 liability without the elected farm income allocated
to the three prior taxable years plus (b) the increases in the
section 1 tax for each of the three prior taxable years by
taking into account the allocable share of the elected farm
income for such years. If a taxpayer elects the operation the
provision for a taxable year, the allocation of elected farm
income among taxable years pursuant to the election shall apply
for purposes of any election in a subsequent taxable year.
The provision does not apply for employment tax purposes,
or to an estate or a trust. Further, the provision does not
apply for purposes of the alternative minimum tax under section
55. Finally, the provision does not require the recalculation
of the tax liability of any other taxpayer, including a minor
child required to use the tax rates of his or her parents under
section 1(g).
The election shall be made in the manner prescribed by
the Secretary of the Treasury and, except as provided by the
Secretary, shall be irrevocable. In addition, the Secretary of
the Treasury shall prescribe such regulations as are necessary
to carry out the purposes of the provision, including
regulations regarding the order and manner in which items of
income, gain, deduction, loss, and credits (and any limitations
thereon) are to be taken into account for purposes of the
provision and the application of the provision to any short
taxable year. It is expected that such regulations will deny
the multiple application of items that carryover from one
taxable year to the next (e.g., net operating loss or tax
credit carryovers).
The provision applies to taxable years beginning after
December 31, 1997, and before January 1, 2001.
32. Intercity Passenger Rail Fund; Elective carryback of existing net
operating losses of the National Railroad Passenger Corporation
(Amtrak) (sec. 702 of the Senate amendment)
Present Law
In addition to current transportation-related trust fund
fuels excise taxes, there is a permanent 4.3-cents-per-gallon
General Fund excise tax on transportation fuels.
Generally, net operating losses may be carried back to
the three taxable years preceding the year of loss (10 taxable
years preceding the year of loss in certain circumstances).
House Bill
No provision.
Senate Amendment
The Senate amendment dedicates net revenues from 0.5 cent
per gallon of the 4.3-cents-per gallon transportation motor
fuels excise tax to a new Intercity Passenger Rail Fund (``Rail
Fund'') to finance capital improvements of National Railroad
Passenger Corporation (Amtrak) and certain transportation
activities in States not receiving Amtrak service. Dedicated
revenues are those from fuels taxes imposed from October 1,
1997 through April 15, 2001.
The Senate amendment also expands the purposes for which
non-Amtrak States may use Rail Fund monies to include: (1)
local transit needs such as transportation for the elderly and
handicapped; (2) rail/highway crossing safety projects
(generally financed through the Highway Trust Fund); (3)
certain capital expenditures of smaller freight railroads; and
(4) certain rural airport capital expenditures.
Amounts received from the Rail Fund are not included in
income. No tax deduction or addition to basis is allowed by the
recipient with respect to expenditure of the amount.
Rail Fund spending is subject to appropriation, and is
provided for under provisions of the Fiscal Year 1998 Budget
Resolution.
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement follows the approach of the
Senate amendment with modifications. The conference agreement
provides elective procedures that allows Amtrak to consider the
tax attributes of its predecessors, those railroads that were
relieved of their responsibility to provide intercity rail
passenger service as a result of the Rail Passenger Service Act
of 1970, in the use of its net operating losses. The benefit
allowable under these procedures is limited to the least of:
(1) 35 percent of Amtrak's existing qualified carryovers, (2)
the net tax liability for the carryback period, or (3)
$2,323,000,000. One half of the amount so calculated will be
treated as a payment of the tax imposed by chapter 1 of the
Internal Revenue Code of 1986 for each of the first two taxable
years ending after the date of enactment.
The existing qualified carryovers are the net operating
loss carryovers that are available under section 172(b) in
Amtrak's first taxable year ending after September 30, 1997.
The net tax liability for the carryback period is the aggregate
of the net tax liability of Amtrak's railroad predecessors for
all taxable years beginning before January 1, 1971, for which
there is a net Federal tax liability. Amtrak's railroad
predecessors are those railroads that were relieved of their
responsibility to provide intercity rail passenger service as a
result of the Rail Passenger Service Act of 1970, and their
predecessors. In the case of a railroad predecessor who joined
in the filing of a consolidated tax return, the net tax
liability of the predecessor will be the net tax liability of
the consolidated group.
The net operating losses of Amtrak are required to be
reduced by an amount equal to the amount obtained by Amtrak
under this provision, divided by 0.35. The Secretary of the
Treasury is to adjust, as he deems appropriate, the tax account
of each predecessor railroad for the carryback period to
reflect the utilization of the net operating losses. The amount
of the adjustment is equal to the amount of the benefit and is
to be taken into consideration on the tax accounts of the
predecessor railroads on a first-in, first-out basis, starting
with balances for the earliest year for which any predecessor
railroad has a net tax liability. No additional refund to any
taxpayer other than Amtrak is to be allowed as a result of
these adjustments.
The availability of the elective procedures is
conditioned on Amtrak (1) agreeing to make payments of one
percent (1%) of the amount it receives to each of the non-
Amtrak States to offset certain transportation related
expenditures and (2) using the balance for certain qualified
expenses. Non-Amtrak States are those States that are not
receiving Amtrak service at any time during the period
beginning on the date of enactment and ending on the date of
payment.
No deduction is allowed with respect to any qualified
expense whose payment is attributable to the proceeds made
available as a result of this provision. The basis of any
property must be reduced by the portion of its cost that is
attributable to such proceeds. An item of cost or expense is
attributable to such proceeds if it is (1) paid from the
proceeds of the refund or (2) to the extent the principal and
interest of any borrowings are paid from the proceeds of the
refund, from the proceeds of such borrowings.
Amtrak's earnings and profits will be increased by the
amount of the refund. However, the conferees expect that this
amount will not be included in adjusted current earnings for
alternative minimum tax purposes, consistent with Treas. Reg.
sec. 1.56(g)-1(c)(4) (ii).
Effective date.--The provision is effective on the date
of enactment. However, no refund shall be made as a result of
this provision earlier than the date of enactment of Federal
legislation which authorizes reforms of Amtrak. No interest
shall accrue with respect to the payment of any refund until 45
days after the later of (1) the enactment of such reform
legislation, or (2) the filing by Amtrak of a Federal income
tax return which includes the election to use the procedures
described in this provision.
X. REVENUE-INCREASE PROVISIONS
A. Financial Products
1. Require recognition of gain on certain appreciated financial
positions in personal property (sec. 1001(a) of the House bill
and sec. 801(a) of the Senate amendment)
Present Law
In general, gain or loss is taken into account for tax
purposes when realized. Gain or loss generally is realized with
respect to a capital asset at the time the asset is sold,
exchanged, or otherwise disposed of. Special rules under the
Code can defer or accelerate recognition in certain
circumstances. Transactions designed to reduce or eliminate
risk of loss, such as a ``short sale against the box,'' or an
``equity swap,'' generally do not cause realization.
House Bill
The House bill requires recognition of gain (but not
loss) upon a constructive sale of any ``appreciated financial
position'' in stock, a partnership interest or debt other than
certain ``straight'' debt instruments (as defined in sec.
1361(c)(5)(B)). A constructive sale occurs when the taxpayer
enters into one of the following transactions with respect to
the same or substantially identical property: (1) a short sale,
(2) an offsetting notional principal contract, or (3) a futures
or forward contact. For a taxpayer who has one of these
transactions, a constructive sale occurs when it acquires the
related long position. Other transactions will be treated as
constructive sales to the extent provided in Treasury
regulations.
The House bill provides an exception for transactions
that are closed before the end of the 30th day after the close
of the taxable year. This exception does not apply to
transactions closed during the 90-day period ending on such day
unless, for the 60 days after closing, (1) the taxpayer holds
the appreciated financial position and (2) at no time is the
taxpayer's risk of loss reduced by holding certain other
positions.
Effective date.--The constructive sale provision is
effective for constructive sales entered into after June 8,
1997. In the case of a decedent dying after June 8, 1997, if
(1) a constructive sale occurred before such date, (2) the
transaction remains open for not less than two years, and (3)
the transaction is not closed in a taxable transaction within
30 days after the date of enactment, all positions comprising
the constructive sale will be treated as property constituting
rights to receive income in respect of a decedent under section
691. A special rule is also provided for transactions entered
into before June 8, 1997, that in some circumstances prevents
such transactions from resulting in constructive sales after
the effective date.
Senate Amendment
The Senate amendment is the same as the House bill with
two modifications. Under the Senate amendment, the types of
debt instruments excluded from the definition of ``appreciated
financial position'' are instruments that are not convertible
and the interest on which is either fixed, payable at certain
variable rates or based on certain interest payments on a pool
of mortgages. In addition, the Senate amendment provides an
exception for transactions closed during the 90-day period
ending on the 30th day after the close of the taxable year that
are reestablished during such period, so long as the normal
requirements for positions closed within such 90-day period are
met by the reestablished position.
Conference Agreement
The conference agreement follows the Senate amendment
with the following modifications.
A trust instrument that is actively traded is generally
treated as stock for purposes of determining whether the
instrument is an appreciated financial position. The conference
agreement provides that a trust instrument will not be treated
as stock if substantially all (by value) of the property held
by the trust is debt that qualifies for the exception to the
definition of appreciated financial position for certain debt
instruments. In addition, the conference agreement clarifies
that only debt instruments that entitle the holder to receive
an unconditional principal amount qualify for the exception.
The conference agreement modifies the exception to
constructive sale treatment for transactions that are closed in
the 90-day period ending with the 30th day after the close of
the taxable year by applying similar requirements to all
transactions closed prior to such day. Under the conference
agreement, the exception is available only if, for the 60 days
after closing a transaction, (1) the taxpayer holds the
appreciated financial position and (2) at no time is the
taxpayer's risk of loss reduced by holding certain other
positions. If a transaction that is closed is reestablished in
a substantially similar position, the exception applies
provided that the reestablished position is closed prior to the
end of the 30th day after the close of the taxable year and the
above two requirements are met after such closing.
The conferees also wish to clarify some aspects of the
application of the provision. The conferees do not intend that
an agreement that is not a contract for purposes of applicable
contract law will be treated as a forward contract. Thus,
contingencies to which the contract is subject will generally
be taken into account.
The conferees intend that the constructive sale provision
generally will apply to transactions that are identified
hedging or straddle transactions under other Code provisions
(secs. 1092 (a)(2), (b)(2) and (e), 1221 and 1256(e)). Where
either position in such an identified transaction is an
appreciated financial position and a constructive sale of such
position results from the other position, the conferees intend
that the constructive sale will be treated as having occurred
immediately before the identified transaction. The constructive
sale will not, however, prevent qualification of the
transaction as an identified hedging or straddle transaction.
Where, after the establishment of such an identified
transaction, there is a constructive sale of eitherposition in
the transaction, gain will generally be recognized and accounted for
under the relevant hedging or straddle provision. However, the
conferees intend that future Treasury regulations may except certain
transactions from the constructive sale provision where the gain
recognized would be deferred under an identified hedging or straddle
provision (e.g. Treas. reg. sec. 1.446-4(b)).
The conferees wish to clarify certain other aspects of
the Treasury's regulatory authority under the provision. The
conferees urge that the Treasury issue prompt guidance,
including safe harbors, with respect to common transactions
entered into by taxpayers.
The legislative history to both the House bill and the
Senate amendment describe ``collar'' transactions and recommend
that Treasury regulations provide standards for determining
which collar transactions result in constructive sales. The
conferees expect that these Treasury regulations with respect
to collars will be applied prospectively, except in cases to
prevent abuse.
The legislative history states that, under the
regulations to be issued by the Treasury, either a taxpayer's
appreciated financial position or an offsetting transaction may
in certain circumstances be considered on a disaggregated basis
for purposes of the constructive sale determination. The
conferees wish to clarify that this authority is intended to be
used only where such disaggregated treatment reflects the
economic reality of the transaction and is administratively
feasible. For example, one transaction for which disaggregated
treatment might be appropriate is an equity swap that
references a small group of stocks, where the transaction is
entered into by a taxpayer owning only one of the stocks.
1
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\1\ A standard similar to that of Treas. reg. sec. 1.246-5 would be
appropriate for determining whether the relationship between the stock
held and the group of stocks shorted is sufficient for constructive
sale purposes.
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Effective date.--The conference agreement modifies the
special rule for decedents dying after June 8, 1997, to require
that a position be open at some time during the three-year
period ending on the decedent's death. Thus, no amount will be
treated as income in respect of a decedent under the rule
unless this requirement is met, as well as the requirements
that the transaction remains open for not less than two years
and that the transaction is not closed within 30 days after the
date of enactment. Finally, the conference agreement modifies
the special rule to provide that gain with respect to a
position that accrues after the transaction is closed will not
be included in income in respect of a decedent.
2. Election of mark-to-market for securities traders and for traders
and dealers in commodities (sec. 1001(b) of the House bill and
sec. 801(b) of the Senate amendment)
Present Law
A dealer in securities must compute its income pursuant
to the mark-to-market method of accounting. Mark-to-market
treatment does not apply to traders in securities or dealers in
other property.
House Bill
The House bill allows securities traders and commodities
traders and dealers to elect mark-to-market accounting similar
to that currently required for securities dealers. All
securities held by an electing taxpayer in connection with a
trade or business as a securities trader, and all commodities
held by an electing taxpayer in connection with a trade or
business as a commodities dealer or trader, are subject to
mark-to-market treatment. Property not held in connection with
its trade or business is not subject to the election provided
that it is identified by the taxpayer under rules similar to
the present law rules for securities dealers. Gain or loss
recognized by an electing taxpayer under the provision is
ordinary gain or loss.
Under the House bill, commodities for purposes of the
provision would include only commodities of a kind customarily
dealt in on an organized commodities exchange.
Effective date.--The election applies to taxable years
ending after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and
Senate amendment with the following modifications.
The conference agreement clarifies that if a securities
trader elects application of the provision, all securities held
in connection with its trade or business will generally be
subject to mark-to-market accounting. An exception is provided
for securities that have no connection with activities as a
trader and that are identified on the day acquired (or at such
other times as provided in Treasury regulations). The conferees
do not intend that an electing taxpayer can mark-to-market
loans made to customers or receivables or debt instruments
acquired from customers that are not received or acquired in
connection with a trade or business as a securities trader.
Because the conferees are concerned about issues of taxpayer
selectivity, the conferees intend that an electing taxpayer
must be able to demonstrate by clear and convincing evidence
that a security bears no relation to activities as a trader in
order to be identified as not subject to the mark-to-market
regime. Any security that hedges another security that is held
in connection with the taxpayer's trade or business as a trader
will be treated as so held. Any position that is properly
subject to the mark-to-market regime will not be taken into
account for purposes of the constructive sale rules of section
1259. Similar rules apply to commodities traders.
The conference agreement expands the definition of a
commodity for purposes of theprovision to include any commodity
that is actively traded (within the meaning of section 1092(d)(1)), any
option, forward contract, futures contract, short position, notional
principal contract or derivative instrument that references such a
commodity, and any other evidence of an interest in such a commodity.
Also included are positions that hedge the listed items and that are
identified by the taxpayer under rules similar to the rules for
securities.
The conferees anticipate that Treasury regulations
applying section 475(b)(4), which prevents a dealer from
treating certain notional principal contracts and other
derivative financial instruments as held for investment will,
in the case of a commodities trader or dealer apply only to
contracts and instruments referenced to commodities.
Effective date.--The conferees wish to clarify that the
special rule with respect to the section 481 adjustment applies
only to taxpayers making the election for the taxable year
which includes the date of enactment. Any elections made
thereafter will be governed by rules and procedures established
by the Secretary of the Treasury.
3. Limitation on exception for investment companies under section 351
(sec. 1002 of the House bill and sec. 802 of the Senate
amendment)
Present Law
Gain or loss is recognized upon a contribution by a
shareholder to a corporation that is an investment company.
Gain, but not loss, is recognized upon a contribution by a
partner to a partnership that would be treated as an investment
company. Under Treasury regulations, a contribution of property
is treated as made to an investment company only if (1) the
contribution results, directly or indirectly, in a
diversification of the transferor's interest and (2) the
transferee is (a) a regulated investment company (``RIC''), (b)
a real estate investment trust (``REIT'') or (c) a corporation
more than 80 percent of the assets of which by value (excluding
cash and non-convertible debt instruments) are readily
marketable stocks or securities or interests in RICs or REITs
that are held for investment
House Bill
The House bill modifies the definition of an investment
company by requiring that the following assets also be taken
into account for purposes of the 80-percent test: money,
financial instruments, foreign currency, and interests in RICs,
REITs, common trust funds, publicly-traded partnerships and
precious metals. The House bill provides an exception for
precious metals that are produced, used or held in an active
trade or business by a partnership. The House bill also
provides ``look through'' rules for certain entities that hold
the above-listed items.
Effective date.--The provision is effective for transfers
after June 8, 1997, in taxable years ending after such date,
with an exception for transfers pursuant to certain binding
written contracts in effect on that date.
Senate Amendment
The Senate amendment follows the House bill, but
clarifies that equity interests in non-corporate entities will
be taken into account for purposes of the investment company
determination only if (1) the entity is a REIT, publicly-traded
partnership or common trust fund, (2) the interest is
convertible into or exchangeable for one of the other listed
assets or (3) the entity holds listed assets and is subject to
the ``look-through'' rules. The Senate amendment also clarifies
that the exception for precious metals used or held in an
active trade or business applies to both corporations and
partnerships. The Senate amendment deletes the exception for
precious metals that are produced by a partnership. The Senate
amendment also provides the Treasury with regulatory authority
to remove items from the list in appropriate circumstances.
Conference Agreement
The conference agreement is the same as the Senate
amendment.
4. Disallowance of interest on indebtedness allocable to tax-exempt
obligations (sec. 1003 of the House bill)
Present Law
In general
Present law disallows a deduction for interest on
indebtedness incurred or continued to purchase or carry
obligations the interest on which is not subject to tax (tax-
exempt obligations) (sec. 265). This rule applies to tax-exempt
obligations held by individual and corporate taxpayers. The
rule also applies to certain cases in which a taxpayer incurs
or continues indebtedness and a related person acquires or
holds tax-exempt obligations. 2
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\2\ Code section 7701(f) (as enacted in the Deficit Reduction Act
of 1984 (sec. 53(c) of P.L. 98-369)) provides that the Treasury
Secretary shall prescribe such regulations as may be necessary or
appropriate to prevent the avoidance of any income tax rules which deal
with linking of borrowing to investment or diminish risk through the
use of related persons, pass-through entities, or other intermediaries.
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Application to non-financial corporations
General guidelines.--In Rev. Proc. 72-18, 1972-1 C.B.
740, the IRS provided guidelines for application of the
disallowance provision to individuals, dealers in tax-exempt
obligations, other business enterprises, and banks in certain
situations. Under Rev. Proc. 72-18, a deduction is disallowed
only when indebtedness is incurred or continued for the purpose
of purchasing or carrying tax-exempt obligations.
This purpose may be established either by direct or
circumstantial evidence. Direct evidence of a purpose to
purchase tax-exempt obligations exists when the proceeds of
indebtedness are directly traceable to the purchase of tax-
exempt obligations or when such obligations are used as
collateral for indebtedness. In the absence of direct evidence,
a deduction is disallowed only if the totality of facts and
circumstances establishes a sufficiently direct relationship
between the borrowing and the investment in tax-exempt
obligations.
Two-percent de minimis exception.--In the case of an
individual, interest on indebtedness generally is not
disallowed if during the taxable year the average adjusted
basis of the tax-exempt obligations does not exceed 2 percent
of the average adjusted basis of the individual's portfolio
investments and trade or business assets. In the case of a
corporation other than a financial institution or a dealer in
tax-exempt obligations, interest on indebtedness generally is
not disallowed if during the taxable year the average adjusted
basis of the tax-exempt obligations does not exceed 2 percent
of the average adjusted basis of all assets held in the active
conduct of the trade or business. These safe harbors are
inapplicable to financial institutions and dealers in tax-
exempt obligations.
Interest on installment sales to State and local
governments.--If a taxpayer sells property to a State or local
government in exchange for an installment obligation, interest
on the obligation may be exempt from tax. Present law has been
interpreted to not disallow interest on a taxpayer's
indebtedness if the taxpayer acquires nonsalable tax-exempt
obligations in the ordinary course of business in payment for
services performed for, or goods supplied to, State or local
governments. 3
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\3\ R.B. George Machinery Co., 26 B.T.A. 594 (1932) acq. C.B. XI-2,
4; Rev. Proc. 72-18, as modified by Rev. Proc. 87-53, 1987-2 C.B. 669.
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Application to financial corporations and dealers in tax-exempt
obligations
In the case of a financial institution, the allocation of
the interest expense of the financial institution (which is not
otherwise allocable to tax-exempt obligations) is based on the
ratio of the average adjusted basis of the tax-exempt
obligations acquired after August 7, 1987, to the average
adjusted basis of all assets of the taxpayer (sec. 265). In the
case of an obligation of an issuer which reasonably anticipates
to issue not more than $10 million of tax-exempt obligations
(other than certain private activity bonds) within a calendar
year (the ``small issuer exception''), only 20 percent of the
interest allocable to such tax-exempt obligations is disallowed
(sec. 291(a)(3)). A similar pro rata rule applies to dealers in
tax-exempt obligations, but there is no small issuer exception,
and the 20-percent disallowance rule does not apply (Rev. Proc.
72-18).
Treatment of insurance companies
Present law provides that a life insurance company's
deduction for additions to reserves is reduced by a portion of
the company's income that is not subject to tax (generally,
tax-exempt interest and deductible intercorporate dividends)
(secs. 807 and 812). The portion by which the life insurance
company's reserve deduction is reduced is related to its
earnings rate. Similarly, in the case of property and casualty
insurance companies, the deduction for losses incurred is
reduced by a percentage (15 percent) of (1) the insurer's tax-
exempt interest and (2) the deductible portion of dividends
received (with special rules for dividends from affiliates)
(sec. 832(b)(5)(B)). If the amount of this reduction exceeds
the amount otherwise deductible as losses incurred, the excess
is includible in the property and casualty insurer's income.
House Bill
General rule
The House bill extends to all corporations (other than
insurance companies) the rule that applies to financial
institutions that disallows interest deductions of a taxpayer
(that are not otherwise disallowed as allocable under present
law to tax-exempt obligations) in the same proportion as the
average basis of its tax-exempt obligations bears to the
average basis of all of the taxpayer's assets. However, the
House bill does not extend the small-issuer exception to
taxpayers which are not financial institutions.
Exceptions
The House bill does not apply to nonsalable tax-exempt
debt acquired by a corporation in the ordinary course of
business in payment for goods or services sold to a State or
local government. In addition, the House bill provides a de
minimis exception under which the disallowance rule does not
apply to corporations, other than financial institutions and
dealers in tax-exempt obligations, if the average adjusted
basis of tax-exempt obligations acquired after August 7, 1986,
is less than the lesser of $1 million or 2 percent of the basis
of all of the corporation's assets. Under the House bill,
insurance companies are not subject to the pro rata rule but
would continue to be subject to present law.
Holdings by related persons
The House bill applies the interest disallowance
provision to all related persons that are members of the same
consolidated group as if all the members of the group were a
single taxpayer. The consolidated group rule is to be applied
without regard to any member that is an insurance company. In
the case of affiliated corporations that are not members of the
same consolidated group, tracing rules apply as if all of the
related persons are a single entity.
In the case of a corporation (other than a financial
institution) that is a partner in a partnership, the corporate
partners are treated as holding their allocable shares of all
of the assets of the partnership.
The provision is not intended to affect the application
of section 265 to related parties under present law.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment with respect to
obligations acquired after June 8, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the provision
of the House bill.
5. Gains and losses from certain terminations with respect to property
(sec. 1004 of the House bill and sec. 803 of the Senate
amendment)
Present Law
Extinguishment treated as sale or exchange.--The
definition of capital gains and losses in section 1222 requires
that there be a ``sale or exchange'' of a capital asset. Court
decisions interpreted this requirement to mean that when a
disposition is not a sale or exchange of a capital asset, for
example, a lapse, cancellation, or abandonment, the disposition
produces ordinary income or loss,4 Under a special
provision, gains and losses attributable to the cancellation,
lapse, expiration, or other termination of a right or
obligation with respect to certain personal property are
treated as gains or losses from the sale of a capital asset
(sec. 1234A). Personal property subject to this rule is (1)
personal property (other than stock that is not part of
straddle or of a corporation that is not formed or availed of
to take positions which offset positions in personal property
of its shareholders) of a type which is actively traded and
which is, or would be on acquisition, a capital asset in the
hands of the taxpayer and (2) a ``section 1256 contract''
5 which is capital asset in the hands of the
taxpayer. Section 1234A does not apply to the retirement of a
debt instrument.
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\4\ See Fairbanks v. U.S., 306 U.S. 436 (1039); Comm'r v. Pittston
Co., 252 F. 2d 344 (2nd Cir.), cert. denied, 357 U.S. 919 (1958).
\5\ A ``section 1256 contract'' means (1) any regulated futures
contract, (2) foreign currency contract, (3) nonequity option, or (4)
dealer equity option.
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Character of gain on retirement of debt obligations.--
Amounts received on the retirement of any debt instrument are
treated as amounts received in exchange therefor (sec.
1271(a)(1)). In addition, gain on the sale or exchange of a
debt instrument with OID 6 generally is treated as
ordinary income to the extent of its OID if there was an
intention at the time of its issuance to call the debt
instrument before maturity (sec. 1271(a)(2)). These rules do
not apply to (1) debt issued by a natural person or (2) debt
issued before July 2, 1982, by a noncorporate or nongovernment
issuer.
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\6\ The issuer of a debt instrument with OID generally accrues and
deducts the discount, as interest, over the life of the obligation even
though the amount of such interest is not paid until the debt matures.
The holder of such a debt instrument also generally includes the OID in
income as it accrues as interest. The mandatory inclusion of OID in
income does not apply, among other exceptions, to debt obligations
issued by natural persons before March 2, 1984, and loans of less than
$10,000 between natural persons if such loan is not made in the
ordinary course of business of the lender (secs. 1272(a)(2) (D) and
(E)).
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House Bill
Extension of relinquishment rule to all types of
property.--The House bill extends the rule which treats gain or
loss from the cancellation, lapse, expiration, or other
termination of a right or obligation which is (or on
acquisition would be) a capital asset in the hands of the
taxpayer to all types of property.
Character of gain on retirement of debt obligations
issued by natural persons.--The House bill repeals the
provision that exempts debt obligations issued by natural
persons from the rule which treats gain realized on retirement
of the debt as exchanges. Thus, under the House bill, gain or
loss on the retirement of such debt will be capital gain or
loss if the debt is a capital asset. The House bill retains the
present-law exceptions for debt issued before July 2, 1982, by
noncorporations or nongovernments.
Effective date.--The extension of the extinguishment rule
applies to property acquired or positions established 30 days
after the date of enactment. The repeal of the exception to the
character of gain on retirement of debt instruments issued by
natural persons or obligations issued before July 2, 1982,
applies to debt issued or purchased after June 8, 1997.
Senate Amendment
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date.--The extension of the extinguishment rule
applies to property acquired or positions established 30 days
after the date of enactment. The repeal of the exception to the
character of gain on retirement of debt instruments issued by
natural persons or obligations issued before July 2, 1982,
applies to debt issued or purchased (within the meaning of
section 1272(d)(1)) after June 8, 1997. Thus, the repeal of the
exception to the character of gain on retirement of debt
instruments issued by natural persons or obligations issued
before July 2, 1982, does not apply to transfers after June 8,
1997, where the basis of the debt instrument to the transferee
is determined in whole or in part by reference to the adjusted
basis of that instrument in the hands of the transferor (i.e.,
the basis to the transferee is a carryover basis). However, the
repeal of the except to the character of gain on retirement of
debt instruments issued by natural person applies to any debt
instruments issued after June 8, 1997.
Conference Agreement
The conference agreement generally follows the Senate
amendment.
In addition, the conference agreement provides that if a
taxpayer enters into a short sale of property and such property
becomes substantially worthless, the taxpayer shall recognize
gain as if the short sale were closed when the property becomes
substantially worthless. The conference agreement also extends
the statute of limitations with respect to such gain
recognition to the earlier of: (1) three years after the
Treasury Secretary is notified that the position has become
substantially worthless; or (2) six years after the date of
filing of the income tax return for the taxable year during
which the position became substantially worthless. To the
extent provided in Treasury regulations, similar gain
recognition rules shall apply to any option with respect to
property, any offsetting notional principal contract with
respect to property, any futures or forward contract to deliver
property, or with respect to any similar transaction or
position that becomes substantially worthless. The provision
applies to property that becomes substantially worthless after
the date of enactment of the Act. No inference is intended as
to the proper treatment of these or similar transactions or
positions under present law.
6. Determination of original issue discount where pooled debt
obligations subject to acceleration (sec. 1005 of the House
bill)
Present Law
Inclusion of interest income, in general
A taxpayer generally must include in gross income the
amount of interest received or accrued within the taxable year
on indebtedness held by the taxpayer. If the principal amount
of an indebtedness may be paid without interest by a specified
date (as is the case with certain credit card balances), under
present law, the holder of the indebtedness is not required to
accrue interest until after the specified date has passed.
Original issue discount
The holder of a debt instrument with original issue
discount (``OID'') generally accrues and incudes in gross
income, as interest, the OID over the life of the obligation,
even though the amount of the interest may not be received
until the maturity of the instrument.
Special rules for determining the amount of OID allocated
to a period apply to certain instruments that may be subject to
prepayment. First, if a borrower can reduce the yield on a debt
by exercising a prepayment option, the OID rules assume that
the borrower will prepay the debt. In addition, in the case of
(1) any regular interest in a REMIC, (2) qualified mortgages
held by a REMIC, or (3) any other debt instrument if payments
under the instrument may be accelerated by reason of
prepayments of other obligations securing the instrument, the
daily portions of the OID on such debt instruments are
determined by taking into account an assumption regarding the
prepayment of principal for such instruments.
House Bill
The bill applies the special OID rule applicable to any
regular interest in a REMIC, qualified mortgages held by a
REMIC, or certain other debt instruments to any pool of debt
instruments the yield on which may be reduced by reason of
prepayments. Thus, under the bill, if a taxpayer holds a pool
of credit card receivables that require interest to be paid if
the borrowers do not pay their accounts by a specified date,
the taxpayer would be required to accrue interest or OID on
such pool based upon a reasonable assumption regarding the
timing of the payments of the accounts in the pool. In
addition, the Secretary of the Treasury is authorized to
provide appropriate exemptions from the provision, including
exemptions for taxpayers that hold a limited amount of debt
instruments, such as small retailers.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment. If a taxpayer is
required to change its method of accounting under the bill,
such change would be treated as initiated by the taxpayer with
the consent of the Secretary of the Treasury and any section
481 adjustment would be included in income ratably over a four-
year period. It is understood that some taxpayers presently use
a method of accounting similar to the method required to be
used under the bill and have asked the Secretary of the
Treasury for permission to change to a different method for
pre-effective date years. So as not to require taxpayers to
change methods of accounting multiple times, it is expected
that the Secretary would not grant these pending requests.
Senate Amendment
No provision.
Conference Agreement
The conference agreement generally follows the House
bill, with modifications. The conference agreement applies to
any pool of debt instruments the yield on which may be affected
by reason of prepayments. In addition, the conferees wish to
clarify that it is within the discretion of the Secretary of
the Treasury to grant changes of methods of accounting that are
pending for pre-effective date years.
7. Deny interest deduction on certain debt instruments (sec. 1006 of
the House bill)
Present Law
Whether an instrument qualifies for tax purposes as debt
or equity is determined under all the facts and circumstances
based on principles developed in case law. If an instrument
qualifies as equity, the issuer generally does not receive a
deduction for dividends paid and the holder generally includes
such dividends in income (although corporate holders generally
may obtain adividends-received deduction of at least 70 percent
of the amount of the dividend). If an instrument qualifies as debt, the
issuer may receive a deduction for accrued interest and the holder
generally includes interest in income, subject to certain limitations.
Original issue discount (``OID'') on a debt instrument is
the excess of the stated redemption price at maturity over the
issue price of the instrument. An issuer of a debt instrument
with OID generally accrues and deducts the discount as interest
over the life of the instrument even though interest may not be
paid until the instrument matures. The holder of such a debt
instrument also generally includes the OID in income on an
accrual basis.
House Bill
Under the House bill, no deduction is allowed for
interest or OID on an instrument issued by a corporation (or
issued by a partnership to the extent of its corporate
partners) that is payable in stock of the issuer or a related
party (within the meaning of sections 267(b) and 707(b)),
including an instrument a substantial portion of which is
mandatorily convertible or convertible at the issuer's option
into stock of the issuer or a related party. In addition, an
instrument is to be treated as payable in stock if a
substantial portion of the principal or interest is required to
be determined, or may be determined at the option of the issuer
or related party, by reference to the value of stock of the
issuer or related party. An instrument also is treated as
payable in stock if it is part of an arrangement designed to
result in such payment of the instrument with or by reference
to such stock, such as in the case of certain issuances of a
forward contract in connection with the issuance of debt,
nonrecourse debt that is secured principally by such stock, or
certain debt instruments that are convertible at the holder's
option when it is substantially certain that the right will be
exercised. For example, it is not expected that the provision
will affect debt with a conversion feature where the conversion
price is significantly higher than the market price of the
stock on the issue date of the debt. The House bill does not
affect the treatment of a holder of an instrument.
The House bill is not intended to affect the
characterization of instruments as debt or equity under present
law; and no inference is intended as to the treatment of any
instrument under present law.
Effective date.--The provision is effective for
instruments issued after June 8, 1997, but will not apply to
such instruments (1) issued pursuant to a written agreement
which was binding on such date and at all times thereafter, (2)
described in a ruling request submitted to the Internal Revenue
Service on or before such date, or (3) described in a public
announcement or filing with the Securities and Exchange
Commission on or before such date.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill. The
conference agreement clarifies that for purposes of the
provision, principal or interest shall be treated as required
to be paid in, converted to, or determined with reference to
the value of equity if it may be so required at the option of
the holder or a related party and there is a substantial
certainty that the option will be exercised.
B. Corporate Organizations and Reorganizations
1. Require gain recognition for certain extraordinary dividends (sec.
1011 of the House bill and sec. 811 of the Senate amendment)
Present Law
A corporate shareholder generally can deduct at least 70
percent of a dividend received from another corporation. This
dividends received deduction is 80 percent if the corporate
shareholder owns at least 20 percent of the distributing
corporation and generally 100 percent if the shareholder owns
at least 80 percent of the distributing corporation.
Section 1059 of the Code requires a corporate shareholder
that receives an ``extraordinary dividend'' to reduce the basis
of the stock with respect to which the dividend was received by
the nontaxed portion of the dividend. Whether a dividend is
``extraordinary'' is determined, among other things, by
reference to the size of the dividend in relation to the
adjusted basis of the shareholder's stock. Also, a dividend
resulting from a non pro rata redemption or a partial
liquidation is an extraordinary dividend. If the reduction in
basis of stock exceeds the basis in the stock with respect to
which an extraordinary dividend is received, the excess is
taxed as gain on the sale or disposition of such stock, but not
until that time (sec. 1059(a)(2)). The reduction in basis for
this purpose occurs immediately before any sale or disposition
of the stock (sec. 1059(d)(1)(A)). The Treasury Department has
general regulatory authority to carry out the purposes of the
section.
Except as provided in regulations, the extraordinary
dividend provisions do not apply to result in a double
reduction in basis in the case of distributions between members
of an affiliated group filing consolidated returns, where the
dividend is eliminated or excluded under the consolidated
return regulations. Double inclusion of earnings and profits
(i.e., from both the dividend and from gain on the disposition
of stock with a reduced basis) also should generally be
prevented.7 Treasury regulations provide for
application of the provision when a corporation is a partner in
a partnership that receives a distribution.8
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\7\ See H. Rept. 99-841, II-166, 99th Cong. 2d Sess. (September 18,
1986).
\8\ See Treas. reg. sec. 1.701-2(f), Example (2).
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In general, a distribution in redemption of stock is
treated as a dividend, rather than as a sale of the stock, if
it is essentially equivalent to a dividend (sec. 302). A
redemption of the stock of a shareholder generally is
essentially equivalent to a dividend if it does not result in a
meaningful reduction in the shareholder's proportionate
interest in the distributing corporation. Section 302(b) also
contains several specific tests (e.g., a substantial reduction
computation and a termination test) to identify redemptions
that are not essentially equivalent to dividends. The
determination whether a redemption is essentially equivalent to
a dividend includes reference to the constructive ownership
rules of section 318, including the option attribution rules of
section 318(a)(4). The rules relating to treatment of cash or
other property received in a reorganization contain a similar
reference (sec. 356(a)(2)).
House Bill
Under the House bill, except as provided in regulations,
a corporate shareholder recognizes gain immediately with
respect to any redemption treated as a dividend (in whole or in
part) when the nontaxed portion of the dividend exceeds the
basis of the shares surrendered, if the redemption is treated
as a dividend due to options being counted as stock
ownership.9
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\9\ Thus, for example, where a portion of such a distribution would
not have been treated as a dividend due to insufficient earnings and
profits, the rule applies to the portion treated as a dividend.
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In addition, the House bill requires immediate gain
recognition whenever the basis of stock with respect to which
any extraordinary dividend was received is reduced below zero.
The reduction in basis of stock would be treated as occurring
at the beginning of the ex-dividend date of the extraordinary
dividend to which the reduction relates.
Reorganizations or other exchanges involving amounts that
are treated as dividends under section 356 of the Code are
treated as redemptions for purposes of applying the rules
relating to redemptions under section 1059(e). For example, if
a recapitalization or other transaction that involves a
dividend under section 356 has the effect of a non pro rata
redemption or is treated as a dividend due to options being
counted as stock, the rules of section 1059 apply. Redemptions
of shares, or other extraordinary dividends on shares, held by
a partnership will be subject to section 1059 to the extent
there are corporate partners (e.g., appropriate adjustments to
the basis of the shares held by the partnership and to the
basis of the corporate partner's partnership interest will be
required).
Under continuing section 1059(g) of present law, the
Treasury Department is authorized to issue regulations where
necessary to carry out the purposes and prevent the avoidance
of the provision.
Effective date.--The provision generally is effective for
distributions after May 3, 1995, unless made pursuant to the
terms of a written binding contract in effect on May 3, 1995
and at all times thereafter before such distribution, or a
tender offer outstanding on May 3, 1995.10 However,
in applying the new gain recognition rules to any distribution
that is not a partial liquidation, a non pro rata redemption,
or a redemption that is treated as a dividend by reason of
options, September 13, 1995 is substituted for May 3, 1995 in
applying the transition rules.
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\10\ Thus, for example, in the case of a distribution prior to the
effective date, the provisions of present law would continue to apply,
including the provisions of present-law sections 1059(a) and
1059(d)(1), requiring reduction in basis immediately before any sale or
disposition of the stock, and requiring recognition of gain at the time
of such sale or disposition.
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No inference is intended regarding the tax treatment
under present law of any transaction within the scope of the
provision, including transactions utilizing options.
In addition, no inference is intended regarding the rules
under present law (or in any case where the treatment is not
specified in the provision) for determining the shares of stock
with respect to which a dividend is received or that experience
a basis reduction.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Require gain recognition on certain distributions of controlled
corporation stock (sec. 1012 of the House bill and sec. 812 of
the Senate amendment)
Present Law
A corporation generally is required to recognize gain on
the distribution of property (including stock of a subsidiary)
as if such property had been sold for its fair market value.
The shareholders generally treat the receipt of property as a
taxable event as well. Section 355 of the Internal Revenue Code
provides an exception to this rule for certain ``spin-off''
type distributions of stock of a controlled corporation,
provided that various requirements are met, including certain
restrictions relating to acquisitions and dispositions of stock
of the distributing corporation (``distributing'') or the
controlled corporation (``controlled'') prior and subsequent to
a distribution.
In cases where the form of the transaction involves a
contribution of assets to the particular controlled corporation
that is distributed in connection with the distribution, there
are specific Code requirements that distributing corporation's
shareholders own ``control'' of the distributed corporation
immediately after the distribution. Control is defined for this
purpose as 80 percent of the voting power of all classes of
stock entitled to vote and 80 percent of each other class of
stock. (secs. 368(a)(1)(D), 368(c), and 351(a) and (c)). In
addition, it is a requirement for qualification of any section
355 distribution that the distributing corporation distribute
control of the controlled corporation (defined by reference to
the same 80-percent test).11 Present law has the
effect of imposing more restrictive requirements on certain
types of acquisitions or other transfers following a
distribution if the company involved is the controlled
corporation rather than the distributing corporation.
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\11\ If a controlled corporation is acquired after a distribution,
an issue may arise whether the acquisition can be viewed under step-
transaction concepts as having occurred before the distribution, with
the result that the distributing corporation would not be viewed as
having distributed the necessary 80 percent control. The Internal
Revenue Service has indicated that it will not rule on requests for
section 355 treatment in cases in which there have been negotiations,
agreements, or arrangements with respect to transactions or events
which, if consummated before the distribution, would result in the
distribution of stock or securities of a corporation which is not
``controlled'' by the distributing corporation. Rev. Proc. 96-39, 1996-
33 I.R.B. 11; see also Rev. Rul. 96-30, 1996-1 C.B. 36; Rev. Rul. 70-
225, 1970-1 C.B. 80.
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After a spin-off transaction, the amount of a
stockholder's basis in the stock of the distributing
corporation is generally allocated between the stock of
distributing and controlled received by that shareholder, in
proportion to their relative fair market values. (sec. 358(c);
see Treas. reg. sec. 1.358-2). In the case of an affiliated
group of corporations filing a consolidated return, this basis
allocation rule generally eliminates any excess loss account in
the stock of a controlled corporation that is distributed
within the group, and its basis is generally determined with
reference to the basis of the distributing
corporation.12
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\12\ Excess loss accounts in consolidation generally are created
when a subsidiary corporation makes a distribution (or has a loss that
is used by other members of the group) that exceeds the parent's basis
in the stock of the subsidiary. In general, such excess loss accounts
in consolidation are permitted to be deferred rather than causing
immediate taxable gain. Nevertheless, they are recaptured when a
subsidiary leaves the group or in certain other situations. However,
such excess loss accounts are not recaptured in certain cases where
there is an internal spin-off prior to the subsidiary leaving the
group. See, Treas. reg. sec. 1.1502-19(g). In addition, an excess loss
account may not be created at all in certain cases that are similar
economically to a distribution that would reduce the stock basis of the
distributing subsidiary corporation, if the distribution from the
subsidiary is structured to meet the form of a section 355
distribution.
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The treatment of basis of the distributing and controlled
corporations in a section 355 distribution differs from a
distribution of stock that is not a qualified section 355 spin-
off. In a non-qualified distribution within an affiliated group
of corporations filing a consolidated return, not only is gain
generally recognized (though deferred) on the excess of value
over basis at the distributing corporation level, the basis of
the distributing corporation's stock is increased by any gain
recognized in the distribution (when that gain is taken into
account under the relevant regulations), and reduced by the
fair market value of the distribution if the distribution is
within an affiliated group filing a consolidated return. The
basis of the stock of the distributed corporation within the
group is a fair market value basis. In the case of a
distribution between members of an affiliated group that is not
filing a consolidated return, the distribution causes a
reduction of basis of the distributing corporation only to the
extent it exceeds the earnings and profits of the distributing
corporation or it is an extraordinary dividend.
House Bill
The House bill adopts additional restrictions under
section 355 on acquisitions and dispositions of the stock of
the distributing or controlled corporation.
Under the House bill, if, pursuant to a plan or
arrangement in existence on the date of distribution, either
the controlled or distributing corporation is acquired, gain is
recognized by the other corporation as of the date of the
distribution.
In the case of an acquisition of a controlled
corporation, the amount of gain recognized by the distributing
corporation is the amount of gain that the distributing
corporation would have recognized had stock of the controlled
corporation been sold for fair market value on the date of
distribution. In the case of an acquisition of the distributing
corporation, the amount of gain recognized by the controlled
corporation is the amount of net gain that the distributing
corporation would have recognized had it sold its assets for
fair market value immediately after the distribution. This gain
is treated as long-term capital gain. No adjustment to the
basis of the stock or assets of either corporation is allowed
by reason of the recognition of the gain.
Whether a corporation is acquired is determined under
rules similar to those of present law section 355(d), except
that acquisitions would not be restricted to ``purchase''
transactions. Thus, an acquisition occurs if one or more
persons acquire 50 percent or more of the vote or value of the
stock of the controlled or distributing corporation pursuant to
a plan or arrangement. For example, assume a corporation
(``P'') distributes the stock of its wholly owned subsidiary
(``S'') to its shareholders. If, pursuant to a plan or
arrangement, 50 percent or more of the vote or value of either
P or S is acquired by one or more persons, the bill proposal
requires gain recognition by the corporation not acquired.
Except as provided in Treasury regulations, if the assets of
the distributing or controlled corporation are acquired by a
successor in a merger or other transaction under section
368(a)(1)(A), (C) or (D) of the Code, the shareholders
(immediately before the acquisition) of the corporation
acquiring such assets are treated as acquiring stock in the
corporation from which the assets were acquired. Under Treasury
regulations, other asset transfers also could be subject to
this rule. However, in any transaction, stock received directly
or indirectly by former shareholders of distributing or
controlled, in a successor or new controlling corporation of
either, is not to be treated as acquired stock if it is
attributable to such shareholders' stock in distributing or
controlled that was not acquired as part of a plan or
arrangement to acquire 50 percent or more of such successor or
other corporation.
Acquisitions occurring within the four-year period
beginning two years before the date of distribution are
presumed to have occurred pursuant to a plan or arrangement.
Taxpayers can avoid gaining recognition by showing that an
acquisition occurring during this four-year period was
unrelated to the distribution.
The House bill does not apply to distributions that would
otherwise be subject to section 355(d) of present law, which
imposes corporate level tax on certain disqualified
distributions.
The House bill does not apply to a distribution pursuant
to a title 11 or similar case.
The Treasury Department is authorized to prescribe
regulations as necessary to carry out the purposes of the
proposal, including regulations to provide for the application
of the proposal in the case of multiple transactions.
Except as provided in regulations, in the case of
distributions of stock within an affiliated group of
corporations filing a consolidated return, section 355 does not
apply to any distribution of the stock of one member of the
group to another member. In the case of such a distribution of
stock, the Secretary of the Treasury is to provide appropriate
rules for the treatment of the distribution, including rules
governing adjustments to the adjusted basis of the stock and
the earnings and profits of the members of the group.
The House bill also modifies certain rules for
determining control immediately after a distribution in the
case of certain divisive transactions in which a controlled
corporation is distributed and the transaction meets the
requirements of section 355. In such cases, under section 351
and modified section 368(a)(2)(H) with respect to certain
reorganizations under section 368(a)(1)(D), those shareholders
receiving stock in the distributed corporation are treated as
in control of the distributed corporation immediately after the
distribution if they hold stock representing a 50 percent or
greater interest in the vote and value of stock of the
distributed corporation.
The House bill does not change the present-law
requirement under section 355 that the distributing corporation
must distribute 80 percent of the voting power and 80 percent
of each other class of stock of the controlled corporation. It
is expected that this requirement will be applied by the
Internal Revenue Service taking account of the provisions of
the proposal regarding plans that permit certain types of
planned restructuring of the distributing corporation following
the distribution, and to treat similar restructurings of the
controlled corporation in a similar manner. Thus, the 80-
percent control requirement is expected to be administered in a
manner that would prevent the tax-free spin-off of a less-than-
80-percent controlled subsidiary, but would not generally
impose additional restrictions on post-distribution
restructurings of the controlled corporation if such
restrictions would not apply to the distributing corporation.
Effective date.--The provision is generally effective for
distributions after April 16, 1997. However, the part of the
provision that provides a 50-percent control requirement
immediately after certain section 351 and 368(a)(1)(D)
distributions governed by section 355 is effective for
transfers after the date of enactment.
No part of the provision will apply to a distribution (or
transfer, as the case may be) after April 16, 1997, if such
distribution or transfer is: (1) made pursuant to a written
agreement whichwas binding on such date and at all times
thereafter; (2) described in a ruling request submitted to the Internal
Revenue Service on or before such date; or (3) described on or before
such date in a public announcement or in a filing with the Securities
and Exchange Commission (``SEC'') required solely by reason of the
distribution. Any written agreement, ruling request, or public
announcement is not within the scope of these transition provisions
unless it identifies the unrelated acquiror of the distributing
corporation or of any controlled corporation, whichever is applicable.
Senate Amendment
The Senate amendment generally follows the House bill
with a number of modifications.
The Senate amendment modifies the House bill denial of
section 355 treatment to certain distributions within an
affiliated group of corporations. Under the Senate amendment,
except as provided in Treasury regulations, in the case of
distributions of stock within an affiliated group of
corporations (as defined in section 1504(a), and whether or not
filing a consolidated return), section 355 does not apply to
any distribution of the stock of one member of the group to
another member if the distribution is part of a transaction
that results in an acquisition that would be taxable to either
the distributing or the controlled corporation under the
provision.
In addition, in the case of any distribution of stock of
one member of an affiliated group of corporations to another
member, the Secretary of the Treasury is authorized under
section 358(c) to provide adjustments to the basis of any stock
in a corporation which is a member of such group, to reflect
appropriately the proper treatment of such distribution. As one
example, the Secretary of the Treasury may consider providing
rules that require a carryover basis within the group for the
stock of the distributed corporation (including a carryover of
an excess loss account, if any, in a consolidated return) and
that also provide a reduction in the basis of the stock of the
distributing corporation to reflect the change in the value and
basis of the distributing corporation's assets. The Treasury
Department may determine that the aggregate stock basis of
distributing and controlled after the distribution may be
adjusted to an amount that is less than the aggregate basis of
the stock of the distributing corporation before the
distribution, to prevent inappropriate potential for artificial
losses or diminishment of gain on disposition of any of the
corporations involved in the spin off.
The Senate amendment modifies the House bill rules for
determining control immediately after a distribution in the
case of certain divisive transactions in which a controlled
corporation is distributed and the transaction meets the
requirements of section 355. In such cases, under section 351
and modified section 368(a)(2)(H) with respect to certain
reorganizations under section 368(a)(1)(D), those shareholders
receiving stock in the distributed corporation are treated as
in control of the distributed corporation immediately after the
distribution if they hold stock representing a greater than 50
percent interest (rather than a 50 percent or greater interest,
as under the House bill) in the vote and value of stock of the
distributed corporation.
Effective date.--The provision is generally effective for
distributions after April 16, 1997. However, the part of the
amendment providing a greater-than-50-percent control
requirement immediately after certain section 351 and
368(a)(1)(D) distributions governed by section 355 is effective
for transfers after the date of enactment.
The provision will not apply to a distribution after
April 16, 1997 that is part of an acquisition that would
otherwise cause gain recognition to the distributing or
controlled corporation under the bill, if such acquisition is:
(1) made pursuant to a written agreement which was binding on
April 16, 1997 and at all times thereafter; (2) described in a
ruling request submitted to the Internal Revenue Service on or
before such date; or (3) described on or before such date in a
public announcement or in a filing with the Securities and
Exchange Commission (``SEC'') required solely by reason of the
distribution or acquisition. Any written agreement, ruling
request, or public announcement or SEC filing is not within the
scope of these transition provisions unless it identifies the
acquiror of the distributing corporation or of any controlled
corporation, whichever is applicable.
The part of the provision that provides a greater-than-
50-percent control provision for certain transfers after the
date of enactment will not apply if such transfer meets the
requirements of (1), (2), or (3) of the preceding paragraph.
Conference Agreement
The conference agreement follows the Senate amendment
with additional modifications.
Amount and timing of gain recognition under section 355(e)
Under the conference agreement, in the case of an
acquisition of either the distributing corporation or the
controlled corporation, the amount of gain recognized is the
amount that the distributing corporation would have recognized
had the stock of the controlled corporation been sold for fair
market value on the date of the distribution. Such gain is
recognized immediately before the distribution. As under the
House bill and Senate amendment, no adjustment to the basis of
the stock or assets of either corporation is allowed by reason
of the recognition of the gain.13
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\13\ There is no intention to limit the otherwise applicable
Treasury regulatory authority under section 336(e) of the Code. There
is also no intention to limit the otherwise applicable provisions of
section 1367 with respect to the effect on shareholder stock basis of
gain recognized by an S corporation under this provision.
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Acquisitions resulting in gain recognition
Under the conference agreement, as under the House bill
and Senate amendment, the gain recognition provisions of
section 355(e) apply when one or more persons acquire 50
percent ormore of the voting power or value of the stock of
either the distributing corporation or the controlled corporation,
pursuant to a plan or series of related transactions.
The conference agreement provides certain additions and
clarifications to identify cases that do not cause gain
recognition under the provisions of section 355(e).
Single affiliated group
Under the conference agreement, a plan (or series of
related transactions) is not one that will cause gain
recognition if, immediately after the completion of such plan
or transactions, the distributing corporation and all
controlled corporations are members of a single affiliated
group of corporations (as defined in section 1504 without
regard to subsection (b) thereof).
Example 1: P corporation is a member of an affiliated
group of corporations that includes subsidiary corporation S
and subsidiary corporation S1. P owns all the stock of S. S
owns all the stock of S1. P corporation is merged into
unrelated X corporation in a transaction in which the former
shareholders of X corporation will own 50 percent or more of
the vote or value of the stock of surviving X corporation after
the merger. As part of the plan of merger, S1 will be
distributed by S to X, in a transaction that otherwise
qualifies under section 355. After this distribution, S, S1,
and X will remain members of a single affiliated group of
corporations under section 1504 (without regard to whether any
of the corporations is a foreign corporation, an insurance
company, a tax exempt organization, or an electing section 936
company). Even though there has been an acquisition of P, S,
and S1 by X, and a distribution of S1 by S that is part of a
plan or series of related transactions, the plan is not treated
as one that requires gain recognition on the distribution of S1
to X. This is because the distributing corporation S and the
controlled corporation S1 remain within a single affiliated
group after the distribution (even though the P group has
changed ownership).
Continuing direct or indirect ownership
The conference agreement clarifies that an acquisition
does not require gain recognition if the same persons own 50
percent or more of both corporations, directly or indirectly
(rather than merely indirectly, as in the House bill and Senate
amendment), before and after the acquisition and distribution,
provided the stock owned before the acquisition was not
acquired as part of a plan (or series of related transactions)
to acquire a 50 percent or greater interest in either
distributing or controlled.
Example 2: Individual A owns all the stock of P
corporation. P owns all the stock of a subsidiary corporation,
S. Subsidiary S is distributed to individual A in a transaction
that otherwise qualifies under section 355. As part of a plan,
P then merges with corporation X, also owned entirely by
individual A. There is not an acquisition that requires gain
recognition under the provision, because individual A owns
directly or indirectly 100 percent of all the stock of both X,
the successor to P, and S before and after the
transaction.14 The same result would occur if P were
contributed to a holding company, all the stock of which is
owned by A.
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\14\ The example assumes that A did not acquire his or her stock in
P as part of a plan or series of related transactions that results in
the direct or indirect ownership of 50 percent or more of S or P
separately by A. If A's stock in P was acquired as part of such a plan,
the transaction would be one requiring gain recognition on the spin-off
of S.
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The conference agreement, following the House bill and
Senate amendment, continues to provide that except as provided
in Treasury regulations, certain other acquisitions are not
taken into account. For example, under section 355(e)(3)(A),
the following other types of acquisitions of stock are not
subject to the provision, provided that the stock owned before
the acquisition was not acquired pursuant to a plan or series
of related transactions to acquire a 50-percent or greater
ownership interest in either distributing or controlled:
First, the acquisition of stock in the controlled
corporation by the distributing corporation (as one example, in
the case of a drop-down of property by the distributing
corporation to the corporation to be distributed in exchange
for the stock of the controlled corporation);
Second, the acquisition by a person of stock in any
controlled corporation by reason of holding stock or securities
in the distributing corporation (as one example, the receipt by
a distributing corporation shareholder of controlled
corporation stock in a distribution--including a split-off
distribution in which a shareholder that did not own 50 percent
of the stock of distributing owns 50 percent or more of the
stock of controlled); and
Third, the acquisition by a person of stock in any
successor corporation of the distributing corporation or any
controlled corporation by reason of holding stock or securities
in such distributing or controlled corporation (for example,
the receipt by former shareholders of distributing of 50
percent or more of the stock of a successor corporation in a
merger of distributing).
As under the House bill and Senate amendment, a public
offering of sufficient size can result in an acquisition that
causes gain recognition under the provision.
Attribution
The conference agreement also modifies the attribution
rule for determining when an acquisition has occurred. Rather
than apply section 355(d)(8)(A), which attributes stock owned
by a corporation to a corporate shareholder only if that
shareholder owns 10 percent of the corporation, the conference
agreement provides that, except as provided in regulations,
section 318(a)(2)(C) applies without regard to the amount of
stock ownership of the corporation.
Example 3: Assume the facts are the same as in the
immediately preceding exampleexcept that corporations P and X
are each owned by the same 20 individual 5-percent shareholders (rather
than wholly by individual A). The transaction described in the previous
example, in which S is spun off by P to P's shareholders and P is
acquired by X, would not cause gain recognition, because the same
shareholders would own directly or indirectly 50 percent or more of the
stock of each corporation both before and after the transaction.
Section 355(f)
The conference agreement follows the Senate amendment in
providing that, except as provided in Treasury regulations,
section 355 (or so much of section 356 as relates to section
355) shall not apply to the distribution of stock from one
member of an affiliated group of corporations (as defined in
section 1504(a)) to another member of such group (an
``intragroup spin-off'') if such distribution is part of a plan
(or series of related transactions) described in subsection
(e)(2)(A)(ii), pursuant to which one or more persons acquire
directly or indirectly stock representing a 50-percent or
greater interest in the distributing corporation or any
controlled corporation.
Example 4: P corporation owns all the stock of subsidiary
corporation S. S owns all the stock of subsidiary corporation
T. S distributes the stock of T corporation to P as part of a
plan or series of related transactions in which P then
distributes S to its shareholders and then P is merged into
unrelated X corporation. After the merger, former shareholders
of X corporation own 50 percent or more of the voting power or
value of the stock of the merged corporation. Because the
distribution of T by S is part of a plan or series of related
transactions in which S is distributed by P outside the P
affiliated group and P is then acquired under section 355(e),
section 355 in its entirety does not apply to the intragroup
spin-off of T to P, under section 355(f). Also, the
distribution of S by P is subject to section 355(e).
The conference agreement clarifies that, in determining
whether an acquisition described in subsection (e)(2)(A)(ii)
occurs, all the provisions of new subsection 355(e) are
applied. For example, an intragroup spin-off in connection with
an overall transaction that does not cause gain recognition
under section 355(e) because it is described in section
355(e)(2)(C), or because of section 355(e)(3), is not subject
to the rule of section 355(f).
The Treasury Department has regulatory authority to vary
the result that the intragroup distribution under section
355(f) does not qualify for section 355 treatment. In this
connection, the Treasury Department could by regulation
eliminate some or all of the gain recognition required under
section 355(f) in connection with the issuance of regulations
that would cause appropriate basis results with respect to the
stock of S and T in the above example so that concerns
regarding present law section 355 basis rules (described below
in connection with section 358(c)) would be eliminated.\15\
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\15\ Examples of approaches that the Treasury Department may
consider are discussed in connection with section 358(c), infra.)
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Treasury regulatory authority under section 358(c)
As under the Senate amendment, the conference agreement
provides that in the case of any distribution of stock of one
member of an affiliated group of corporations to another member
under section 355 (``intragroup spin-off'), the Secretary of
the Treasury is authorized under section 358(c) to provide
adjustments to the basis of any stock in a corporation which is
a member of such group, to reflect appropriately the proper
treatment of such distribution. It is understood that the
approach of any such regulations applied to intragroup spin-
offs that do not involve an acquisition may also be applied
under the Treasury regulatory authority to modify the rule of
section 355(f) as may be appropriate.
The conferees believe that the concerns relating to basis
adjustments in the case of intragroup spin offs are essentially
similar, whether or not an acquisition is currently intended as
part of a plan or series of related transactions. The concerns
include the following. First, under present law consolidated
return regulations, it is possible that an excess loss account
of a lower tier subsidiary may be eliminated. This creates the
potential for the subsidiary to leave the group without
recapture of the excess loss account, even though the group has
benefitted from the losses or distributions in excess of basis
that led to the existence of the excess loss account.
Second, under present law, a shareholder's stock basis in
its stock of the distributing corporation is allocated after a
spin-off between the stock of the distributing and controlled
corporations, in proportion to the relative fair market values
of the stock of those companies. If a disproportionate amount
of asset basis (as compared to value) is in one of the
companies (including but not limited to a shift of value and
basis through a borrowing by one company and contribution of
the borrowed cash to the other), present law rules under
section 358(c) can produce an increase in stock basis relative
to asset basis in one corporation, and a corresponding decrease
in stock basis relative to asset basis in the other company.
Because the spin-off has occurred within the corporate group,
the group can continue to benefit from high inside asset basis
either for purposes of sale or depreciation, while also
choosing to benefit from the disproportionately high stock
basis in the other corporation. If, for example, both
corporations were sold at a later date, a prior distribution
can result in a significant decrease in the amount of gain
recognized than would have occurred if the two corporations had
been sold together without a prior spin off (or separately,
without a prior spin-off).
Example 5: P owns all the stock of S1 and S1 owns all the
stock of S2. P's basis in the stock of S1 is 50; the inside
asset basis of S1's assets is 50; and the total value of S1's
stock and assets (including the value of S2) is 150. S1's basis
in the stock of S2 is 0; the inside basis of S2's assets is 0;
and the value of S2's stock and assets is 100. If S1 were sold,
holding S2, the total gain would be 100. S1 distributes S2 to P
in a section 355 transaction. After this spin-off, under
present law, P's basis in the stock of S1 is approximately 17
(50/150 times the total 50 stock basis in S1 prior to the spin-
off) and the inside asset basis of S1 is 50. P's basis in
thestock of S2 is 33 (100/150 times the total 50 stock basis in S1
prior to the spin-off) and the inside asset basis of S2 is 0. After a
period of time, S2 can be sold for its value of 100, with a gain of 67
rather than 100. Also, since S1 remains in the corporate group, the
full 50 inside asset basis can continue to be used. S1's assets could
be sold for 50 with no gain or loss. Thus, S1 and S2 can be sold later
at a total gain of 67, rather than the total gain of 100 that would
have occurred had they been sold without the spin-off.
As one variation on the foregoing concern, taxpayers have
attempted to utilize spin-offs to extract significant amounts
of asset value and basis, (including but not limited to
transactions in which one corporation decreases its value by
incurring debt, and increases the asset basis and value of the
other corporation by contributing the proceeds of the debt to
the other corporation) without creation of an excess loss
account or triggering of gain, even when the extraction is in
excess of the basis in the distributing corporation's stock.
The Treasury Department may promulgate any regulations
necessary to address these concerns and other collateral
issues. As one example, the Treasury Department may consider
providing rules that require a carryover basis within the group
(or stock basis conforming to asset basis as appropriate) for
the distributed corporation (including a carryover of an excess
loss account, if any, in a consolidated return). Similarly, the
Treasury Department may provide a reduction in the basis of the
stock of the distributing corporation to reflect the change in
the value and basis of the distributing corporation's assets.
The Treasury Department may determine that the aggregate stock
basis of distributing and controlled after the distribution may
be adjusted to an amount that is less than the aggregate basis
of the stock of the distributing corporation before the
distribution, to prevent inappropriate potential for artificial
losses or diminishment of gain on disposition of any of the
corporations involved in the spin-off. The Treasury Department
may provide separate regulations for corporations in affiliated
groups filing a consolidated return and for affiliated groups
not filing a consolidated return, as appropriate to each
situation.
Effective date
The conferees wish to clarify certain aspects of the
effective date and transitional relief under the provision.
First, the conference agreement clarifies that an
acquisition of stock that occurs on or before April 16, 1997
will not cause gain recognition under the provision, even if
there is a distribution after that date that is part of a plan
or series of related transactions that would otherwise be
subject to the provision.
Second, any contract that is in fact binding under State
law as of April 16, 1997, even though not written, is eligible
for transition relief. It would be expected, in such a case,
that some form of contemporaneous written evidence of such
contract would be in existence. As one example, if under State
law acceptance of the terms and conditions of a contract by a
corporate board of directors creates a binding contract with an
acquiror, then such contract, and the terms and conditions
presented to the board, could satisfy the requirement for
binding contract transitional relief under the conference
agreement. If there was such an offer and acceptance on or
before April 16, 1997 and a ruling request filed on or before
April 16, 1997, with respect to a proposed spin-off and
acquisition, which identifies the acquiror as one of a list of
prospective acquirors, then the transaction may be eligible for
relief under the transition rules.
Finally, with respect to the Treasury Department
regulatory authority under section 358(c) as applied to
intragroup spin-off transactions that are not part of a plan or
series of related transactions under new section 355(f), the
conferees expect that any Treasury regulations will be applied
prospectively, except in cases to prevent abuse.
3. Reform tax treatment of certain corporate stock transfers (sec. 1013
of the House bill and sec. 813 of the Senate amendment)
Present Law
Under section 304, if one corporation purchases stock of
a related corporation, the transaction generally is
recharacterized as a redemption. In determining whether a
transaction so recharacterized is treated as a sale or a
dividend, reference is made to the changes in the selling
corporation's ownership of stock in the issuing corporation
(applying the constructive ownership rules of section 318(a)
with modifications under section 304(c)). Sales proceeds
received by a corporate transferor that are characterized as a
dividend may qualify for the dividends received deduction under
section 243, and such dividend may bring with it foreign tax
credits under section 902. Section 304 does not apply to
transfers of stock between members of a consolidated group.
Section 1059 applies to ``extraordinary dividends,''
including certain redemption transactions treated as dividends
qualifying for the dividends received deduction. If a
redemption results in an extraordinary dividend, section 1059
generally requires the shareholder to reduce its basis in the
stock of the redeeming corporation by the nontaxed portion of
such dividend.
House Bill
Under the House bill, to the extent that a section 304
transaction is treated as a distribution under section 301, the
transferor and the acquiring corporation are treated as if (1)
the transferor had transferred the stock involved in the
transaction to the acquiring corporation in exchange for stock
of the acquiring corporation in a transaction to which section
351(a) applies, and (2) the acquiring corporation had then
redeemed the stock it is treated as having issued. Thus, the
acquiring corporation is treated for all purposes as having
redeemed the stock it is treated as having issued to the
transferor. In addition, the bill amends section 1059 so that,
if the section 304 transaction is treated as a dividend to
which the dividends received deduction applies, the dividend is
treated as an extraordinary dividend in which only the basis of
the transferred shares would be taken into account under
section 1059.
Under the House bill, a special rule applies to section
304 transactions involving acquisitions by foreign
corporations. The bill limits the earnings and profits of the
acquiring foreign corporation that are taken into account in
applying section 304. The earnings and profits of the acquiring
foreign corporation to be taken into account will not exceed
the portion of such earnings and profits that (1) is
attributable to stock of such acquiring corporation held by a
corporation or individual who is the transferor (or a person
related thereto) and who is a U.S. shareholder (within the
meaning of sec, 951(b)) of such corporation, and (2) was
accumulated during periods in which such stock was owned by
such person while such acquiring corporation was a controlled
foreign corporation. For purposes of this rule, except as
otherwise provided by the Secretary of the Treasury, the rules
of section 1248(d) (relating to certain exclusions from
earnings and profits) would apply. The Secretary of the
Treasury is to prescribe regulations as appropriate, including
regulations determining the earnings and profits that are
attributable to particular stock of the acquiring corporation.
No inference is intended as to the treatment of any
transaction under present law.
Effective date.--The provision is effective for
distributions or acquisitions after June 8, 1997 except that
the provision will not apply to any such distribution or
acquisition (1) made pursuant to a written agreement which was
binding on such date and at all times thereafter, (2) described
in a ruling request submitted to the Internal Revenue Service
on or before such date, or (3) described in a public
announcement or filing with the Securities and Exchange
Commission on or before such date.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House Bill and the
Senate amendment.
4. Modify holding period for dividends-received deduction (sec. 1014 of
the House bill and sec. 814 of the Senate amendment)
Present Law
If an instrument issued by a U.S. corporation is
classified for tax purposes as stock, a corporate holder of the
instrument generally is entitled to a dividends received
deduction for dividends received on that instrument. This
deduction is 70 percent of dividends received if the recipient
owns less than 20 percent (by vote and value) of stock of the
payor. If the recipient owns more than 20 percent of the stock
the deduction is increased to 80 percent. If the recipient owns
more than 80 percent of the payor's stock, the deduction is
further increased to 100 percent for qualifying dividends.
The dividends-received deduction is allowed to a
corporate shareholder only if the shareholder satisfies a 46-
day holding period for the dividend-paying stock (or a 91-day
period for certain dividends on preferred stock). The 46- or
91-day holding period generally does not include any time in
which the shareholder is protected from the risk of loss
otherwise inherent in the ownership of an equity interest. The
holding period must be satisfied only once, rather than with
respect to each dividend received.
House Bill
The House bill provides that a taxpayer is not entitled
to a dividends-received deduction if the taxpayer's holding
period for the dividend-paying stock is not satisfied over a
period immediately before or immediately after the taxpayer
becomes entitled to receive the dividend.
Effective date.--The provision is effective for dividends
paid or accrued after the 30th day after the date of the
enactment.
Senate Amendment
The Senate amendment is the same as the House bill except
for the effective date.
Effective date.-- The Senate amendment is generally
effective for dividends paid or accrued after the 30th day
after the date of enactment. However, the provision will not
apply to dividends received within two years of the date of
enactment if: (1) the dividend is paid with respect to stock
held on June 8, 1997, and all times thereafter until the
dividend is received; (2) the stock is continuously subject to
a position described in section 246(c)(4) on June 8, 1997, and
all times thereafter until the dividend is received; and (3)
such stock and related position is identified by the taxpayer
within 30 days after enactment of this Act. A stock will not be
considered to be continuously subject to a position if such
position is sold, closed or otherwise terminated and is
reestablished.
Conference Agreement
The conference agreement follows the Senate amendment.
C. Other Corporate Provisions
1. Registration of confidential corporate tax shelters and substantial
understatement penalty (sec. 1021 of the House bill and sec.
821 of the Senate amendment)
Present Law
Tax shelter registration
An organizer of a tax shelter is required to register the
shelter with the Internal Revenue Service (IRS) (sec. 6111). If
the principal organizer does not do so, the duty may fall upon
any other participant in the organization of the shelter or any
person participating in its sale or management. The shelter's
identification number must be furnished to each investor who
purchases or acquires an interest in the shelter. Failure to
furnish this number to the tax shelter investors will subject
the organizer to a $100 penalty for each such failure (sec.
6707(b)).
A penalty may be imposed against an organizer who fails
without reasonable cause to timely register the shelter or who
provides false or incomplete information with respect to it.
The penalty is the greater of one percent of the aggregate
amount invested in the shelter or $500. Any person claiming any
tax benefit with respect to a shelter must report its
registration number on her return. Failure to do so without
reasonable cause will subject that person to a $250 penalty
(sec. 6707(b)(2)).
A person who organizes or sells an interest in a tax
shelter subject to the registration rule or in any other
potentially abusive plan or arrangement must maintain a list of
the investors (sec. 6112). A $50 penalty may be assessed for
each name omitted from the list. The maximum penalty per year
is $100,000 (sec. 6708).
For this purpose, a tax shelter is defined as any
investment that meets two requirements. First, the investment
must be (1) required to be registered under a Federal or state
law regulating securities, (2) sold pursuant to an exemption
from registration requiring the filing of a notice with a
Federal or state agency regulating the offering or sale of
securities, or (3) a substantial investment. Second, it must be
reasonable to infer that the ratio of deductions and 350
percent of credits to investment for any investor (i.e., the
tax shelter ratio) may be greater than two to one as of the
close of any of the first five years ending after the date on
which the investment is offered for sale. An investment that
meets these requirements will be considered a tax shelter
regardless of whether it is marketed or customarily designated
as a tax shelter (sec. 6111(c)(1)).
Accuracy-related penalty
The accuracy-related penalty, which is imposed at a rate
of 20 percent, applies to the portion of any underpayment that
is attributable to (1) negligence, (2) any substantial
understatement of income tax, (3) any substantial valuation
misstatement, (4) any substantial overstatement of pension
liabilities, or (5) any substantial estate or gift tax
valuation understatement.
The substantial understatement penalty applies in the
following manner. If the correct income tax liability of a
taxpayer for a taxable year exceeds that reported by the
taxpayer by the greater of 10 percent of the correct tax or
$5,000 ($10,000 in the case of most corporations), then a
substantial understatement exists and a penalty may be imposed
equal to 20 percent of the underpayment of tax attributable to
the understatement. In determining whether a substantial
understatement exists, the amount of the understatement is
reduced by any portion attributable to an item if (1) the
treatment of the item on the return is or was supported by
substantial authority, or (2) facts relevant to the tax
treatment of the item were adequately disclosed on the return
or on a statement attached to the return and there was a
reasonable basis for the tax treatment of the item. Special
rules apply to tax shelters.
With respect to tax shelter items of non-corporate
taxpayers, the penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority
for his position, he reasonably believed that the treatment
claimed was more likely than not the proper treatment of the
item. This reduction in the penalty is unavailable to corporate
tax shelters. The reduction in the understatement for items
disclosed on the return is inapplicable to both corporate and
non-corporate tax shelters. For this purpose, a tax shelter is
a partnership or other entity, plan, or arrangement the
principal purpose of which is the avoidance or evasion of
Federal income tax.
The Secretary may waive the penalty with respect to any
item if the taxpayer establishes reasonable cause for his
treatment of the item and that he acted in good faith.
House Bill
Tax shelter registration
The House bill requires a promoter of a corporate tax
shelter to register the shelter with the Secretary.
Registration is required not later than the next business day
after the day when the tax shelter is first offered to
potential users. If the promoter is not a U.S. person, or if a
required registration is not otherwise made, then any U.S.
participant is required to register the shelter. An exception
to this special rule provides that registration would not be
required if the U.S. participant notifies the promoter in
writing not later than 90 days after discussions began that the
U.S. participant will not participate in the shelter and the
U.S. person does not in fact participate in the shelter.
A corporate tax shelter is any investment, plan,
arrangement or transaction (1) a significant purpose of the
structure of which is tax avoidance or evasion by a corporate
participant, (2) that is offered to any potential participant
under conditions of confidentiality, and (3) for which the tax
shelter promoters may receive total fees in excess of $100,000.
A transaction is offered under conditions of
confidentiality if: (1) an offeree (or any person acting on its
behalf) has an understanding or agreement with or for the
benefit of anypromoter to restrict or limit its disclosure of
the transaction or any significant tax features of the transaction; or
(2) the promoter claims, knows or has reason to know (or the promoter
causes another person to claim or otherwise knows or has reason to know
that a party other than the potential offeree claims) that the
transaction (or one or more aspects of its structure) is proprietary to
the promoter or any party other than the offeree, or is otherwise
protected from disclosure or use. The promoter includes specified
related parties.
Registration will require the submission of information
identifying and describing the tax shelter and the tax benefits
of the tax shelter, as well as such other information as the
Treasury Department may require.
Tax shelter promoters are required to maintain lists of
those who have signed confidentiality agreements, or otherwise
have been subjected to nondisclosure requirements, with respect
to particular tax shelters. In addition, promoters must retain
lists of those paying fees with respect to plans or
arrangements that have previously been registered (even though
the particular party may not have been subject to
confidentiality restrictions).
All registrations will be treated as taxpayer information
under the provisions of section 6103 and will therefore not be
subject to any public disclosure.
The penalty for failing to timely register a corporate
tax shelter is the greater of $10,000 or 50 percent of the fees
payable to any promoter with respect to offerings prior to the
date of late registration (i.e., this part of the penalty does
not apply to fee payments with respect to offerings after late
registration). A similar penalty is applicable to actual
participants in any corporate tax shelter who were required to
register the tax shelter but did not. With respect to
participants, however, the 50-percent penalty is based only on
fees paid by that participant. Intentional disregard of the
requirement to register by either a promoter or a participant
increases the 50-percent penalty to 75 percent of the
applicable fees.
Substantial understatement penalty
The House bill makes two modifications to the substantial
understatement penalty. The first modification affects the
reduction in the amount of the understatement which is
attributable to an item if there is a reasonable basis for the
treatment of the item. The House bill provides that in no event
would a corporation have a reasonable basis for its tax
treatment of an item attributable to a multi-party financing
transaction if such treatment does not clearly reflect the
income of the corporation. No inference is intended that such a
multi-party financing transaction could not also be a tax
shelter as defined under the modification described below or
under present law.
The second modification affects the special tax shelter
rules, which define a tax shelter as an entity the principal
purpose of which is the avoidance or evasion of Federal income
tax. The House bill instead provides that a significant purpose
(rather than the principal purpose) of the entity must be the
avoidance or evasion of Federal income tax for the entity to be
considered a tax shelter. This modification conforms the
definition of tax shelter for purposes of the substantial
understatement penalty to the definition of tax shelter for
purposes of these new confidential corporate tax shelter
registration requirements.
Treasury report
The House bill also directs the Treasury Department, in
consultation with the Department of Justice, to issue a report
to the tax-writing committees on the following tax shelter
issues: (1) a description of enforcement efforts under section
7408 of the Code (relating to actions to enjoin promoters of
abusive tax shelters) with respect to corporate tax shelters
and the lawyers, accountants, and others who provide opinions
(whether or not directly addressed to the taxpayer) regarding
aspects of corporate tax shelters; (2) an evaluation of whether
the penalties regarding corporate tax shelters are generally
sufficient; and (3) an evaluation of whether confidential tax
shelter registration should be extended to transactions where
the investor (or potential investor) is not a corporation. The
report is due one year after the date of enactment.
Effective date
The tax shelter registration provision applies to any tax
shelter offered to potential participants after the date the
Treasury Department issues guidance with respect to the filing
requirements. The modifications to the substantial
understatement penalty apply to items with respect to
transactions entered into after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Treat certain preferred stock as ``boot'' (sec. 1022 of the House
bill and sec. 822 of the Senate amendment)
Present Law
In reorganization transactions within the meaning of
section 368 and certain other restructurings, no gain or loss
is recognized except to the extent ``other property'' (often
called ``boot'') is received, that is, property other than
certain stock, including preferred stock. Thus, preferred stock
can be received tax-free in a reorganization. Upon the receipt
of ``other property,'' gain but not loss can be recognized. A
special rule permits debt securities to be received tax-free,
but only to the extent debt securities of no lesser principal
amount are surrendered in the exchange. Other than this debt-
for-debt rule, similar rules generally apply to transactions
under section 351.
House Bill
The House bill amends the relevant provisions (secs. 351,
354, 355, 356 and 1036) to treat certain preferred stock as
``other property'' (i.e., ``boot'') subject to certain
exceptions. Thus, when a taxpayer exchanges property for this
preferred stock in a transaction that qualifies under either
section 351, 355, 368, or 1036, gain but not loss is
recognized.
The House bill applies to preferred stock (i.e., stock
that is limited and preferred as to dividends and does not
participate, including through a conversion privilege, in
corporate growth to any significant extent), where (1) the
holder has the right to require the issuer or a related person
(within the meaning of secs. 267(b) and 707(b)) to redeem or
purchase the stock, (2) the issuer or a related person is
required to redeem or purchase the stock, (3) the issuer (or a
related person) has the right to redeem or purchase the stock
and, as of the issue date, it is more likely than not that such
right will be exercised, or (4) the dividend rate on the stock
varies in whole or in part (directly or indirectly) with
reference to interest rates, commodity prices, or other similar
indices, regardless of whether such varying rate is provided as
an express term of the stock (for example, in the case of an
adjustable rate stock) or as a practical result of other
aspects of the stock (for example, in the case of auction rate
stock). For this purpose, the rules of (1), (2), and (3) apply
if the right or obligation may be exercised within 20 years of
the date the instrument is issued and such right or obligation
is not subject to a contingency which, as of the issue date,
makes remote the likelihood of the redemption or purchase. In
addition, if neither the stock surrendered nor the stock
received in the exchange is stock of a corporation any class of
stock of which (or of a related corporation) is publicly
traded, a right or obligation is disregarded if it may be
exercised only upon the death, disability, or mental
incompetency of the holder. Also, a right or obligation is
disregarded in the case of stock transferred in connection with
the performance of services if it may be exercised only upon
the holder's separation from service.
The following exchanges are excluded from this gain
recognition: (1) certain exchanges of preferred stock for
comparable preferred stock of the same or lesser value; (2) an
exchange of preferred stock for common stock; (3) certain
exchanges of debt securities for preferred stock of the same or
lesser value; and (4) exchanges of stock in certain
recapitalization of family-owned corporations. For this
purpose, a family-owned corporation is defined as any
corporation if at least 50 percent of the total voting power
and value of the stock of such corporation is owned by members
of the same family for five years preceding the
recapitalization. In addition, a recapitalization does not
qualify for the exception if the same family does not own 50
percent of the total voting power and value of the stock
throughout the three-year period following the
recapitalization. Members of the same family are defined by
reference to the definition in section 447(e). Thus, a family
includes children, parents, brothers, sisters, and spouses,
with a limited attribution for directly and indirectly owned
stock of the corporation. Shares held by a family member are
treated as not held by a family member to the extent a non-
family member had a right, option or agreement to acquire the
shares (directly or indirectly, for example, through
redemptions by the issuer), or with respect to shares as to
which a family member has reduced its risk of loss with respect
to the share, for example, through an equity swap. Even though
the provision excepts certain family recapitalizations, the
special valuation rules of section 2701 for estate and gift tax
consequences continue to apply.
An exchange of nonqualified preferred stock for
nonqualified preferred stock in an acquiring corporation may
qualify for tax-free treatment under section 354, but not
section 351. In cases in which both sections 354 and 351 may
apply to a transaction, section 354 generally will apply for
purposes of this proposal. Thus, in that situation, the
exchange would be tax free.
The Treasury Secretary has regulatory authority to (1)
apply installment sale-type rules to preferred stock that is
subject to this proposal in appropriate cases and (2) prescribe
treatment of preferred stock subject to this provision under
other provisions of the Code (e.g., secs. 304, 306, 318, and
368(c)). Until regulations are issued, preferred stock that is
subject to the proposal shall continue to be treated as stock
under other provisions of the Code.
Effective date.--The provision is effective for
transactions after June 8, 1997, but will not apply to such
transactions (1) made pursuant to a written agreement which was
binding on such date and at all times thereafter, (2) described
in a ruling request submitted to the Internal Revenue Service
on or before such date, or (3) described in a public
announcement or filing with the Securities and Exchange
Commission on or before such date.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with certain clarifications.
The conference agreement clarifies that nonqualified
preferred stock is treated as ``boot'' under section 351(b).
The transferor receiving such stock thus is not treated as
receiving nonrecognition treatment under section 351(a).
However, the nonqualified preferred stock continues to be
treated as stock received by a transferor for purposes of
qualification of a transaction under section 351(a), unless and
until regulations may provide otherwise.
Thus, for example, if A contributes appreciated property
to new corporation X for all the common stock (representing 90
percent of the value and all the voting power) of X stock and B
contributes cash for nonqualified preferred stock representing
10 percent of the value of X stock, B has received ``boot,''
but the preferred stock is still treated as stock for purposes
of sections 351(a) and 368(c), unless and until Treasury
Regulations are issued requiring a different result. Thus, the
transaction qualifies for non-recognition under section 351. If
B had received other stock in addition to nonqualified
preferred stock, B would be required to recognize gain only to
the extent of the fair market value of the nonqualified
preferred stock B receives.
The conference agreement also clarifies the treatment of
certain conversion or exchange rights, by deleting any
statutory reference to the existence of a ``conversion
privilege.'' The conferees wish to clarify that in no event
will a conversion privilege into stock of the issuer
automatically be considered to constitute participation in
corporate growth to any significant extent. The conferees also
wish to clarify that stock that is convertible or exchangeable
into stock of a corporation other than the issuer (including,
for example, stock of a parent corporation or other related
corporation) is not considered to be stock that participates in
corporate growth to any significant extent for purposes of the
provision.
D. Administrative Provisions
1. Reporting of certain payments made to attorneys (sec. 1031 of the
House bill)
Present Law
Information reporting is required by persons engaged in a
trade or business and making payments in the course of that
trade or business of ``rent, salaries, wages, . . . or other
fixed or determinable gains, profits, and income'' (Code sec.
6041(a)). Treas. reg. sec. 1.6041-1(d)(2) provides that
attorney's fees are required to be reported if they are paid by
a person in a trade or business in the course of a trade or
business. Reporting is required to be done on Form 1099-Misc.
If, on the other hand, the payment is a gross amount and it is
not known what portion is the attorney's fee, no reporting is
required on any portion of the payment.
House Bill
The House bill requires gross proceeds reporting on all
payments to attorneys made by a trade or business in the course
of that trade or business. It is anticipated that gross
proceeds reporting would be required on Form 1099-B (currently
used by brokers to report gross proceeds). The only exception
to this new reporting requirement would be for any payments
reported on either Form 1099-Misc under section 6041 (reports
of payment of income) or on Form W-2 under section 6051
(payments of wages).
In addition, the present exception in the regulations
exempting from reporting any payments made to corporations will
not apply to payments made to attorneys. Treasury regulation
section 1.6041-3(c) exempts payments to corporations generally
(although payments to most corporations providing medical
services must be reported). Reporting will be required under
both Code sections 6041 and 6045 (as proposed) for payments to
corporations that provide legal services. The exception of
Treasury regulation section 1.6041-3(g) exempting from
reporting payments of salaries or profits paid or distributed
by a partnership to the individual partners would continue to
apply to both sections (since these amounts are required to be
reported on Form K-1).
First, the provision applies to payments made to
attorneys regardless of whether the attorney is the exclusive
payee. Second, payments to law firms are payments to attorneys,
and therefore are subject to this reporting provision. Third,
attorneys are required to promptly supply their TINs to persons
required to file these information reports, pursuant to section
6109. Failure to do so could result in the attorney being
subject to penalty under section 6723 and the payments being
subject to backup withholding under section 3406. Fourth, the
IRS should administer this provision so that there is no
overlap between reporting under section 6041 and reporting
under section 6045. For example, if two payments are
simultaneously made to an attorney, one of which represents the
attorney's fee and the second of which represents the
settlement with the attorney's client, the first payment would
be reported under section 6041 and the second payment would not
be reported under either section 6041 or section 6045, since it
is known that the entire payment represents the settlement with
the client (and therefore no portion of it represents income to
the attorney).
Effective date.--The provision is effective for payments
made after December 31, 1997. Consequently, the first
information reports will be filed with the IRS (and copies will
be provided to recipients of the payments) in 1999, with
respect to payments made in 1998.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
2. Information reporting on persons receiving contract payments from
certain Federal agencies (sec. 1032 of the House bill and sec.
831 of the Senate amendment)
Present Law
A service recipient (i.e., a person for whom services are
performed) engaged in a trade or business who makes payments of
remuneration in the course of that trade or business to any
person for services performed must file with the IRS an
information return reporting such payments (and the name,
address, and taxpayer identification number of the recipient)
if the remuneration paid to the person during the calendar year
is $600 or more (sec. 6041A(a)). A similar statement must also
be furnished to the person to whom such payments were made
(sec. 6041A(e)). Treasury regulations explicitly exempt from
this reporting requirement payments made to a corporation
(Treas. reg. sec. 1.6041A-1(d)(2)).
The head of each Federal executive agency must file an
information return indicating the name, address, and taxpayer
identification number (TIN) of each person (including
corporations) with which the agency enters into a contract
(sec. 6050M). The Secretary of the Treasury has the authority
to require that the returns be in such form and be made at such
time as is necessary to make the returns useful as a source of
information for collection purposes. The Secretary is given the
authority both to establish minimum amounts for which no
reporting is necessary as well as to extend the reporting
requirements to Federal license grantors and subcontractors of
Federal contracts. Treasury regulations provide that no
reporting is required if the contract is for $25,000 or less
(Treas. reg. sec. 1.6050M-1(c)(1)(i)).
House Bill
The House bill requires reporting of all payments of $600
or more made by a Federal executive agency to any person
(including a corporation) for services. In addition, the
provision requires that a copy of the information return be
sent by the Federal agency to the recipient of the payment. An
exception is provided for certain classified or confidential
contracts.
Effective date.--The provision is effective for returns
the due date for which (without regard to extensions) is more
than 90 days after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Disclosure of tax return information for administration of certain
veterans programs (sec. 1033 of the House bill and sec. 832 of
the Senate amendment)
Present Law
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431). No tax
information may be furnished by the Internal Revenue Service
(``IRS'') to another agency unless the other agency establishes
procedures satisfactory to the IRS for safeguarding the tax
information it receives (sec. 6103(p)).
Among the disclosures permitted under the Code is
disclosure to the Department of Veterans Affairs (``DVA'') of
self-employment tax information and certain tax information
supplied to the Internal Revenue Service and Social Security
Administration by third parties. Disclosure is permitted to
assist DVA in determining eligibility for, and establishing
correct benefit amounts under, certain of its needs-based
pension, health care, and other programs (sec.
6103(l)(7)(D)(viii)). The income tax returns filed by the
veterans themselves are not disclosed to DVA.
The DVA is required to comply with the safeguards
currently contained in the Code and in section 1137(c) of the
Social Security Act (governing the use of disclosed tax
information). These safeguards include independent verification
of tax data, notification to the individual concerned, and the
opportunity to contest agency findings based on such
information.
The DVA disclosure provision is scheduled to expire after
September 30, 1998.
House Bill
The House bill permanently extends the DVA disclosure
provision.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement extends the DVA disclosure
provision through September 30, 2003.
4. Establish IRS continuous levy and improve debt collection (secs.
1034, 1035, and 1036 of the House bill and secs. 834, 835, and
836 of the Senate amendment)
A. Continuous levy
Present Law
If any person is liable for any internal revenue tax and
does not pay it within 10 days after notice and demand
16 by the IRS, the IRS may then collect the tax by
levy upon all property and rights to property belonging to the
person,17 unless there is an explicit statutory
restriction on doing so. A levy is the seizure of the person's
property or rights to property. Property that is not cash is
sold pursuant to statutory requirements.18
---------------------------------------------------------------------------
\16\ Notice and demand is the notice given to a person liable for
tax stating that the tax has been assessed and demanding that payment
be made. The notice and demand must be mailed to the person's last
known address or left at the person's dwelling or usual place of
business (Code sec. 6303).
\17\ Code sec. 6331.
\18\ Code secs. 6335-6343.
---------------------------------------------------------------------------
In general, a levy does not apply to property acquired
after the date of the levy,19 regardless of whether
the property is held by the taxpayer or by a third party (such
as a bank) on behalf of a taxpayer. Successive seizures may be
necessary if the initial seizure is insufficient to satisfy the
liability.20 The only exception to this rule is for
salary and wages.21 A levy on salary and wages is
continuous from the date it is first made until the date it is
fully paid or becomes unenforceable.
---------------------------------------------------------------------------
\19\ Code sec. 6331(b).
\20\ Code sec. 6331(c).
\21\ Code sec. 6331(e).
---------------------------------------------------------------------------
A minimum exemption is provided for salary and
wages.22 It is computed on a weekly basis by adding
the value of the standard deduction plus the aggregate value of
personal exemptions to which the taxpayer is entitled, divided
by 52.23 For a family of four for taxable year 1996,
the weekly minimum exemption is $325.24
---------------------------------------------------------------------------
\22\ Code sec. 6334(a)(9).
\23\ Code sec. 6334(d).
\24\ Standard deduction of $6,700 plus four personal exemptions at
$2,550 each equals $16,900, which when divided by 52 equals $325.
---------------------------------------------------------------------------
House Bill
The House bill amends the Code to provide that a
continuous levy is also applicable to non-means tested
recurring Federal payments. This is defined as a Federal
payment for which eligibility is not based on the income and/or
assets of a payee. For example, Social Security payments, which
are subject to levy under present law, would become subject to
continuous levy.
In addition, the House bill provides that this levy would
attach up to 15 percent of any specified payment due the
taxpayer. This rule explicitly replaces the other specifically
enumerated exemptions from levy in the Code. A continuous levy
of up to 15 percent would also apply to unemployment benefits
and means-tested public assistance.
The House bill also permits the disclosure of otherwise
confidential tax return information to the Treasury
Department's Financial Management Service only for the purpose
of, and to the extent necessary in, implementing these levy
provisions.
Effective date.--The provision is effective for levies
issued after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
B. Modifications of levy exemptions
Present Law
The Code exempts from levy workmen's compensation
payments 25 and annuity or pension payments under
the Railroad Retirement Act and benefits under the Railroad
Unemployment Insurance Act,26 unemployment benefits
27 and means-tested public assistance.28
---------------------------------------------------------------------------
\25\ Code sec. 6334(a)(7).
\26\ Code sec. 6334(a)(6).
\27\ Sec. 6334(a)(4).
\28\ Sec. 6334(a)(11).
---------------------------------------------------------------------------
House Bill
The House bill provides that the following property is
not exempt from continuous levy if the Secretary of the
Treasury (or his delegate) approves the levy of such property:
(1) workmen's compensation payments;
(2) annuity or pension payments under the Railroad
Retirement Act and benefits under the Railroad Unemployment
Insurance Act;
(3) unemployment benefits; and
(4) means-tested public assistance.
Effective date.--The provision applies to levies issued
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill,
except that it does not apply to annuity or pension payments
under the Railroad Retirement Act and benefits under the
Railroad Unemployment Insurance Act.
Conference Agreement
The conference agreement follows the House bill.
5. Consistency rule for beneficiaries of trusts and estates (sec. 1037
of the House bill and sec. 833 of the Senate amendment)
Present Law
An S corporation is required to file a return for the
taxable year and is required to furnish to its shareholders a
copy of certain information shown on such return. The
shareholder is required to file its return in a manner that is
consistent with the information received from the S
corporation, unless the shareholder files with the Secretary of
the Treasury a notification of inconsistent treatment (sec.
6037(c)). Similar rules apply in the case of partnerships and
their partners (sec. 6222).
The fiduciary of an estate or trust that is required to
file a return for any taxable year is required to furnish to
beneficiaries certain information shown on such return
(generally via a Schedule K-1) (sec. 6034A). In addition, a
U.S. person that is treated as the owner of any portion of a
foreign trust is required to ensure that the trust files a
return for the taxable year and furnishes certain required
information to each U.S. person who is treated as an owner of a
portion of the trust or who receives any distribution from the
trust (sec. 6048(b)). However, rules comparable to the
consistency rules that apply to S corporation shareholders and
partners in partnerships are not specified in the case of
beneficiaries of estates and trusts.
House Bill
Under the House bill, a beneficiary of an estate or trust
is required to file its return in a manner that is consistent
with the information received from the estate or trust, unless
the beneficiary files with its return a notification of
inconsistent treatment identifying the inconsistency.
Effective date.--The provision is effective for returns
filed after date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
E. Excise Tax Provisions
1. Extension and modification of Airport and Airway Trust Fund excise
taxes (sec. 1041 of the House bill and sec. 841 of the Senate
amendment)
Present Law
In general.--Excise taxes imposed on commercial air
transportation of passengers (10 percent of fare) and cargo
(6.25 percent of shipping charge) and on noncommercial aviation
fuels (15 cents per gallon on aviation gasoline and 17.5 cents
per gallon on jet fuel) are transferred to the Airport and
Airway Trust Fund to finance a portion of the cost of programs
administered by the Federal Aviation Administration. The
Airport and Airway Trust Fund excise taxes are scheduled to
expire after September 30, 1997.
Commercial passenger tax.--Domestic passenger
transportation is taxed at 10 percent of the fare. There is no
special tax rate for flight segments to or from small, rural
airports. Application of the 10-percent tax to transportation
sold through credit card frequent flyer award and similar
arrangements is unclear.
Passengers traveling on domestic flights that connect to
or from international flights are not subject to tax.
International departures are taxed at $6 per passenger; no tax
is imposed on international arrivals.
Travel between the 48 contiguous States and Alaska or
Hawaii (and between those two States) is taxed at 10 percent of
the fare attributable to U.S.-territorial miles plus a $6 per
passenger international departure tax.
Passengers are liable for the tax; air carrier liability
is only for collection and remittance to the government. Air
carriers deposit collected taxes semimonthly, generally no
later than the 10th day of the second semimonthly period after
the transportation is deemed sold.
Advertising.--Airlines are required to advertise their
fares either tax-inclusive or, if separately stated, to state
the pre-tax fare, tax, and total in equal sized type.
General Fund fuels tax.--In addition to the Airport and
Airway Trust fuel taxes, aviation fuels used in both commercial
and noncommercial aviation are subject to a 4.3-cents-per-
gallon excise tax. Revenues from this tax are retained in the
General Fund.
House Bill
Extension.--Subject to the modifications described below,
the House bill extends the present-law Airport and Airway Trust
Fund excise taxes for 10 years, through September 30, 2007.
Commercial passenger tax modifications.--Domestic
passenger transportation is taxed at 7.5 percent of the fare
plus $2 per flight segment. (A flight segment is a flight
involving one take-off). The $2 rate increases to $3 in four
equal annual increments (1999-2002), and is indexed to the
consumer price index (``CPI'') thereafter. The House bill
specifies that payments for the right to award frequent flyer-
type points and similar price reductions through credit card
and other arrangements are subject to the 7.5-percent tax rate.
The House bill retains the present-law exemption for
passengers traveling on domestic flights that connect to or
from international flights. Both international departures and
arrivals are taxed at $15.50 per passenger. The $15.50-per-
passenger rate is indexed to the CPI after 1998.
Travel between the 48 contiguous States and Alaska or
Hawaii (or between those States) is taxed at 7.5 percent of the
fare attributable to U.S. territorial miles, plus $2 per flight
segment, plus the $15.50 per passenger rate international
departure tax.
The House bill imposes secondary liability for tax on air
carriers. The House bill also provides two special delays in
deposits: (1) taxes otherwise due in the period August 15-
September 30, 1997, are due October 10, 1997; and (2) taxes
otherwise due in the period July 1-September 30, 1998, are due
October 13, 1998.
Advertising.--The House bill requires airlines to state
separately pre-tax fare and tax, with tax being stated in print
at least 50 percent the size of print in which fare is stated.
Transfer of General Fund fuels tax revenues.--The House
bill transfers revenues from the 4.3-cents-per-gallon fuels tax
to the Airport and Airway Trust Fund for taxes received in the
Treasury on or after October 1, 1997.
Effective date.--The provisions apply generally to
transportation beginning after September 30, 1997, with special
rules for (1) prepayments between related parties under credit
card and similar arrangements after June 11, 1997, that are
related to rights to transportation to be awarded or otherwise
distributed after September 30, 1997, and (2) tickets sold
after date of enactment and before October 1, 1997 for
transportation beginning after September 30, 1997.
Senate Amendment
Extension.--Subject to the modifications described below,
the Senate amendment extends the present-law Airport and Airway
excise taxes for 10 years, the same period as in the House
bill.
Commercial passenger tax modifications.--Domestic
passenger transportation is taxed at 10 percent (the same rate
as under present law). The Senate amendment also includes a
7.5-percent rate for flight segments to or from airports that
enplaned no more than 100,000 passengers in the second
preceding calendar year and that either (1) are at least 75
miles from a airport that had more than 100,000 passenger
enplanements in that year, or (2) qualify foressential air
service subsidies as of the date of the amendment's enactment. The
Senate amendment specifies that payments for frequent-flyer-type awards
or similar price reductions through credit card and other arrangements
are subject to the 10-percent tax.
The Senate amendment taxes passengers traveling on
domestic flights that connect to or from international flights
the same as other domestic passengers (i.e., at 10 percent of
fare, or 7.5 percent for certain rural airport flight segments,
for the domestic flight). Both international departures and
arrivals are taxed at $8 per passenger. Unlike under the
comparable House bill provision, the $8 per passenger rate is
not indexed.
Travel between the 48 contiguous States and Alaska or
Hawaii (or between those two States) is taxed the same as under
present law.
The Senate amendment is the same as the House bill on
liability for tax. The Senate amendment provides two special
delays in deposits: (1) taxes otherwise due in the period
August 15-September 30, 1997, are due October 10, 1997; and (2)
taxes otherwise due in the period July 1-September 30, 2001,
are due October 10, 2001.
Advertising.--No provision.
Transfer of General Fund fuels tax.--No provision.
Effective date.--The Senate amendment is the same as the
House bill, except the credit card prepayment rule applies to
payments after June 16, 1997.
Conference Agreement
Extension.--The conference agreement follows the House
bill and the Senate amendment (i.e., extends the present-law
Airport and Airway Trust Fund excise taxes for 10 years,
subject to the modifications described below).
Commercial passenger tax modifications.--The conference
agreement follows the House bill's domestic passenger tax
structure with the following modifications to the rates:
October 1, 1997-September 30, 1998........ 9 percent of the fare, plus
$1 per domestic flight
segment.
October 1, 1998-September 30, 1999........ 8 percent of the fare, plus
$2 per domestic flight
segment.
September 30, 1999-December 31, 1999...... 7.5 percent of the fare,
plus $2.25 per domestic
flight segment.
After December 31, 1999, the ad valorem rate will remain
at 7.5 percent. The domestic flight segment component of the
tax will increase to $2.50 (January 1, 2000-December 31, 2000),
to $2.75 (January 1, 2001-December 31, 2001), and to $3
(January 1, 2002-December 31, 2002). Beginning on January 1,
2003, the $3 rate will be indexed to the CPI as under the House
bill.29
---------------------------------------------------------------------------
\29\ Similar to a provision of the House bill, the conference
agreement includes a rule of administrative convenience that there is
no change in the number of segment taxes imposed if a passenger's route
between two locations is changed (with a resulting change in the number
of domestic segments) if there is no change in the fare charged
(including no imposition of any additional administrative or other fee
associated with the route change).
---------------------------------------------------------------------------
The conference agreement follows the Senate amendment on
the treatment of certain domestic flight segments to and from
qualified rural airports, with a modification. Under the
conference agreement, the tax rate on these flight segments
will be 7.5 percent of fare, with no flight segment rate being
imposed on eligible flight segments.
The conference agreement follows the House bill and the
Senate amendment provisions extending the tax on international
departures and expanding that tax to include international
arrivals, with a modification setting the tax rate on both
international departures and arrivals at $12 per passenger
(indexed to the CPI beginning on January 1, 1999, as under the
House bill). The conferees believe this increased tax level is
consistent with the user tax principles of the Airport and
Airway Trust Fund taxes which include the recovery from
international passengers of a greater percentage of the costs
those passengers impose on FAA-programs than are collected by
the present-law international departure tax, so that purely
domestic passengers and the General Fund will not be required
to subsidize the costs imposed by international travelers to
the extent occurring under present law.
The conference agreement does not include the provision
of the Senate amendment extending tax to domestic flights that
connect to or from international flights. Rather, those flights
will continue to be tax-free when the flights constitute
segments of uninterrupted international transportation (i.e.,
the scheduled interval at any intermediate stop does not exceed
12 hours). If an intermediate stop exceeds 12 hours, subsequent
domestic segments are taxed as domestic transportation.
The conference agreement follows the Senate amendment
provision retaining the $6 per passenger rate applicable to the
international airspace component of flights between the 48
contiguous States and Alaska or Hawaii (or to flights between
Alaska and Hawaii).30 For example, a passenger
traveling from Los Angeles to Honolulu in December 1997 would
be taxed at 9 percent of the fare applicable to U.S.
territorial miles plus $1 per flight segment plus $6. As with
the general $12 international arrival and departure rate, this
$6-per-passenger rate will be indexed to the CPI beginning on
January 1, 1999.
---------------------------------------------------------------------------
\30\ In contrast, transportation between Alaska or Hawaii and
foreign countries (including U.S. possessions) is taxed exclusively as
international travel, subject to the $12 per passenger arrival and
departure tax.
---------------------------------------------------------------------------
The conference agreement follows the House bill and
Senate amendment provisions clarifying that the air passenger
excise tax applies to payments to air carriers (and related
parties) for the right to award air travel benefits. The tax
rate is 7.5 percent. Examples of such taxable payments include
(1) payments for frequent flyer miles (including other rights
to air transportation) purchased by credit card companies,
telephone companies, rental car companies, television networks,
restaurants and hotels, air carriers and related parties, and
other businesses, and (2) amounts received by air carriers (or
related parties) pursuant to joint venture credit card or other
marketing arrangements. The conference agreement includes an
exception to this general rule in the case of payments for air
transportation rights between corporations that are members of
a 100 percent commonly owned controlled group (e.g.,
transportation purchased from an air carrier by a 100 percent
commonly owned corporation operating a frequent flyer award
program for the air carrier).
The conferees are aware that consumers accrue mileage
awards from numerous sources, including actual air travel as
well as programs giving rise to taxable payments under this
provision of the conference agreement. Once awarded to
consumers, these miles are commingled in the consumer's account
such that any miles used for a specific purpose may not be
traceable to the source which gave rise to them. The conference
agreement authorizes the Treasury Department to develop
regulations excluding from the tax base a portion of otherwise
taxable payments, if any, with respect to awarded frequent
flyer miles if the Treasury determines that a portion properly
can be allocated (traced) to miles which are used by consumers
for purposes other than air transportation. Miles that are
unused should not be treated as used for purposes other than
air transportation. As part of any rulemaking process it
undertakes, the Treasury is authorized to review airline
frequent flyer programs and other information from all
available sources, including industry and third-party data, in
determining whether mileage awards can be adequately traced to
support tax-base allocations based on the ultimate use of the
awards. The conferees intend that an adjustment to the tax base
will be prescribed only if the Treasury finds a consistent
pattern of non-air transportation usage by consumers at levels
indicating that significant mileage awarded pursuant to
payments taxable under this provision is being used for
purposes other than air transportation. In making any such
adjustment, the Treasury Department should treat mileage used
for non-air transportation purposes as coming first from
mileage awarded to consumers from actual air travel (and other
sources not subject to tax under this provision).
The conference agreement follows the House bill and the
Senate amendment provisions extending secondary liability for
the passenger taxes to air carriers.
The conference agreement includes the provision of the
House bill changing certain commercial air passenger excise tax
deposit dates for taxes otherwise due after August 14, 1997,
and before October 1, 1997, to October 10, 1997. Additionally,
the conference agreement provides that deposits of commercial
air passenger taxes that otherwise would be required after
August 14, 1998, and before October 1, 1998, will be due on
October 5, 1998. Deposits of the commercial air cargo and
aviation fuels taxes that otherwise would be required to be
made after July 31, 1998, and before October 1, 1998, will be
due on October 5, 1998.
Advertising.--The conference agreement does not include
the House bill provision changing the rules governing airline
fare advertising.
Transfer of General Fund fuels tax revenues.--The
conference agreement includes the House bill provision
transferring gross receipts from the 4.3-cents-per-gallon
general fund tax on aviation fuels to the Airport and Airway
Trust Fund.
Effective date.--The conference agreement follows the
House bill.
2. Extend diesel fuel excise tax rules to kerosene (sec. 1042 of the
House bill)
Present Law
Diesel fuel is taxed at 24.3 cents per gallon when the
fuel is removed from a registered terminal storage facility
unless the fuel is dyed and is destined for a nontaxable use.
Kerosene is taxed at the wholesale level if it is sold as
an aviation fuel. If kerosene is blended with diesel fuel, tax
is due from the blender unless the kerosene, and the diesel
fuel with which it is blended, are dyed and destined for a
nontaxable use.
House Bill
The diesel fuel tax rules are extended to kerosene, with
the following modifications:
(1) Undyed kerosene can be removed from terminals without
tax by registered aviation wholesalers;
(2) Undyed kerosene can be removed from terminals by
pipeline without tax for use as an industrial feedstock (and
other than by pipeline as permitted in Treasury Department
rules for such a use); and
(3) Expedited refunds to ultimate vendors are allowed for
tax-paid kerosene sold for use in space heaters.
Effective date.--July 1, 1998.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill with
modifications. First, registration as a terminal facility
eligible to handle non-tax-paid diesel fuel and kerosene is
conditional on the facility offering its customers dyeing for
nontaxable sales of diesel fuel and kerosene. Second, the
minimum amount for vendor refunds of tax paid on kerosene is
reduced from $200 to $100. Third, the Treasury Department is
given regulatory authority to allow tax-free sales of kerosene
to wholesale dealers that (a) satisfy such registration and
other compliance measures as Treasury may prescribe and (b)
sell kerosene exclusively to retailers eligible for refunds
with respect to undyed kerosene sold by them for a nontaxable
use.
3. Reinstate Leaking Underground Storage Tank Trust Fund excise tax
(sec. 1043 of the House bill and sec. 842 of the Senate
amendment)
Present Law
Before January 1, 1996, a 0.1-cent-per-gallon excise tax
was imposed on gasoline, diesel fuel, special motor fuels,
aviation fuels, and inland waterway fuels. Revenues were
transferred to a Leaking Underground Storage Tank Trust Fund to
finance cleanup of damage from leaking underground storage
tanks.
House Bill
The House bill reinstates the tax for approximately five
years, from the date of enactment through September 30, 2002.
Effective date.--Date of enactment.
Senate Amendment
The Senate amendment reinstates the tax for 10 years,
from October 1, 1997, through September 30, 2007.
Effective date.--Date of enactment.
Conference Agreement
The conference agreement follows the House bill and
Senate amendment with a modification to the reinstatement
period. The modified period is October 1, 1997, through March
31, 2005.
4. Application of communications excise tax to prepaid telephone cards
(sec. 1044 of the House bill and sec. 843 of the Senate
amendment)
Present Law
A 3-percent excise tax is imposed on amounts paid for
local and toll (long-distance) telephone service and
teletypewriter exchange service. The tax is collected by the
provider of the service from the consumer (business and
personal service).
House Bill
Under the House bill, any amounts paid to communications
service providers (in cash or in kind) for the right to award
or otherwise distribute free or reduced-rate long-distance
telephone service are treated as amounts paid for taxable
communication services, subject to the 3-percent ad valorem tax
rate. Examples of such taxable amounts include (1) prepaid
telephone cards offered through service stations, convenience
stores and other businesses to their customers and others and
(2) amounts received by communication service providers
pursuant to joint venture credit card or other marketing
arrangements. The Treasury Department is authorized
specifically to disregard accounting allocations or other
arrangements which have the effect of reducing artificially the
base to which the 3-percent tax is applied. No inference is
intended from this provision as to the proper treatment of
these payments under present law.
Effective date.--The provision is effective for amounts
paid on or after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with technical modifications. The conference
agreement clarifies that any amounts paid to communications
service providers (in cash or in kind) for the right to award
or otherwise distribute free or reduced-rate telephone service
(i.e., local or toll telephone service) are treated as amounts
paid for taxable communication services, subject to the 3-
percent ad valorem tax rate.
The conference agreement also clarifies that the base to
which the communications tax applies in the case of prepaid
telephone cards and similar arrangements is the retail value of
the service provided by the use of the card or arrangement. The
conferees understand that prepaid telephone cards are offered
to the public in two forms. The first type of prepaid telephone
card can be called a ``dollar value card.'' In this case, the
final customer purchases a card or account which allows him to
utilize $X worth of telephone service provided by an underlying
telecommunications carrier. In this case, following the House
bill and the Senate amendment, the conference agreement
provides that the 3-percent communications excise tax apply to
thevalue X at the time the prepaid telephone card is sold by a
telecommunications carrier to a person who is not a telecommunications
carrier.
The second type of prepaid telephone card can be called a
``unit card'' or a ``minute card.'' In this case the final
customer purchases a card or account which allows him to use Y
number of units or minutes of telephone service provided by an
underlying telecommunications carrier. The conferees intend
that the tax applicable to such cards be based on the retail
value of the telephone service offered to a consumer and the
conference agreement grants the Treasury Department regulatory
authority to determine the appropriate retail value. Presently,
the Federal Communications Commission generally requires
telecommunications carriers to file a tariff listing the prices
of their various service offerings including the price of units
or minutes offered via prepaid telephone cards. In this case,
following the House bill and the Senate amendment, the
conference agreement provides that the 3-percent communications
excise tax will apply to Y (the number of units or minutes)
multiplied by the tariffed price of those units or minutes at
the time the prepaid telephone card is sold by a
telecommunications carrier to a person who is not a
telecommunications carrier. The conferees recognize that such a
tariffed value may not in all cases correspond to the over-the-
counter price that a final customer may pay for the card.
However, the conferees believe that looking to the tariffed
price, at present, is the best way to achieve neutral treatment
of ``dollar cards'' and ``unit'' or ``minute cards.'' The
conferees understand that not all prepaid telephone cards may
have an underlying tariff that applies to that particular card.
In such cases, the conferees intend that tariffs for comparable
telephone service be applied if applicable. The conferees
believe that tariffs should continue to be filed for service
offered via prepaid telephone cards, but if, in the future,
tariff filings are not generally filed the conference agreement
authorizes the Treasury Department to determine the appropriate
retail value of the units or minutes of service offered on such
cards.
The conferees understand that sometimes a communications
service provider may require certain customers to prepay for
their service as assurance that payment is made by the customer
for services to be provided. The conferees do not consider such
arrangements to constitute payment for communications services
for the purposes of this provision if the customer is entitled
to a full refund, in cash, for the value of any unused service.
The conferees consider such arrangements to be deposits to
assure payment of service to be provided in the future.
No inference is intended from this provision as to the
proper treatment of payments received by communications service
providers for prepaid telephone cards and amounts received by
communication service providers pursuant to joint venture
credit card or other marketing arrangements under present law.
Effective date.--The conference agreement modifies the
effective date so that the provision is effective for cards
sold on or after the first day of the month which commences
more than 60 days after the date of enactment.
5. Modify treatment of tires under the heavy highway vehicle retail
excise tax (sec. 1402 of the House bill and sec. 845 of the
Senate amendment)
Present Law
A 12-percent retail excise tax is imposed on certain
heavy highway trucks and trailers, and on highway tractors. A
separate manufacturers' excise tax is imposed on tires weighing
more than 40 pounds. This tire tax is imposed as a fixed dollar
amount which varies based on the weight of the tire. Because
tires are taxed separately, the value of tires installed on a
highway vehicle is excluded from the 12-percent excise tax on
heavy highway vehicles. The determination of value is factual
and has given rise to numerous tax audit challenges.
House Bill
The current exclusion of the value of tires installed on
a taxable highway vehicle is repealed. Instead, a credit for
the amount of manufacturers' excise tax actually paid on the
tires is allowed.
Effective date.--The provision is effective after
December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
6. Increase tobacco excise taxes (sec. 846 of the Senate amendment)
Present Law
The following excise taxes are imposed on tobacco
products:
Cigarettes--
Small cigarettes--24 cents/pack of 20
Large cigarettes--$25.20/1000
Cigars--
Large cigars--12.75% of mfgr. price, up to $30/1000
Small cigars--$1.125/1000
Cigarette papers--$0.0075/50 papers
Cigarette tubes--$0.15/50 tubes
Chewing tobacco--$0.12/lb.
Snuff--$0.36/lb.
Pipe tobacco--$0.675/lb.
House Bill
No provision.
Senate Amendment
The Senate amendment increases the small cigarette tax
rate by 20 cents per pack of 20 (i.e., to 44 cents per pack),
and increases the tax rates on other tobacco products
proportionately. The Senate amendment also extends the tax to
``roll-your-own'' cigarette tobacco at $0.66/lb., and includes
compliance provisions for untaxed cigarettes destined for
export.
Floor stocks taxes are imposed on cigarettes and other
currently taxed tobacco products held for sale on October 1,
1997 (including articles held in foreign trade zones).
Effective date.--October 1, 1997.
Conference Agreement
The conference agreement on H.R. 2014 does not include
the Senate amendment. However, the conference agreement on H.R.
2015 follows the Senate amendment, with modifications. First,
the tax rate on small cigarettes is increased by $5 per
thousand (10 cents per pack of 20 cigarettes) and the tax rates
on other currently taxed tobacco products are increased
proportionately beginning on January 1, 2000. On January 1,
2002, the small cigarette tax rate is increased by an
additional $2.50 per thousand (5 cents per pack) with the tax
rates on other currently taxed tobacco products also being
increased proportionately at that time. Thus, the aggregate tax
increase on small cigarettes is 15 cents per pack of 20
cigarettes. The conference agreement imposes tax on ``roll-
your-own'' tobacco at the same rate as pipe tobacco.
The conference agreement includes a technical amendment
to H.R. 2015, which provides that an amount equal to the
increase in tobacco excise taxes included in H.R. 2015 will be
credited against total payments made by parties pursuant to
future Federal legislation implementing the proposed tobacco
industry settlement agreement of June 20, 1997.
Effective date.--The conference agreement on H.R. 2015 is
effective on the date of enactment for tobacco products removed
after December 31, 1999, and December 31, 2001, respectively.
Appropriate floor stocks taxes are imposed on January 1, 2000,
and on January 1, 2002.
F. Provisions Relating to Tax-Exempt Organizations
1. Extend UBIT rules to second-tier subsidiaries and amend control test
(sec. 1051 of the House bill and sec. 851 of the Senate
amendment)
Present Law
In general, interest, rents, royalties and annuities are
excluded from unrelated taxable business income (UBTI) of tax-
exempt organizations. However, section 512(b)(13) treats
otherwise excluded rent, royalty, annuity, and interest income
as UBTI if such income is received from a taxable or tax-exempt
subsidiary that is 80 percent controlled by the parent tax-
exempt organization.31 In the case of a stock
subsidiary, the 80 percent control test is met if the parent
organization owns 80 percent or more of the voting stock and
all other classes of stock of the subsidiary.32 In
the case of a non-stock subsidiary, the applicable Treasury
regulations look to factors such as the representation of the
parent corporation on the board of directors of the nonstock
subsidiary, or the power of the parent corporation to appoint
or remove the board of directors of the
subsidiary.33
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\31\ For this purpose, a ``controlled organization'' is defined
under section 368(c). Under present law, rent, royalty, annuity, and
interest payments are treated as UBTI when received by the parent
organization based on the percentage of the subsidiary's income that is
UBTI (either in the hands of the subsidiary if the subsidiary is tax-
exempt, or in the hands of the parent organization if the subsidiary is
taxable).
\32\ Treas. reg. sec. 1.512(b)-1(l)(4)(I)(a).
\33\ Treas. reg. sec. 1.512(b)-l(1)(4)(I)(b).
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The control test under section 512(b)(13) does not,
however, incorporate any indirect ownership rules.34
Consequently, rents, royalties, annuities and interest derived
from second-tier subsidiaries generally do not constitute UBTI
to the tax-exempt parent organization.35
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\34\ See PLR 9338003 (June 16, 1993) (holding that because no
indirect ownership rules are applicable under section 512(b)(13), rents
paid by a second-tier taxable subsidiary are not UBTI to a tax-exempt
parent organization). In contrast, an example of an indirect ownership
rule can be found in Code section 318. Section 318(a)(2)(C) provides
that if 50 percent or more in value of the stock in a corporation is
owned, directly or indirectly, by or for any person, such person shall
be considered as owning the stock owned, directly or indirectly by or
for such corporation, in the proportion the value of the person's stock
ownership bears to the total value of all stock in the corporation.
\35\ See PLR 9542045 (July 28, 1995) (holding that first-tier
holding company and second-tier operating subsidiary were organized
with bona fide business functions and were not agents of the tax-exempt
parent organization; therefore, rents, royalties, and interest received
by tax-exempt parent organization from second-tier subsidiary were not
UBTI).
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House Bill
The House bill modifies the test for determining control
for purposes of section 512(b)(13). Under the House bill,
``control'' means (in the case of a stock corporation)
ownership by vote or value of more than 50 percent of the
stock. In the case of a partnership or other entity, control
means ownership of more than 50 percent of the profits, capital
or beneficial interests.
In addition, the House bill applies the constructive
ownership rules of section 318 for purposes of section
512(b)(13). Thus, a parent exempt organization is deemed to
control any subsidiary in which it holds more than 50 percent
of the voting power or value, directly (as in the case of a
first-tier subsidiary) or indirectly (as in the case of a
second-tier subsidiary).
The House bill also makes technical modifications to the
method provided in section 512(b)(13) for determining how much
of an interest, rent, annuity, or royalty payment made by a
controlled entity to a tax-exempt organization is includible in
the latter organization's UBTI. Such payments are subject to
the unrelated business income tax to the extent the payment
reduces the net unrelated income (or increases any net
unrelated loss) of the controlled entity.
Effective date.--The modification of the control test to
one based on vote or value, the application of the constructive
ownership rules of section 318, and the technical modifications
to the flow-through method apply to taxable years beginning
after the date of enactment. The reduction of the ownership
threshold for purposes of the control test from 80 percent to
more than 50 percent applies to taxable years beginning after
December 31, 1998.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, except that the effective date is modified to
provide temporary transition relief for certain payments. The
provision does not apply to payments made during the first two
taxable years beginning on or after the date of enactment if
such payments are made pursuant to a binding written contract
in effect as of June 8, 1997, and at all times thereafter
before such payment. In addition, the conference agreement does
not include the delayed application of the reduction of the
ownership threshold for purposes of the control test from 80
percent to more than 50 percent.
2. Limitation on increase in basis of property resulting from sale by
tax-exempt entity to related person (sec. 1052 of the House
bill and sec. 852 of the Senate amendment)
Present law
If a tax-exempt entity transfers assets to a controlled
taxable entity in a transaction that is treated as a sale, the
transferee taxable entity obtains a fair market value basis in
the assets. Because the transferor is tax-exempt, no gain is
recognized on the transfer except to the extent of certain
unrelated business taxable income, if any.
Other provisions of the Code deny certain tax benefits
when a transferor and transferee are related parties. For
example, losses on sales between related parties are not
recognized (sec. 267). As another example, ordinary income
treatment, rather than capital gain treatment, is required on a
sale of depreciable property between related
parties.(sec.1239).
House Bill
In the case of a sale or exchange of property directly or
indirectly between a tax-exempt entity and a related person,
the basis of the related person in the property will not exceed
the adjusted basis of such property immediately before the sale
in the hands of the tax-exempt entity, increased by the amount
of any gain recognized to the tax-exempt entity under the
unrelated business taxable income rules of section 511.
A related person means any person having a relationship
to the tax-exempt entity described in section 267(b) or
707(b)(1) (generally, certain more-than-50-percent
relationships, with specified attribution rules). For purposes
of applying section 267(b)(2), such an entity is treated as if
it were an individual.
Effective date.--The provision applies to sales or
exchanges after June 8, 1997, except that it will not apply to
a sale or exchange made pursuant to a written agreement which
was binding on such date and at all times thereafter.
Senate Amendment
The Senate amendment is the same as the House bill,
except that it is clarified that the term ``tax-exempt entity''
for purposes of the provision is defined as in section
168(h)(2)(A), without regard to section 168(h)(2)(A)(iii).
Conference Agreement
The conference agreement does not include the House bill
provision or the Senate amendment.
3. Reporting and proxy tax requirements for political and lobbying
expenditures of certain tax-exempt organizations (sec. 1053 of
the House bill)
Present Law
Section 162(e) denies deductions as a trade or business
expense for certain lobbying and political expenditures.
Section 162(e)(3) provides a flow-through rule to disallow a
deduction for a portion of membership dues or similar payments
paid to a tax-exempt organization if the organization notifies
the member under section 6033(e) that such portion of the
membership dues is allocable to political or lobbying
activities engaged in by the organization.
Under section 6033(e), tax-exempt organizations (other
than charities described in section 501(c)(3)) that engage in
lobbying or political campaign activities must disclose the
amount of members' dues allocable to lobbying or political
campaign expenditures to their members and to the Internal
Revenue Service (IRS), except for certain in-house, de minimis
expenses.\36\ If an organization fails to meet the disclosure
requirement under section 6033(e), then the organization
generally is subject to a so-called ``proxy tax'' equal to 35
percent of the amount of members' dues allowable to lobbying or
political campaign expenditures. However, under section
6033(e)(3), organizations are exempt from the disclosure
requirements and proxy tax if they can establish to the
satisfaction of the Secretary of the Treasury that
substantially all dues or other similar amounts received by the
organization are not deductible without regard to whether or
not the organization conducts lobbying or political campaign
activities. In Rev. Proc. 95-35, the IRS announced that all
tax-exempt organizations--other than (1) organizations
described in section 501(c)(4) that are not veterans
organizations, (2) agricultural and horticultural organizations
described in section 501(c)(5), and (3) trade associations and
other organizations described in section 501(c)(6)--are deemed
automatically to qualify for the section 6033(e)(3) exemption
from the general disclosure requirements and proxy tax. Rev.
Proc. 95-35 further provides that an organization described in
section 501(c)(4) or an agricultural or horticultural
organization described in section 501(c)(5) qualified for the
section 6033(e)(3) exemption if the organization receives at
least 90 percent of its dues from (1) members with annual dues
of less than $50 or (2) other tax-exempt organizations. Under
Rev. Proc. 95-35, a trade association or other organization
described in section 501(c)(6) qualifies for the section
6033(e)(3) exemption if the organization receives at least 90
percent of its dues from other tax-exempt
organizations.37
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\36\ Such disclosure is not required, however with respect to
political expenditures if tax is imposed on the organization with
respect to such expenditures under section 527(f) (see sec.
6033(e)(1)(B)(iii)).
\37\ In addition, Rev. Proc. 95-35 provides that any organization
may establish that it satisfies the section 6033(e)(3) exemption by (1)
maintaining records establishing that 90 percent or more of the annual
dues paid to the organization are not deductible without regard to
whether or not the organization conducts lobbying or political campaign
activities, and (2) notifying the IRS that it is described in section
6033(e)(3) on any Form 990 (i.e., annual information return) that it is
required to file. Additionally, an organization may request a private
letter ruling that the organization is eligible for the section
6033(e)(3) exemption.
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House Bill
Section 6033(e)(3) is amended to provide that an
exemption from the general disclosure requirements and proxy
tax of section 6033(e) is available to a tax-exempt
organization if more than 90 percent of the amount of aggregate
annual dues (or similar payments) received by the organization
are paid by (1) individuals or families whose annual dues (or
similar amounts) are less than $100,38 or (2) tax-
exempt entities. For purposes of the provision, all
organizations sharing a name, charter, historic affiliation, or
similar characteristics and coordinating their activities would
be treated as a single entity. As under present law, charities
described in section 501(c)(3) are not subject to the section
6033(e) disclosure requirements and proxy tax.
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\38\ The $100 amount will be indexed for inflation after December
31, 1997 (rounded to the nearest multiple of $5).
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
4. Repeal grandfather rule with respect to pension business of certain
insurers (sec. 1054 of the bill and sec. 853 of the Senate
amendment)
Present Law
Present law provides that an organization described in
section 501(c) (3) or (4) of the Code is exempt from tax only
if no substantial part of its activities consists of providing
commercial-type insurance. When this rule was enacted in 1986,
certain treatment (described below) applied to Blue Cross and
Blue Shield organizations providing health insurance that (1)
were in existence on August 16, 1986; (2) were determined at
any time to be tax-exempt under a determination that had not
been revoked; and (3) were tax-exempt for the last taxable year
beginning before January 1, 1987 (when the present-law rule
became effective), provided that no material change occurred in
the structure or operations of the organizations after August
16, 1986, and before the close of 1986 or any subsequent
taxable year.
The treatment applicable to such organizations, which
became taxable organizations under the provision, is as
follows. A special deduction applies with respect to health
business equal to 25 percent of the claims and expenses
incurred during the taxable year less the adjusted surplus at
the beginning of the year. An exception is provided for such
organizations from the application of the 20-percent reduction
in the deduction for increases in unearned premiums that
applies generally to property and casualty insurance companies.
A fresh start was provided with respect to changes in
accounting methods resulting from the change from tax-exempt to
taxable status. Thus, no adjustment was made under section 481
on account of an accounting method change. Such an organization
was required to compute its ending 1986 loss reserves without
artificial changes that would reduce 1987 income. Thus, any
reserve weakening after August 16, 1986 was treated as
occurring in the organization's first taxable year beginning
after December 31, 1986. The basis of such an organization's
assets was deemed to be equal to the amount of the assets' fair
market value on the first day of the organization's taxable
year beginning after December 31, 1986, for purposes of
determining gain or loss (but not for determining depreciation
or for other purposes).
Grandfather rules were provided in the 1986 Act relating
to the provision. It was provided that the provision does not
apply to that portion of the business of the Teachers Insurance
Annuity Association-College Retirement Equities Fund which is
attributable to pension business, nor does the provision apply
with respect to that portion of the business of Mutual of
America which is attributable to pension business. Pension
business means the administration of any plan described in
section 401(a) of the Code which includes a trust exempt from
tax under section 501(a), and plan under which amounts are
contributed by an individual's employer for an annuity contract
described in section 403(b) of the Code, any individual
retirement plan described in section 408 of the Code, and any
eligible deferred compensation plan to which section 457(a) of
the Code applies.
House Bill
The House bill repeals the grandfather rules applicable
to that portion of the business of the Teachers Insurance
Annuity Association-College Retirement Equities Fund which is
attributable to pension business and to that portion of the
business of Mutual of America which is attributable to pension
business. The Teachers Insurance Annuity Association and
College Retirement Equities Fund and Mutual of America are to
be treated for Federal tax purposes as life insurance
companies.
A fresh start is provided with respect to changes in
accounting methods resulting from the change from tax-exempt to
taxable status. Thus, no adjustment is made under section 481
on account of an accounting method change. The Teachers
Insurance Annuity Association and College Retirement Equities
Fund and Mutual of America are required to compute ending 1997
loss reserves without artificial changes that would reduce 1998
income. Thus, any reserve weakening after June 8, 1997, is
treated as occurring in the organization's first taxable year
beginning after December 31, 1997. The basis of assets of
Teachers Insurance Annuity Association and College Retirement
Equities Fund and Mutual of America is deemed to be equal to
the amount of the assets' fair market value on the first day of
the organization's taxable year beginning after December 31,
1997, for purposes of determining gain or loss (but not for
determining depreciation or for other purposes).
Effective date.--Taxable years beginning after December
31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill,
except that the Senate amendment repeals only the grandfather
rule applicable to that portion of the business of Mutual of
America which is attributable to pension business.
Effective date.--Same as the House bill.
Conference Agreement
The conference agreement follows the House bill.
G. Foreign Provisions
1. Inclusion of income from notional principal contracts and stock
lending transactions under subpart F (sec. 1171 of the House
bill and sec. 861 of the Senate amendment)
Present Law
Under the subpart F rules, the U.S. 10-percent
shareholders of a controlled foreign corporation (``CFC'') are
subject to U.S. tax currently on certain income earned by the
CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the
subpart F rules includes, among other things, ``foreign
personal holding company income.''
Foreign personal holding company income generally
consists of the following: dividends, interest, royalties,
rents and annuities; net gains from sales or exchanges of (1)
property that gives rise to the foregoing types of income, (2)
property that does not give rise to income, and (3) interests
in trusts, partnerships, and REMICs; net gains from commodities
transactions; net gains from foreign currency transactions; and
income that is equivalent to interest. Income from notional
principal contracts referenced to commodities, foreign
currency, interest rates, or indices thereon is treated as
foreign personal holding company income; income from equity
swaps or other types of notional principal contracts is not
treated as foreign personal holding company income. Income
derived from transfers of debt securities (but not equity
securities) pursuant to the rules governing securities lending
transactions (sec. 1058) is treated as foreign personal holding
company income.
Income earned by a CFC that is a regular dealer in the
property sold or exchanged generally is excluded from the
definition of foreign personal holding company income. However,
no exception is available for a CFC that is a regular dealer in
financial instruments referenced to commodities.
A U.S. shareholder of a passive foreign investment
company (``PFIC'') is subject to U.S. tax and an interest
charge with respect to certain distributions from the PFIC and
gains on dispositions of the stock of the PFIC, unless the
shareholder elects to include in income currently for U.S. tax
purposes its share of the earnings of the PFIC. A foreign
corporation is a PFIC if it satisfies either a passive income
test or a passive assets test. For this purpose, passive income
is defined by reference to foreign personal holding company
income.
House Bill
The House bill treats net income from all types of
notional principal contracts as a new category of foreign
personal holding company income. However, income, gain,
deduction or loss from a notional principal contract entered
into to hedge an item of income in another category of foreign
personal holding company income is included in that other
category.
The House bill treats payments in lieu of dividends
derived from equity securities lending transactions pursuant to
section 1058 as another new category of foreign personal
holding company income.
The House bill provides an exception from foreign
personal holding company income for certain income, gain,
deduction, or loss from transactions (including hedging
transactions) entered into in the ordinary course of a CFC's
business as a regular dealer in property, forward contracts,
options, notional principal contracts, or similar financial
instruments (including instruments referenced to commodities).
These modifications to the definition of foreign personal
holding company income apply for purposes of determining a
foreign corporation's status as a PFIC.
Effective date.--The provision applies to taxable years
beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. The conferees wish to clarify the treatment
of notional principal contracts under the provision. Although
net income from notional principal contracts is added as a new
category of foreign personal holding company income, amounts
with respect to a notional principal contract entered into to
hedge an item described in another category of foreign personal
holding company income are taken into account under the rules
of such other category. In this regard, gains and losses from
transactions in inventory property are covered by an exclusion
from the category of personal holding company income for net
gains from property transactions; income from a notional
principal contract entered into to hedge inventory property is
taken into account under such category and thus similarly is
excluded from foreign personal holding company income.
2. Restrict like-kind exchange rules for certain personal property
(sec. 1172 of the House bill and sec. 862 of the Senate
amendment)
Present Law
An exchange of property, like a sale, generally is a
taxable event. However, 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'' which
is to be held for productive use in a trade or business or for
investment (sec. 1031). In general, any kind of real estate is
treated as of a like-kind with other real property as long as
the properties are both located either within or bothoutside
the United States. In addition, certain types of property, such as
inventory, stocks and bonds, and partnership interests, are not
eligible for nonrecognition treatment under section 1031.
If section 1031 applies to an exchange of properties, the
basis of the property received in the exchange is equal to the
basis of the property transferred, decreased by any money
received by the taxpayer, and further adjusted for any gain or
loss recognized on the exchange.
House Bill
The House bill provides that personal property
predominantly used within the United States and personal
property predominantly used outside the United States are not
``like-kind'' properties. For this purpose, the use of the
property surrendered in the exchange will be determined based
upon the use during the 24 months immediately prior to the
exchange. Similarly, for section 1031 to apply, property
received in the exchange must continue in the same use (i.e.,
foreign or domestic) for the 24 months immediately after the
exchange.
The 24-month period is reduced to such lesser time as the
taxpayer held the property, unless such shorter holding period
is a result of a transaction (or series of transactions)
structured to avoid the purposes of the provision. Property
described in section 168(g)(4) (generally, property used both
within and without the United States that is eligible for
accelerated depreciation as if used in the United States) will
be treated as property predominantly used in the United States.
Effective date.--The provision is effective for exchanges
after June 8, 1997, unless the exchange is pursuant to a
binding contract in effect on such date and all times
thereafter. A contract will not fail to be considered to be
binding solely because (1) it provides for a sale in lieu of an
exchange or (2) either the property to be disposed of as
relinquished property or the property to be acquired as
replacement property (whichever is applicable) was not
identified under the contract before June 9, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Impose holding period requirement for claiming foreign tax credits
with respect to dividends (sec. 1173 of the House bill and sec.
863 of the Senate amendment)
Present Law
A U.S. person that receives a dividend from a foreign
corporation generally is entitled to a credit for foreign
income taxes paid on the dividend, regardless of the
shareholder's holding period for the stock. If a regulated
investment company (``RIC'') elects, U.S. persons that receive
dividends from the RIC generally are entitled to an indirect
credit for foreign taxes paid by the RIC, regardless of the
shareholder's holding period for the RIC stock. A U.S.
corporation that receives a dividend from a foreign corporation
in which it has a 10-percent or greater voting interest
generally is entitled to an indirect credit for foreign taxes
paid by the foreign corporation, also regardless of the
shareholder's holding period.
House Bill
The House bill disallows the foreign tax credits normally
available with respect to a dividend from a corporation or RIC
if the shareholder has not held the stock for 16 days in the
case of common stock and 46 days in the case of preferred
stock. The disallowance applies both to foreign tax credits for
foreign withholding taxes that are paid on the dividend where
the dividend-paying stock is held for less than these holding
periods and to indirect foreign tax credits for taxes paid by a
lower-tier foreign corporation or a RIC where any of the
required stock in the chain of ownership is held for less than
these holding periods. Periods during which a taxpayer is
protected from risk of loss generally are not counted toward
the holding period requirement. In the case of a bona fide
contract to sell stock, a special rule applies for purposes of
indirect foreign tax credits. The House bill also provides an
exception for foreign active securities dealers.
Effective date.--The provision is effective for dividends
paid or accrued more than 30 days after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill with
one modification. Under the Senate amendment, the special rule
for contracts to sell stock does not apply to indirect foreign
tax credits of a RIC shareholder.
Conference Agreement
The conference agreement generally follows the Senate
amendment with one modification. The conference agreement
grants regulatory authority to the Secretary of the Treasury to
treat certain foreign taxes as not subject to the provision.
The conferees anticipate that this authority may be used to
address internal withholding taxes imposed by a foreign country
on persons that do business in the foreign country.
4. Penalties for failure to file disclosure of exemption for income
from the international operation of ships or aircraft by
foreign persons (sec. 1174 of the House bill)
Present Law
The United States generally imposes a 4-percent tax on
the U.S.-source gross transportation income of foreign persons
that is not effectively connected with the foreign person's
conduct of a U.S. trade or business (sec. 887). Foreign persons
generally are subject to U.S. tax at regular graduated rates on
net income, including transportation income, that is
effectively connected with a U.S. trade or business (secs.
871(b) and 882).
Transportation income is any income derived from, or in
connection with, the use (or hiring or leasing for use) of a
vessel or aircraft (or a container used in connection
therewith) or the performance of services directly related to
such use (sec. 863(c)(3)). Income attributable to
transportation that begins and ends in the United States is
treated as derived from sources in the United States (sec.
863(c)(1)). In the case of transportation that either begins or
ends in the United States, generally 50 percent of such income
is treated as U.S. source and 50 percent is treated as foreign
source (sec. 863(c)(2)). U.S.-source transportation income is
treated as effectively connected with a foreign person's
conduct of U.S. trade or business only if the foreign person
has a fixed place of business in the United States that is
involved in the earning of such income and substantially all of
such income of the foreign person is attributable to regularly
scheduled transportation (sec. 887(b)(4)).
An exemption from U.S. tax is provided for income derived
by a nonresident alien individual or foreign corporation from
the international operation of a ship or aircraft, provided
that the foreign country in which such individual is resident
or such corporation is organized grants an equivalent exemption
to individual residents of the United States or corporations
organized in the United States (secs. 872(b) (1) and (2) and
883(a) (1) and (2)).
Pursuant to guidance published by the Internal Revenue
Service, a nonresident alien individual or foreign corporation
that is entitled to an exemption from U.S. tax for its income
from the international operation of ships or aircraft must file
a U.S. income tax return and must attach to such return a
statement claiming the exemption (Rev. Proc. 91-12, 1991-1 C.B.
473). If the foreign person is claiming an exemption based on
an applicable income tax treaty, the foreign person must
disclose that fact as required by the Secretary of the Treasury
(sec. 6114). The penalty for failure to make disclosure of a
treaty-based position as required under section 6114 is $1,000
for an individual and $10,000 for a corporation (sec. 6712).
House Bill
Under the House bill, a foreign person that claims
exemption from U.S. tax for income from the international
operation of ships or aircraft, but does not satisfy the filing
requirements for claiming such exemption, is subject to the
penalty of the denial of such exemption and any deductions or
credits otherwise allowable in determining the U.S. tax
liability with respect to such income. If a foreign person that
has a fixed placed of business in the United States fails to
satisfy the filing requirements for claiming an exemption from
U.S. tax for its income from the international operation of
ships or aircraft, such person is subject to the additional
penalty that foreign source income from the international
operation of ships or aircraft would be treated as effectively
connected with the conduct of a U.S. trade or business, but
only to the extent that such income is attributable to such
fixed place of business in the United States. Income so treated
as effectively connected with a U.S. business is subject to
U.S. tax at graduated rates (and is subject to the disallowance
of deductions and credits described above). These penalties do
not apply in the case of a failure to disclose that is due to
reasonable cause. The provision would not apply to the extent
the application would be contrary to any treaty obligation of
the United States.
The House bill also provides for the provision of
information by the U.S. Customs Service to the Secretary of the
Treasury regarding foreign-flag ships engaged in shipping to or
from the United States.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the provision
in the House bill.
5. Limitation on treaty benefits for payments to hybrid entities (sec.
1175 of the House bill and sec. 742 of the Senate amendment)
Present Law
Nonresident alien individuals and foreign corporations
(collectively, foreign persons) that are engaged in business in
the United States are subject to U.S. tax on the income from
such business in the same manner as a U.S. person. In addition,
the United States imposes tax on certain types of U.S.-source
income, including interest, dividends and royalties, of foreign
persons not engaged in business in the United States. Such tax
is imposed on a gross basis and is collected through
withholding. The statutory rate of this withholding tax is 30
percent. However, most U.S. income tax treaties provide for a
reduction in rate, or elimination, of this withholding tax.
Treaties generally provide for different applicable withholding
tax rates for different types of income. Moreover, the
applicable withholding tax rates differ among treaties. The
specific withholding tax rates pursuant to a treaty are the
result of negotiations between the United States and the treaty
partner.
The application of the withholding tax is more
complicated in the case of income derived through an entity,
such as a limited liability company, that is treated as a
partnership for U.S. tax purposes but may be treated as a
corporation for purposes of the tax laws of a treaty partner.
The Treasury regulations include specific rules that apply in
the case of income derived through anentity that is treated as
a partnership for U.S. tax purposes. In the case of a payment of an
item of U.S. source income to a U.S. partnership, the partnership is
required to impose the withholding tax to the extent the item of income
is includible in the distributive share of a partner who is a foreign
person. Tax-avoidance opportunities may arise in applying the reduced
rates of withholding tax provided under a treaty to cases involving
income derived through a limited liability company or other hybrid
entity (e.g., an entity that is treated as a partnership for U.S. tax
purposes but as a corporation for purposes of the treaty partner's tax
laws).
Following the passage of the House bill and the Senate
amendment, proposed and temporary regulations were issued
addressing the application of the reduced rates of withholding
tax provided under a treaty in cases involving a hybrid entity.
Temp. Treas. reg. sec. 1.894-1T.
House Bill
The House bill limits the availability of a reduced rate
of withholding tax pursuant to an income tax treaty in order to
prevent tax avoidance. Under the House bill, a foreign person
is entitled to a reduced rate of withholding tax under a treaty
with a foreign country on an item of income derived through an
entity that is a partnership (or is otherwise treated as
transparent) for U.S. tax purposes only if such item is treated
for purposes of the taxation laws of such foreign country as an
item of income of such person. This rule does not apply if the
treaty itself contains a provision addressing the applicability
of the treaty in the case of income derived through a
partnership. Moreover, the rule does not apply if the foreign
country imposes tax on an actual distribution of such item of
income from such partnership to such person. In this regard,
the foreign country will be considered to impose tax on a
distribution even though such tax may be reduced or eliminated
by reason of deductions or credits otherwise available to the
taxpayer.
The House bill addresses a potential tax-avoidance
opportunity for Canadian corporations with U.S. subsidiaries
that arises because of the interaction between the U.S. tax
law, the Canadian tax law, and the income tax treaty between
the United States and Canada. Through the use of a U.S. limited
liability company, which is treated as a partnership for U.S.
tax purposes but as a corporation for Canadian tax purposes, a
payment of interest (which is deductible for U.S. tax purposes)
may be converted into a dividend (which is excludable for
Canadian tax purposes). Accordingly, interest paid by a U.S.
subsidiary through a U.S. limited liability company to a
Canadian parent corporation would be deducted by the U.S.
subsidiary for U.S. tax purposes and would be excluded by the
Canadian parent corporation for Canadian tax purposes; the only
tax on such interest would be a U.S. withholding tax, which may
be imposed at a reduced rate of 10 percent (rather than the
full statutory rate of 30 percent) pursuant to the income tax
treaty between the United States and Canada. Under the House
bill, withholding tax is imposed at the full statutory rate of
30 percent in such case. The provision would not apply if the
U.S.-Canadian income tax treaty is amended to include a
provision reaching a similar result. In this regard, the United
States and Canada recently negotiated a proposed protocol that
would amend the provision in the treaty governing cross-border
social security payments and this issue could be addressed in
the context of that protocol or an additional protocol.
Moreover, the provision would not apply if Canada were to
impose tax on the Canadian parent on dividends received from
the U.S. limited liability company.
It is believed that the provision generally is consistent
with U.S. treaty obligations, including the U.S.-Canada treaty.
The United States has recognized authority to implement its tax
treaties so as to avoid abuses.
Effective date.--The provision is effective upon date of
enactment.
Senate Amendment
The Senate amendment provides that the Secretary of the
Treasury shall prescribe regulations to determine the extent to
which a taxpayer shall be denied benefits under an income tax
treaty of the United States with respect to any payment
received by, or income attributable to activities of, an entity
that is treated as a partnership for U.S. federal income tax
purposes (or is otherwise treated as fiscally transparent for
such purposes) but is treated as fiscally non-transparent for
purposes of the tax laws of the jurisdiction of residence of
the taxpayer.
The Senate amendment addresses the potential tax-
avoidance opportunity that may arise in applying the reduced
rates of withholding tax provided under a treaty to cases
involving income derived through a limited liability company or
other hybrid entity (e.g., an entity that is treated as a
partnership for U.S. tax purposes but as a corporation for
purposes of the treaty partner's tax laws). Such a tax-
avoidance opportunity may arise, for example, for Canadian
corporations with U.S. subsidiaries because of the interaction
between the U.S. tax law, the Canadian tax law, and the income
tax treaty between the United States and Canada. Through the
use of a U.S. limited liability company, which is treated as a
partnership for U.S. tax purposes but as a corporation for
Canadian tax purposes, a payment of interest (which is
deductible for U.S. tax purposes) may be converted into a
dividend (which is excludable for Canadian tax purposes).
Accordingly, interest paid by a U.S. subsidiary through a U.S.
limited liability company to a Canadian parent corporation
would be deducted by the U.S. subsidiary for U.S. tax purposes
and would be excluded by the Canadian parent corporation for
Canadian tax purposes; the only tax on such interest would be a
U.S. withholding tax, which may be imposed at a reduced rate of
10 percent (rather than the full statutory rate of 30 percent)
pursuant to the income tax treaty between the United States and
Canada. It is expected that the regulations will impose
withholding tax at the full statutory rate of 30 percent in
such case.
Effective date.--The provision is effective upon date of
enactment.
Conference Agreement
The conference agreement generally follows the House bill
with a modification to provide regulatory authority to address
the availability of treaty benefits in situations that involve
hybrid entities but that are not covered by the denial of
benefits specifically provided by the provision.
Under the conference agreement, a foreign person is not
entitled to a reduced rate of withholding tax under a treaty
with a foreign country on an item of income derived through an
entity that is treated as a partnership (or is otherwise
treated as fiscally transparent) for U.S. tax purposes if (i)
such item is not treated for purposes of the taxation laws of
such foreign country as an item of income of such person, (ii)
the foreign country does not impose tax on an actual
distribution of such item of income from such entity to such
person, and (iii) the treaty itself does not contain a
provision addressing the applicability of the treaty in the
case of income derived through a partnership or other fiscally
transparent entity. In addition, the conference agreement
grants the Secretary of the Treasury authority to prescribe
regulations to determine, in situations other than the
situation specifically described in the statutory provision,
the extent to which a taxpayer shall not be entitled to
benefits under an income tax treaty of the United States with
respect to any payment received by, or income attributable to
activities of, an entity that is treated as a partnership for
U.S. federal income tax purposes (or is otherwise treated as
fiscally transparent for such purposes) but is treated as
fiscally non-transparent for purposes of the tax laws of the
jurisdiction of residence of the taxpayer.
The conferees note that on June 30, 1997 the Secretary
issued proposed and temporary regulations addressing the
availability of treaty benefits in cases involving hybrid
entities. The conferees believe that these regulations are
consistent with the provision in the conference agreement. The
conferees also believe that the provision in the conference
agreement and the temporary and proposed regulations are
consistent with U.S. treaty obligations. Such provision and
such regulations represent interpretations of U.S. treaties
clarifying those situations involving hybrid entities in which
taxpayers are entitled to treaty benefits and those situations
in which they are not.
6. Interest on underpayments that are reduced by foreign tax credit
carrybacks (sec. 1176 of the House bill and sec. 865 of the
Senate amendment)
Present Law
U.S. persons may credit foreign taxes against U.S. tax on
foreign source income. The amount of foreign tax credits that
can be claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to offset
U.S. tax on U.S. source income. Separate limitations are
applied to specific categories of income. The amount of
creditable taxes paid or accrued in any taxable year which
exceeds the foreign tax credit limitation is permitted to be
carried back two years and carried forward five years.
For purposes of the computation of interest on
overpayments of tax, if an overpayment for a taxable year
results from a foreign tax credit carryback from a subsequent
taxable year, the overpayment is deemed not to arise prior to
the filing date for the subsequent taxable year in which the
foreign taxes were paid or accrued (sec. 6611(g)). Accordingly,
interest does not accrue on the overpayment prior to the filing
date for the year of the carryback that effectively created
such overpayment. In Fluor Corp. v. United States, 35 Fed. Cl.
520 (1996), the court held that in the case of an underpayment
of tax (rather than an overpayment) for a taxable year that is
eliminated by a foreign tax credit carryback from a subsequent
taxable year, interest does not accrue on the underpayment that
is eliminated by the foreign tax credit carryback. The
Government has filed an appeal in the Fluor case.
House Bill
Under the House bill, if an underpayment for a taxable
year is reduced or eliminated by a foreign tax credit carryback
from a subsequent taxable year, such carryback does not affect
the computation of interest on the underpayment for the period
ending with the filing date for such subsequent taxable year in
which the foreign taxes were paid or accrued. The House bill
also clarifies the application of the interest rules of both
section 6601 and section 6611 in the case of a foreign tax
credit carryback that is triggered by a net operating loss or
net capital loss carryback; in such a case, a deficiency is not
considered to have been reduced, and an overpayment is not
considered to have been created, until the filing date for the
subsequent year in which the loss carryback arose. No inference
is intended regarding the computation of interest under present
law in the case of a foreign tax credit carryback (including a
foreign tax credit carryback that is triggered by a net
operating loss or net capital loss carryback).
Effective date.--The provision is effective for foreign
taxes actually paid or accrued in taxable years beginning after
date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
7. Determination of period of limitations relating to foreign tax
credits (sec. 1177 of the House bill and sec. 866 of the Senate
amendment)
Present Law
U.S. persons may credit foreign taxes against U.S. tax on
foreign source income. The amount of foreign tax credits that
can be claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to offset
U.S. tax on U.S. source income. Separate limitations are
applied to specific categories of income. The amount of
creditable taxes paid or accrued in any taxable year which
exceeds the foreign tax credit limitation is permitted to be
carried back two years and carried forward five years.
For purposes of the period of limitations on filing
claims for credit or refund, in the case of a claim relating to
an overpayment attributable to foreign tax credits, the
limitations period is ten years from the filing date for the
taxable year with respect to which the claim is made.
TheInternal Revenue Service has taken the position that, in the case of
a foreign tax credit carryforward, the period of limitations is
determined by reference to the year in which the foreign taxes were
paid or accrued (and not the year to which the foreign tax credits are
carried) (Rev. Rul. 84-125, 1984-2 C.B. 125). However, the court in
Ampex Corp. v. United States, 620 F.2d 853 (1980), held that, in the
case of a foreign tax credit carryforward, the period of limitations is
determined by reference to the year to which the foreign tax credits
are carried (and not the year in which the foreign taxes were paid or
accrued).
House Bill
Under the House bill, in the case of a claim relating to
an overpayment attributable to foreign tax credits, the
limitations period is determined by reference to the year in
which the foreign taxes were paid or accrued (and not the year
to which the foreign tax credits are carried). No inference is
intended regarding the determination of such limitations period
under present law.
Effective date.--The provision is effective for foreign
taxes paid or accrued in taxable years beginning after date of
enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
8. Treatment of income from certain sales of inventory as U.S. source
(sec. 864 of the Senate amendment)
Present Law
U.S. persons are subject to U.S. tax on their worldwide
income. A credit against U.S. tax on foreign source income is
allowed for foreign taxes. The amount of foreign tax credits
that can be claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to offset
U.S. tax on U.S. source income. Specific rules apply in
determining whether income is from U.S. or foreign sources.
Income from the sale or exchange of inventory property
generally is sourced where the sale occurs. In Liggett Group,
Inc. v. Commissioner, 58 T.C.M. 1167 (1990), the court
concluded that a sale of inventory property by a U.S.
corporation to U.S. customers gave rise to foreign source
income because the sale occurred outside the United States.
House Bill
No provision.
Senate Amendment
Under the Senate amendment, income from a sale of
inventory property by a U.S. resident to another U.S. resident
for use, consumption, or disposition in the United States is
treated as U.S. source income, if the sale is not attributable
to an office or other fixed place of business maintained by the
seller outside the United States.
Effective date.--The provision is effective for taxable
years beginning after date of enactment.
Conference Agreement
The conference agreement does not include the provision
in the Senate amendment.
9. Modify foreign tax credit carryover rules (sec. 867 of the Senate
amendment)
Present Law
U.S. persons may credit foreign taxes against U.S. tax on
foreign source income. The amount of foreign tax credits that
can be claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to offset
U.S. tax on U.S. source income. Separate foreign tax credit
limitations are applied to specific categories of income.
The amount of creditable taxes paid or accrued (or deemed
paid) in any taxable year which exceeds the foreign tax credit
limitation is permitted to be carried back two years and
forward five years. The amount carried over may be used as a
credit in a carryover year to the extent the taxpayer otherwise
has excess foreign tax credit limitation for such year. The
separate foreign tax credit limitations apply for purposes of
the carryover rules.
House Bill
No provision.
Senate Amendment
The Senate amendment reduces the carryback period for
excess foreign tax credits from two years to one year. The
amendment also extends the excess foreign tax credit
carryforward period from five years to seven years.
Effective date.--The provision applies to foreign tax
credits arising in taxable years beginning after December 31,
1997.
Conference Agreement
The conference agreement does not include the provision
in the Senate amendment.
10. Repeal special exception to foreign tax credit limitation for
alternative minimum tax purposes (sec. 868 of the Senate
amendment)
Present Law
Present law imposes a minimum tax on a corporation to the
extent the taxpayer's minimum tax liability exceeds its regular
tax liability. The corporate minimum tax is imposed at a rate
of 20 percent on alternative minimum taxable income in excess
of a phased-out $40,000 exemption amount.
The combination of the taxpayer's net operating loss
carryover and foreign tax credits cannot reduce the taxpayer's
alternative minimum tax liability by more than 90 percent of
the amount determined without these items.
The Omnibus Budget Reconciliation Act of 1989 (``1989
Act'') provided a special exception to the limitation on the
use of the foreign tax credit against the tentative minimum
tax. In order to qualify for this exception, a corporation must
meet four requirements. First, more than 50 percent of both the
voting power and value of the stock of the corporation must be
owned by U.S. persons who are not members of an affiliated
group which includes such corporation. Second, all of the
activities of the corporation must be conducted in one foreign
country with which the United States has an income tax treaty
in effect and such treaty must provide for the exchange of
information between such country and the United States. Third,
the corporation generally must distribute to its shareholders
all current earnings and profits (except for certain amounts
utilized for normal maintenance or capital expenditures related
to its existing business). Fourth, all of such distributions
which are received by U.S. persons must be utilized by such
persons in a U.S. trade or business. This exception applies to
taxable years beginning after March 31, 1990 (with a proration
rule effective for certain taxable years which include March
31, 1990).
House Bill
No provision.
Senate Amendment
The special exception regarding the use of foreign tax
credits for purposes of the alternative minimum tax, as
provided by the 1989 Act, is repealed.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
Conference Agreement
The conference agreement follows the Senate amendment.
H. Pension and Employee Benefit Provisions
1. Cashout of certain accrued benefits (sec. 917 of the House bill and
sec. 879 of the Senate amendment)
Present Law
Under present law, in the case of an employee whose plan
participation terminates, a qualified plan may involuntarily
``cash out'' the benefit (i.e., pay out the balance to the
credit of a plan participant without the participant's consent,
and, if applicable, the consent of the participant's spouse) if
the present value of the benefit does not exceed $3,500. If a
benefit is cashed out under this rule and the participant
subsequently returns to employment covered by the plan, then
service taken into account in computing benefits payable under
the plan after the return need not include service with respect
to which benefits were cashed out unless the employee ``buys
back'' the benefit.
Generally, a cash-out distribution from a qualified plan
to a plan participant can be rolled over, tax free, to an IRA
or to another qualified plan.
House Bill
The House bill increases the limit on involuntary cash
outs from $3,500 to $5,000. The $5,000 amount is adjusted for
inflation beginning after 1998 in $50 increments.
Effective date.--The provision is effective for plan
years beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill,
except the Senate amendment also makes a corresponding change
to title I of ERISA and provides that the $5,000 amount is
adjusted for inflation beginning after 1997 in $50 increments.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, except that the conference agreement does not
increase the $5,000 limit for inflation.
2. Election to receive taxable cash compensation in lieu of nontaxable
parking benefits (sec. 880 of the Senate amendment)
Present Law
Under present law, up to $165 per month of employer-
provided parking is excludable from gross income. In order for
the exclusion to apply, the parking must be provided in
addition to and not in lieu of any compensation that is
otherwise payable to the employee. Employer-provided parking
cannot be provided as part of a cafeteria plan.
House Bill
No provision.
Senate Amendment
Under the Senate amendment, no amount is includible in
the income of an employee merely because the employer offers
the employee a choice between cash and employer-provided
parking. The amount of cash offered is includible in income
only if the employee chooses the cash instead of parking.
Effective date.--The provision is effective with respect
to taxable years beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
3. Repeal of excess distribution and excess retirement accumulation
taxes (sec. 882 of the Senate amendment)
Present Law
Under present law, a 15-percent excise tax is imposed on
excess distributions from qualified retirement plans, tax-
sheltered annuities, and individual retirement arrangements
(``IRAs''). Excess distributions are generally the aggregate
amount of retirement distributions from such plans during any
calendar year in excess of $160,000 (for 1997) or 5 times that
amount in the case of a lump-sum distribution. The 15-percent
excise tax does not apply to distributions received in 1997,
1998, and 1999.
An additional 15-percent estate tax is imposed on an
individual's excess retirement accumulations. Excess retirement
accumulations are generally the balance in retirement plans in
excess of the present value of a benefit that would not be
subject to the 15-percent tax on excess distributions.
House Bill
No provision.
Senate Amendment
The Senate amendment repeals both the 15-percent excise
tax on excess distributions and the 15-percent estate tax on
excess retirement accumulations.
Effective date.--The provision repealing the excess
distribution tax is effective with respect to excess
distributions received after December 31, 1996. The repeal of
the excess accumulation tax is effective with respect to
decedents dying after December 31, 1996.
Conference Agreement
The conference agreement follows the Senate amendment.
4. Tax on prohibited transactions (sec. 884 of the Senate amendment)
Present Law
Present law prohibits certain transactions (prohibited
transactions) between a qualified plan and a disqualified
person in order to prevent persons with a close relationship to
the qualified plan from using that relationship to the
detriment of plan participants and beneficiaries. A two-tier
excise tax is imposed on prohibited transactions. The initial
level tax is equal to 10- percent of the amount involved with
respect to the transaction. If the transaction is not corrected
within a certain period, a tax equal to 100 percent of the
amount involved may be imposed.
House Bill
No provision.
Senate Amendment
The Senate amendment increases the initial-level
prohibited transaction tax from 10 percent to 15 percent.
Effective date.--The provision is effective with respect
to prohibited transactions occurring after the date of
enactment.
Conference Agreement
The conference agreement follows the Senate amendment.
5. Basis recovery rules (sec. 885 of the Senate amendment)
Present Law
Under present law, amounts received as an annuity under a
tax-qualified pension plan generally are includible in income
in the year received, except to the extent the amount received
represents return of the recipient's investment in the contract
(i.e., basis). The portion of each annuity payment that
represents a return of basis generally is determined by a
simplified method. Under this method, the portion of each
annuity payment that is a return to basis is equal to the
employee's total basis as of the annuity starting date, divided
by the number of anticipated payments under a specified table.
The number of anticipated payments listed in the table is based
on the age of the primary annuitant on the annuity starting
date.
House Bill
No provision.
Senate Amendment
Under the Senate amendment, the present-law table applies
to benefits based on the life of one annuitant. A separate
table applies to benefits based on the life of more than one
annuitant.
Effective date.--The provision is effective with respect
to annuity starting dates after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment. As
under the Senate amendment, a separate table applies to
benefits based on the life of more than one annuitant, as
follows:
Combined age of annuitants Number of payments
Not more than 110............................................. 410
More than 110 but not more than 120........................... 360
More than 120 but not more than 130........................... 310
More than 130 but not more than 140........................... 260
More than 140................................................. 210
The conference agreement clarifies that the new table
applies to benefits based on the life of more than one
annuitant, even if the amount of the annuity varies by
annuitant. Thus, for example, the new table applies to a 50-
percent joint and survivor annuity. The new table does not
apply to an annuity paid on a single life merely because it has
additional features, e.g., a term certain.
Effective date.--Same as the Senate amendment.
I. Other Revenue-Increase Provisions
1. Phase out suspense accounts for certain large farm corporations
(sec. 1061 of the House bill and sec. 871 of the Senate
amendment)
Present Law
A corporation (or a partnership with a corporate partner)
engaged in the trade or business of farming must use an accrual
method of accounting for such activities unless such
corporation (or partnership), for each prior taxable year
beginning after December 31, 1975, did not have gross receipts
exceeding $1 million. If a farm corporation is required to
change its method of accounting, the section 481 adjustment
resulting from such change is included in gross income ratably
over a 10-year period, beginning with the year of change. This
rule does not apply to a family farm corporation.
A provision of the Revenue Act of 1987 (``1987 Act'')
requires a family corporation (or a partnership with a family
corporation as a partner) to use an accrual method of
accounting for its farming business unless, for each prior
taxable year beginning after December 31, 1985, such
corporation (and any predecessor corporation) did not have
gross receipts exceeding $25 million. A family corporation is
one where at least 50 percent of the stock of the corporation
is held by one, or in some limited cases, two or three,
families.
A family farm corporation that must change to an accrual
method of accounting as a result of the 1987 Act provision is
required to establish a suspense account in lieu of including
the entire amount of the section 481 adjustment in gross
income. The initial balance of the suspense account equals the
lesser of (1) the section 481 adjustment otherwise required for
the year of change, or (2) the section 481 adjustment computed
as if the change in method of accounting had occurred as of the
beginning of the taxable year preceding the year of change.
The amount of the suspense account is required to be
included in gross income if the corporation ceases to be a
family corporation. In addition, if the gross receipts of the
corporation attributable to farming for any taxable year
decline to an amount below the lesser of (1) the gross receipts
attributable to farming for the last taxable year for which an
accrual method of accounting was not required, or (2) the gross
receipts attributable to farming for the most recent taxable
year for which a portion of the suspense account was required
to be included in income, a portion of the suspense account is
required to be included in gross income.
House Bill
The House bill repeals the ability of a family farm
corporation to establish a suspense account when it is required
to change to an accrual method of accounting. Thus, under the
provision, any family farm corporation required to change to an
accrual method of accounting would restore the section 481
adjustment applicable to the change in gross income ratably
over a 10-year period beginning with the year of change.
In addition, any taxpayer with an existing suspense
account is required to restore the account into income ratably
over a 20-year period beginning in the first taxable year
beginning after June 8, 1997, subject to the present-law
requirements to restore such accounts more rapidly. The amount
required to be restored to income for a taxable year pursuant
to the 20-year spread period shall not exceed the net operating
loss of the corporation for the year (in the case of a
corporation with a net operating loss) or 50 percent of the net
income of the taxpayer for the year (for corporations with
taxable income). For this purpose, a net operating loss or
taxable income is determined without regard to the amount
restored to income under the provision. Any reduction in the
amount required to be restored to income is taken into account
ratably over the remaining years in the 20-year period or, if
applicable, after the end of the 20-year period. Amounts that
extend beyond the 20-year period remain subject to the net
operating loss and 50-percent-of-taxable income rules. The net
operating loss and 50-percent-of-taxable income rules do not
apply to restorations of suspense accounts pursuant to present
law.
Effective date.--The provision is effective for taxable
years ending after June 8, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
In addition, the Senate amendment repeals the present-law
requirement to accelerate the recovery of suspense accounts
when the gross receipts of the taxpayer decreases.
Conference Agreement
The conference agreement follows the Senate amendment. In
addition, the conferees wish to clarify that in the case of a
family farm corporation that elects to be an S corporation for
a taxable year, the net operating loss and 50 percent of
taxable income limitations shall be determined by taking into
account all the items of income, gain, deduction and loss of
the corporation, whether or not such items are separately
stated under section 1366.
2. Modify net operating loss carryback and carryforward rules (sec.
1062 of the House bill, and sec. 872 of the Senate amendment)
Present Law
The net operating loss (``NOL'') of a taxpayer
(generally, the amount by which the business deductions of a
taxpayer exceeds its gross income) may be carried back three
years and carried forward 15 years to offset taxable income in
such years. A taxpayer may elect to forgo the carryback of an
NOL. Special rules apply to real estate investment trusts
(``REITs'') (no carrybacks), specified liability losses (10-
year carryback), and excess interest losses (no carrybacks).
House Bill
The House bill limits the NOL carryback period to two
years and extends the NOL carryforward period to 20 years. The
House bill does not apply to the carryback rules relating to
REITs, specified liability losses, excess interest losses, and
corporate capital losses. In addition, the House bill does not
apply to NOLs arising from casualty losses of individual
taxpayers.
Effective date.--The provision is effective for NOLs
arising in taxable years beginning after the date of enactment.
Senate Amendment
The Senate amendment follows the House bill. In addition,
the Senate amendment preserves the 3-year carryback for NOLs of
farmers and small businesses attributable to losses incurred in
Presidentially declared disaster areas.
Conference Agreement
The conference agreement follows the Senate amendment.
3. Expand the limitations on deductibility of premiums and interest
with respect to life insurance, endowment and annuity contracts
(sec. 1063 of the House bill and sec. 873 of the Senate
amendment)
Present Law
Exclusion of inside buildup and amounts received by reason of death
No Federal income tax generally is imposed on a
policyholder with respect to the earnings under a life
insurance contract (``inside buildup''). 39 Further,
an exclusion from Federal income tax is provided for amounts
received under a life insurance contract paid by reason of the
death of the insured (sec. 101(a)).
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\39\ This favorable tax treatment is available only if the
policyholder has an insurable interest in the insured when the contract
is issued and if the life insurance contract meets certain requirements
designed to limit the investment character of the contract (sec. 7702).
Distributions from a life insurance contract (other than a modified
endowment contract) that are made prior to the death of the insured
generally are includible in income, to the extent that the amounts
distributed exceed the taxpayer's basis in the contract; such
distributions generally are treated first as a tax-free recovery of
basis, and then as income (sec. 72(e)). In the case of a modified
endowment contract, however, in general, distributions are treated as
income first, loans are treated as distributions (i.e., income rather
than basis recovery first), and an additional 10 percent tax is imposed
on the income portion of distributions made before age 59-\1/2\ and in
certain other circumstances (secs. 72(e) and (v)). A modified endowment
contract is a life insurance contract that does not meet a statutory
``7-pay'' test, i.e., generally is funded more rapidly than 7 annual
level premiums (sec. 7702A). Certain amounts received under a life
insurance contract on the life of a terminally or chronically ill
individual, and certain amounts paid by a viatical settlement provider
for the sale or assignment of a life insurance contract on the life of
a terminally ill or chronically ill individual, are treated as
excludable as if paid of the death of the insured (sec. 101(g)).
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Premium deduction limitation
No deduction is permitted for premiums paid on any life
insurance policy covering the life of any officer or employee,
or of any person financially interested in any trade or
business carried on by the taxpayer, when the taxpayer is
directly or indirectly a beneficiary under such policy (sec.
264(a)(1)).
Interest deduction disallowance with respect to life insurance
Present law provides generally that no deduction is
allowed for interest paid or accrued on any indebtedness with
respect to one or more life insurance contracts or annuity or
endowment contracts owned by the taxpayer covering any
individual who is or was (1) an officer or employee of, or (2)
financially interested in, any trade or business currently or
formerly carried on by the taxpayer (the ``COLI'' rules).
This interest deduction disallowance rule generally does
not apply to interest on debt with respect to contracts
purchased on or before June 20, 1986; rather, an interest
deduction limit based on Moody's Corporate Bond Yield Average--
Monthly Average Corporates applies in the case of such
contracts.40
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\40\ Phase-in rules apply generally with respect to otherwise
deductible interest paid or accrued after December 31, 1995, and before
January 1, 1999, in the case of debt incurred before January 1, 1996.
In addition, transition rules apply.
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An exception to this interest disallowance rule is
provided for interest on indebtedness with respect to life
insurance policies covering up to 20 key persons. A key person
is an individual who is either an officer or a 20-percent owner
of the taxpayer. The number of individuals that can be treated
as key persons may not exceed the greater of (1) 5 individuals,
or (2) the lesser of 5 percent of the total number of officers
and employees of the taxpayer, or 20 individuals. For
determining who is a 20-percent owner, all members of a
controlled group are treated as one taxpayer. Interest paid or
accrued on debt with respect to a contract covering a key
person is deductible only to the extent the rate of interest
does not exceed Moody's Corporate Bond Yield Average--Monthly
Average Corporates for each month beginning after December 31,
1995, that interest is paid or accrued.
The foregoing interest deduction limitation was added in
1996 to existing interest deduction limitations with respect to
life insurance and similar contracts.41
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\41\ Since 1942, a limitation has applied to the deductibility of
interest with respect to single premium contracts (sec. 264(a)(2)). For
this purpose, a contract is treated as a single premium contract if (1)
substantially all the premiums on the contract are paid within a period
of 4 years from the date on which the contract is purchased, or (2) an
amount is deposited with the insurer for payment of a substantial
number of future premiums on the contract. Further, under a limitation
added in 1964, no deduction is allowed for any amount paid or accrued
on debt incurred or continued to purchase or carry a life insurance,
endowment, or annuity contract pursuant to a plan of purchase that
contemplates the systematic direct or indirect borrowing of part or all
of the increases in the cash value of the contract (sec. 264(a)(3)). An
exception to the latter rule is provided, permitting deductibility of
interest on bona fide debt that is part of such a plan, if no part of 4
of the annual premiums due during the first 7 years is paid by means of
debt (the ``4-out-of-7 rule'') (sec. 264(c)(1)). In addition to the
specific disallowance rules of section 264, generally applicable
principles of tax law apply.
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Interest deduction limitation with respect to tax-exempt interest
income
Present law provides that no deduction is allowed for
interest on debt incurred or continued to purchase or carry
obligations the interest on which is wholly exempt from Federal
income tax (sec. 265(a)(2)). In addition, in the case a
financial institution, a proration rule provides that no
deduction is allowed for that portion of the taxpayer's
interest that is allocable to tax-exempt interest (sec.
265(b)). The portion of the interest deduction that is
disallowed under this rule generally is the portion determined
by the ratio of the taxpayer's (1) average adjusted bases of
tax-exempt obligations acquired after August 7, 1986, to (2)
the average adjusted bases for all of the taxpayer's assets
(sec. 265(b)(2)).42
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\42\ Special rules apply for certain tax-exempt obligations of
small issuers (sec. 265(b)(3)).
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House Bill
Expansion of premium deduction limitation to individuals in whom
taxpayer has an insurable interest
Under the House bill, the present-law premium deduction
limitation is modified to provide that no deduction is
permitted for premiums paid on any life insurance, annuity or
endowment contract, if the taxpayer is directly or indirectly a
beneficiary under the contract.
Expansion of interest disallowance to individuals in whom taxpayer has
insurable interest
Under the House bill, no deduction is allowed for
interest paid or accrued on any indebtedness with respect to
life insurance policy, or endowment or annuity contract,
covering the life of any individual. Thus, the provision limits
interest deductibility in the case of such a contract covering
any individual in whom the taxpayer has an insurable interest
when the contract is first issued under applicable State law,
except as otherwise provided under present law with respect to
key persons and pre-1986 contracts.
Pro rata disallowance of interest on debt to fund life insurance
In the case of a taxpayer other than a natural person, no
deduction is allowed for the portion of the taxpayer's interest
expense that is allocable to unborrowed policy cash surrender
values with respect to any life insurance policy or annuity or
endowment contract issued after June 8, 1997. Interest expense
is so allocable based on the ratio of (1) the taxpayer's
average unborrowed policy cash values of life insurance
policies, and annuity and endowment contracts, issued after
June 8, 1997, to (2) the average adjusted bases for all assets
of the taxpayer. This rule does not apply to any policy or
contract owned by an entity engaged in a trade or business,
covering any individual who is an employee, officer or director
of the trade or business at the time first covered by the
policy or contract. Such a policy or contract is not taken into
account in determining unborrowed policy cash values.
The unborrowed policy cash values means the cash
surrender value of the policy or contract determined without
regard to any surrender charge, reduced by the amount of any
loan with respect to the policy or contract. The cash surrender
value is to be determined without regard to any other
contractual or noncontractual arrangement that artificially
depresses the cash value of a contract.
If a trade or business (other than a sole proprietorship
or a trade or business of performing services as an employee)
is directly or indirectly the beneficiary under any policy or
contract, then the policy or contract is treated as held by the
trade or business. For this purpose, the amount of the
unborrowed cash value is treated as not exceeding the amount of
the benefit payable to the trade or business. In the case of a
partnership or S corporation, the provision applies at the
partnership or corporate level. The amount of the benefit is
intended to take into account the amount payable to the
business under the contract (e.g., as a death benefit) or
pursuant to another agreement (e.g., under a split dollar
agreement). The amount of the benefit is intended also to
include any amount by which liabilities of the business would
be reduced by payments under the policy or contract (e.g., when
payments under the policy reduce the principal or interest on a
liability owed to or by the business).
As provided in regulations, the issuer or policyholder of
the life insurance policy or endowment or annuity contract is
required to report the amount of the amount of the unborrowed
cash value in order to carry out this rule.
If interest expense is disallowed under other provisions
of section 264 (limiting interest deductions with respect to
life insurance policies or endowment or annuity contracts) or
under section 265 (relating to tax-exempt interest), then the
disallowed interest expense is not taken into account under
this provision, and the average adjusted bases of assets is
reduced by theamount of debt, interest on which is so
disallowed. The provision is applied before present-law rules relating
to capitalization of certain expenses where the taxpayer produces
property (sec. 263A).
An aggregation rule is provided, treating related persons
as one for purposes of the provision.
The provision does not apply to any insurance company
subject to tax under subchapter L of the Code. Rather, the
rules reducing certain deductions for losses incurred, in the
case of property and casualty companies, and reducing reserve
deductions or dividends received deductions of life insurance
companies, are modified to take into account the increase in
cash values of life insurance policies or annuity or endowment
contracts held by insurance companies.
Effective date
The provisions apply with respect to contracts issued
after June 8, 1997. For this purpose, a material increase in
the death benefit or other material change in the contract
causes the contract to be treated as a new contract. To the
extent of additional covered lives under a contract after June
8, 1997, the contract is treated as a new contract. In the case
of an increase in the death benefit of a contract that is
converted to extended term insurance pursuant to nonforfeiture
provisions, in a transaction to which section 501(d)(2) of the
Health Insurance Portability and Accountability Act of 1996
applies, the contract is not treated as a new contract.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with modifications.
Expansion of premium deduction limitation to individuals in whom
taxpayer has an insurable interest
The conference agreement provides that the premium
deduction limitation does not apply to premiums with respect to
any annuity contract described in section 72(s)(5) (relating to
certain qualified pension plans, certain retirement annuities,
individual retirement annuities, and qualified funding assets),
nor to premiums with respect to any annuity to which section
72(u) applies (relating to current taxation of income on the
contract in the case of an annuity contract held by a person
who is not a natural person).
Expansion of interest disallowance to individuals in whom taxpayer has
insurable interest
The conference agreement specifies the treatment of
certain interest to which the provision of the bill providing
for expansion of interest disallowance to individuals in whom
taxpayer has insurable interest otherwise would apply. The
conference agreement provides that in the case of a transfer
for valuable consideration of a life insurance contract or any
interest therein described in section 101(a)(2), the amount of
the death benefit excluded from gross income under section
101(a) may not exceed an amount equal to the sum of the actual
value of the consideration, premiums, interest disallowed as a
deduction under new section 264(a)(4), and other amounts
subsequently paid by the transferee. Thus, under the provision,
in the case of the transfer for value of a life insurance
contract, the interest with respect to the contract that
otherwise would be disallowed under new section 264(a)(4) is
capitalized, reducing the amount included in income by the
transferee upon receipt by the transferee of the amounts paid
by reason of the death of the insured.
Pro rata disallowance of interest on debt to fund life insurance
Under the pro rata interest disallowance provision of the
bill, the conference agreement provides that interest expense
is allocable to unborrowed policy cash values based on the
ratio of (1) the taxpayer's average unborrowed policy cash
values of life insurance policies, and annuity and endowment
contracts, issued after June 8, 1997, to (2) the sum of (a) in
the case of assets that are life insurance policies or annuity
or endowment contracts, the average unborrowed policy cash
values, and (b) in the case of other assets, the average
adjusted bases for all such other assets of the taxpayer.
Under the pro rata interest disallowance rule, the
conference agreement expands the exception for any policy or
contract owned by an entity engaged in a trade or business,
covering an individual who is an employee, officer or director
of the trade or business at the time first covered. Under the
conference agreement, the exception applies to any policy or
contract owned by an entity engaged in a trade or business,
which covers one individual who (at the time first insured
under the policy or contract) is (1) a 20-percent owner of the
entity, or (2) an individual (who is not a 20-percent owner)
who is an officer, director or employee of the trade or
business. The exception also applies in the case of a joint-
life policy or contract under which the sole insureds are a 20-
percent owner and the spouse of the 20-percent owner. A joint-
life contract under which the sole insureds are a 20-percent
owner and his or her spouse is the only type of policy or
contract with more than one insured that comes within the
exception. Thus, for example, if the insureds under a contract
include an individual described in the exception (e.g., an
employee, officer, director, or 20-percent owner) and any
individual who is not described in the exception (e.g., a
debtor of the entity), then the exception does not apply to the
policy or contract. For purposes of this exception, a 20-
percent owner has the same meaning as under present-law section
264(d)(4). In addition, the conference agreement provides that
the pro rata interest disallowance rule does not apply to any
annuity contract to which section 72(u) applies (relating to
current taxation of income on the contract in the case of an
annuity contract held by a person who is not a natural person).
The conference agreement provides that any policy or contract
that is not subject to the pro rata interest disallowance rule
by reason of this exception (for 20-percent owners, their
spouses, employees, officers and directors, and in the case of
an annuity contract to which section 72(u) applies) is not
taken into account in applying the ratio to determine the
portion of the taxpayer's interest expense that is allocable to
unborrowed policy cash values.
The conferees wish to clarify that the aggregation rule
(treating related persons as one for purposes of the provision)
is intended to prevent taxpayers from avoiding the pro rata
interest limitation by owning life insurance, endowment or
annuity contracts, while incurring interest expense through a
related person.
Treatment of insurance companies
The conference agreement modifies the rules of the
provision relating to the reduction of certain deductions of
insurance companies. For purposes of those rules, an increase
in the policy cash value for any policy or contract is (1) the
amount of the increase in the adjusted cash value, reduced by
(2) the gross premiums received with respect to the policy or
contract during the taxable year, and increased by (3)
distributions under the policy or contract to which section
72(e) apply (other than amounts includable in the
policyholder's gross income). For this purpose, the adjusted
cash value means the cash surrender value of the policy or
contract, increased by (1) commissions payable with respect to
the policy or contract for the taxable year, and (2) asset
management fees, surrender and mortality charges, and any other
fees or charges, specified in regulations, which are imposed
(or would be imposed if the policy or contract were surrendered
or canceled) with respect to the policy or contract for the
taxable year.
Effective date
The conferees wish to clarify the rule under the
effective date providing that the addition of covered lives is
treated as a new contract only with respect to such additional
covered lives. It is intended that this rule apply with respect
to a master or group policy or contract, not with respect to a
joint-life policy or contract (i.e., a policy or contract that
insures more than one individual).
4. Allocation of basis of properties distributed to a partner by a
partnership (sec. 1064 of the House bill and sec. 874 of the
Senate amendment)
Present Law
In general
The partnership provisions of present law generally
permit partners to receive distributions of partnership
property without recognition of gain or loss (sec.
731).43 Rules are provided for determining the basis
of the distributed property in the hands of the distributee,
and for allocating basis among multiple properties distributed,
as well as for determining adjustments to the distributee
partner's basis in its partnership interest. Property
distributions are tax-free to a partnership. Adjustments to the
basis of the partnership's remaining undistributed assets are
not required unless the partnership has made an election that
requires basis adjustments both upon partnership distributions
and upon transfers of partnership interests (sec. 754).
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\43\ Exceptions to this nonrecognition rule apply: (1) when money
(and the fair market value of marketable securities) received exceeds a
partner's adjusted basis in the partnership (sec. 731(a)(1)); (2) when
only money, inventory and unrealized receivables are received in
liquidation of a partner's interest and loss is realized (sec.
731(a)(2)); (3) to certain disproportionate distributions involving
inventory and unrealized receivables (sec. 751(b)); and (4) to certain
distributions relating to contributed property (secs. 704(c) and 737).
In addition, if a partner engages in a transaction with a partnership
other than in its capacity as a member of the partnership, the
transaction generally is considered as occurring between the
partnership and one who is not a partner (sec. 707).
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Partner's basis in distributed properties and partnership interest
Present law provides two different rules for determining
a partner's basis in distributed property, depending on whether
or not the distribution is in liquidation of the partner's
interest in the partnership. Generally, a substituted basis
rule applies to property distributed to a partner in
liquidation. Thus, the basis of property distributed in
liquidation of a partner's interest is equal to the partner's
adjusted basis in its partnership interest (reduced by any
money distributed in the same transaction) (sec. 732(b)).
By contrast, generally, a carryover basis rule applies to
property distributed to a partner other than in liquidation of
its partnership interest, subject to a cap (sec. 732(a)). Thus,
in a non-liquidating distribution, the distributee partner's
basis in the property is equal to the partnership's adjusted
basis in the property immediately before the distribution, but
not to exceed the partner's adjusted basis in its partnership
interest (reduced by any money distributed in the same
transaction). In a non-liquidating distribution, the partner's
basis in its partnership interest is reduced by the amount of
the basis to the distributee partner of the property
distributed and is reduced by the amount of any money
distributed (sec. 733).
Allocating basis among distributed properties
In the event that multiple properties are distributed by
a partnership, present law provides allocation rules for
determining their bases in the distributee partner's hands. An
allocation rule is needed when the substituted basis rule for
liquidating distributions applies, in order to assign a portion
of the partner's basis in its partnership interest to each
distributed asset. An allocation rule is also needed in a non-
liquidating distribution of multiple assets when the total
carryover basis would exceed the partner's basis in its
partnership interest, so a portion of the partner's basis in
its partnership interest is assigned to each distributed asset.
Present law provides for allocation in proportion to the
partnership's adjusted basis. The rule allocates basis first to
unrealized receivables and inventory items in an amount equal
to the partnership's adjusted basis (or if the allocated basis
is less than partnership basis, then in proportion to the
partnership's basis), and then among other properties in
proportion to their adjusted bases to the partnership (sec.
732(c)).44 Under this allocation rule, in the case
of a liquidating distribution, the distributee partner can have
a basis in the distributed property that exceeds the
partnership's basis in the property.
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\44\ A special rule allows a partner that acquired a partnership
interest by transfer within two years of a distribution to elect to
allocate the basis of property received in the distribution as if the
partnership had a section 754 election in effect (sec. 732(d)). The
special rule also allows the Service to require such an allocation
where the value at the time of transfer of the property received
exceeds 110 percent of its adjusted basis to the partnership (sec.
732(d)). Treas. Reg. sec. 1.732-1(d)(4) generally requires the
application of section 732(d) where the allocation of basis under
section 732(c) upon a liquidation of the partner's interest would have
resulted in a shift of basis from non-depreciable property to
depreciable property.
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House Bill
The House bill modifies the basis allocation rules for
distributee partners. It allocates a distributee partner's
basis adjustment among distributed assets first to unrealized
receivables and inventory items in an amount equal to the
partnership's basis in each such property (as under present
law).
Under the provision, basis is allocated first to the
extent of each distributed property's adjusted basis to the
partnership. Any remaining basis adjustment, if an increase, is
allocated among properties with unrealized appreciation in
proportion to their respective amounts of unrealized
appreciation (to the extent of each property's appreciation),
and then in proportion to their respective fair market values.
For example, assume that a partnership with two assets, A and
B, distributes them both in liquidation to a partner whose
basis in its interest is 55. Neither asset consists of
inventory or unrealized receivables. Asset A has a basis to the
partnership of 5 and a fair market value of 40, and asset B has
a basis to the partnership of 10 and a fair market value of 10.
Under the provision, basis is first allocated to asset A in the
amount of 5 and to asset B in the amount of 10 (their adjusted
bases to the partnership). The remaining basis adjustment is an
increase totaling 40 (the partner's 55 basis minus the
partnership's total basis in distributed assets of 15). Basis
is then allocated to asset A in the amount of 35, its
unrealized appreciation, with no allocation to asset B
attributable to unrealized appreciation because its fair market
value equals the partnership's adjusted basis. The remaining
basis adjustment of 5 is allocated in the ratio of the assets'
fair market values, i.e., 4 to asset A (for a total basis of
44) and 1 to asset B (for a total basis of 11).
If the remaining basis adjustment is a decrease, it is
allocated among properties with unrealized depreciation in
proportion to their respective amounts of unrealized
depreciation (to the extent of each property's depreciation),
and then in proportion to their respective adjusted bases
(taking into account the adjustments already made). A remaining
basis adjustment that is a decrease arises under the provision
when the partnership's total adjusted basis in the distributed
properties exceeds the amount of the partner's basis in its
partnership interest, and the latter amount is the basis to be
allocated among the distributed properties. For example, assume
that a partnership with two assets, C and D, distributes them
both in liquidation to a partner whose basis in its partnership
interest is 20. Neither asset consists of inventory or
unrealized receivables. Asset C has a basis to the partnership
of 15 and a fair market value of 15, and asset D has a basis to
the partnership of 15 and a fair market value of 5. Under the
provision, basis is first allocated to the extent of the
partnership's basis in each distributed property, or 15 to each
distributed property, for a total of 30. Because the partner's
basis in its interest is only 20, a downward adjustment of 10
(30 minus 20) is required. The entire amount of the 10 downward
adjustment is allocated to the property D, reducing its basis
to 5. Thus, the basis of property C is 15 in the hands of the
distributee partner, and the basis of property D is 5 in the
hands of the distributee partner.
Effective date.--The provision applies to partnership
distributions after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
5. Treatment of inventory items of a partnership (sec. 1065 of the
House bill and sec. 875 of the Senate amendment)
Present Law
Under present law, upon the sale or exchange of a
partnership interest, any amount received that is attributable
to unrealized receivables, or to inventory that has
substantially appreciated, is treated as an amount realized
from the sale or exchange of property that is not a capital
asset (sec. 751(a)).
Present law provides a similar rule to the extent that a
distribution is treated as a sale or exchange of a partnership
interest. A distribution by a partnership in which a partner
receives substantially appreciated inventory or unrealized
receivables in exchange for its interest in certain other
partnership property (or receives certain other property in
exchange for its interest in substantially appreciated
inventory or unrealized receivables) is treated as a taxable
sale or exchange of property, rather than as a nontaxable
distribution (sec. 751(b)).
For purposes of these rules, inventory of a partnership
generally is treated as substantially appreciated if the fair
market value of the inventory exceeds 120 percent of adjusted
basis of the inventory to the partnership (sec. 751(d)(1)(A)).
In applying this rule, inventory property is excluded from the
calculation if a principal purpose for acquiring the inventory
property was to avoid the rules relating to inventory (sec.
751(d)(1)(B)).
House Bill
The House bill eliminates the requirement that inventory
be substantially appreciated in order to give rise to ordinary
income under the rules relating to sales and exchanges of
partnership interests and certain partnership distributions.
This conforms the treatment of inventory to the treatment of
unrealized receivables under these rules.
Effective date.--The provision is effective for sales,
exchanges, and distributions after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with modifications. The conference agreement
repeals the requirement that inventory be substantially
appreciated only with respect to sales or exchanges of
partnership interests under section 751(a) of the Code, but not
with respect to distributions under section 751(b) of the Code.
Thus, present law is retained with respect to distributions
governed by section 751(b).
Effective date.--The conference agreement follows the
House bill and the Senate amendment, with a modification. The
conference agreement provides that the provision is effective
for sales, exchanges, and distributions after the date of
enactment, except that the provision does not apply to any sale
or exchange pursuant to a written binding contract in effect on
June 8, 1997, and at all times thereafter before such sale or
exchange.
6. Treatment of appreciated property contributed to a
partnership (sec. 1066 of the House bill)
Present Law
Under present law, if a partner contributes appreciated
property to a partnership, no gain is recognized to the
contributing partner at the time of the contribution. The
contributing partner's basis in its partnership interest is
increased by the basis of the contributed property at the time
of the contribution. The pre-contribution gain is reflected in
the difference between the partner's capital account and its
basis in its partnership interest (``book/tax differential'').
Income, gain, loss, and deduction with respect to the
contributed property must be shared among the partners so as to
take account of the variation between the basis of the property
to the partnership and its fair market value at the time of
contribution (sec. 704(c)(1)(A)).
If the property is subsequently distributed to another
partner within 5 years of the contribution, the contributing
partner generally recognizes gain as if the property had been
sold for its fair market value at the time of the distribution
(sec. 704(c)(1)(B)). Similarly, the contributing partner
generally includes pre-contribution gain in income to the
extent that the value of other property distributed by the
partnership to that partner exceeds its adjusted basis in its
partnership interest, if the distribution by the partnership is
made within 5 years after the contribution of the appreciated
property (sec. 737).
House Bill
The House bill extends to 10 years the period in which a
partner recognizes pre-contribution gain with respect to
property contributed to a partnership. Thus, under the
provision, a partner that contributes appreciated property to a
partnership generally recognizes pre-contribution gain in the
event that the partnership distributes the contributed property
to another partner, or distributes to the contributing partner
other property whose value exceeds that partner's basis in its
partnership interest, if the distribution occurs within 10
years after the contribution to the partnership.
Effective date.--Effective for property contributed to a
partnership after June 8, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with a
modification. The conference agreement extends to 7 years the
period in which a partner recognizes pre-contribution gain with
respect to property contributed to a partnership. Thus, under
the conference agreement, a partner that contributes
appreciated property to a partnership generally recognizes pre-
contribution gain in the event that the partnership distributes
the contributed property to another partner, or distributes to
the contributing partner other property whose value exceeds
that partner's basis in its partnership interest, if the
distribution occurs within 7 years after the contribution to
the partnership.
Effective date.--The effective date is the same as the
House bill, with a modification. The conference agreement is
effective for property contributed to a partnership after June
8, 1997, except that the provision does not apply to any
property contributed to a partnership pursuant to a written
binding contract in effect on June 8, 1997, and at all times
thereafter before such contribution, if the contract provides
for the contribution of a fixed amount of property.
7. Earned income credit compliance provisions (sec. 1067 of the House
bill and sec. 5851 of the Senate amendment to H.R. 2015 (``the
Balanced Budget Act of 1997''))
Overview
Certain eligible low-income workers are entitled to claim
a refundable earned income credit on their income tax return. A
refundable credit is a credit that not only reduces an
individual's tax liability but allows refunds to the individual
in excess of income tax liability. The amount of the credit an
eligible individual may claim depends upon whether the
individual has one, more than one, or no qualifying children,
and is determined by multiplying the credit rate by the
individual's 45 earned income up to an earned income
amount. The maximum amount of the credit is the product of the
credit rate and the earned income amount. The credit is reduced
by the amount of the alternative minimum tax (``AMT'') the
taxpayer owes for the year. The credit is phased out above
certain income levels.
---------------------------------------------------------------------------
\45\ In the case of a married individual who files a joint return
with his or her spouse, the income for purposes of these tests is the
combined income of the couple.
---------------------------------------------------------------------------
For individuals with earned income (or AGI, if greater)
in excess of the beginning of the phaseout range, the maximum
credit amount is reduced by the phaseout rate multiplied by the
amount of earned income (or AGI, if greater) in excess of the
beginning of the phaseout range. For individuals with earned
income (or AGI, if greater) in excess of the end of the
phaseout range, no credit is allowed. The definition of AGI
used for phasing out the earned income credit disregards
certain losses. The losses disregarded are: (1) net capital
losses (if greater than zero); (2) net losses from trusts and
estates; (3) net losses from nonbusiness rents and royalties;
and (4) 50 percent of the net losses from business, computed
separately with respect to sole proprietorships (other than in
farming), sole proprietorships in farming, and other
businesses. Also, an individual is not eligible for the earned
income credit if the aggregate amount of ``disqualified
income'' of the taxpayer for the taxable year exceeds $2,250.
Disqualified income is the sum of: (1) interest (taxable and
tax-exempt); (2) dividends; (3) net rent and royalty income (if
greater than zero); (4) capital gain net income; and (5) net
passive income (if greater than zero) that is not self-
employment income. The earned income amount, the phaseout
amount and the disqualified income amount are indexed for
inflation.
The parameters for the credit depend upon the number of
qualifying children the individual claims. For 1997, the
parameters are given in the following table:
PRESENT-LAW EARNED INCOME CREDIT PARAMETERS
------------------------------------------------------------------------
Two or
more One No
qualifying qualifying qualifying
children child children
------------------------------------------------------------------------
Credit rate (percent)............... 40.00 34.00 7.65
Earned income amount................ $9,140 $6,500 $4,340
Maximum credit...................... $3,656 $2,210 $332
Phaseout begins..................... $11,930 $11,930 $5,430
Phaseout rate (percent)............. 21.06 15.98 7.65
Phaseout ends....................... $29,290 $25,760 $9,770
------------------------------------------------------------------------
In order to claim the credit, an individual must either
have a qualifying child or meet other requirements. A
qualifying child must meet a relationship test, an age test, an
identification test, and a residence test. In order to claim
the credit without a qualifying child, an individual must not
be a dependent and must be over age 24 and under age 65.
a. Deny EIC eligibility for prior acts of recklessness or
fraud (sec. 1067 of the House bill and sec. 5851 of
the Senate amendment to H.R. 2015)
Present Law
The accuracy-related penalty, which is imposed at a rate
of 20 percent, applies to the portion of any underpayment that
is attributable to (1) negligence, (2) any substantial
understatement of income tax, (3) any substantial valuation
overstatement, (4) any substantial overstatement of pension
liabilities, or (5) any substantial estate or gift tax
valuation understatement (sec. 6662). Negligence includes any
careless, reckless, or intentional disregard of rules or
regulations, as well as any failure to make a reasonable
attempt to comply with the provisions of the Code.
The fraud penalty, which is imposed at a rate of 75
percent, applies to the portion of any underpayment that is
attributable to fraud (sec. 6663).
Neither the accuracy-related penalty nor the fraud
penalty is imposed with respect to any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith with
respect to that portion.
House Bill
Under the House bill, a taxpayer who fraudulently claims
the earned income credit (EIC) is ineligible to claim the EIC
for a subsequent period of 10 years. In addition, a taxpayer
who erroneously claims the EIC due to reckless or intentional
disregard of rules or regulations is ineligible to claim the
EIC for a subsequent period of two years. These sanctions are
in addition to any other penalty imposed under present law. The
determination of fraud or of reckless or intentional disregard
of rules or regulations are made in a deficiency proceeding
(which provides for judicial review).
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
b. Recertification required when taxpayer found to be
ineligible for EIC in past (sec. 1067 of the House
bill and sec. 5851 of the Senate amendment to H.R.
2015)
Present law
If an individual fails to provide a correct TIN and
claims the EIC, such omission is treated as a mathematical or
clerical error. Also, if an individual who claims the EIC with
respect to net earnings from self employment fails to pay the
proper amount of self-employment tax on such net earnings, the
failure is treated as a mathematical or clerical error for
purposes of the amount of EIC claimed. Generally, taxpayers
have 60 days in which they can either provide a correct TIN or
request that the IRS follow the current-law deficiency
procedures. If a taxpayer fails to respond within this period,
he or she must file an amended return with a correct TIN or
clarify that any self-employment tax has been paid in order to
obtain the EIC originally claimed.
The IRS must follow deficiency procedures when
investigating other types of questionable EIC claims. Under
these procedures, contact letters are first sent to the
taxpayer. If the necessary information is not provided by the
taxpayer, a statutory notice of deficiency is sent by certified
mail, notifying the taxpayer that the adjustment will be
assessed unless the taxpayer files a petition in Tax Court
within 90 days. If a petition is not filed within that time and
there is no other response to the statutory notice, the
assessment is made and the EIC is denied.
House Bill
Under the House bill, a taxpayer who has been denied the
EIC as a result of deficiency procedures is ineligible to claim
the EIC in subsequent years unless evidence of eligibility for
the credit is provided by the taxpayer. To demonstrate current
eligibility, the taxpayer is required to meet evidentiary
requirements established by the Secretary of the Treasury.
Failure to provide this information when claiming the EIC is
treated as a mathematical or clerical error. If a taxpayer is
recertified as eligible for the credit, the taxpayer is not
required to provide this information in the future unless the
IRS again denies the EIC as a result of a deficiency procedure.
Ineligibility for the EIC under the provision is subject to
review by the courts.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
c. Due diligence requirements for paid preparers (sec. 1067
of the House bill and sec. 5851 of the Senate
amendment to H.R. 2015)
Present Law
Several penalties apply in the case of an understatement
of tax that is caused by an income tax return preparer. First,
if any part of an understatement of tax on a return or claim
for refund is attributable to a position for which there was
not a realistic possibility of being sustained on its merits
and if any person who is an income tax return preparer with
respect to such return or claim for refund knew (or reasonably
should have known) of such position and such position was not
disclosed or was frivolous, then that return preparer is
subject to a penalty of $250 with respect to that return or
claim (sec. 6694(a)). The penalty is not imposed if there is
reasonable cause for the understatement and the return preparer
acted in good faith.
In addition, if any part of an understatement of tax on a
return or claim for refund is attributable to a willful attempt
by an income tax return preparer to understate the tax
liability of another person or to any reckless or intentional
disregard of rules or regulations by an income tax return
preparer, then the income tax return preparer is subject to a
penalty of $1,000 with respect to that return or claim (sec.
6694(b)).
Also, a penalty for aiding and abetting the
understatement of tax liability is imposed in cases where any
person aids, assists in, procures, or advises with respect to
the preparation or presentation of any portion of a return or
other document if (1) the person knows or has reason to believe
that the return or other document will be used in connection
with any material matter arising under the tax laws, and (2)
the person knows that if the portion of the return or
otherdocument were so used, an understatement of the tax liability of
another person would result (sec. 6701).
Additional penalties are imposed on return preparers with
respect to each failure to (1) furnish a copy of a return or
claim for refund to the taxpayer, (2) sign the return or claim
for refund, (3) furnish his or her identifying number, (4)
retain a copy or list of the returns prepared, and (5) file a
correct information return (sec. 6695). The penalty is $50 for
each failure and the total penalties imposed for any single
type of failure for any calendar year are limited to $25,000.
House Bill
Under the House bill, return preparers are required to
fulfill certain due diligence requirements with respect to
returns they prepare claiming the EIC. The penalty for failure
to meet these requirements is $100. This penalty is in addition
to any other penalty imposed under present law.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
d. Modify the definition of AGI used to phaseout the EIC
Present Law
The EIC is phased out above certain income levels. For
individuals with earned income (or AGI, if greater) in excess
of the beginning of the phaseout range, the maximum credit
amount is reduced by the phaseout rate multiplied by the amount
of earned income (or AGI, if greater) in excess of the
beginning of the phaseout range. For individuals with earned
income (or AGI, if greater) in excess of the end of the
phaseout range, no credit is allowed. The definition of AGI
used for the phase out of the earned income credit disregards
certain losses. The losses disregarded are: (1) net capital
losses (if greater than zero); (2) net losses from trusts and
estates; (3) net losses from nonbusiness rents and royalties;
and (4) 50 percent of the net losses from business, computed
separately with respect to sole proprietorships (other than in
farming), sole proprietorships in farming, and other
businesses.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
The conference agreement modifies the definition of AGI
used for phasing out the credit by adding two items of
nontaxable income and changing the percentage of certain losses
disregarded. The two items added are: (1) tax-exempt interest,
and (2) nontaxable distributions from pensions, annuities, and
individual retirement arrangements (but only if not rolled over
into similar vehicles during the applicable rollover period).
The conference agreement also increases the amount of net
losses from businesses, computed separately with respect to
sole proprietorships (other than farming), sole proprietorships
in farming, and other businesses disregarded from 50 percent to
75 percent.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
8. Eligibility for income forecast method (sec. 1068 of the House bill
and sec. 876 of the Senate amendment)
Present Law
A taxpayer generally recovers the cost of property used
in a trade or business through depreciation or amortization
deductions over time. Tangible property generally is
depreciated under the modified Accelerated Cost Recovery System
(``MACRS'') of section 168, which applies specific recovery
periods and depreciation methods to the cost of various types
of depreciable 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. The cost of such property may be
depreciated under the ``income forecast'' method.
The income forecast method is considered to be a method
of depreciation not expressed in a term of years. Under the
income forecast method, the depreciation deduction for a
taxable year for a property is determined by multiplying the
cost of the property (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 is
available to any property if (1) the taxpayer elects to exclude
such property from MACRS and (2) for the first taxable year for
which depreciation is allowable, the property is properly
depreciated under such method. The income forecast method has
been held to be applicable for computing depreciation
deductionsfor motion picture films, television films and taped
shows, books, patents, master sound recordings and video games. Most
recently, the income forecast method has been held applicable to
consumer durable property subject to short-term ``rent-to-own'' leases.
House Bill
The House bill clarifies the types of property to which
the income forecast method may be applied. Under the House
bill, the income forecast method is available to motion picture
films, television films and taped shows, books, patents, master
sound recordings, copyrights, and other such property as
designated by the Secretary of the Treasury.
In addition, consumer durables subject to rent-to-own
contracts are provided a three-year recovery period and a four-
year class life for MACRS purposes (and are not eligible for
the income forecast method). Such property generally is
described in Rev. Proc. 95-38, 1995-34 I.R.B. 25.
Effective date.--The provision is effective for property
placed in service after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement generally follows the House bill
and the Senate amendment, with modifications to depreciation
applicable to qualified rent-to-own property. First, the
conference agreement provides that the special 3-year recovery
period may apply to any property generally used in the home for
personal, but not business, use. The conferees understand that
certain rent-to-own property, including computer and peripheral
equipment, may be used in the home for either personal or
business purposes, and the taxpayer may not be aware of how its
customers may use the property. So as not to increase the
administrative burdens of taxpayers, the conferees intend that
if such dual-use property does not represent a significant
portion of a taxpayer's leasing property and if such other
leasing property predominantly is qualified rent-to-own
property, then such dual-use property generally also would be
qualified rent-to-own property. However, if such dual-use
property represents a significant portion of the taxpayer's
leasing property, the conferees intend that the burden of proof
be placed on the taxpayer to show that such property is
qualified rent-to-own property.
In addition, the conference agreement modifies the
definition of ``rent-to-own contract'' to include leases that
provide for decreasing regular periodic payments.
Finally, the conferees wish to clarify that the 3-year
recovery period provided under the provision only applies to
property subject to leases and no inference is intended as to
whether any arrangement constitutes a lease for tax purposes.
9. Require taxpayers to include rental value of residence in income
without regard to period of rental (sec. 1069 of the House
bill)
Present Law
Gross income for purposes of the Internal Revenue Code
generally includes all income from whatever source derived,
including rents. The Code (sec. 280A(g)) provides a de minimis
exception to this rule where a dwelling unit is used during the
taxable year by the taxpayer as a residence and such dwelling
unit is actually rented for less than 15 days during the
taxable year. In this case, the income from such rental is not
included in gross income and no deductions arising from such
rental use are allowed as a deduction.
House Bill
The House bill repeals the 15-day rules of section
280A(g). The House bill also provides that no reduction in
basis is required if the taxpayer (1) rented the dwelling unit
for less than 15 days during the taxable year and (2) did not
claim depreciation on the dwelling unit for the period of
rental.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
10. Modify the exception to the related party rule of section 1033 for
individuals to only provide an exception for de minimis amounts
(sec. 1070 of the House bill and sec. 877 of the Senate
amendment)
Present Law
Under 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
replacement period of time. Pursuant to a provision of Public
Law 104-7, subchapter C corporations (and certain partnerships
with corporate partners) are not entitled to defer gain under
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 section 267(b) or 707(b)(1). An exception
to this related party rule provides that a taxpayer could
purchase replacement property or stock from a related person
and defer gain under section 1033 to the extent the related
person acquired the replacement property or stock from an
unrelated person within the replacement period.
House Bill
The House bill expands the present-law denial of the
application of section 1033 to any other taxpayer (including an
individual) that acquires replacement property from a related
party (as defined by secs. 267(b) and 707(b)(1)) unless the
taxpayer has aggregate realized gain of $100,000 or less for
the taxable year with respect to converted property with
aggregate realized gains. In the case of a partnership (or S
corporation), the annual $100,000 limitation applies to both
the partnership (or S corporation) and each partner (or
shareholder).
Effective date.--The provision applies to involuntary
conversions occurring after June 8, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
11. Repeal of exception for certain sales by manufacturers to dealers
(sec. 1071 of the House bill and sec. 878 of the Senate
amendment)
Present Law
In general, the installment sales method of accounting
may not be used by dealers in personal property. Present law
provides an
exception which permits the use of the installment method for
installment obligations arising from the sale of tangible
personal property by a manufacturer of the property (or an
affiliate of the manufacturer) to a dealer,46 but
only if the dealer is obligated to make payments of principal
only when the dealer resells (or rents) the property, the
manufacturer has the right to repurchase the property at a
fixed (or ascertainable) price after no longer than a 9-month
period following the sale to the dealer, and certain other
conditions are met. In order to meet the other conditions, the
aggregate face amount of the installment obligations that
otherwise qualify for the exception must equal at least 50
percent of the total sales to dealers that gave rise to such
receivables (the ``50-percent test'') in both the taxable year
and the preceding taxable year, except that, if the taxpayer
met all of the requirements for the exception in the preceding
taxable year, the taxpayer would not be treated as failing to
meet the 50-percent test before the second consecutive year in
which the taxpayer did not actually meet the test. In addition,
these requirements must be met by the taxpayer in its first
taxable year beginning after October 22, 1986, except that
obligations issued before that date are treated as meeting the
applicable requirements if such obligations were conformed to
the requirements of the provision within 60 days of that date.
---------------------------------------------------------------------------
\46\ I.e., the sale of the property must be intended to be for
resale or leasing by the dealer.
---------------------------------------------------------------------------
House Bill
The House bill repeals the exception that permits the use
of the installment method of accounting for certain sales by
manufacturers to dealers.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment. Any resulting
adjustment from a required change in accounting will be
includible ratably over the 4 taxable years beginning after
that date.
Senate Amendment
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date.--The provision is effective for taxable
years beginning one year after the date of enactment. Any
resulting adjustment from a required change in accounting will
be includible ratably over the 4 taxable years beginning after
that date.
Conference Agreement
The conference agreement follows the Senate amendment.
12. Extension of Federal unemployment surtax (sec. 881 of the Senate
amendment)
Present Law
The Federal Unemployment Tax Act (FUTA) imposes a 6.2-
percent gross tax rate on the first $7,000 paid annually by
covered employers to each employee. Employers in States with
programs approved by the Federal Government and with no
delinquent Federal loans may credit 5.4-percentage points
against the 6.2-percent tax rate, making the minimum, net
Federal unemployment tax rate 0.8 percent. Since all States
have approved programs, 0.8 percent is the Federal tax rate
that generally applies. This Federal revenue finances
administration of the system, half of the Federal-State
extended benefits program, and a Federal account for State
loans. The States use the revenue turned back to them by the
5.4-percent credit to finance their regular State programs and
half of the Federal-State extended benefits program.
In 1976, Congress passed a temporary surtax of 0.2
percent of taxable wages to be added to the permanent FUTA tax
rate. Thus, the current 0.8-percent FUTA tax rate has two
components: a permanent tax rate of 0.6 percent, and a
temporary surtax rate of 0.2 percent. The temporary surtax
subsequently has been extended through 1998.
House Bill
No provision.
Senate Amendment
The Senate amendment extends the temporary surtax rate
through December 31, 2007. It also increases the limit from
0.25 percent to 0.50 percent of covered wages on the Federal
Unemployment Account (FUA) in the Unemployment Trust Fund.
Effective date.--The provision is effective for labor
performed on or after January 1, 1999.
Conference Agreement
The conference agreement follows the Senate amendment.
13. Treatment of charitable remainder trusts (sec. 883 of the Senate
amendment)
Present Law
In general
Sections 170(f), 2055(e)(2) and 2522(c)(2) disallow a
charitable deduction for income, estate or gift tax purposes,
respectively, where the donor transfers an interest in property
to a charity (e.g., a remainder) while also either retaining an
interest in that property (e.g., an income interest) or
transferring an interest in that property to a noncharity for
less than full and adequate consideration. Exceptions to this
general rule are provided for: (1) remainder interests in
charitable remainder annuity trusts, charitable remainder
unitrusts, pooled income funds, farms, and personal residences;
(2) present interests in the form of a guaranteed annuity or a
fixed percentage of the annual value of the property; (3) an
undivided portion of the donor's entire interest in the
property; and (4) a qualified conservation easement.
Charitable remainder annuity trusts and charitable remainder unitrusts
A charitable remainder annuity trust is a trust which is
required to pay a fixed dollar amount, not less often than
annually, of at least 5 percent of the initial value of the
trust to a non-charity for the life of an individual or a
period of years not to exceed 20 years, with the remainder
passing to charity. A charitable remainder unitrust is a trust
which generally isrequired to pay, at least annually, a fixed
percentage of the fair market value of the trust's assets determined at
least annually to a noncharity for the life of an individual or a
period of years not to exceed 20 years, with the remainder passing to
charity (sec. 664(d)).
Distributions from a charitable remainder annuity trust
or charitable remainder unitrust are treated first as ordinary
income to the extent of the trust's current and previously
undistributed ordinary income for the trust's year in which the
distribution occurred; second, as capital gains to the extent
of the trust's current capital gain and previously
undistributed capital gain for the trust's year in which the
distribution occurred; third, as other income (e.g., tax-exempt
income) to the extent of the trust's current and previously
undistributed other income for the trust's year in which the
distribution occurred; and, fourth, as corpus (sec. 664(b)).
Distributions are includible in the income of the
beneficiary for the year that the annuity or unitrust amount is
required to be distributed even though the annuity or unitrust
amount is not distributed until after the close of the trust's
taxable year. Treas. reg. sec. 1.664-1(d)(4).
On April 18, 1997, the Treasury Department proposed
regulations providing additional rules under sections 664 and
2702 to address perceived abuses involving distributions from
charitable remainder trusts. One of those proposed rules would
require that payment of any required annuity or unitrust amount
by a charitable remainder trust (other than an ``income only''
unitrust) be made by the close of the trust's taxable year in
which such payments are due. See Prop. Treas. reg. secs. 1.664-
2(a)(1)(i) and 1.664-3(a)(1)(i).
House Bill
No provision.
Senate Amendment
Under the Senate amendment, a trust cannot be a
charitable remainder annuity trust if the annuity for any year
is greater than 50 percent of the initial fair market value of
the trust's assets or be a charitable remainder unitrust if the
percentage of assets that are required to be distributed at
least annually is greater than 50 percent. Any trust that fails
this 50-percent rule will not be a charitable remainder trust
whose taxation is governed under section 664, but will be
treated as a complex trust and, accordingly, all its income
will be taxed to its beneficiaries or to the trust.
Effective date.--The provision applies to transfers to a
trust made after June 18, 1997.
Conference Agreement
The conference agreement follows the Senate amendment
with a modification that requires that the value of the
charitable remainder with respect to any transfer to a
qualified charitable remainder annuity trust or charitable
remainder unitrust be at least 10 percent of the net fair
market value of such property transferred in trust on the date
of the contribution to the trust. The 10-percent test is
measured on each transfer to the charitable remainder trust
and, consequently, a charitable remainder trust which meets the
10-percent test on the date of transfer will not subsequently
fail to meet that test if interest rates have declined between
the trust's creation and the death of a measuring life.
Similarly, where a charitable remainder trust is created for
the joint lives of two individuals with a remainder to charity,
the trust will not cease to qualify as a charitable remainder
trust because the value of the charitable remainder was less
than 10 percent of the trust's assets at the first death of
those two individuals. The conference agreement provides
several additional rules in order to provide relief for trusts
that do not meet the 10-percent rule.
First, where a transfer is made after July 28, 1997, to a
charitable remainder trust that fails the 10-percent test, the
trust is treated as meeting the 10-percent requirement if the
governing instrument of the trust is changed by reformation,
amendment, construction, or otherwise to meet such requirement
by reducing the payout rate or duration (or both) of any
noncharitable beneficiary's interest to the extent necessary to
satisfy such requirement so long as the reformation is
commenced within the period permitted for reformations of
charitable remainder trusts under section 2055(e)(3). The
statute of limitations applicable to a deficiency of any tax
resulting from reformation of the trust shall not expire before
the date one year after the Treasury Department is notified
that the trust has been reformed. In substance, this rule
relaxes the requirements of section 2055(e)(3)(B) to the extent
necessary for the reformation for the trust to meet the 10-
percent requirement.
Second, a transfer to a trust will be treated as if the
transfer never had been made where a court having jurisdiction
over the trust subsequently declares the trust void (because,
e.g., the application of the 10 percent rule frustrates the
purposes for which the trust was created) and judicial
proceedings to revoke the trust are commenced within the period
permitted for reformations of charitable remainder trusts under
section 2055(e)(3). Under this provision, the effect of
``unwinding'' the trust is that any transactions made by the
trust with respect to the property transferred (e.g., income
earned on the assets transferred to the trust and capital gains
generated by the sales of the property transferred) would be
income and capital gain of the donor (or the donor's estate if
the trust was testamentary), and the donor (or the donor's
estate if the trust was testamentary) would not be permitted a
charitable deduction with respect to the transfer. The statute
of limitations applicable to a deficiency of any tax resulting
from ``unwinding'' the trust shall not expire before the date
one year after the Treasury Department is notified that the
trust has been revoked.
Third, where an additional contribution is made after
July 28, 1997, to a charitable remainder unitrust created
before July 29, 1997, and that unitrust would not meet the 10-
percent requirement with respect to the additional
contribution, the conference agreement provides that such
additional contribution will be treated, under regulations to
be issued by the Secretary of the Treasury, as if it had been
made to a new trust that does not meet the 10-percent
requirement, but which does not affect the status of the
original unitrust as a charitable remainder trust.
The conferees intend that this provision of the
conference agreement not limit or alter the validity of
regulations proposed by the Treasury Department on April 18,
1997, or the Treasury Department's authority to address abuses
of the rules governing the taxation of charitable remainder
trusts or their beneficiaries.
Effective date.--The requirement that the payout rate not
exceed 50 percent applies to transfers to a trust made after
June 18, 1997.
The requirement that the value of the charitable
remainder with respect to any transfer to a qualified remainder
trust be at least 10 percent of the fair market value of the
assets transferred in trust applies to transfers to a trust
made after July 28, 1997. However, the 10-percent requirement
does not apply to a charitable remainder trust created by a
testamentary instrument (e.g., a will or revocable trust)
executed before July 29, 1997, if the instrument is not
modified after that date and the settlor dies before January 1,
1999, or could not be modified after July 28, 1997, because the
settlor was under a mental disability on that date (i.e., July
28, 1997) and all times thereafter.
14. Modify general business credit carryback and carryforward rules
(sec. 788(b) of the Senate amendment)
Present Law
A qualified taxpayer is allowed to claim the
rehabilitation credit, the energy credit, the reforestation
credit, the work opportunity credit, the alcohol fuels credit,
the research credit, the low-income housing credit, the
enhanced oil recovery credit, the disabled access credit, the
renewable electricity production credit, the empowerment zone
employment credit, the Indian employment credit, the employer
social security credit, and the orphan drug credit
(collectively, known as the general business credit), subject
to certain limitations based on tax liability for the year.
Unused general business credits generally may be carried back
three years and carried forward 15 years to offset tax
liability of such years, subject to the same limitations.
House Bill
No provision.
Senate Amendment
The Senate amendment limits the carryback period for the
general business credit to one year and extends the
carryforward period to 20 years.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Conference Agreement
The conference agreement includes the Senate amendment
with a clarification that the provision is effective for
credits arising in taxable years beginning after December 31,
1997.
15. Using Federal case registry of child support orders for tax
enforcement purposes
Present Law
The Personal Responsibility and Work Opportunity
Reconciliation Act of 1996 mandated the creation of a Federal
Case Registry of Child Support Orders (the FCR) by October 1,
1998. Although HHS has not yet issued final regulations, the
FCR is required to include the names, and the State case
identification numbers of individuals who are owed or who owe
child support or for whom paternity is being established. It
may also include the social security numbers (SSNs) of these
individuals.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
Not later than October 1, 1999, the Secretary of the
Treasury will have access to the Federal Case Registry of Child
Support Orders. Also, by October 1, 1999, the data elements on
the State Case Registry will include the SSNs of children
covered by cases in the Registry, and the States will provide
the SSNs of these children to the FCR.
Effective date.-- The provision is effective on October
1, 1999.
16. Expanded SSA records for tax enforcement
Present Law
Under the Family Support Act of 1988, States must require
each parent to furnish their social security number (SSN) for
birth records. Parents can apply directly to the Social
Security Administration (SSA) for an SSN for their child; or,
in most states, they may apply for the child's SSN when
obtaining a birth certificate. On an individual's SSN
application, the SSA currently requires the mother's maiden
name but not her SSN.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
SSA is required to obtain social security numbers (SSNs)
of both parents on minor children's applications for SSNs. The
SSA will provide this information to the IRS as part of the
Data Master File (``DM-1 file'). The conferees anticipate that
the IRS will use the information to identify questionable
claims for the earned income credit, the dependent exemption,
and other tax benefits, before tax refunds are paid out.
Effective date.--The provision is effective on the date
of enactment.
17. Treatment of amounts received under the work requirements of the
Personal Responsibility and Work Opportunity Act of 1996
Present Law
Workfare payments
Generally under the Personal Responsibility and Work
Opportunity Act of 1996, the receipt of certain government
assistance payments is denied unless the recipient meets
certain work requirements. The tax treatment of payments
received with respect to these work requirements (``workfare
payments'') was not specified in that legislation.
Earned income credit
Certain eligible low-income workers are entitled to claim
a refundable earned income credit on their income tax return.
The amount of the credit an eligible individual may claim
depends upon whether the individual has one, more than one, or
no qualifying children, and is generally determined by
multiplying the credit rate by the individual's earned income
up to an earned income amount. The maximum amount of the credit
is the product of the credit rate and the earned income amount.
The credit is reduced by the amount of the alternative minimum
tax (``AMT'') the taxpayer owes for the year. The credit is
phased out above certain income levels. For individuals with
earned income (or AGI, if greater) in excess of the beginning
of the phaseout range, the maximum credit amount is reduced by
the phaseout rate multiplied by the amount of earned income (or
AGI, if greater) in excess of the beginning of the phaseout
range. For individuals with earned income (or AGI, if greater)
in excess of the end of the phaseout range, no credit is
allowed. For these purposes, both earned income and AGI are
defined to include wages. There is no explicit provision
whether workfare payments are wages for purposes of the earned
income credit.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
The conference agreement provides that workfare payments
are not wages for purposes of the earned income credit. There
is no inference intended with respect to whether workfare
payments otherwise qualify as wages for purposes of income and
employment taxes or as wages for purposes of an employer's
eligibility for the work opportunity tax credit and the
welfare-to-work tax credit. Also, there is no inference
intended with respect to whether workfare payments are wages
for purposes of the earned income credit before enactment of
this provision.
Effective date.--The provision is effective on the date
of enactment.
XI. FOREIGN TAX PROVISIONS
A. General Provisions
1. Simplify foreign tax credit limitation for individuals (sec. 1103 of
the House bill and sec. 901 of the Senate amendment)
Present Law
In order to compute the foreign tax credit, a taxpayer
computes foreign source taxable income and foreign taxes paid
in each of the applicable separate foreign tax credit
limitation categories. In the case of an individual, this
requires the filing of IRS Form 1116.
In many cases, individual taxpayers who are eligible to
credit foreign taxes may have only a modest amount of foreign
source gross income, all of which is income from investments.
Taxable income of this type ordinarily is includible in the
single foreign tax credit limitation category for passive
income. However, under certain circumstances, the Code treats
investment-type income (e.g., dividends and interest) as income
in one of several other separate limitation categories (e.g.,
high withholding tax interest income or general limitation
income). For this reason, any taxpayer with foreign source
gross income is required to provide sufficient detail on Form
1116 to ensure that foreign source taxable income from
investments, as well as all other foreign source taxable
income, is allocated to the correct limitation category.
House Bill
The House bill allows individuals with no more than $300
($600 in the case of married persons filing jointly) of
creditable foreign taxes, and no foreign source income other
than passive income, an exemption from the foreign tax credit
limitation rules. (It is intended that an individual electing
this exemption will not be required to file Form 1116 in order
to obtain the benefit of the foreign tax credit.) An individual
making this election is not entitled to any carryover of excess
foreign taxes to or from a taxable year to which the election
applies.
For purposes of this election, passive income generally
is defined to include all types of income that is foreign
personal holding company income under the subpart F rules, plus
income inclusions from foreign personal holding companies and
passive foreign investment companies, provided that the income
is shown on a payee statement furnished to the individual. For
purposes of this election, creditable foreign taxes include
only foreign taxes that are shown on a payee statement
furnished to the individual.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Simplify translation of foreign taxes (sec. 1104 of the House bill
and sec. 902 of the Senate amendment)
Present Law
Translation of foreign taxes
Foreign income taxes paid in foreign currencies are
required to be translated into U.S. dollar amounts using the
exchange rate as of the time such taxes are paid to the foreign
country or U.S. possession. This rule applies to foreign taxes
paid directly by U.S. taxpayers, which taxes are creditable in
the year paid or accrued, and to foreign taxes paid by foreign
corporations that are deemed paid by a U.S. corporation that is
a shareholder of the foreign corporation, and hence creditable,
in the year that the U.S. corporation receives a dividend or
has an income inclusion from the foreign corporation.
Redetermination of foreign taxes
For taxpayers that utilize the accrual basis of
accounting for determining creditable foreign taxes, accrued
and unpaid foreign tax liabilities denominated in foreign
currencies are translated at the exchange rate as of the last
day of the taxable year of accrual. If a difference exists
between the dollar value of accrued foreign taxes and the
dollar value of those taxes when paid, a redetermination of
foreign taxes arises. A foreign tax redetermination may occur
in the case of a refund of foreign taxes. A foreign tax
redetermination also may arise because the amount of foreign
currency units actually paid differs from the amount of foreign
currency units accrued. In addition, a redetermination may
arise due to fluctuations in the value of the foreign currency
relative to the dollar between the date of accrual and the date
of payment.
As a general matter, a redetermination of foreign tax
paid or accrued directly by a U.S. person requires notification
of the Internal Revenue Service and a redetermination of U.S.
tax liability for the taxable year for which the foreign tax
was claimed as a credit. The Treasury regulations provide
exceptions to this rule for de minimis cases. In the case of a
redetermination of foreign taxes that qualify for the indirect
(or ``deemed-paid'') foreign tax credit under sections 902 and
960, the Treasury regulations generally require taxpayers to
make appropriate adjustments to the payor foreign corporation's
pools of earnings and profits and foreign taxes.
House Bill
Translation of foreign taxes
Translation of certain accrued foreign taxes
With respect to taxpayers that take foreign income taxes
into account when accrued, the House bill generally provides
for foreign taxes to be translated at the average exchange rate
for the taxable year to which such taxes relate. This rule does
not apply (1) to any foreign income tax paid after the date two
years after the close of the taxable year to which such taxes
relate, (2) with respect to taxes of an accrual-basis taxpayer
that are actually paid in a taxable year prior to the year to
which they relate, or (3) to tax payments that are denominated
in an inflationary currency (as defined by regulations).
Translation of all other foreign taxes
Under the House bill, foreign taxes not eligible for
application of the preceding rule generally are translated into
U.S. dollars using the exchange rates as of the time such taxes
are paid. The House bill provides the Secretary of the Treasury
with authority to issue regulations that would allow foreign
tax payments to be translated into U.S. dollar amounts using an
average exchange rate for a specified period.
Redetermination of foreign taxes
Under the House bill, a redetermination is required if
(1) accrued taxes when paid differ from the amounts claimed as
credits by the taxpayer; (2) accrued taxes are not paid before
the date two years after the close of the taxable year to which
such taxes relate; or (3) any tax paid is refunded in whole or
in part. Thus, for example, the House bill provides that if at
the close of the second taxable year after the taxable year to
which an accrued tax relates, any portion of the tax so accrued
has not yet been paid, a foreign tax redetermination under
section 905(c) is required for the amount representing the
unpaid portion of that accrued tax. In other words, the
previous accrual of any tax that is unpaid as of that date is
denied. In cases where a redetermination is required, as under
present law, the bill specifies that the taxpayer must notify
the Secretary, who will redetermine the amount of the tax for
the year or years affected. In the case of indirect foreign tax
credits, regulatory authority is granted to prescribe
appropriate adjustments to the foreign tax credit pools in lieu
of such a redetermination.
The House bill provides that in the case of accrued taxes
not paid within the date two years after the close of the
taxable year to which such taxes relate, any such taxes if
subsequently paid are taken into account for the taxable year
to which such taxes relate. These taxes are translated into
U.S. dollar amounts using the exchange rates in effect as of
the time such taxes are paid.
For example, assume that in year 1 a taxpayer accrues
1,000 units of foreign tax that relate to year 1 and that the
currency involved is not inflationary . Further assume that as
of the end of year 1 the tax is unpaid. In this case, the House
bill provides that the taxpayer translates 1,000 units of
accrued foreign tax into U.S. dollars at the average exchange
rate for year 1. If the 1,000 units of tax are paid by the
taxpayer in either year 2 or year 3, no redetermination of
foreign tax is required. If any portion of the tax so accrued
remains unpaid as of the end of year 3, however, the taxpayer
is required to redetermine its foreign tax accrued in year 1 to
eliminate the accrued but unpaid tax, thereby reducing its
foreign tax credit for such year. If the taxpayer pays the
disallowed taxes in year 4, the taxpayer again redetermines its
foreign taxes (and foreign tax credit) for year 1, but the
taxes paid in year 4 are translated into U.S. dollars at the
exchange rate for year 4.
Effective date
The provision generally is effective for foreign taxes
paid (in the case of taxpayers using the cash basis for
determining the foreign tax credit) or accrued (in the case of
taxpayers using the accrual basis for determining the foreign
tax credit) in taxable years beginning after December 31, 1997.
The provision's changes to the foreign tax redetermination
rules apply to foreign taxes which relate to taxable years
beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill with
one modification with respect to the treatment of accrued taxes
that are paid more than two years after the close of the
taxable year to which such taxes relate. In the case of the
indirect foreign tax credit, any such taxes are taken into
account for the taxable year in which paid, and are translated
into U.S. dollar amounts using the exchange rates as of the
time such taxes are paid. In the case of the direct foreign tax
credit, as under the House bill, any such taxes are taken into
account for the taxable year to which such taxes relate, but
are translated into U.S. dollar amounts using the exchange
rates in effect as of the time such taxes are paid.
Conference Agreement
The conference agreement follows the Senate amendment
with one modification. The conference agreement clarifies that
the regulatory authority applicable in the case of indirect
foreign tax credits allows, in lieu of a redetermination of
taxes, appropriate adjustments to the pools of post-1986
foreign income taxes and the pools of post-1986 undistributed
earnings.
3. Election to use simplified foreign tax credit limitation for
alternative minimum tax purposes (sec. 1105 of the House bill
and sec. 903 of the Senate amendment)
Present Law
Computing foreign tax credit limitations requires the
allocation and apportionment of deductions between items of
foreign source income and items of U.S. source income. Foreign
tax credit limitations must be computed both for regular tax
purposes and for purposes of the alternative minimum tax (AMT).
Consequently, the allocation and apportionment of deductions
must be done separately for regular tax foreign tax credit
limitation purposes and AMT foreign tax credit limitation
purposes.
House Bill
The House bill permits taxpayers to elect to use as their
AMT foreign tax credit limitation fraction the ratio of foreign
source regular taxable income to entire alternative minimum
taxable income, rather than the ratio of foreign source
alternative minimum taxable income to entire alternative
minimum taxable income. Under this election, foreign source
regular taxable income is used, however, only to the extent it
does not exceed entire alternative minimum taxable income. In
the event that foreign source regular taxable income does
exceed entire alternative minimum taxable income, and the
taxpayer has income in more than one foreign tax credit
limitation category, it is intended that the foreign source
taxable income in each such category generally would be reduced
by a pro rata portion of that excess.
The election is available only in the first taxable year
beginning after December 31, 1997 for which the taxpayer claims
an AMT foreign tax credit. It is intended that a taxpayer will
be treated, for this purpose, as claiming an AMT foreign tax
credit for any taxable year for which the taxpayer chooses to
have the benefits of the foreign tax credit and in which the
taxpayer is subject to the alternative minimum tax or would be
subject to the alternative minimum tax but for the availability
of the AMT foreign tax credit. The election, once made, will
apply to all subsequent taxable years, and may be revoked only
with the consent of the Secretary of the Treasury.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Simplify treatment of personal transactions in foreign currency
(sec. 1106 of the House bill and sec. 904 of the Senate
amendment)
Present Law
When a U.S. taxpayer makes a payment in a foreign
currency, gain or loss (referred to as ``exchange gain or
loss'') generally arises from any change in the value of the
foreign currency relative to the U.S. dollar between the time
the currency was acquired (or the obligation to pay was
incurred) and the time that the payment is made. Gain or loss
results because foreign currency, unlike the U.S. dollar, is
treated as property for Federal income tax purposes.
Exchange gain or loss can arise in the course of a trade
or business or in connection with an investment transaction.
Exchange gain or loss also can arise where foreign currency was
acquired for personal use.
House Bill
If an individual acquires foreign currency and disposes
of it in a personal transaction and the exchange rate changes
between the acquisition and disposition of such currency, the
House bill applies nonrecognition treatment to any resulting
exchange gain, provided that such gain does not exceed $200.
The provision does not change the treatment of resulting
exchange losses.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with one modification. The conference
agreement clarifies that transactions entered into in
connection with a business trip constitute personal
transactions for purposes of this provision. Exchange gain
resulting from such transactions is eligible for nonrecognition
treatment under this provision.
5. Simplify foreign tax credit limitation for dividends from 10/50
companies (sec. 1107 of the House bill)
Present Law
U.S. persons may credit foreign taxes against U.S. tax on
foreign source income. The amount of foreign tax credits that
can be claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to offset
U.S. tax on U.S. source income. Separate limitations are
applied to specific categories of income.
Special foreign tax credit limitation rules apply in the
case of dividends received from a foreign corporation in which
the taxpayer owns at least 10 percent of the stock by vote and
which is not a controlled foreign corporation (a so-called
``10/50 company''). Dividends received by the taxpayer from
each 10/50 company are subject to a separate foreign tax credit
limitation.
House Bill
Under the House bill, a single foreign tax credit
limitation generally applies to dividends received by the
taxpayer from all 10/50 companies. However, separate foreign
tax creditlimitations continue to apply to dividends received
by the taxpayer from each 10/50 company that qualifies as a passive
foreign investment company. Regulatory authority is granted to provide
rules regarding the treatment of distributions out of earnings and
profits for periods prior to the taxpayer's acquisition of such stock.
To the extent the regulations treat distributions from a foreign
corporation out of earnings and profits for pre-acquisition periods as
subject to a separate foreign tax credit limitation, it is expected
that the regulations would allow the taxpayer to elect to apply that
separate foreign tax credit limitation (rather than the limitation
applicable to dividends from all 10/50 companies) also to distributions
out of post-acquisition earnings and profits of such corporation.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2001.
Senate Amendment
No provision.
Conference Agreement
The conference agreement generally provides for look-
through treatment to apply in characterizing dividends from 10/
50 companies for foreign tax credit limitation purposes. Under
the conference agreement, any dividend from a 10/50 company
paid out of earnings and profits accumulated in a taxable year
beginning after December 31, 2002 is treated as income in a
foreign tax credit limitation category in proportion to the
ratio of the earnings and profits attributable to income in
such foreign tax credit limitation category to the total
earnings and profits. Regulatory authority is granted to
provide rules regarding the treatment of distributions out of
earning and profits for periods prior to the taxpayer's
acquisition of such stock.
In the case of dividends from a 10/50 company paid out of
earnings and profits accumulated in a taxable year beginning
before January 1, 2003, the conference agreement provides that
a single foreign tax credit limitation generally applies to all
such dividends from all 10/50 companies. However, separate
foreign tax credit limitations continue to apply to any such
dividends received by the taxpayer from each 10/50 company that
qualifies as a passive foreign investment company. Regulatory
authority is granted to provide rules regarding the treatment
of distributions out of earning and profits for periods prior
to the taxpayer's acquisition of such stock.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2002.
B. General Provisions Affecting Treatment of Controlled Foreign
Corporations (secs. 1111-1113 of the House bill and secs. 911-913 of
the Senate amendment)
Present Law
If an upper-tier controlled foreign corporation (``CFC'')
sells stock of a lower-tier CFC, the gain generally is included
in the income of U.S. 10-percent shareholders as subpart F
income and such U.S. shareholder's basis in the stock of the
first-tier CFC is increased to account for the inclusion. The
inclusion is not characterized for foreign tax credit
limitation purposes by reference to the nature of the income of
the lower-tier CFC; instead it generally is characterized as
passive income.
For purposes of the foreign tax credit limitations
applicable to so-called 10/50 companies, a CFC is not treated
as a 10/50 company with respect to any distribution out of its
earnings and profits for periods during which it was a CFC and,
except as provided in regulations, the recipient of the
distribution was a U.S. 10-percent shareholder in such
corporation.
If subpart F income of a lower-tier CFC is included in
the gross income of a U.S. 10- percent shareholder, no
provision of present law allows adjustment of the basis of the
upper-tier CFC's stock in the lower-tier CFC.
The subpart F income earned by a foreign corporation
during its taxable year is taxed to the persons who are U.S.
10-percent shareholders of the corporation on the last day, in
that year, on which the corporation is a CFC. In the case of a
U.S. 10-percent shareholder who acquired stock in a CFC during
the year, such inclusions are reduced by all or a portion of
the amount of dividends paid in that year by the foreign
corporation to any person other than the acquiror with respect
to that stock.
As a general rule, subpart F income does not include
income earned from sources within the United States if the
income is effectively connected with the conduct of a U.S.
trade or business by the CFC. This general rule does not apply,
however, if the income is exempt from, or subject to a reduced
rate of, U.S. tax pursuant to a provision of a U.S. treaty.
A U.S. corporation that owns at least 10 percent of the
voting stock of a foreign corporation is treated as if it had
paid a share of the foreign income taxes paid by the foreign
corporation in the year in which the foreign corporation's
earnings and profits become subject to U.S. tax as dividend
income of the U.S. shareholder. A U.S. corporation also may be
deemed to have paid taxes paid by a second- or third-tier
foreign corporation if certain conditions are satisfied.
House Bill
Lower-tier CFCs
Characterization of gain on stock disposition
Under the House bill, if a CFC is treated as having gain
from the sale or exchange of stock in a foreign corporation,
the gain is treated as a dividend to the same extent that it
would have been so treated under section 1248 if the CFC were a
U.S. person. This provision, however, does not affect the
determination of whether the corporation whose stock is sold or
exchanged is a CFC.
Thus, for example, if a U.S. corporation owns 100 percent
of the stock of a foreign corporation, which owns 100 percent
of the stock of a second foreign corporation, then under the
House bill, any gain of the first corporation upon a sale or
exchange of stock of the second corporation is treated as a
dividend for purposes of subpart F income inclusions to the
U.S. shareholder, to the extent of earnings and profits of the
second corporation attributable to periods in which the first
foreign corporation owned the stock of the second foreign
corporation while the latter was a CFC with respect to the U.S.
shareholder.
Gain on disposition of stock in a related corporation
created or organized under the laws of, and having a
substantial part of its assets in a trade or business in, the
same foreign country as the gain recipient, even if
recharacterized as a dividend under the House bill provision,
is not excluded from foreign personal holding company income
under the same-country exception that applies to actual
dividends.
Under the House bill, for purposes of this rule, a CFC is
treated as having sold or exchanged stock if, under any
provision of subtitle A of the Code, the CFC is treated as
having gain from the sale or exchange of such stock. Thus, for
example, if a CFC distributes to its shareholder stock in a
foreign corporation, and the distribution results in gain being
recognized by the CFC under section 311(b) as if the stock were
sold to the shareholder for fair market value, the House bill
makes clear that, for purposes of this rule, the CFC is treated
as having sold or exchanged the stock.
The House bill also repeals a provision added to the Code
by the Technical and Miscellaneous Revenue Act of 1988 that,
except as provided by regulations, requires a recipient of a
distribution from a CFC to have been a U.S. 10-percent
shareholder of that CFC for the period during which the
earnings and profits which gave rise to the distribution were
generated in order to avoid treating the distribution as one
coming from a 10/50 company. Thus, under the House bill, a CFC
is not treated as a 10/50 company with respect to any
distribution out of its earnings and profits for periods during
which it was a CFC, whether or not the recipient of the
distribution was a U.S. 10-percent shareholder of the
corporation when the earnings and profits giving rise to the
distribution were generated.
Adjustments to basis of stock
Under the House bill, when a lower-tier CFC earns subpart
F income, and stock in that corporation is later disposed of by
an upper-tier CFC, the resulting income inclusion of the U.S.
10-percent shareholders, under regulations, is to be adjusted
to account for previous inclusions, in a manner similar to the
adjustments provided to the basis of stock in a first-tier CFC.
Thus, just as the basis of a U.S. 10-percent shareholder in a
first-tier CFC rises when subpart F income is earned and falls
when previously taxed income is distributed, so as to avoid
double taxation of the income on a later disposition of the
stock of that company, the subpart F income from gain on the
disposition of a lower-tier CFC generally is reduced by income
inclusions of earnings that were not subsequently distributed
by the lower-tier CFC.
For example, assume that a U.S. person is the owner of
all of the stock of a first-tier CFC which, in turn, is the
sole shareholder of a second-tier CFC. In year 1, the second-
tier CFC earns $100 of subpart F income which is included in
the U.S. person's gross income for that year. In year 2, the
first-tier CFC disposes of the second-tier CFC's stock and
recognizes $300 of income with respect to the disposition. All
of that income constitutes subpart F foreign personal holding
company income. Under the House bill, the Secretary is granted
regulatory authority to reduce the U.S. person's year 2 subpart
F inclusion by $100--the amount of year 1 subpart F income of
the second-tier CFC that was included, in that year, in the
U.S. person's gross income. Such an adjustment, in effect,
allows for a step-up in the basis of the stock of the second-
tier CFC to the extent of its subpart F income previously
included in the U.S. person's gross income.
Subpart F inclusions in year of acquisition
If a U.S. 10-percent shareholder acquires the stock of a
CFC from another U.S. 10-percent shareholder during a taxable
year of the CFC in which it earns subpart F income, the House
bill provision reduces the acquiror's subpart F income
inclusion for that year by a portion of the amount of the
dividend deemed (under sec. 1248) to be received by the
transferor. The portion by which the inclusion is reduced (as
is the case if a dividend was paid to the previous owner of the
stock) does not exceed the lesser of the amount of dividends
with respect to such stock deemed received (under sec. 1248) by
other persons during the year or the amount determined by
multiplying the subpart F income for the year by the proportion
of the year during which the acquiring shareholder did not own
the stock.
Treatment of U.S. income earned by a CFC
Under the House bill, an exemption or reduction by treaty
of the branch profits tax that would be imposed under section
884 on a CFC does not affect the general statutory exemption
from subpart F income that is granted for U.S. source
effectively connected income. For example, assume a CFC earns
income of a type that generally would be subpart F income, and
that income is earned from sources within the United States in
connection with business operations therein. Further assume
that repatriation of that income is exempted from the U.S.
branch profits tax under a provision of an applicable U.S.
income tax treaty. The House bill provides that,
notwithstanding the treaty's effect on the branch tax, the
income is not treated as subpart F income as long as it is not
exempt from U.S. taxation (or subject to a reduced rate of tax)
under any other treaty provision.
Extension of indirect foreign tax credit
The House bill extends the application of the indirect
foreign tax credit (secs. 902 and 960) to taxes paid or accrued
by certain fourth-, fifth-, and sixth-tier foreign
corporations. In general, three requirements are required to be
satisfied by a foreign company at any of these tiers to qualify
for the credit. First, the company must be a CFC. Second, the
U.S. corporation claiming the credit under section 902(a) must
be a U.S. shareholder (as defined in sec. 951(b)) with respect
to the foreign company. Third, the product of the percentage
ownership of voting stock at each level from the U.S.
corporation down must equal at least 5 percent. The House bill
limits the application of the indirect foreign tax credit below
the third tier to taxes paid or incurred in taxable years
during which the payor is a CFC. Foreign taxes paid below the
sixth tier of foreign corporations remain ineligible for the
indirect foreign tax credit.
Effective dates
Lower-tier CFCs.--The provision that treats gains on
dispositions of stock in lower-tier CFCs as dividends under
section 1248 principles applies to gains recognized on
transactions occurring after the date of enactment.
The provision that expands look-through treatment, for
foreign tax credit limitation purposes, of dividends from CFCs
is effective for distributions after the date of enactment.
The provision that provides for regulatory adjustments to
U.S. shareholder inclusions, with respect to gains of CFCs from
dispositions of stock in lower-tier CFCs is effective for
determining inclusions for taxable years of U.S. shareholders
beginning after December 31, 1997. Thus, the House bill permits
regulatory adjustments to an inclusion occurring after the
effective date to account for income that was previously taxed
under the subpart F provisions either prior to or subsequent to
the effective date.
Subpart F inclusions in year of acquisition.--The
provision that permits dispositions of stock to be taken into
consideration in determining a U.S. shareholder's subpart F
inclusion for a taxable year is effective with respect to
dispositions occurring after the date of enactment.
Treatment of U.S. source income earned by a CFC.--The
provision concerning the effect of treaty exemptions from, or
reductions of, the branch profits tax on the determination of
subpart F income is effective for taxable years beginning after
December 31, 1986.
Extension of indirect foreign tax credit.--The provision
that extends application of the indirect foreign tax credit to
certain CFCs below the third tier is effective for foreign
taxes paid or incurred by CFCs for taxable years of such
corporations beginning after the date of enactment.
In the case of any chain of foreign corporations, the
taxes of which would be eligible for the indirect foreign tax
credit, under present law or under the House bill, but for the
denial of indirect credits below the third or sixth tier, as
the case may be, no liquidation, reorganization, or similar
transaction in a taxable year beginning after the date of
enactment will have the effect of permitting taxes to be taken
into account under the indirect foreign tax credit provisions
of the Code which could not have been taken into account under
those provisions but for such transaction.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
C. Modification of Passive Foreign Investment Company Provisions to
Eliminate Overlap with Subpart F, to Allow Mark-to-Market Election, and
to Require Measurement Based on Value for PFIC Asset Test (secs. 1121-
1123 of the House bill and secs. 751-753 of the Senate amendment)
Present Law
Overview
U.S. citizens and residents and U.S. corporations
(collectively, ``U.S. persons'') are taxed currently by the
United States on their worldwide income, subject to a credit
against U.S. tax on foreign income based on foreign income
taxes paid with respect to such income. A foreign corporation
generally is not subject to U.S. tax on its income from
operations outside the United States.
Income of a foreign corporation generally is taxed by the
United States when it is repatriated to the United States
through payment to the corporation's U.S. shareholders, subject
to a foreign tax credit. However, a variety of regimes imposing
current U.S. tax on income earned through a foreign corporation
have been reflected in the Code. Today the principal anti-
deferral regimes set forth in the Code are the controlled
foreign corporation rules of subpart F (secs. 951-964) and the
passive foreign investment company rules (secs. 1291-1297).
Additional anti-deferral regimes set forth in the Code are the
foreign personal holding company rules (secs. 551-558); the
personal holding company rules (secs. 541-547); the accumulated
earnings tax (secs. 531-537); and the foreign investment
company and electing foreign investment company rules (secs.
1246-1247). The anti-deferral regimes included in the Code
overlap such that a given taxpayer may be subject to multiple
sets of anti-deferral rules.
Controlled foreign corporations
A controlled foreign corporation (CFC) is defined
generally as any foreign corporation if U.S. persons own more
than 50 percent of the corporation's stock (measured by vote or
value), taking into account only those U.S. persons that own at
least 10 percent of the stock (measured by vote only) (sec.
957). Stock ownership includes not only stock owned directly,
but also stock owned indirectly or constructively (sec. 958).
Certain income of a CFC (referred to as ``subpart F
income'') is subject to current U.S. tax. The United States
generally taxes the U.S. 10-percent shareholders of a CFC
currently on their pro rata shares of the subpart F income of
the CFC. In effect, the Code treats those U.S. shareholders as
having received a current distribution out of the CFC's subpart
F income. Such shareholders also are subject to current U.S.
tax on their pro rata shares of the CFC's earnings invested in
U.S. property. The foreign tax credit may reduce the U.S. tax
on these amounts.
Passive foreign investment companies
The Tax Reform Act of 1986 established an anti-deferral
regime for passive foreign investment companies (PFICs). A PFIC
is any foreign corporation if (1) 75 percent or more of its
gross income for the taxable year consists of passive income,
or (2) 50 percent or more of the average fair market value of
its assets consists of assets that produce, or are held for the
production of, passive income. For purposes of applying the
PFIC asset test, the assets of a CFC are required to be
measured using adjusted basis; the assets of a foreign
corporation that is not a CFC are measured using fair market
value unless the corporation elects to use adjusted basis.
Two alternative sets of income inclusion rules apply to
U.S. persons that are shareholders in a PFIC. One set of rules
applies to PFICs that are ``qualified electing funds,'' under
which electing U.S. shareholders include currently in gross
income their respective shares of the PFIC's total earnings,
with a separate election to defer payment of tax, subject to an
interest charge, on income not currently received. The second
set of rules applies to PFICs that are not qualified electing
funds (``nonqualified funds''), under which the U.S.
shareholders pay tax on income realized from the PFIC and an
interest charge that is attributable to the value of deferral.
Overlap between subpart F and the PFIC provisions
A foreign corporation that is a CFC is also a PFIC if it
meets the passive income test or the passive asset test
described above. In such a case, the 10-percent U.S.
shareholders are subject both to the subpart F provisions
(which require current inclusion of certain earnings of the
corporation) and to the PFIC provisions (which impose an
interest charge on amounts distributed from the corporation and
gains recognized upon the disposition of the corporation's
stock, unless an election is made to include currently all of
the corporation's earnings).
House Bill
Elimination of overlap between subpart F and the PFIC provisions
In the case of a PFIC that is also a CFC, the House bill
generally treats the corporation as not a PFIC with respect to
certain 10-percent shareholders. This rule applies if the
corporation is a CFC (within the meaning of section 957(a)) and
the shareholder is a U.S. shareholder (within the meaning of
section 951(b)) of such corporation (i.e., if the shareholder
is subject to the current inclusion rules of subpart F with
respect to such corporation). Moreover, the rule applies for
that portion of the shareholder's holding period with respect
to the corporation's stock which is after December 31, 1997 and
during which the corporation is a CFC and the shareholder is a
U.S. shareholder. Accordingly, a shareholder that is subject to
current inclusion under the subpart F rules with respect to
stock of a PFIC that is also a CFC generally is not subject
also to the PFIC provisions with respect to the same stock. The
PFIC provisions continue to apply in the case of a PFIC that is
also a CFC to shareholders that are not subject to subpart F
(i.e., to shareholders that are U.S. persons and that own
(directly, indirectly, or constructively) less than 10 percent
of the corporation's stock by vote).
If a shareholder of a PFIC is subject to the rules
applicable to nonqualified funds beforebecoming eligible for
the special rules provided under the proposal for shareholders that are
subject to subpart F, the stock held by such shareholder continues to
be treated as PFIC stock unless the shareholder makes an election to
pay tax and an interest charge with respect to the unrealized
appreciation in the stock or the accumulated earnings of the
corporation.
If, under the House bill, a shareholder is not subject to
the PFIC provisions because the shareholder is subject to
subpart F and the shareholder subsequently ceases to be subject
to subpart F with respect to the corporation, for purposes of
the PFIC provisions, the shareholder's holding period for such
stock is treated as beginning immediately after such cessation.
Accordingly, in applying the rules applicable to PFICs that are
not qualified electing funds, the earnings of the corporation
are not attributed to the period during which the shareholder
was subject to subpart F with respect to the corporation and
was not subject to the PFIC provisions.
Mark-to-market election
The House bill allows a shareholder of a PFIC to make a
mark-to-market election with respect to the stock of the PFIC,
provided that such stock is marketable (as defined below).
Under such an election, the shareholder includes in income each
year an amount equal to the excess, if any, of the fair market
value of the PFIC stock as of the close of the taxable year
over the shareholder's adjusted basis in such stock. The
shareholder is allowed a deduction for the excess, if any, of
the adjusted basis of the PFIC stock over its fair market value
as of the close of the taxable year. However, deductions are
allowable under this rule only to the extent of any net mark-
to-market gains with respect to the stock included by the
shareholder for prior taxable years.
Under the House bill, this mark-to-market election is
available only for PFIC stock that is ``marketable.'' For this
purpose, PFIC stock is considered marketable if it is regularly
traded on a national securities exchange that is registered
with the Securities and Exchange Commission or on the national
market system established pursuant to section 11A of the
Securities and Exchange Act of 1934. In addition, PFIC stock is
considered marketable if it is regularly traded on any exchange
or market that the Secretary of the Treasury determines has
rules sufficient to ensure that the market price represents a
legitimate and sound fair market value. Any option on stock
that is considered marketable under the foregoing rules is
treated as marketable, to the extent provided in regulations.
PFIC stock also is treated as marketable, to the extent
provided in regulations, if the PFIC offers for sale (or has
outstanding) stock of which it is the issuer and which is
redeemable at its net asset value in a manner comparable to a
U.S. regulated investment company (RIC).
In addition, the House bill treats as marketable any
PFIC stock owned by a RIC that offers for sale (or has
outstanding) any stock of which it is the issuer and which is
redeemable at its net asset value. The House bill treats as
marketable any PFIC stock held by any other RIC that otherwise
publishes net asset valuations at least annually, except to the
extent provided in regulations. It is believed that even for
RICs that do not make a market in their own stock, but that do
regularly report their net asset values in compliance with the
securities laws, inaccurate valuation may bring exposure to
legal liabilities, and this exposure may ensure the reliability
of the values such RICs assign to the PFIC stock they hold.
The shareholder's adjusted basis in the PFIC stock is
adjusted to reflect the amounts included or deducted under this
election. In the case of stock owned indirectly by a U.S.
person through a foreign entity (as discussed below), the basis
adjustments for mark-to-market gains and losses apply to the
basis of the PFIC in the hands of the intermediary owner, but
only for purposes of the subsequent application of the PFIC
rules to the tax treatment of the indirect U.S. owner. In
addition, similar basis adjustments are made to the adjusted
basis of the property actually held by the U.S. person by
reason of which the U.S. person is treated as owning PFIC
stock.
Amounts included in income pursuant to a mark-to-market
election, as well as gain on the actual sale or other
disposition of the PFIC stock, is treated as ordinary income.
Ordinary loss treatment also applies to the deductible portion
of any mark-to-market loss on PFIC stock, as well as to any
loss realized on the actual sale or other disposition of PFIC
stock to the extent that the amount of such loss does not
exceed the net mark-to-market gains previously included with
respect to such stock. The source of amounts with respect to a
mark-to-market election generally is determined in the same
manner as if such amounts were gain or loss from the sale of
stock in the PFIC.
An election to mark to market applies to the taxable
year for which made and all subsequent taxable years, unless
the PFIC stock ceases to be marketable or the Secretary of the
Treasury consents to the revocation of such election.
Under constructive ownership rules, U.S. persons that
own PFIC stock through certain foreign entities may make this
election with respect to the PFIC. These constructive ownership
rules apply to treat PFIC stock owned directly or indirectly by
or for a foreign partnership, trust, or estate as owned
proportionately by the partners or beneficiaries, except as
provided in regulations. Stock in a PFIC that is thus treated
as owned by a person is treated as actually owned by that
person for purposes of again applying the constructive
ownership rules. In the case of a U.S. person that is treated
as owning PFIC stock by application of this constructive
ownership rule, any disposition by the U.S. person or by any
other person that results in the U.S. person being treated as
no longer owning the PFIC stock, as well as any disposition by
the person actually owning the PFIC stock, is treated as a
disposition by the U.S. person of the PFIC stock.
In addition, a CFC that owns stock in a PFIC is treated
as a U.S. person that may make the election with respect to
such PFIC stock. Any amount includible (or deductible) in the
CFC's gross income pursuant to this mark-to-market election is
treated as foreign personal holding company income (or a
deduction allocable to foreign personal holding company
income). The source of such amounts, however, is determined by
reference to the actual residence of the CFC.
In the case of a taxpayer that makes the mark-to-market
election with respect to stock in aPFIC that is a nonqualified
fund after the beginning of the taxpayer's holding period with respect
to such stock, a coordination rule applies to ensure that the taxpayer
does not avoid the interest charge with respect to amounts attributable
to periods before such election. A similar rule applies to RICs that
make the mark-to-market election under the House bill after the
beginning of their holding period with respect to PFIC stock (to the
extent that the RIC had not previously marked to market the stock of
the PFIC).
Except as provided in the coordination rules described
above, the rules of section 1291 (with respect to nonqualified
funds) do not apply to a shareholder of a PFIC if a mark-to-
market election is in effect for the shareholder's taxable
year. Moreover, in applying section 1291 in a case where a
mark-to-market election was in effect for any prior taxable
year, the shareholder's holding period for the PFIC stock is
treated as beginning immediately after the last taxable year
for which such election applied.
A special rule applicable in the case of a PFIC
shareholder that becomes a U.S. person treats the adjusted
basis of any PFIC stock held by such person on the first day of
the year in which such shareholder becomes a U.S. person as
equal to the greater of its fair market value on such date or
its adjusted basis on such date. Such rule applies only for
purposes of the mark-to-market election.
Effective date
The provision is effective for taxable years of U.S.
persons beginning after December 31, 1997, and taxable years of
foreign corporations ending with or within such taxable years
of U.S. persons.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with one modification to the rules regarding
the measurement of assets for purposes of applying the PFIC
asset test. Under the conference agreement, if the stock of a
foreign corporation is publicly traded for the taxable year,
the PFIC asset test is applied using fair market value for
purposes of measuring the PFIC's assets. For this purpose, the
stock of a foreign corporation is treated as publicly traded if
such stock is readily tradeable on a national securities
exchange that is registered with the Securities and Exchange
Commission, the national market system established pursuant to
section 11A of the Securities and Exchange Act of 1934, or any
other exchange or market that the Secretary of the Treasury
determines has rules sufficient to ensure that the market price
represents a sound fair market value. Because the PFIC asset
test is applied based on quarterly measurements of the
corporation's assets, it is intended that a corporation the
stock of which is publicly traded on each such quarterly
measurement date during the taxable year will be eligible for
this asset measurement rule for such taxable year. In applying
the PFIC asset test, it is intended that the total value of a
publicly-traded foreign corporation's assets generally will be
treated as equal to the sum of the aggregate value of its
outstanding stock plus its liabilities.
The conference agreement does not change the rules
applicable to non-publicly-traded foreign corporations for
purposes of the measurement of assets in applying the PFIC
asset test. Accordingly, CFCs that are not publicly traded
continue to be required to measure their assets using adjusted
basis, and any other foreign corporations that are not publicly
traded continue to measure their assets using fair market value
unless they elect to use adjusted basis.
D. Simplify Formation and Operation of International Joint Ventures
(secs. 1131, 1141-1145, and 1151 of the House bill and secs. 921, 931-
935, and 941 of the Senate amendment)
Present Law
Under section 1491, an excise tax generally is imposed on
transfers of property by a U.S. person to a foreign corporation
as paid-in surplus or as a contribution to capital or to a
foreign partnership, estate or trust. The tax is 35 percent of
the amount of gain inherent in the property transferred but not
recognized for income tax purposes at the time of the transfer.
However, several exceptions to the section 1491 excise tax are
available. Under section 1494(c), a substantial penalty applies
in the case of a failure to report a transfer described in
section 1491.
Section 367 applies to require gain recognition upon
certain transfers by U.S. persons to foreign corporations.
Under section 367(d), a U.S. person that contributes intangible
property to a foreign corporation is treated as having sold the
property to the corporation and is treated as receiving deemed
royalty payments from the corporation. These deemed royalty
payments are treated as U.S. source income. A U.S. person may
elect to apply similar rules to a transfer of intangible
property to a foreign partnership that otherwise would be
subject to the section 1491 excise tax.
A foreign partnership may be required to file a
partnership return. If a foreign partnership fails to file a
required return, losses and credits with respect to the
partnership may be disallowed to the partnership. A U.S. person
that acquires or disposes of an interest in a foreign
partnership, or whose proportional interest in the partnership
changes substantially, may be required to file an information
return with respect to such event.
A partnership generally is considered to be a domestic
partnership if it is created or organized in the United States
or under the laws of the United States or any State. A foreign
partnership generally is any partnership that is not a domestic
partnership.
House Bill
Transfers of foreign entities
The House bill repeals the sections 1491-1494 excise tax
and information reporting rules that apply to certain transfers
of appreciated property by a U.S. person to a foreign entity.
Instead of the excise tax that applies under present law to
transfers to a foreign estate or trust, gain recognition is
required upon a transfer of appreciated property by a U.S.
person to a foreign estate or trust. Instead of the excise tax
that applies under present law to certain transfers to foreign
corporations, regulatory authority is granted under section 367
to deny nonrecognition treatment to such a transfer in a
transaction that is not otherwise described in section 367.
Instead of the excise tax that applies under present law to
transfers to foreign partnerships, regulatory authority is
granted to provide for gain recognition on a transfer of
appreciated property to a partnership in cases where such gain
otherwise would be transferred to a foreign partner. In
addition, regulatory authority is granted to deny the
nonrecognition treatment that is provided under section 1035 to
certain exchanges of insurance policies, where the transfer is
to a foreign person.
The House bill repeals the rule that treats as U.S.
source income any deemed royalty arising under section 367(d).
Under the House bill, in the case of a transfer of intangible
property to a foreign corporation, the deemed royalty payments
under section 367(d) are treated as foreign source income to
the same extent that an actual royalty payment would be
considered to be foreign source income. Regulatory authority is
granted to provide similar treatment in the case of a transfer
of intangible property to a foreign partnership.
Information reporting
The House bill provides detailed information reporting
rules in the case of foreign partnerships. A foreign
partnership generally is required to file a partnership return
for a taxable year if the partnership has U.S. source income or
is engaged in a U.S. trade or business, except to the extent
provided in regulations.
Under the House bill, reporting rules similar to those
applicable under present law in the case of controlled foreign
corporations apply in the case of foreign partnerships. A U.S.
partner that controls a foreign partnership is required to file
an annual information return with respect to such partnership.
For this purpose, a U.S. partner is considered to control a
foreign partnership if the partner holds a more than 50 percent
interest in the capital, profits, or, to the extent provided in
regulations, losses, of the partnership. Similar information
reporting also will be required from a U.S. 10-percent partner
of a foreign partnership that is controlled by U.S. 10-percent
partners. A $10,000 penalty applies to a failure to comply with
these reporting requirements; additional penalties of up to
$50,000 apply in the case of continued noncompliance after
notification by the Secretary of the Treasury. The penalties
for failure to report information with respect to a controlled
foreign corporation are conformed with these penalties.
Under the House bill, reporting by a U.S. person of an
acquisition or disposition of an interest in a foreign
partnership, or a change in the person's proportional interest
in the partnership, is required only in the case of
acquisitions, dispositions, or changes involving at least a 10-
percent interest. A $10,000 penalty applies to a failure to
comply with these reporting requirements; additional penalties
of up to $50,000 apply in the case of continued noncompliance
after notification by the Secretary. The penalties for failure
to report information with respect to a foreign corporation are
conformed with these penalties.
Under the House bill, reporting rules similar to those
applicable under present law in the case of transfers by U.S.
persons to foreign corporations apply in the case of transfers
to foreign partnerships. These reporting rules apply in the
case of a transfer to a foreign partnership only if the U.S.
person holds at least a 10-percent interest in the partnership
or the value of the property transferred by such person to the
partnership during a 12-month period exceeded $100,000.
Apenalty equal to 10 percent of the value of the property transferred
applies to a failure to comply with these reporting requirements. The
penalty under present law for failure to report transfers to a foreign
corporation is conformed with this penalty. In the case of a transfer
to a foreign partnership, failure to comply also results in gain
recognition with respect to the property transferred.
Under the House bill, in the case of a failure to report
required information with respect to a foreign corporation,
partnership, or trust, the statute of limitations with respect
to any event or period to which such information relates does
not expire before the date that is three years after the date
on which such information is provided.
Foreign or domestic partnership determination
Under the House bill, regulatory authority is granted to
provide rules treating a partnership as a foreign partnership
where such treatment is more appropriate. It is expected that a
recharacterization of a partnership as foreign rather than
domestic under such regulations will be based only on material
factors such as the residence of the partners and the extent to
which the partnership is engaged in business in the United
States or earns U.S. source income. It also is expected that
such regulations will provide guidance regarding the
determination of whether an entity that is a partnership for
Federal income tax purposes is to be considered to be created
or organized in the United States or under the law of the
United States or any State.
Effective date
The provisions with respect to the repeal of sections
1491-1494 are effective upon date of enactment. The provisions
with respect to the source of a deemed royalty under section
367(d) also are effective for transfers made and royalties
deemed received after date of enactment.
The provisions regarding information reporting with
respect to foreign partnerships generally are effective for
partnership taxable years beginning after date of enactment.
The provisions regarding information reporting with respect to
interests in, and transfers to, foreign partnerships are
effective for transfers to, and changes in interest in, foreign
partnerships after date of enactment. Taxpayers may elect to
apply these rules to transfers made after August 20, 1996 (and
thereby avoid a penalty under section 1494(c)) and the
Secretary may prescribe simplified reporting requirements for
these cases. The provision with respect to the statute of
limitations in the case of noncompliance with reporting
requirements is effective for information returns due after
date of enactment.
The provision granting regulatory authority with respect
to the treatment of partnerships as foreign or domestic is
effective for partnership taxable years beginning after date of
enactment.
Senate Amendment
The Senate amendment generally follows the House bill
with several modifications.
Under the Senate amendment, gain recognition is required
upon a transfer of appreciated property by a U.S. person to a
foreign estate or trust, except as provided in regulations.
This rule does not apply to a transfer to a trust to the extent
that any person is treated as the owner of the trust under
section 679.
Under the Senate amendment, the penalty equal to 10
percent of the value of the transferred property that applies
to a failure to comply with the information reporting
requirements with respect to a transfer of property to a
foreign corporation or partnership may not exceed $100,000
except in cases of intentional disregard for such reporting
requirements.
Under the Senate amendment, regulatory authority is
granted to provide rules treating a partnership as a domestic
or foreign partnership, where such treatment is more
appropriate, without regard to where the partnership is created
or organized. It is expected that a recharacterization of a
partnership under such regulations will be based only on
material factors such as the residence of the partners and the
extent to which the partnership is engaged in business in the
United States or earns U.S. source income. It also is expected
that such regulations will provide guidance regarding the
determination of whether an entity that is a partnership for
Federal income tax purposes is to be considered to be created
or organized in the United States or under the law of the
United States or any State.
Conference Agreement
The conference agreement generally follows the Senate
amendment with modifications.
The conference agreement clarifies that, for purposes of
the requirement of gain recognition upon a transfer of
appreciated property by a U.S. person to a foreign estate or
trust, a U.S. trust that becomes a foreign trust is treated as
having transferred all of its assets to a foreign trust.
The conference agreement further clarifies that, in the
case of a transfer by a U.S. person to a foreign corporation as
paid-in surplus or as a contribution to capital in a
transaction not otherwise described in section 367 (e.g., a
capital contribution by a non-shareholder), regulatory
authority is granted under section 367 to treat such transfer
as a fair market value sale and to require gain recognition
thereon.
For purposes of the information reporting rules
applicable to a U.S. partner that controls a foreign
partnership, the conference agreement clarifies that a
partner's interest in a partnership is determined with
application of constructive ownership rules similar to those
provided in section 267(c) (other than paragraph (3)).
Finally, the conference agreement provides that
regulations issued under the grant of regulatory authority to
provide rules treating a partnership as a domestic or foreign
partnership will apply only to partnerships created or
organized after the date such regulations are filed with the
Federal Register (or, if earlier, the date of a public notice
substantially describing the expected contents of the
regulations). Accordingly, regulations issued under this grant
of regulatory authority will not be applied to reclassify pre-
existing partnerships. In connection with this regulatory
authority, the conferees wish to make clear that it is intended
that the general rule for classifying a partnership as domestic
or foreign will continue to be the place where the partnership
is created or organized (or the laws under which it is created
or organized), and that the regulations are expected to provide
a different classification result only in unusual cases. The
conferees also expect that any regulations will avoid period-
by-period reclassifications of partnerships.
E. Modification of Reporting Threshold for Stock Ownership of a Foreign
Corporation (sec. 1146 of the House bill and sec. 936 of the Senate
amendment)
Present Law
Several provisions of the Code require U.S. persons to
report information with respect to a foreign corporation in
which they are shareholders or officers or directors. Sections
6038 and 6035 generally require every U.S. citizen or resident
who is an officer, or director, or who owns at least 10 percent
of the stock, of a foreign corporation that is a controlled
foreign corporation or a foreign personal holding company to
file Form 5471 annually.
Section 6046 mandates the filing of information returns
by certain U.S. persons with respect to a foreign corporation
upon the occurrence of certain events. U.S. persons required to
file these information returns are those who acquire 5 percent
or more of the value of the stock of a foreign corporation,
others who become U.S. persons while owning that percentage of
the stock of a foreign corporation, and U.S. citizens and
residents who are officers or directors of foreign corporations
with such U.S. ownership.
A failure to file the required information return under
section 6038 may result in monetary penalties or reduction of
foreign tax credit benefits. A failure to file the required
information returns under sections 6035 or 6046 may result in
monetary penalties.
House Bill
The House bill increases the threshold for stock
ownership of a foreign corporation that results in information
reporting obligations under section 6046 from 5 percent (based
on value) to 10 percent (based on vote or value).
Effective date.--The provision is effective for
reportable transactions occurring after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
F. Other Foreign Simplification Provisions
1. Transition rule for certain trusts (sec. 1161 of the House bill and
sec. 951 of the Senate amendment)
Present Law
Under rules enacted with the Small Business Job
Protection Act of 1996, a trust is considered to be a U.S.
trust if two criteria are met. First, a court within the United
States must be able to exercise primary supervision over the
administration of the trust. Second, U.S. fiduciaries of the
trust must have the authority to control all substantial
decisions of the trust. A trust that does not satisfy both of
these criteria is considered to be a foreign trust. These rules
for defining a U.S. trust generally are effective for taxable
years of a trust that begin after December 31, 1996. A trust
that qualified as a U.S. trust under prior law could fail to
qualify as a U.S. trust under these new criteria.
House Bill
Under the House bill, the Secretary of the Treasury is
granted authority to allow nongrantor trusts that had been
treated as U.S. trusts under prior law to elect to continue to
be treated as U.S. trusts, notwithstanding the new criteria for
qualification as a U.S. trust.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1996.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Simplify stock and securities trading safe harbor (sec. 1162 of the
House bill and sec. 952 of the Senate amendment)
Present Law
A nonresident alien individual or foreign corporation
that is engaged in a trade or business within the United States
is subject to U.S. taxation on its net income that is
effectively connected with the trade or business, at graduated
rates of tax. Under a ``safe harbor'' rule, foreign persons
that trade in stocks or securities for their own accounts are
not treated as engaged in a U.S. trade or business for this
purpose.
For a foreign corporation to qualify for the safe harbor,
it must not be a dealer in stock or securities. In addition, if
the principal business of the foreign corporation is trading in
stock or securities for its own account, the safe harbor
generally does not apply if the principal office of the
corporation is in the United States.
For foreign persons who invest in securities trading
partnerships, the safe harbor applies only if the partnership
is not a dealer in stock and securities. In addition, if the
principal business of the partnership is trading stock or
securities for its own account, the safe harbor generally does
not apply if the principal office of the partnership is in the
United States.
Under Treasury regulations that apply to both
corporations and partnerships, the determination of the
location of the entity's principal office turns on the location
of various functions relating to operation of the entity,
including communication with investors and the general public,
solicitation and acceptance of sales of interests, and
maintenance and audits of its books of account (Treas. reg.
sec. 1.864-2(c)(2) (ii) and (iii)). Under the regulations, the
location of the entity's principal office does not depend on
the location of the entity's management or where investment
decisions are made.
House Bill
The House bill modifies the stock and securities trading
safe harbor by eliminating the requirement for both
partnerships and foreign corporations that trade stock or
securities for their own accounts that the entity's principal
office not be within the United States.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Clarification of determination of foreign taxes deemed paid (sec.
1178(a) of the House bill and sec. 953(a) of the Senate
amendment)
Present Law
Under section 902, a domestic corporation that receives a
dividend from a foreign corporation in which it owns 10 percent
or more of the voting stock is deemed to have paid a portion of
the foreign taxes paid by such foreign corporation. The
domestic corporation that receives a dividend is deemed to have
paid a portion of the foreign corporation's post-1986 foreign
income taxes based on the ratio of the amount of such dividend
to the foreign corporation's post-1986 undistributed earnings.
The foreign corporation's post-1986 foreign income taxes is the
sum of the foreign income taxes with respect to the taxable
year in which the dividend is distributed plus certain foreign
income taxes with respect to prior taxable years (beginning
after December 31, 1986).
House Bill
The House bill clarifies that, for purposes of the deemed
paid credit under section 902 for a taxable year, a foreign
corporation's post-1986 foreign income taxes includes foreign
income taxes with respect to prior taxable years (beginning
after December 31, 1986) only to the extent such taxes are not
attributable to dividends distributed by the foreign
corporation in prior taxable years. No inference is intended
regarding the determination of foreign taxes deemed paid under
present law.
Effective date.--The provision is effective on date of
enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Clarification of foreign tax credit limitation for financial
services income (sec. 1178(b) of the House bill and sec. 953(b)
of the Senate amendment)
Present Law
Under section 904, separate foreign tax credit
limitations apply to various categories of income. Two of these
separate limitation categories are passive income and financial
services income. For purposes of the separate foreign tax
credit limitation applicable to passive income, certain income
that is treated as high-taxed income is excluded from the
definition of passive income. For purposes of the separate
foreign tax credit limitation applicable to financial services
income, the definition of financial services income generally
incorporates passive income as defined for purposes of the
separate limitation applicable to passive income.
House Bill
The House bill clarifies that the exclusion of income
that is treated as high-taxed income does not apply for
purposes of the separate foreign tax credit limitation
applicable to financial services income. No inference is
intended regarding the treatment of high-taxed income for
purposes of the separate foreign tax credit limitation
applicable to financial services income under present law.
Effective date.--The provision is effective on date of
enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
G. Other Foreign Provisions
1. Eligibility of licenses of computer software for foreign sales
corporation benefits (sec. 1101 of the House bill and sec. 741
of the Senate amendment)
Present Law
Under special tax provisions that provide an export
benefit, a portion of the foreign trade income of an eligible
foreign sales corporation (``FSC'') is exempt from Federal
income tax. Foreign trade income is defined as the gross income
of a FSC that is attributable to foreign trading gross
receipts. The term ``foreign trading gross receipts'' includes
the gross receipts of a FSC from the sale, lease, or rental of
export property and from services related and subsidiary to
such sales, leases, or rentals.
For purposes of the FSC rules, export property is defined
as property (1) which is manufactured, produced, grown, or
extracted in the United States by a person other than a FSC;
(2) which is held primarily for sale, lease, or rental in the
ordinary conduct of a trade or business by or to a FSC for
direct use, consumption, or disposition outside the United
States; and (3) not more than 50 percent of the fair market
value of which is attributable to articles imported into the
United States. Intangible property generally is excluded from
the definition of export property for purposes of the FSC
rules; this exclusion applies to copyrights other than films,
tapes, records, or similar reproductions for commercial or home
use. The temporary Treasury regulations provide that a license
of a master recording tape for reproduction outside the United
States is not excluded from the definition of export property
(Treas. Reg. sec. 1.927(a)-1T(f)(3)). The statutory exclusion
for intangible property does not contain any specific reference
to computer software. However, the temporary Treasury
regulations provide that a copyright on computer software does
not constitute export property, and that standardized, mass
marketed computer software constitutes export property if such
software is not accompanied by a right to reproduce for
external use (Treas. Reg. sec. 1.927(a)-1T(f)(3)).
House Bill
The House bill provides that computer software licensed
for reproduction abroad is not excluded from the definition of
export property for purposes of the FSC provisions.
Accordingly, computer software that is exported with a right to
reproduce is eligible for the benefits of the FSC provisions.
In light of the rapid innovations in the computer and software
industries, the Committee intends that the term ``computer
software'' be construed broadly to accommodate technological
changes in the products produced by both industries. No
inference is intended regarding the qualification as export
property of computer software licensed for reproduction abroad
under present law.
Effective date.--The provision generally applies to gross
receipts from computer software licenses attributable to
periods after December 31, 1997. Accordingly, in the case of a
multi-year license, the provision applies to gross receipts
attributable to the period of such license that is after
December 31, 1997. In the case of gross receipts attributable
to 1998, the provision applies to only one-third of such gross
receipts. In the case of gross receipts attributable to 1999,
the provision applies to only two-thirds of such gross
receipts.
Senate Amendment
The Senate amendment is the same as the House bill, with
a modification to the effective date.
Effective date.--The provision applies to gross receipts
from computer software licenses attributable to periods after
December 31, 1997. Accordingly, in the case of a multi-year
license, the provision applies to gross receipts attributable
to the period of such license that is after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
2. Increase dollar limitation on section 911 exclusion (sec. 1102 of
the House bill)
Present Law
U.S. citizens generally are subject to U.S. income tax on
all their income, whether derived in the United States or
elsewhere. A U.S. citizen who earns income in a foreign country
also may be taxed on such income by that foreign country. A
credit against the U.S. income tax imposed on foreign source
income is allowed for foreign taxes paid on such income.
U.S. citizens living abroad may be eligible to exclude
from their income for U.S. tax purposes certain foreign earned
income and foreign housing costs. In order to qualify for these
exclusions, a U.S. citizen must be either (1) a bona fide
resident of a foreign country for an uninterrupted period that
includes an entire taxable year or (2) present overseas for 330
days out of any 12 consecutive month period. In addition, the
taxpayer must have his or her tax home in a foreign country.
The exclusion for foreign earned income generally applies
to income earned from sources outside the United States as
compensation for personal services actually rendered by the
taxpayer. The maximum exclusion for foreign earned income for a
taxable year is $70,000.
The exclusion for housing costs applies to reasonable
expenses, other than deductible interest and taxes, paid or
incurred by or on behalf of the taxpayer for housing for the
taxpayer and his or her spouse and dependents in a foreign
country. The exclusion amount for housing costs for a taxable
year is equal to the excess of such housing costs for the
taxable year over an amount computed pursuant to a specified
formula.
The combined earned income exclusion and housing cost
exclusion may not exceed the taxpayer's total foreign earned
income. The taxpayer's foreign tax credit is reduced by the
amount of the credit that is attributable to excluded income.
House Bill
Under the House bill, the $70,000 limitation on the
exclusion for foreign earned income is increased to $80,000, in
increments of $2,000 each year beginning in 1998. The $80,000
limitation on the exclusion for foreign earned income is
indexed for inflation beginning in 2008 (for inflation after
2006).
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
3. Treatment of certain securities positions under the subpart F
investment in U.S. property rules (sec. 743 of the Senate
amendment)
Present Law
Under the rules of subpart F (secs. 951-964), the U.S.
10-percent shareholders of a controlled foreign corporation
(CFC) are required to include in income currently for U.S. tax
purposes certain earnings of the CFC, whether or not such
earnings are distributed currently to the shareholders. The
U.S. 10-percent shareholders of a CFC are subject to current
U.S. tax on their shares of certain income earned by the CFC
(referred to as ``subpart F income'). The U.S. 10-percent
shareholders also are subject to current U.S. tax on their
shares of the CFC's earnings to the extent invested by the CFC
in certain U.S. property.
A shareholder's current income inclusion with respect to
a CFC's investment in U.S. property for a taxable year is based
on the CFC's average investment in U.S. property for such year.
For this purpose, the U.S. property held by the CFC must be
measured as of the close of each quarter in the taxable year.
U.S. property generally is defined to include tangible property
located in the United States, stock of a U.S. corporation,
obligations of a U.S. person, and the right to use certain
intellectual property in the United States. Exceptions are
provided for, among other things, obligations of the United
States, U.S. bank deposits, certain trade or business
obligations, and stock or debts of certain unrelated U.S.
corporations.
House Bill
No provision.
Senate Amendment
The Senate amendment provides two additional exceptions
from the definition of U.S. property for purposes of the
subpart F rules. Both exceptions relate to transactions entered
into by a securities or commodities dealer in the ordinary
course of its business as a securities or commodities dealer.
The first exception covers the deposit of collateral or
margin by a securities or commodities dealer, or the receipt of
such a deposit by a securities or commodities dealer, if such
deposit is made or received on commercial terms in the ordinary
course of the dealer's business as a securities or commodities
dealer. This exception applies to deposits of margin or
collateral for securities loans, notional principal contracts,
options contracts, forward contracts, futures contracts, and
any other financial transaction with respect to which the
Secretary of the Treasury determines that the posting of
collateral or margin is customary.
The second exception covers repurchase agreement
transactions and reverse repurchase agreement transactions
entered into by or with a securities or commodities dealer in
the ordinary course of its business as a securities or
commodities dealer. The exception applies only to the extent
that the obligation under the transaction does not exceed the
fair market value of readily marketable securities transferred
or otherwise posted as collateral.
Effective date.--The provision is effective for taxable
years of foreign corporations beginning after December 31,
1997, and taxable years of U.S. shareholders with or within
which such taxable years of foreign corporations end.
Conference Agreement
The conference agreement generally follows the Senate
amendment. Under the conference agreement, for purposes of
these two additional exceptions under section 956, the term
``dealer in commodities'' means futures commission merchants
and dealers in commodities within the meaning of the new
definition that is added to section 475 by the conference
agreement. In addition, the conferees wish to clarify that the
addition of these two exceptions under section 956 is not
intended to create any inference regarding the treatment of an
obligation of a U.S. person to return stock that is borrowed
pursuant to a securities loan.
4. Exception from foreign personal holding company income under subpart
F for active financing income (sec. 744 of the Senate
amendment)
Present Law
Under the subpart F rules, certain U.S. shareholders of a
controlled foreign corporation (``CFC'') are subject to U.S.
tax currently on certain income earned by the CFC, whether or
notsuch income is distributed to the shareholders. The income
subject to current inclusion under the subpart F rules includes, among
other things, ``foreign personal holding company income'' and insurance
income. The U.S. 10-percent shareholders of a CFC also are subject to
current inclusion with respect to their shares of the CFC's foreign
base company services income (i.e., income derived from services
performed for a related person outside the country in which the CFC is
organized).
Foreign personal holding company income generally
consists of the following: dividends, interest, royalties,
rents and annuities; net gains from sales or exchanges of (1)
property that gives rise to the preceding types of income, (2)
property that does not give rise to income, and (3) interests
in trusts, partnerships, and REMICs; net gains from commodities
transactions; net gains from foreign currency transactions; and
income that is equivalent to interest.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization and related person insurance
income. Subpart F insurance income also includes income
attributable to an insurance contract in connection with risks
located within the CFC's country of organization, as the result
of an arrangement under which another corporation receives a
substantially equal amount of consideration for insurance of
other-country risks. Investment income of a CFC that is
allocable to any insurance or annuity contract related to risks
located outside the CFC's country of organization is taxable as
subpart F insurance income (Prop. Treas. reg. sec. 1.953-1(a)).
Investment income allocable to risks located within the CFC's
country of organization generally is taxable as foreign
personal holding company income.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a temporary exception from
foreign personal holding company income for subpart F purposes
for certain income that is derived in the active conduct of an
insurance, banking, financing or similar business. Such
exception is applicable only for taxable years beginning in
1998.
Under the Senate amendment, foreign personal holding
company income does not include income that is derived in or
incident to the active conduct of a banking, financing or
similar business by a CFC that is predominantly engaged in the
active conduct of such business. For this purpose, income
derived in the active conduct of a banking, financing, or
similar business generally is determined under the principles
applicable in determining financial services income for foreign
tax credit limitation purposes. Moreover, the Secretary of the
Treasury shall prescribe regulations applying look-through
treatment in characterizing for this purpose dividends,
interest, income equivalent to interest, rents, and royalties
from related persons. A CFC is considered to be predominantly
engaged in the active conduct of a banking, financing, or
similar business if (1) more than 70 percent of its gross
income is derived from transactions with unrelated persons and
more than 20 percent of its gross income from that business is
derived from transactions with unrelated persons located within
the country in which the CFC is organized or incorporated, or
(2) the CFC is predominantly engaged in the active conduct of a
banking or securities business, or is a qualified bank or
securities affiliate, as defined for purposes of the passive
foreign investment company provisions.
Under the Senate amendment, foreign personal holding
company income also does not include certain investment income
of a qualifying insurance company with respect to risks located
within the CFC's country of organization. These exceptions
apply to income derived from investments of assets equal to the
total of (1) unearned premiums and reserves ordinary and
necessary for the proper conduct of the CFC's insurance
business, (2) one-third of premiums earned during the taxable
year on insurance contracts regulated in the country in which
sold as property, casualty, or health insurance contracts, and
(3) the greater of $10 million or 10 percent of reserves for
insurance contracts regulated in the country in which sold as
life insurance or annuity contracts. For this purpose, a
qualifying insurance company is an entity that is subject to
regulation as an insurance company under the laws of its
country of incorporation and that realizes at least 50 percent
of its gross income (other than income from investments) from
premiums related to risks located within such country. These
exceptions for insurance investment income do not apply to
investment income which is received by the CFC from a related
person. Similarly, the exceptions do not apply to investment
income that is attributable directly or indirectly to the
insurance or reinsurance of risks of related persons. The
Senate amendment does not change the rule of present law that
investment income of a CFC that is attributable to the issuing
or reinsuring of any insurance or annuity contract related to
risks outside of its country of organization is taxable as
Subpart F insurance income.
The Senate amendment also provides an exception from
foreign base company services income for income derived from
services performed in connection with the active conduct of a
banking, financing, insurance or similar business by a CFC that
is predominantly engaged in the active conduct of such
business.
Effective date.--The provision applies only to taxable
years of foreign corporations beginning in 1998, and to taxable
years of United States shareholders with or within which such
taxable years of foreign corporations end.
Conference Agreement
The conference agreement generally follows the Senate
amendment with modifications.
Under the conference agreement, the temporary exception
from foreign personal holding company income applies to income
that is derived in the active conduct of a banking, financing
or similar business by a CFC that is predominantly engaged in
the active conduct of such business. For this purpose, income
derived in the active conduct of a banking, financing,
orsimilar business generally is determined under the principles
applicable in determining financial services income for foreign tax
credit limitation purposes. However, in the case of a corporation that
is engaged in the active conduct of a banking or securities business,
the income that is eligible for this exception is determined under the
principles applicable in determining the income which is treated as
nonpassive income for purposes of the passive foreign investment
company provisions. The conferees generally intend that the income of a
corporation engaged in the active conduct of a banking or securities
business that is eligible for this exception is the income that is
treated as nonpassive under the regulations proposed under section
1296(b). See Prop. Treas. Reg. secs. 1.1296-4 and 1.1296-6. In this
regard, the conferees intend that eligible income will include income
or gains with respect to foreclosed property which is incident to the
active conduct of a banking business.
For purposes of the temporary exception, a corporation is
considered to be predominantly engaged in the active conduct of
a banking, financing, or similar business if it is engaged in
the active conduct of a banking or securities business or is a
qualified bank affiliate or qualified securities affiliate. In
this regard, the conferees intend that a corporation will be
considered to be engaged in the active conduct of a banking or
securities business if the corporation would be treated as so
engaged under the regulations proposed under section 1296(b);
the conferees further intend that qualified bank affiliates and
qualified securities affiliates will be as determined under
such proposed regulations. See Prop. Treas. Reg. secs. 1.1296-4
and 1.1296-6.
Alternatively, a corporation is considered to be engaged
in the active conduct of a banking, financing or similar
business if more than 70 percent of its gross income is derived
from such business from transactions with unrelated persons
located within the country under the laws of which the
corporation is created or organized. For this purpose, income
derived by a qualified business unit of a corporation from
transactions with unrelated persons located in the country in
which the qualified business unit maintains its principal
office and conducts substantial business activity is treated as
derived by the corporation from transactions with unrelated
persons located within the country in which the corporation is
created or organized. A person other than a natural person is
considered to be located within the country in which it
maintains an office through which it engages in a trade or
business and by which the transaction is effected. A natural
person is treated as located within the country in which such
person is physically located when such person enters into the
transaction.
The conference agreement provides a temporary exception
from foreign personal holding company income for certain
investment income of a qualifying insurance company with
respect to risks located within the CFC's country of creation
or organization. The rules of this provision of the conference
agreement differ from the rules of present-law section 953 of
the Code, which determines the subpart F inclusions of a U.S.
shareholder relating to insurance income of a CFC. Such
insurance income under section 953 generally is computed in
accordance with the rules of subchapter L of the Code. The
conferees believe that review of the rules of this provision
would be appropriate when final guidance under section 953 is
published by the Treasury Department.
The conference agreement provides a temporary exception
for income (received from a person other than a related person)
from investments made by a qualifying insurance company of its
reserves or 80 percent of its unearned premiums (as defined for
purposes of the provision). For this purpose, in the case of
contracts regulated in the country in which sold as property,
casualty, or health insurance contracts, unearned premiums and
reserves mean unearned premiums and reserves for losses
incurred determined using the methods and interest rates that
would be used if the qualifying insurance company were subject
to tax under subchapter L of the Code. Thus, for this purpose,
unearned premiums are determined in accordance with section
832(b)(4), and reserves for losses incurred are determined in
accordance with section 832(b)(5) and 846 of the Code (as well
as any other rules applicable to a U.S. property and casualty
insurance company with respect to such amounts).
In the case of a contract regulated in the country in
which sold as a life insurance or annuity contract, the
following three alternative rules for determining reserves are
provided under the conference agreement. It is intended that
any one of the three rules may be elected with respect to a
particular line of business.
First, reserves for such contracts may be determined
generally under the rules applicable to domestic life insurance
companies under subchapter L of the Code, using the methods
there specified, but substituting for the interest rates in
Code section 807(d)(2)(B) an interest rate determined for the
country in which the qualifying insurance company was created
or organized, calculated in the same manner as the mid-term
applicable Federal interest rate (``AFR'') (within the meaning
of section 1274(d)).
Second, the reserves for such contracts may be determined
generally using a preliminary term foreign reserve method,
except that the interest rate to be used is the interest rate
determined for the country in which the qualifying insurance
company was created or organized, calculated in the same manner
as the mid-term AFR. If a qualifying insurance company uses
such a preliminary term method with respect to contracts
insuring risks located in the country in which the company is
created or organized, then such method is the method that
applies for purposes of this election.
Third, reserves for such contracts may be determined to
be equal to the net surrender value of the contract (as defined
in section 807(e)(1)(A)).
In no event may the reserve for any contract at any time
exceed the foreign statement reserve for the contract, reduced
by any catastrophe or deficiency reserve. This rule applies
whether the contract is regulated as a property, casualty,
health, life insurance, annuity, or any other type of contract.
The conference agreement also provides a temporary
exception for income from investment of assets equal to (1)
one-third of premiums earned during the taxable year on
insurance contracts regulated in the country in which sold as
property, casualty, or health insurance contracts, and (2) the
greater of 10 percent of reserves, or, in the case of a
qualifying insurance company that is a startup company, $10
million. For this purpose, a startup companyis a company
(including any predecessor) that has not been engaged in the active
conduct of an insurance business for more than 5 years. It is intended
that the 5-year period commences when the foreign company first is
engaged in the active conduct of an insurance business. If the foreign
company was formed before being acquired by the U.S. shareholder, the
5-year period commences when the acquired company first was engaged in
the active conduct of an insurance business. The conferees intend that
in the event of the acquisition of a book of business from another
company through an assumption or indemnity reinsurance transaction, the
period commences when the acquiring company first engaged in the active
conduct of an insurance business, except that if more than a
substantial part (e.g., 80 percent) of the business of the ceding
company is acquired, then the 5-year period commences when the ceding
company first engaged in the active conduct of an insurance business.
In addition, it is not intended that reinsurance transactions among
related persons be used to multiply the number of 5-year periods.
To prevent the shifting of relatively high-yielding
assets to generate investment income that qualifies under this
temporary exception, the conference agreement provides that,
under rules prescribed by the Secretary, income is allocated to
contracts as follows. In the case of contracts that are
separate-account-type contracts (including variable contracts
not meeting the requirements of section 817), only the income
specifically allocable to such contracts is taken into account.
In the case of other contracts, income not specifically
allocable is allocated ratably among such contracts.
The conference agreement modifies the definition of a
qualifying insurance company. Under the conference agreement, a
qualifying insurance company means any entity which: (1) is
regulated as an insurance company under the laws of the country
in which it is incorporated; (2) derives at least 50 percent of
its net written premiums from the insurance or reinsurance of
risks situated within its country of incorporation; and (3) is
engaged in the active conduct of an insurance business and
would be subject to tax under subchapter L if it were a
domestic corporation.
The conference agreement clarifies that this provision
does not apply to investment income (includable in the income
of a U.S. shareholder of a CFC pursuant to section 953)
allocable to contracts that insure related party risks or risks
located in a country other than the country in which the
qualifying insurance company is created or organized.
Finally, the conference agreement provides an anti-abuse
rule applicable for purposes of these temporary exceptions from
foreign personal holding company income. For purposes of
applying these exceptions, items with respect to a transaction
or series of transactions shall be disregarded if one of the
principal purposes of the transaction or transactions is to
qualify income or gain for these exceptions, including any
change in the method of computing reserves or any other
transaction or transactions one of the principal purposes of
which is the acceleration or deferral of any item in order to
claim the benefits of these exceptions.
The conferees recognize that insurance, banking,
financing, and similar businesses are businesses the active
conduct of which involves the generation of income, such as
interest anddividends, of a type that generally is treated as
passive for purposes of subpart F. For purposes of this temporary
provision, the conferees intend to delineate the income derived in the
active conduct of such businesses, while retaining the present-law
anti-deferral rules of subpart F with respect to income not derived in
the active conduct of these financial services businesses. However, the
conferees recognize that the line between income derived in the active
conduct of such businesses and income otherwise derived by entities so
engaged can be difficult to draw. The conferees believe that the issues
of the determination of income derived in the active conduct of such
businesses and the potential mobility of the business activity and
income recognition of insurance, banking, financing, and similar
businesses require further study. In the event that it becomes
necessary to consider a possible extension of the provision in the
future, the conferees would invite the comments of taxpayers and the
Treasury Department regarding these issues.
5. Treat service income of nonresident alien individuals earned on
foreign ships as foreign source income and disregard the U.S. presence
of such individuals (sec. 745 of the Senate amendment)
Present Law
Nonresident alien individuals generally are subject to
U.S. taxation and withholding on their U.S. source income.
Compensation for labor and personal services performed within
the United States is considered U.S. source unless such income
qualifies for a de minimis exception. To qualify for the
exception, the compensation paid to a nonresident alien
individual must not exceed $3,000, the compensation must
reflect services performed on behalf of a foreign employer, and
the individual must be present in the United Sates for not more
than 90 days during the taxable year. Special rules apply to
exclude certain items from the gross income of a nonresident
alien. An exclusion applies to gross income derived by a
nonresident alien individual from the international operation
of a ship if the country in which such individual is resident
provides a reciprocal exemption for U.S. residents. However,
this exclusion does not apply to income from personal services
performed by an individual crew member on board a ship.
Consequently, wages exceeding $3,000 in a taxable year that are
earned by nonresident alien individual crew members of a
foreign ship while the vessel is within U.S. territory are
subject to income taxation by the United States.
U.S. residents are subject to U.S. tax on their worldwide
income. In general, a non-U.S. citizen is considered to be a
resident of the United States if the individual (1) has entered
the United States as a lawful permanent U.S. resident or (2) is
present in the United States for 31 or more days during the
current calendar year and has been present in the United States
for a substantial period of time--183 or more days--during a
three-year period computed by weighting toward the present year
(the ``substantial presence test''). An individual generally is
treated as present in the United States on any day if such
individual is physically present in the United States at any
time during the day. Certain categories of individuals (e.g.,
foreign government employees and certain students) are not
treated as U.S. residents even if they are present in the
United States for the requisite period of time. Crew members of
a foreign vessel who are on board the vessel while it is
stationed within U.S. territorial waters are treated as present
in the United States.
House Bill
No provision.
Senate Amendment
The Senate amendment treats gross income of a nonresident
alien individual, who is present in the United States as a
member of the regular crew of a foreign vessel, from the
performance of personal services in connection with the
international operation of a ship as income from foreign
sources. Thus, such income is exempt from U.S. income and
withholding tax. However, such persons are not excluded for
purposes of applying the minimum participation standards of
section 410 to a plan of the employer. In addition, for
purposes of determining whether an individual is a U.S.
resident under the substantial presence test, the Senate
amendment provides that the days that such individual is
present as a member of the regular crew of a foreign vessel are
disregarded.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Conference Agreement
The conference agreement generally follows the Senate
amendment with modifications. The conference agreement provides
that the treatment of income of a nonresident alien crew member
of a foreign vessel as foreign source income will not apply for
purposes of the pension rules and certain employee benefit
provisions. The conference agreement further provides that, for
purposes of determining whether an individual is a U.S.
resident under the substantial presence test, any day that such
individual is present as a member of the regular crew of a
foreign vessel is disregarded only if the individual does not
otherwise engage in trade or business within the United States
on such day.
XII. SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND BUSINESSES
A. Provisions Relating to Individuals
1. Modifications to standard deduction of dependents; AMT treatment of
certain minor children (sec. 1201 of the House bill and sec. 1001 of
the Senate amendment)
Present Law
Standard deduction of dependents.--The standard deduction
of a taxpayer for whom a dependency exemption is allowed on
another taxpayer's return can not exceed the lesser of (1) the
standard deduction for an individual taxpayer (projected to be
$4,250 for 1998) or (2) the greater of $500 (indexed)
1 or the dependent's earned income (sec. 63(c)(5)).
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\1\ The indexed amount is projected to be $700 for 1998.
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Taxation of unearned income of children under age 14.--
The tax on a portion of the unearned income (e.g., interest and
dividends) of a child under age 14 is the additional tax that
the child's custodial parent would pay if the child's unearned
income were included in that parent's income. The portion of
the child's unearned income which is taxed at the parent's top
marginal rate is the amount by which the child's unearned
income is more than the sum of (1) $500 2 (indexed)
plus (2) the greater of (a) $500 3 (indexed) or (b)
the child's itemized deductions directly connected with the
production of the unearned income (sec. 1(g)).
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\2\ Projected to be $700 for 1998.
\3\ Projected to be $700 for 1998.
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Alternative minimum tax (``AMT'') exemption for children
under age 14.--Single taxpayers are entitled to an exemption
from the alternative minimum tax (``AMT'') of $33,750. However,
in the case of a child under age 14, his exemption from the
AMT, in substance, is the unused alternative minimum tax
exemption of the child's custodial parent, limited to sum of
earned income and $1,400 (sec. 59(j)).
House Bill
Standard deduction of dependents.--The House bill
increases the standard deduction for a taxpayer with respect to
whom a dependency exemption is allowed on another taxpayer's
return to the lesser of (1) the standard deduction for
individual taxpayers or (2) the greater of: (a) $500
4 (indexed for inflation as under present law), or
(b) the individual's earned income plus $250. The $250 amount
is indexed for inflation after 1998.
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\4\ Projected to be $700 for 1998.
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Alternative minimum tax exemption for children under age
14.--The House bill increases the AMT exemption amount for a
child under age 14 to the lesser of (1) $33,750 or (2) the sum
of the child's earned income plus $5,000. The $5,000 amount is
indexed for inflation after 1998.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Increase de minimis threshold for estimated tax to $1,000 for
individuals (sec. 1202 of the House bill and sec. 1002 of the
Senate amendment)
Present Law
An individual taxpayer generally is subject to an
addition to tax for any underpayment of estimated tax (sec.
6654). An individual generally does not have an underpayment of
estimated tax if he or she makes timely estimated tax payments
at least equal to: (1) 100 percent of the tax shown on the
return of the individual for the preceding year (the ``100
percent of last year's liability safe harbor'') or (2) 90
percent of the tax shown on the return for the current year.
The 100 percent of last year's liability safe harbor is
modified to be a 110 percent of last year's liability safe
harbor for any individual with an AGI of more than $150,000 as
shown on the return for the preceding taxable year. Income tax
withholding from wages is considered to be a payment of
estimated taxes. In general, payment of estimated taxes must be
made quarterly. The addition to tax is not imposed where the
total tax liability for the year, reduced by any withheld tax
and estimated tax payments, is less than $500.
House Bill
The House bill increases the $500 individual estimated
tax de minimis threshold to $1,000.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Optional methods for computing SECA tax combined (sec. 1203 of the
House bill)
Present Law
The Self-Employment Contributions Act (``SECA'') imposes
taxes on net earnings from self-employment to provide social
security coverage to self-employed workers. The maximum amount
of earnings subject to the SECA tax is coordinated with, and is
set at the same level as, the maximum level of wages and
salaries subject to FICA taxes ($65,000 for OASDI taxes in 1997
and indexed annually, and without limit for the Hospital
Insurance tax). Special rules allow certain self-employed
individuals to continue to maintain social security coverage
during a period of low income. The method applicable to farmers
is slightly more favorable than the method applicable to other
self-employed persons.
A farmer may increase his or her self-employment income,
for purposes of obtaining social security coverage, by
reporting two-thirds of the first $2,400 of gross income as net
earnings from self-employment, i.e., the optional amount of net
earnings from self-employment would not exceed $1,600. There is
no limit on the number of times a farmer may use this method.
The optional method for non farm income is similar, also
permitting two-thirds of the first $2,400 of gross income to be
treated as self-employment income. However, the optional non
farm method may not be used more than five times by any
individual, and may only be used if the taxpayer had net
earnings from self-employment of $400 or more in at least two
of the three years immediately preceding the year in which the
optional method is elected.
In general, to receive benefits, including Disability
Insurance Benefits, under the Social Security Act, a worker
must have a minimum number of quarters of coverage. A minimum
amount of wages or self-employment income must be reported to
obtain a quarter of coverage. A maximum of four quarters of
coverage may be obtained each year. In 1978, the amount of
earnings required to obtain a quarter of coverage began
increasing each year. Starting in 1994, a farmer could obtain
only two quarters of coverage under the optional method
applicable to farmers.
House Bill
The House bill combines the farm and non farm optional
methods into a single combined optional method applicable to
all self-employed workers. A self-employed worker may elect to
use the optional method an unlimited number of times. If it is
used, it must be applied to all self-employment earnings for
the year, both farm and non farm.
The $2,400 amount is increased to an amount which would
provide four quarters of coverage in 1998 (the ``lower
limit''). Such amount increases each year based on the earnings
requirements under the Social Security Act.
The optional method in this provision is elected on a
year-by-year basis. An election for a taxable year must be
filed with the original Federal income tax return for the year,
and may not be made retroactively by filing an amended return.
Effective date--The provision is effective for taxable
years beginning after January 1, 1998.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
4. Treatment of certain reimbursed expenses of rural letter carriers'
vehicles (sec. 1204 of the House bill and sec. 1003 of the
Senate amendment)
Present Law
A taxpayer who uses his or her automobile for business
purposes may deduct the business portion of the actual
operation and maintenance expenses of the vehicle, plus
depreciation (subject to the limitations of sec. 280F).
Alternatively, the taxpayer may elect to utilize a standard
mileage rate in computing the deduction allowable for business
use of an automobile that has not been fully depreciated. Under
this election, the taxpayer's deduction equals the applicable
rate multiplied by the number of miles driven for business
purposes and is taken in lieu of deductions for depreciation
and actual operation and maintenance expenses.
An employee of the U.S. Postal Service may compute his
deduction for business use of an automobile in performing
services involving the collection and delivery of mail on a
rural route by using, for all business use mileage, 150 percent
of the standard mileage rate.
Rural letter carriers are paid an equipment maintenance
allowance (EMA) to compensate them for the use of their
personal automobiles in delivering the mail. The tax
consequences of the EMA are determined by comparing it with the
automobile expense deductions that each carrier is allowed to
claim (using either the actual expenses method or the 150
percent of the standard mileage rate). If the EMA exceeds the
allowable automobile expense deductions, the excess generally
is subject to tax. If the EMA falls short of the allowable
automobile expense deductions, a deduction is allowed only to
the extent that the sum of this shortfall and all other
miscellaneous itemized deductions exceeds two percent of the
taxpayer's adjusted gross income.
House Bill
The House bill repeals the special rate for Postal
Service employees of 150 percent of the standard mileage rate.
In its place, the House bill requires that the rate of
reimbursement provided by the Postal Service to rural letter
carriers be considered to be equivalent to their expenses. The
rate of reimbursement that is considered to be equivalent to
their expenses is the rate of reimbursement contained in the
1991 collective bargaining agreement, which may be increased by
no more than the rate of inflation.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
5. Travel expenses of Federal employees participating in a Federal
criminal investigation (sec. 1205 of the House bill and sec.
1004 of the Senate amendment)
Present Law
Unreimbursed ordinary and necessary travel expenses paid
or incurred by an individual in connection with temporary
employment away from home (e.g., transportation costs and the
cost of meals and lodging) are generally deductible, subject to
the two-percent floor on miscellaneous itemized deductions.
Travel expenses paid or incurred in connection with indefinite
employment away from home, however, are not deductible. A
taxpayer's employment away from home in a single location is
indefinite rather than temporary if it lasts for one year or
more; thus, no deduction is permitted for travel expenses paid
or incurred in connection with such employment (sec. 162(a)).
If a taxpayer's employment away from home in a single location
lasts for less than one year, whether such employment is
temporary or indefinite is determined on the basis of the facts
and circumstances.
House Bill
The one-year limitation with respect to deductibility of
expenses while temporarily away from home does not include any
period during which a Federal employee is certified by the
Attorney General (or the Attorney General's designee) as
traveling on behalf of the Federal Government in a temporary
duty status to investigate or provide support services to the
investigation of a Federal crime. Thus, expenses for these
individuals during these periods are fully deductible,
regardless of the length of the period for which certification
is given (provided that the other requirements for
deductibility are satisfied).
Effective date.--The provision is effective for amounts
paid or incurred with respect to taxable years ending after the
date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
6. Payment of taxes by commercially acceptable means (sec. 1206 of the
House bill)
Present Law
Payment of taxes may be made by checks or money orders,
to the extent and under the conditions provided by Treasury
regulations (sec. 6311).
House Bill
In general
The Internal Revenue Service (IRS) is engaged in a long-
term modernization of its information systems, the Tax Systems
Modernization (TSM) Program. This modernization is intended to
address deficiencies in the current IRS information systems and
to plan effectively for future information system needs and
requirements. The systems changes are designed to reduce the
burden on taxpayers, generate additional revenue through
improved voluntary compliance, and achieve productivity gains
throughout the IRS. One key element of this program is
electronic filing of tax returns.
At the present time, increasing reliance is being placed
upon electronic funds transfers for payment of obligations. In
light of this, the IRS seeks to integrate these payment methods
in its TSM program, including electronic filing of returns, as
well as into its traditional collection functions. The House
bill allows the IRS to accept payment by any commercially
acceptable means that the Secretary deems appropriate, to the
extent and under the conditions provided in Treasury
regulations. This will include, for example, electronic funds
transfers, including those arising from credit cards, debit
cards, and charge cards.
The IRS contemplates that it will proceed to negotiate
contracts to implement this provision with one or more private
sector credit and debit card systems. The House bill provides
that the Federal Government may pay fees with respect to any
such contracts only out of amounts specifically appropriated
for that purpose.
Billing error resolution
In the course of processing these transactions, it will
be necessary to resolve billing errors and other disputes. The
Internal Revenue Code contains mechanisms for the determination
of tax liability, defenses and other taxpayer protections, and
the resolution of disputes with respect to those liabilities.
The Truth-in-Lending Act contains provisions for determination
of credit card liabilities, defenses and other consumer
protections, and the resolution of disputes with respect to
these liabilities.
The House bill excludes credit card, debit card, and
charge card issuers and processing mechanisms from the
resolution (such as through the ``billing error'' resolution
process) of tax liability, but makes IRS subject to the Truth-
in-Lending provisions insofar as those provisions impose
obligations and responsibilities with regard to the ``billing
error'' resolution process. It is not intended that consumers
obtain additional ways to dispute their tax liabilities under
the Truth-in-Lending provisions.
The House bill also specifically includes the use of
debit cards in this provision and provides that the
corresponding defenses and ``billing error'' provisions of the
Electronic Fund Transfer Act will apply in a similar manner.
The House bill adds new section 6311(d)(3) to the Code.
This section describes the circumstances under which section
161 of the Truth-in-Lending Act (``TILA'') and section 908 of
the Electronic Fund Transfer Act (``EFTA'') apply to disputes
that may arise in connection with payments of taxes made by
credit card or debit card. Subsections (A) through (C)
recognize that ``billing errors'' relating to the credit card
account, such as an error arising from a credit card
transaction posted to a cardholder's account without the
cardholder's authorization, an amount posted to the wrong
cardholder's account, or an incorrect amount posted to a
cardholder's account as a result of a computational error or
numerical transposition, are governed by the billing error
provisions of section 161 of TILA. Similarly, subsections
6311(d)(3) (A)-(C) provide that errors such as those described
above which arise in connection with payments of internal
revenue taxes made by debit card, are governed by section 908
of EFTA.
The Internal Revenue Code provides that refunds are only
authorized to be paid to the person who made the overpayment
(generally the taxpayer). Subsection 6311(d)(3)(E), however,
provides that where a taxpayer is entitled to receive funds as
a result of the correction of a billing error made under
section 161 of TILA in connection with a credit card
transaction, or under section 908 of EFTA in connection with a
debit card transaction, the IRS is authorized to utilize the
appropriate credit card or debit card system to initiate a
credit to the taxpayer's credit card or debit card account. The
IRS may, therefore, provide such funds through the taxpayer's
credit card or debit card account rather than directly to the
taxpayer.
On the other hand, subsections 6311(d)(3) (A)-(C) provide
that any alleged error or dispute asserted by a taxpayer
concerning the merits of the taxpayer's underlying tax
liability or tax return is governed solely by existing tax
laws, and is not subject to section 161 or section 170 of TILA,
section 908 of EFTA, or any similar provisions of State law.
Absent the exclusion from section 170 of TILA, in a collection
action brought against the cardholder by the card issuer the
cardholder might otherwise assert as a defense that the IRS had
incorrectly computed his tax liability. A collection action
initiated by a credit card issuer against the taxpayer/
cardholder will be an inappropriate vehicle for the
determination of a taxpayer's tax liability, especially since
the United States will not be a party to such an action.
Similarly, without the exclusion from section 161 of TILA
and section 908 of EFTA, a taxpayer could contest the merits of
his tax liability by putting the charge which appears on the
credit card bill in dispute. Pursuant to TILA or EFTA, the
taxpayer's card issuer will have to investigate the dispute,
thereby finding itself in the middle of a dispute between the
IRS and the taxpayer. It is believed that it is improper to
attempt to resolve tax disputes through the billing process. It
is also noted that the taxpayer retains the traditional,
existing remedies for resolving tax disputes, such as resolving
the dispute administratively with the IRS, filing a petition
with the Tax Court after receiving a statutory notice of
deficiency, or paying the disputed tax and filing a claim for
refund (and subsequently filing a refund suit if the claim is
denied or not acted upon).
Creditor status
The TILA imposes various responsibilities and obligations
on creditors. Although the definition of the term ``creditor''
set forth in 15 U.S.C. sec. 1602 is limited, and will generally
not include the IRS, in the case of an open-end credit plan
involving a credit card, the card issuer and any person who
honors the credit card are, pursuant to 15 U.S.C. sec. 1602(f),
creditors.
In addition, 12 CFR sec. 226.12(e) provides that the
creditor must transmit a credit statement to the card issuer
within 7 business days from accepting the return or forgiving
the debt. There is a concern that the response deadlines
otherwise imposed by 12 CFR sec. 226.12(e), if applicable, will
be difficult for the IRS to comply with (given the volume of
payments the IRS is likely to receive in peak periods). This
could subject the IRS to unwarranted damage actions.
Consequently, the House bill generally provides an exception to
creditor status for the IRS.
Privacy protections
The House bill also addresses privacy questions that
arise from the IRS' participation in credit card processing
systems. It is believed that taxpayers expect that the maximum
possible protection of privacy will be accorded any
transactions they have with the IRS. Accordingly, the House
bill provides the greatest possible protection of taxpayers'
privacy that is consistent with developing and operating an
efficient tax administration system. It is expected that the
principle will be fully observed in the implementation of this
provision.
A key privacy issue is the use and redisclosure of tax
information by financial institutions for purposes unrelated to
the processing of credit card charges, i.e., marketing and
related uses. To accept credit card charges by taxpayers, the
IRS will have to disclose tax information to financial
institutions to obtain payment and to resolve billing disputes.
To obtain payment, theIRS will have to disclose, at a minimum,
information on the ``credit slip,'' i.e., the dollar amount of the
payment and the taxpayer's credit card number.
The resolution of billing disputes may require the
disclosure of additional tax information to financial
institutions. In most cases, providing a copy of the credit
slip and verifying the transaction amount will be sufficient.
Conceivably, financial institutions could require some
information regarding the underlying liability even where the
dispute concerns a ``billing dispute'' matter. This additional
information will not necessarily be shared as widely as the
initial payment data. In lieu of disclosing further
information, the IRS may elect to allow disputed amounts to be
charged back to the IRS and to reinstate the corresponding tax
liability.
Despite the language in most cardholder agreements that
permits redisclosure of credit card transaction information,
the public may be largely unaware of how widely that
information is shared. For example, some financial institutions
may share credit, payment, and purchase information with
private credit bureaus, who, in turn, may sell this information
to direct mail marketers, and others. Without use and
redisclosure restrictions, taxpayers may discover that some
traditionally confidential tax information might be widely
disseminated to direct mail marketers and others.
It is intended that credit or debit card transaction
information will generally be restricted to those uses
necessary to process payments and resolve billing errors, as
well as other purposes that are specified in the statute. The
House bill directs the Secretary to issue published procedures
on what constitutes authorized uses and disclosures. It is
anticipated that the Secretary's published procedures will
prohibit the use of transaction information for marketing tax-
related services by the issuer or any marketing that targets
only those who use their credit card to pay their taxes. It is
also anticipated that the published procedures will prohibit
the sale of transaction information to a third party.
Effective date.--The provision is effective nine months
after the date of enactment. The IRS may, in this interim
period, conduct internal tests and negotiate with card issuers,
but may not accept credit or debit cards for payment of tax
liability.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, except
that the requirement that a separate appropriation be made for
payment by the IRS of credit card fees is deleted, and a
prohibition on the payment by the IRS of any fee or the
provision of any other consideration is added.
B. Provisions Relating to Businesses Generally
1. Modifications to look-back method for long-term contracts (sec. 1211
of the House bill, and sec. 1011 of the Senate amendment)
Present Law
Taxpayers engaged in the production of property under a
long-term contract generally must compute income from the
contract under the percentage of completion method. Under the
percentage of completion method, a taxpayer must include in
gross income for any taxable year an amount that is based on
the product of (1) the gross contract price and (2) the
percentage of the contract completed as of the end of the year.
The percentage of the contract completed as of the end of the
year is determined by comparing costs incurred with respect to
the contract as of the end of the year with estimated total
contract costs.
Because the percentage of completion method relies upon
estimated, rather than actual, contract price and costs to
determine gross income for any taxable year, a ``look-back
method'' is applied in the year a contract is completed in
order to compensate the taxpayer (or the Internal Revenue
Service) for the acceleration (or deferral) of taxes paid over
the contract term. The first step of the look-back method is to
reapply the percentage of completion method using actual
contract price and costs rather than estimated contract price
and costs. The second step generally requires the taxpayer to
recompute its tax liability for each year of the contract using
gross income as reallocated under the look-back method. If
there is any difference between the recomputed tax liability
and the tax liability as previously determined for a year, such
difference is treated as a hypothetical underpayment or
overpayment of tax to which the taxpayer applies a rate of
interest equal to the overpayment rate, compounded daily.
5 The taxpayer receives (or pays) interest if the
net amount of interest applicable to hypothetical overpayments
exceeds (or is less than) the amount of interest applicable to
hypothetical underpayments.
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\5\ The overpayment rate equals the applicable Federal short-term
rate plus two percentage points. This rate is adjusted quarterly by the
IRS. Thus, in applying the look-back method for a contract year, a
taxpayer may be required to use five different interest rates.
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House Bill
Election not to apply the look-back method for de minimis amounts
The House bill provides that a taxpayer may elect not to
apply the look-back method with respect to a long-term contract
if for each prior contract year, the cumulative taxable income
(or loss) under the contract as determined using estimated
contract price and costs is within 10 percent of the cumulative
taxable income (or loss) as determined using actual contract
price and costs.
The House bill also provides that a taxpayer may elect
not to reapply the look-back method with respect to a contract
if, as of the close of any taxable year after the year the
contract is completed, the cumulative taxable income (or loss)
under the contract is within 10 percent of the cumulative look-
back income (or loss) as of the close of the most recent year
in which the look-back method was applied (or would have
applied but for the other de minimis exception described
above).
Further, the House bill provides that for purposes of the
look-back method, only one rate of interest is to apply for
each accrual period. An accrual period with respect to a
taxable year begins on the day after the return due date
(determined without regard to extensions) for the taxable year
and ends on such return due date for the following taxable
year. The applicable rate of interest is the overpayment rate
in effect for the calendar quarter in which the accrual period
begins.
Effective date
The provision applies to contracts completed in taxable
years ending after the date of enactment. The change in the
interest rate calculation also applies for purposes of the
look-back method applicable to the income forecast method of
depreciation for property placed in service after September 13,
1995.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Minimum tax treatment of certain property and casualty insurance
companies (sec. 1212 of the House bill and sec. 1012 of the
Senate amendment)
Present Law
Present law provides that certain property and casualty
insurance companies may elect to be taxed only on taxable
investment income for regular tax purposes (sec. 831(b)).
Eligible property and casualty insurance companies are those
whose net written premiums (or if greater, direct written
premiums) for the taxable year exceed $350,000 but do not
exceed $1,200,000.
Under present law, all corporations including insurance
companies are subject to an alternative minimum tax.
Alternative minimum taxable income is increased by 75 percent
of the excess of adjusted current earnings over alternative
minimum taxable income (determined without regard to this
adjustment and without regard to net operating losses).
House Bill
The House bill provides that a property and casualty
insurance company that elects for regular tax purposes to be
taxed only on taxable investment income determines its adjusted
current earnings under the alternative minimum tax without
regard to any amount not taken into account in determining its
gross investment income under section 834(b). Thus, adjusted
current earnings of an electing company is determined without
regard to underwriting income (or underwriting expense, as
provided in sec. 56(g)(4)(B)(i)(II)).
Effective date.--Taxable years beginning after December
31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Treatment of construction allowances provided to lessees (sec. 961
of the House bill and sec. 1014 of the Senate amendment)
Present Law
Issues have arisen as to the proper treatment of amounts
provided to a lessee by a lessor for property to be constructed
and used by the lessee pursuant to the lease (``construction
allowances''). In general, incentive payments are includible in
income as accessions to wealth. 6 A coordinated
issue paper issued by the Internal Revenue Service (``IRS'') on
October 7, 1996, states the IRS position that construction
allowances should generally be included in income in the year
received. However, the paper does recognize that amounts
received by a lessee from a lessor and expended by the lessee
on assets owned by the lessor were not includible in the
lessee's income. The issue paper provides that tax ownership is
determined by applying a ``benefits and burdens of ownership''
test that includes an examination of several factors.
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\6\ John B. White, Inc. v. Comm., 55 T.C. 729 (1971), aff'd per
curiam 458 F. 2d 989 (3d Cir.), cert. denied, 409 U.S. 876 (1972).
However, see, e.g., Federated Department Stores v. Comm., 51 T.C. 500
(1968) aff'd 426 F. 2d 417 (6th Cir. 1970) and The May Department
Stores Co. v. Comm., 33 TCM 1128 (1974), aff'd 519 F. 2d 1154 (8th Cir.
1975) with respect to the application of section 118 to certain
payments.
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House Bill
The House bill provides that the gross income of a lessee
does not include amountsreceived in cash (or treated as a rent
reduction) from a lessor under a short-term lease of retail space for
the purpose of the lessee's construction or improvement of qualified
long-term real property for use in the lessee's trade or business at
such retail space. The exclusion only applies to the extent the
allowance does not exceed the amount expended by the lessee on the
construction or improvement of qualified long-term real property.
The House bill provides that the lessor must treat the
amounts expended on the construction allowance as
nonresidential real property owned by the lessor.
The House bill contains reporting requirements to ensure
that both the lessor and lessee treat such amounts in
accordance with the provision. Under regulations, the lessor
and the lessee shall, at such times and in such manner as
provided by the regulations, furnish to the Secretary of the
Treasury information concerning the amounts received (or
treated as a rent reduction), the amounts expended on qualified
long-term real property, and such other information as the
Secretary deems necessary to carry out the provision.
Effective date.--The provision applies to leases entered
into after the date of enactment. No inference is intended as
to the treatment of amounts that are not subject to the
provision.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement generally follows the House bill
and the Senate amendment, with a clarification of the
coordination of the provision and present-law rule that allows
lessors to take losses with respect to certain leasehold
improvements abandoned at the end of the term of the lease
(sec. 168(i)(8)). In addition, the conferees wish to emphasize
that no inference is intended as to the treatment of amounts
that are not subject to the provision, and that the provisions
of the IRS issue paper and present law (including case law)
will continue to apply where applicable.
C. Partnership Simplification Provisions
1. General provisions
a. Simplified flow-through for electing large partnerships
(sec. 1221 of the House bill and sec. 1021 of the
Senate amendment)
Present Law
Treatment of partnerships in general
A partnership generally is treated as a conduit for
Federal income tax purposes. Each partner takes into account
separately his distributive share of the partnership's items of
income, gain, loss, deduction or credit. The character of an
item is the same as if it had been directly realized or
incurred by the partner. Limitations affecting the computation
of taxable income generally apply at the partner level.
The taxable income of a partnership is computed in the
same manner as that of an individual, except that no deduction
is permitted for personal exemptions, foreign taxes, charitable
contributions, net operating losses, certain itemized
deductions, or depletion. Elections affecting the computation
of taxable income derived from a partnership are made by the
partnership, except for certain elections such as those
relating to discharge of indebtedness income and the foreign
tax credit.
Capital gains
The net capital gain of an individual is taxed generally
at the same rates applicable to ordinary income, subject to a
maximum marginal rate of 28 percent. Net capital gain is the
excess of net long-term capital gain over net short-term
capital loss. Individuals with a net capital loss generally may
deduct up to $3,000 of the loss each year against ordinary
income. Net capital losses in excess of the $3,000 limit may be
carried forward indefinitely.
A special rule applies to gains and losses on the sale,
exchange or involuntary conversion of certain trade or business
assets (sec. 1231). In general, net gains from such assets are
treated as long-term capital gains but net losses are treated
as ordinary losses.
A partner's share of a partnership's net short-term
capital gain or loss and net long-term capital gain or loss
from portfolio investments is separately reported to the
partner. A partner's share of a partnership's net gain or loss
under section 1231 generally is also separately reported.
Deductions and credits
Miscellaneous itemized deductions (e.g., certain
investment expenses) are deductible only to the extent that, in
the aggregate, they exceed two percent of the individual's
adjustedgross income.
In general, taxpayers are allowed a deduction for
charitable contributions, subject to certain limitations. The
deduction allowed an individual generally cannot exceed 50
percent of the individual's adjusted gross income for the
taxable year. The deduction allowed a corporation generally
cannot exceed 10 percent of the corporation's taxable income.
Excess contributions are carried forward for five years.
A partner's distributive share of a partnership's
miscellaneous itemized deductions and charitable contributions
is separately reported to the partner.
Each partner is allowed his distributive share of credits
against his taxable income.
Foreign taxes
The foreign tax credit generally allows U.S. taxpayers to
reduce U.S. income tax on foreign income by the amount of
foreign income taxes paid or accrued with respect to that
income. In lieu of electing the foreign tax credit, a taxpayer
may deduct foreign taxes. The total amount of the credit may
not exceed the same proportion of the taxpayer's U.S. tax which
the taxpayer's foreign source taxable income bears to the
taxpayer's worldwide taxable income for the taxable year.
Unrelated business taxable income
Tax-exempt organizations are subject to tax on income
from unrelated businesses. Certain types of income (such as
dividends, interest and certain rental income) are not treated
as unrelated business taxable income. Thus, for a partner that
is an exempt organization, whether partnership income is
unrelated business taxable income depends on the character of
the underlying income. Income from a publicly traded
partnership, however, is treated as unrelated business taxable
income regardless of the character of the underlying income.
Special rules related to oil and gas activities
Taxpayers involved in the search for and extraction of
crude oil and natural gas are subject to certain special tax
rules. As a result, in the case of partnerships engaged in such
activities, certain specific information is separately reported
to partners.
A taxpayer who owns an economic interest in a producing
deposit of natural resources (including crude oil and natural
gas) is permitted to claim a deduction for depletion of the
deposit as the minerals are extracted. In the case of oil and
gas produced in the United States, a taxpayer generally is
permitted to claim the greater of a deduction for cost
depletion or percentage depletion. Cost depletion is computed
by multiplying a taxpayer's adjusted basis in the depletable
property by a fraction, the numerator of which is the amount of
current year production from the property and the denominator
of which is the property's estimated reserves as of the
beginning of that year. Percentage depletion is equal to a
specified percentage (generally, 15 percent in the case of oil
and gas) of gross income from production. Cost depletion is
limited to the taxpayer's basis in the depletable property;
percentage depletion is not so limited. Once a taxpayer has
exhausted its basis in the depletable property, it may continue
to claim percentage depletion deductions (generally referred to
as ``excess percentage depletion'').
Certain limitations apply to the deduction for oil and
gas percentage depletion. First, percentage depletion is not
available to oil and gas producers who also engage (directly or
indirectly) in significant levels of oil and gas retailing or
refining activities (so-called ``integrated producers'' of oil
and gas). Second, the deduction for percentage depletion may be
claimed by a taxpayer only with respect to up to 1,000 barrels-
per-day of production. Third, the percentage depletion
deduction may not exceed 100 percent of the taxpayer's net
income for the taxable year from the depletable oil and gas
property. Fourth, a percentage depletion deduction may not be
claimed to the extent that it exceeds 65 percent of the
taxpayer's pre-percentage depletion taxable income.
In the case of a partnership that owns depletable oil and
gas properties, the depletion allowance is computed separately
by the partners and not by the partnership. In computing a
partner's basis in his partnership interest, basis is increased
by the partner's share of any partnership-related excess
percentage depletion deductions and is decreased (but not below
zero) by the partner's total amount of depletion deductions
attributable to partnership property.
Intangible drilling and development costs (``IDCs'')
incurred with respect to domestic oil and gas wells generally
may be deducted at the election of the taxpayer. In the case of
integrated producers, no more than 70 percent of IDCs incurred
during a taxable year may be deducted. IDCs not deducted are
capitalized and generally are either added to the property's
basis and recovered through depletion deductions or amortized
on a straight-line basis over a 60-month period.
The special treatment granted to IDCs incurred in the
pursuit of oil and gas may give rise to an item of tax
preference or (in the case of corporate taxpayers) an adjusted
current earnings (``ACE'') adjustment for the alternative
minimum tax. The tax preference item is based on a concept of
``excess IDCs.'' In general, excess IDCs are the excess of IDCs
deducted for the taxable year over the amount of those IDCs
that would have been deducted had they been capitalized and
amortized on a straight-line basis over 120 months commencing
with the month production begins from the related well. The
amount of tax preference is then computed as the difference
between the excess IDC amount and 65 percent of the taxpayer's
net income from oil and gas (computed without a deduction for
excess IDCs). For IDCs incurred in taxable years beginning
after 1992, the ACE adjustment related to IDCs is repealed for
taxpayers other than integrated producers. Moreover, beginning
in 1993, the IDC tax preference generally is repealed for
taxpayers other than integrated producers. In this case,
however, the repeal of the excess IDC preference may not result
in more than a 40 percent reduction (30 percent for taxable
years beginning in 1993) in the amount of the taxpayer's
alternative minimum taxable income computed as if that
preference had not been repealed.
Passive losses
The passive loss rules generally disallow deductions and
credits from passive activities to the extent they exceed
income from passive activities. Losses not allowed in a taxable
year are suspended and treated as current deductions from
passive activities in the next taxable year. These losses are
allowed in full when a taxpayer disposes of the entire interest
in the passive activity to an unrelated person in a taxable
transaction. Passive activities include trade or business
activities in which the taxpayer does not materially
participate. (Limited partners generally do not materially
participate in the activities of a partnership.) Passive
activities also include rental activities (regardless of the
taxpayer's material participation) 7. Portfolio
income (such as interest and dividends), and expenses allocable
to such income, are not treated as income or loss from a
passive activity.
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\7\ An individual who actively participates in a rental real estate
activity and holds at least a 10-percent interest may deduct up to
$25,000 of passive losses. The $25,000 amount phases out as the
individual's income increases from $100,000 to $150,000.
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The $25,000 allowance also applies to low-income housing
and rehabilitation credits (on a deduction equivalent basis),
regardless of whether the taxpayer claiming the credit actively
participates in the rental real estate activity generating the
credit. In addition, the income phaseout range for the $25,000
allowance for rehabilitation credits is $200,000 to $250,000
(rather than $100,000 to $150,000). For interests acquired
after December 31, 1989 in partnerships holding property placed
in service after that date, the $25,000 deduction-equivalent
allowance is permitted for the low-income housing credit
without regard to the taxpayer's income.
A partnership's operations may be treated as multiple
activities for purposes of the passive loss rules. In such
case, the partnership must separately report items of income
and deductions from each of its activities.
Income, loss and other items from a publicly traded
partnership are treated as separate from income and loss from
any other publicly traded partnership, and also as separate
from any income or loss from passive activities.
The Omnibus Budget Reconciliation Act of 1993 added a
rule, effective for taxable years beginning after December 31,
1993, treating a taxpayer's rental real estate activities in
which he materially participates as not subject to limitation
under the passive loss rules if the taxpayer meets eligibility
requirements relating to real property trades or businesses in
which he performs services (sec. 469(c)(7)). Real property
trade or business means any real property development,
redevelopment, construction, reconstruction, acquisition,
conversion, rental, operation, management, leasing, or
brokerage trade or business. An individual taxpayer generally
meets the eligibility requirements if (1) more than half of the
personal services the taxpayer performs in trades or business
during the taxable year are performed in real property trades
or businesses inwhich the taxpayer materially participates, and
(2) such taxpayer performs more than 750 hours of services during the
taxable year in real property trades or businesses in which the
taxpayer materially participates.
REMICs
A tax is imposed on partnerships holding a residual
interest in a real estate mortgage investment conduit
(``REMIC''). The amount of the tax is the amount of excess
inclusions allocable to partnership interests owned by certain
tax-exempt organizations (``disqualified organizations'')
multiplied by the highest corporate tax rate.
Contribution of property to a partnership
In general, a partner recognizes no gain or loss upon the
contribution of property to a partnership. However, income,
gain, loss and deduction with respect to property contributed
to a partnership by a partner must be allocated among the
partners so as to take into account the difference between the
basis of the property to the partnership and its fair market
value at the time of contribution. In addition, the
contributing partner must recognize gain or loss equal to such
difference if the property is distributed to another partner
within five years of its contribution (sec. 704(c)), or if
other property is distributed to the contributor within the
five year period (sec. 737).
Election of optional basis adjustments
In general, the transfer of a partnership interest or a
distribution of partnership property does not affect the basis
of partnership assets. A partnership, however, may elect to
make certain adjustments in the basis of partnership property
(sec. 754). Under a section 754 election, the transfer of a
partnership interest generally results in an adjustment in the
partnership's basis in its property for the benefit of the
transferee partner only, to reflect the difference between that
partner's basis for his interest and his proportionate share of
the adjusted basis of partnership property (sec. 743(b)). Also
under the election, a distribution of property to a partner in
certain cases results in an adjustment in the basis of other
partnership property (sec. 734(b)).
Terminations
A partnership terminates if either (1) all partners cease
carrying on the business, financial operation or venture of the
partnership, or (2) within a 12-month period 50 percent or more
of the total partnership interests are sold or exchanged (sec.
708).
House Bill
In general
The House bill modifies the tax treatment of an electing
large partnership (generally, any partnership that elects under
the provision, if the number of partners in the preceding
taxable year is 100 or more) and its partners. The provision
provides that each partner takes into account separately the
partner's distributive share of the following items, which are
determined at the partnership level: (1) taxable income or loss
from passive loss limitation activities; (2) taxable income or
loss from other activities (e.g., portfolio income or loss);
(3) net capital gain or loss to the extent allocable to passive
loss limitation activities and other activities; (4) tax-exempt
interest; (5) net alternative minimum tax adjustment separately
computed for passive loss limitation activities and other
activities; (6) general credits; (7) low-income housing credit;
(8) rehabilitation credit; (9) credit for producing fuel from a
nonconventional source; (10) creditable foreign taxes and
foreign source items; and (11) any other items to the extent
that the Secretary determines that separate treatment of such
items is appropriate. 8 Separate treatment may be
appropriate, for example, should changes in the law necessitate
such treatment for any items.
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\8\ In determining the amounts required to be separately taken into
account by a partner, those provisions of the large partnership rules
governing computations of taxable income are applied separately with
respect to that partner by taking into account that partner's
distributive share of the partnership's items of income, gain, loss,
deduction or credit. This rule permits partnerships to make otherwise
valid special allocations of partnership items to partners.
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Under the House bill, the taxable income of an electing
large partnership is computed in the same manner as that of an
individual, except that the items described above are
separately stated and certain modifications are made. These
modifications include disallowing the deduction for personal
exemptions, the net operating loss deduction and certain
itemized deductions. 9 All limitations and other
provisions affecting the computation of taxable income or any
credit (except for the at risk, passive loss and itemized
deduction limitations, and any other provision specified in
regulations) are applied at the partnership (and not the
partner) level.
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\9\ An electing large partnership is allowed a deduction under
section 212 for expenses incurred for the production of income, subject
to 70-percent disallowance. No income from an electing large
partnership is treated as fishing or farming income.
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All elections affecting the computation of taxable income
or any credit generally are made by the partnership.
Capital gains
Under the House bill, netting of capital gains and losses
occurs at the partnership level. A partner in a large
partnership takes into account separately his distributive
share of the partnership's net capital gain or net capital
loss. 10 Such net capital gain or loss is treated as
long-term capital gain or loss.
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\10\ The term ``net capital gain'' has the same meaning as in
section 1222(11). The term ``net capital loss'' means the excess of the
losses from sales or exchanges of capital assets over the gains from
sales or exchanges of capital assets. Thus, the partnership cannot
offset any portion of capital losses against ordinary income.
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Any excess of net short-term capital gain over net long-
term capital loss is consolidated with the partnership's other
taxable income and is not separately reported.
A partner's distributive share of the partnership's net
capital gain is allocated between passive loss limitation
activities and other activities. The net capital gain is
allocated to passive loss limitation activities to the extent
of net capital gain from sales and exchanges of property used
in connection with such activities, and any excess is allocated
to other activities. A similar rule applies for purposes of
allocating any net capital loss.
Any gains and losses of the partnership under section
1231 are netted at the partnership level. Net gain is treated
as long-term capital gain and is subject to the rules described
above. Net loss is treated as ordinary loss and consolidated
with the partnership's other taxable income.
Deductions
The House bill contains two special rules for deductions.
First, miscellaneous itemized deductions are not separately
reported to partners. Instead, 70 percent of the amount of such
deductions is disallowed at the partnership level;
11 the remaining 30 percent is allowed at the
partnership level in determining taxable income, and is not
subject to the two-percent floor at the partner level.
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\11\ The 70-percent figure is intended to approximate the amount of
such deductions that would be denied at the partner level as a result
of the 2-percent floor.
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Second, charitable contributions are not separately
reported to partners under the bill. Instead, the charitable
contribution deduction is allowed at the partnership level in
determining taxable income, subject to the limitations that
apply to corporate donors.
Credits in general
Under the House bill, general credits are separately
reported to partners as a single item. General credits are any
credits other than the low-income housing credit, the
rehabilitation credit and the credit for producing fuel from a
nonconventional source. A partner's distributive share of
general credits is taken into account as a current year general
business credit. Thus, for example, the credit for clinical
testing expenses is subject to the present law limitations on
the general business credit. The refundable credit for gasoline
used for exempt purposes and the refund or credit for
undistributed capital gains of a regulated investment company
are allowed to the partnership, and thus are not separately
reported to partners.
In recognition of their special treatment under the
passive loss rules, the low-income housing and rehabilitation
credits are separately reported. 12 In addition, the
credit for producing fuel from a nonconventional source is
separately reported.
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\12\ It is understood that the rehabilitation and low-income
housing credits which are subject to the same passive loss rules (i.e.,
in the case of the low-income housing credit, where the partnership
interest was acquired or the property was placed in service before
1990) could be reported together on the same line.
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The House bill imposes credit recapture at the
partnership level and determines the amount of recapture by
assuming that the credit fully reduced taxes. Such recapture is
applied first to reduce the partnership's current year credit,
if any; the partnership is liable for any excess over that
amount. Under the House bill, the transfer of an interest in an
electing large partnership does not trigger recapture.
Foreign taxes
The House bill retains present-law treatment of foreign
taxes. The partnership reports to the partner creditable
foreign taxes and the source of any income, gain, loss or
deduction taken into account by the partnership. Elections,
computations and limitations are made by the partner.
Tax-exempt interest
The House bill retains present-law treatment of tax-
exempt interest. Interest on a State or local bond is
separately reported to each partner.
Unrelated business taxable income
The House bill retains present-law treatment of unrelated
business taxable income. Thus, a tax-exempt partner's
distributive share of partnership items is taken into account
separately to the extent necessary to comply with the rules
governing such income.
Passive losses
Under the House bill, a partner in an electing large
partnership takes in an electing to account separately his
distributive share of the partnership's taxable income or loss
from passive loss limitation activities. The term ``passive
loss limitation activity'' means any activity involving the
conduct of a trade or business (including any activity treated
as a trade or business under sec. 469(c) (5) or (6)) and any
rental activity. A partner's share of an electing large
partnership's taxable income or loss from passive loss
limitation activities is treated as an item of income or loss
from the conduct of a trade or business which is a single
passive activity, as defined in the passive loss rules. Thus,
an electing large partnership generally is not required to
separately report items from multiple activities.
A partner in an electing large partnership also takes
into account separately his distributive share of the
partnership's taxable income or loss from activities other than
passive loss limitation activities. Such distributive share is
treated as an item of income or expense with respect to
property held for investment. Thus, portfolio income (e.g.,
interest and dividends) is reported separately and is reduced
by portfolio deductions and allocable investment interest
expense.
In the case of a partner holding an interest in an
electing large partnership which is not a limited partnership
interest, such partner's distributive share of any items are
taken into account separately to the extent necessary to comply
with the passive loss rules. Thus, for example, income of an
electing large partnership is not treated as passive income
with respect to the general partnership interest of a partner
who materially participates in the partnership's trade or
business.
Under the House bill, the requirement that the passive
loss rule be separately applied to each publicly traded
partnership (sec. 469(k) of the Code) continues to apply.
Alternative minimum tax
Under the House bill, alternative minimum tax (``AMT'')
adjustments and preferences are combined at the partnership
level. An electing large partnership would report to partners a
net AMT adjustment separately computed for passive loss
limitation activities and other activities. In determining a
partner's alternative minimum taxable income, a partner's
distributive share of any net AMT adjustment is taken into
account instead of making separate AMT adjustments with respect
to partnership items. The net AMT adjustment is determined by
using the adjustments applicable to individuals (in the case of
partners other than corporations), and by using the adjustments
applicable to corporations (in the case of corporate partners).
Except as provided in regulations, the net AMT adjustment is
treated as a deferral preference for purposes of the section 53
minimum tax credit.
Discharge of indebtedness income
If an electing large partnership has income from the
discharge of any indebtedness, such income is separately
reported to each partner. In addition, the rules governing such
income (sec. 108) are applied without regard to the large
partnership rules. Partner-level elections under section 108
are made by each partner separately. Thus, for example, the
large partnership provisions do not affect section 108(d)(6),
which provides that certain section 108 rules apply at the
partner level, or section 108(b)(5), which provides for an
election to reduce the basis of depreciable property. The large
partnership provisions also do not affect the election under
108(c) (added by the Omnibus Budget Reconciliation Act of 1993)
to exclude discharge of indebtedness income with respect to
qualified real property business indebtedness.
REMICs
For purposes of the tax on partnerships holding residual
interests in REMICs, all interests in an electing large
partnership are treated as held by disqualified organizations.
Thus, an electing large partnership holding a residual interest
in a REMIC is subject to a tax equal to the excess inclusions
multiplied by the highest corporate rate. The amount subject to
tax is excluded from partnership income.
Election of optional basis adjustments
Under the House bill, an electing large partnership may
still elect to adjust the basis of partnership assets with
respect to transferee partners. The computation of an electing
large partnership's taxable income is made without regard to
the section 743(b) adjustment. As under present law, the
section 743(b) adjustment is made only with respect to the
transferee partner. In addition, an electing large partnership
is permitted to adjust the basis of partnership property under
section 734(b) if property is distributed to a partner, as
under present law.
Terminations
The House bill provides that an electing large
partnership does not terminate for tax purposes solely because
50 percent of its interests are sold or exchanged within a 12-
month period.
Partnerships and partners subject to large partnership rules
Definition of electing large partnership
An ``electing large partnership'' is any partnership that
elects under the provision, if the number of partners in the
preceding taxable year is 100 or more. The number of partners
is determined by counting only persons directly holding
partnership interests in the taxable year, including persons
holding through nominees; persons holding indirectly (e.g.,
through another partnership) are not counted. Regulations may
provide, however, that if the number of partners in any taxable
year falls below 100, the partnership may not be treated as an
electing large partnership. The election applies to the year
for which made and all subsequent years and cannot be revoked
without the Secretary's consent.
Special rules for certain service partnerships
An election under this provision is not effective for any
partnership if substantially all the partners are: (1)
individuals performing substantial services in connection with
the partnership's activities, or personal service corporations
the owner-employees of which perform such services; (2) retired
partners who had performed such services; or (3) spouses of
partners who had performed such services. In addition, the term
``partner'' does not include any individual performing
substantial services in connection with the partnership's
activities and holding a partnership interest, or an individual
who formerly performed such services and who held a partnership
interest at the time the individual performed such services.
Exclusion for commodity partnerships
An election under this provision is not effective for any
partnership the principal activity of which is the buying and
selling of commodities (not described in sec. 1221(1)), or
options, futures or forwards with respect to commodities.
Special rules for partnerships holding oil and gas properties
Simplified reporting treatment of electing large
partnerships with oil and gas activities
The House bill provides special rules for electing large
partnerships with oil and gas activities that operate under the
simplified reporting regime. These partnerships are
collectively referred to herein as ``oil and gas large
partnerships.'' Generally, the House bill provides that an oil
and gas large partnership reports information to its partners
under the general simplified large partnership reporting regime
described above. To prevent the extension of percentage
depletion deductions to persons excluded therefrom under
present law, however, certain partners are treated as
disqualified persons under the House bill.
The treatment of a disqualified person's distributive
share of any item of income, gain, loss, deduction, or credit
attributable to any partnership oil or gas property is
determined under the bill without regard to the special rules
applicable to large partnerships. Thus, an oil and gas large
partnership reports information related to oil and gas
activities to a partner who is a disqualified person in the
same manner and to the same extent that it reports such
information to that partner under present law. The simplified
reporting rules of the bill, however, apply with respect to
reporting such a partner's share of items not related to oil
and gas activities.
The House bill defines two categories of taxpayers as
disqualified persons. The first category encompasses taxpayers
who do not qualify for the deduction for percentage depletion
under section 613A (i.e., integrated producers of oil and gas).
The second category includes any person whose average daily
production of oil and gas (for purposes of determining the
depletable oil and natural gas quantity under section
613A(c)(2)) is at least 500 barrels for its taxable year in
which (or with which) the partnership's taxable year ends. In
making this computation, all production of domestic crude oil
and natural gas attributable to the partner is taken into
account, including such partner's proportionate share of any
production of the large partnership.
A taxpayer that falls within a category of disqualified
person has the responsibility of notifying any large
partnership in which it holds a direct or indirect interest
(e.g., through a pass-through entity) of its status as such.
Thus, for example, if an integrated producer owns an interest
in a partnership which in turn owns an interest in an oil and
gas large partnership, it is responsible for providing the
management of the electing large partnership information
regarding its status as a disqualified person and details
regarding its indirect interest in the electing large
partnership.
Under the House bill, an oil and gas large partnership
computes its deduction for oil and gas depletion under the
general statutory rules (subject to certain exceptions
described below) under the assumptions that the partnership is
the taxpayer and that it qualifies for the percentage depletion
deduction. The amount of the depletion deduction, as well as
other oil and gas related items, generally are reported to each
partner (other than to partners who are disqualified persons)
as components of that partner's distributive share of taxable
income or loss from passive loss limitation activities. The
House bill provides that in computing the partnership's oil and
gas percentage depletion deduction, the 1,000-barrel-per-day
limitation does not apply. In addition, an oil and gas large
partnership is allowed to compute percentage depletion under
the bill without applying the 65-percent-of-taxable-income
limitation under section 613A(d)(1).
As under present law, an election to deduct IDCs under
section 263(c) is made at the partnership level. Since the
House bill treats those taxpayers required by the Code (sec.
291) to capitalize 30 percent of IDCs as disqualified persons,
an oil and gas large partnership may pass through a full
deduction of IDCs to its partners who are not disqualified
persons. In contrast to present law, an oil and gas large
partnership also has the responsibility with respect to its
partners who are not disqualified persons for making an
election under section 59(e) to capitalize and amortize certain
specified IDCs. Partners who are disqualified persons are
permitted to make their own separate section 59(e) elections
under the House bill.
Consistent with the general reporting regime for electing
large partnerships, the House bill provides that a single AMT
adjustment (under either corporate or non-corporate principles,
as the case may be) is made and reported to the partners (other
than disqualified persons) of an oil and gas large partnership
as a separate item. This separately-reported item is affected
by the limitation on the repeal of the tax preference for
excess IDCs. For purposes of computing this limitation, the
bill treats an oil and gas large partnership as the taxpayer.
Thus, the limitation on repeal of the IDC preference is applied
at the partnership level and is based on the cumulative
reduction in the partnership's alternative minimum taxable
income resulting from repeal of that preference.
The House bill provides that in making partnership-level
computations, any item of income, gain, loss, deduction, or
credit attributable to a partner who is a disqualified person
is disregarded. For example, in computing the partnership's net
income from oil and gas for purposes of determining the IDC
preference (if any) to be reported to partners who are not
disqualified persons as part of the AMT adjustment,
disqualified persons' distributive shares of the partnership's
net income from oil and gas are not to be taken into account.
Regulatory authority
The Secretary of the Treasury is granted authority to
prescribe such regulations as may be appropriate to carry out
the purposes of the provisions.
Effective date
The provisions generally apply to partnership taxable
years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
b. Simplified audit procedures for electing large
partnerships (sec. 1222 of the House bill and sec.
1022 of the Senate amendment)
Present Law
In general
Prior to 1982, regardless of the size of a partnership,
adjustments to a partnership's items of income, gain, loss,
deduction, or credit had to be made in separate proceedings
with respect to each partner individually. Because a large
partnership sometimes had many partners located in different
audit districts, adjustments to items of income, gains, losses,
deductions, or credits of the partnership had to be made in
numerous actions in several jurisdictions, sometimes with
conflicting outcomes.
The Tax Equity and Fiscal Responsibility Act of 1982
(``TEFRA'') established unified audit rules applicable to all
but certain small (10 or fewer partners) partnerships. These
rules require the tax treatment of all ``partnership items'' to
be determined at the partnership, rather than the partner,
level. Partnership items are those items that are more
appropriately determined at the partnership level than at the
partner level, as provided by regulations.
Under the TEFRA rules, a partner must report all
partnership items consistently with the partnership return or
must notify the IRS of any inconsistency. If a partner fails to
report any partnership item consistently with the partnership
return, the IRS may make a computational adjustment and
immediately assess any additional tax that results.
Administrative proceedings
Under the TEFRA rules, a partner must report all
partnership items consistently with the partnership return or
must notify the IRS of any inconsistency. If a partner fails to
report any partnership item consistently with the partnership
return, the IRS may make a computational adjustment and
immediately assess any additional tax that results.
The IRS may challenge the reporting position of a
partnership by conducting a single administrative proceeding to
resolve the issue with respect to all partners. But the IRS
must still assess any resulting deficiency against each of the
taxpayers who were partners in the year in which the
understatement of tax liability arose.
Any partner of a partnership can request an
administrative adjustment or a refund for his own separate tax
liability. Any partner also has the right to participate in
partnership-level administrative proceedings. A settlement
agreement with respect to partnership items binds all parties
to the settlement.
Tax Matters Partner
The TEFRA rules establish the ``Tax Matters Partner'' as
the primary representative of a partnership in dealings with
the IRS. The Tax Matters Partner is a general partner
designated by the partnership or, in the absence of
designation, the general partner with the largest profits
interest at the close of the taxable year. If no Tax Matters
Partner is designated, and it is impractical to apply the
largest profits interest rule, the IRS may select any partner
as the Tax Matters Partner.
Notice requirements
The IRS generally is required to give notice of the
beginning of partnership-level administrative proceedings and
any resulting administrative adjustment to all partners whose
names and addresses are furnished to the IRS. For partnerships
with more than 100 partners, however, the IRS generally is not
required to give notice to any partner whose profits interest
is less than one percent.
Adjudication of disputes concerning partnership items
After the IRS makes an administrative adjustment, the Tax
Matters Partner (and, in limited circumstances, certain other
partners) may file a petition for readjustment of partnership
items in the Tax Court, the district court in which the
partnership's principal place of business is located, or the
Claims Court.
Statute of limitations
The IRS generally cannot adjust a partnership item for a
partnership taxable year if more than 3 years have elapsed
since the later of the filing of the partnership return or the
last day for the filing of the partnership return.
House Bill
The House bill creates a new audit system for electing
large partnerships. The provision defines ``electing large
partnership'' the same way for audit and reporting purposes
(generally, any partnership that elects under the reporting
provisions, if the number of partners in the preceding taxable
year is 100 or more).
As under present law, electing large partnerships and
their partners are subject to unified audit rules. Thus, the
tax treatment of ``partnership items'' is determined at the
partnership, rather than the partner, level. The term
``partnership items'' is defined as under present law.
Unlike present law, however, partnership adjustments
generally will flow through to the partners for the year in
which the adjustment takes effect. Thus, the current-year
partners' share of current-year partnership items of income,
gains, losses, deductions, or credits will be adjusted to
reflect partnership adjustments that take effect in that year.
The adjustments generally will not affect prior-year returns of
any partners (except in the case of changes to any partner's
distributive shares).
In lieu of flowing an adjustment through to its partners,
the partnership may elect to pay an imputed underpayment. The
imputed underpayment generally is calculated by netting the
adjustments to the income and loss items of the partnership and
multiplying that amount by the highest tax rate (whether
individual or corporate; currently, the top individual rate of
39.6 percent). A partner may not file a claim for credit or
refund of his allocable share of the payment. A partnership may
make this election only if it meets requirements set forth in
Treasury regulations designed to ensure payment (for example,
in the case of a foreign partnership).
Regardless of whether a partnership adjustment flows
through to the partners, an adjustment must be offset if it
requires another adjustment in a year after the adjusted year
and before the year the offsetted adjustment takes effect. For
example, if a partnership expensed a $1,000 item in year 1, and
it was determined in year 4 that the item should have been
capitalized and amortized ratably over 10 years, the adjustment
in year 4 would be $700, apart from any interest or penalty.
(The $900 adjustment for the improper deduction would be offset
by $200 of adjustments for amortization deductions.) The year 4
partners would be required to include an additional $700 in
income for that year. The partnership may ratably amortize the
remaining $700 of expenses in years 4-10.
In addition, the partnership, rather than the partners
individually, generally is liable for any interest and
penalties that result from a partnership adjustment. Interest
is computed for the period beginning on the return due date for
the adjusted year and ending on the earlier of the return due
date for the partnership taxable year in which the adjustment
takes effect or the date the partnership pays the imputed
underpayment. Thus, in the above example, the partnership would
be liable for 4 years' worth of interest (on a declining
principal amount).
Penalties (such as the accuracy and fraud penalties) are
determined on a year-by-year basis (without offsets) based on
an imputed underpayment. All accuracy penalty criteria and
waiver criteria (such as reasonable cause, substantial
authority, etc.) are determined as if the partnership were a
taxable individual. Accuracy and fraud penalties are assessed
and accrue interest in the same manner as if asserted against a
taxable individual.
Any payment (for Federal income taxes, interest, or
penalties) that an electing large partnership is required to
make is non- deductible.
If a partnership ceases to exist before a partnership
adjustment takes effect, the former partners are required to
take the adjustment into account, as provided by regulations.
Regulations are also authorized to prevent abuse and to enforce
efficiently the audit rules in circumstances that present
special enforcement considerations (such as partnership
bankruptcy).
Administrative proceedings
Under the electing large partnership audit rules, a
partner is not permitted to report any partnership items
inconsistently with the partnership return, even if the partner
notifies the IRS of the inconsistency. The IRS may treat a
partnership item that was reported inconsistently by a partner
as a mathematical or clerical error and immediately assess any
additional tax against that partner.
As under present law, the IRS may challenge the reporting
position of a partnership by conducting a single administrative
proceeding to resolve the issue with respect to all partners.
Unlike under present law, however, partners will have no right
individually to participate in settlement conferences or to
request a refund.
Partnership representative
The House bill requires each electing large partnership
to designate a partner or other person to act on its behalf. If
an electing large partnership fails to designate such a person,
the IRS is permitted to designate any one of the partners as
the person authorized to act on the partnership's behalf. After
the IRS's designation, an electing large partnership could
still designate a replacement for the IRS-designated partner.
Notice requirements
Unlike under present law, the IRS is not required to give
notice to individual partners of the commencement of an
administrative proceeding or of a final adjustment. Instead,
the IRS is authorized to send notice of a partnership
adjustment to the partnership itself by certified or registered
mail. The IRS could give proper notice by mailing the notice to
the last known address of the partnership, even if the
partnership had terminated its existence.
Adjudication of disputes concerning partnership items
As under present law, an administrative adjustment could
be challenged in the Tax Court, the district court in which the
partnership's principal place of business is located, or the
Claims Court. However, only the partnership, and not partners
individually, can petition for a readjustment of partnership
items.
If a petition for readjustment of partnership items is
filed by the partnership, the courtwith which the petition is
filed will have jurisdiction to determine the tax treatment of all
partnership items of the partnership for the partnership taxable year
to which the notice of partnership adjustment relates, and the proper
allocation of such items among the partners. Thus, the court's
jurisdiction is not limited to the items adjusted in the notice.
Statute of limitations
Absent an agreement to extend the statute of limitations,
the IRS generally could not adjust a partnership item of an
electing large partnership more than 3 years after the later of
the filing of the partnership return or the last day for the
filing of the partnership return. Special rules apply to false
or fraudulent returns, a substantial omission of income, or the
failure to file a return. The IRS would assess and collect any
deficiency of a partner that arises from any adjustment to a
partnership item subject to the limitations period on
assessments and collection applicable to the year the
adjustment takes effect (secs. 6248, 6501 and 6502).
Regulatory authority
The Secretary of the Treasury is granted authority to
prescribe regulations as may be necessary to carry out the
simplified audit procedure provisions, including regulations to
prevent abuse of the provisions through manipulation. The
regulations may include rules that address transfers of
partnership interests, in anticipation of a partnership
adjustment, to persons who are tax-favored (e.g., corporations
with net operating losses, tax-exempt organizations, and
foreign partners) or persons who are expected to be unable to
pay tax (e.g., shell corporations). For example, if prior to
the time a partnership adjustment takes effect, a taxable
partner transfers a partnership interest to a nonresident alien
to avoid the tax effect of the partnership adjustment, the
rules may provide, among other things, that income related to
the partnership adjustment is treated as effectively connected
taxable income, that the partnership adjustment is treated as
taking effect before the partnership interest was transferred,
or that the former partner is treated as a current partner to
whom the partnership adjustment is allocated.
Effective date
The provision applies to partnership taxable years
beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with technical modifications.
c. Due date for furnishing information to partners of
electing large partnerships (sec. 1223 of the House
bill and sec. 1023 of the Senate amendment)
Present Law
A partnership required to file an income tax return with
the Internal Revenue Service must also furnish an information
return to each of its partners on or before the day on which
the income tax return for the year is required to be filed,
including extensions. Under regulations, a partnership must
file its income tax return on or before the fifteenth day of
the fourth month following the end of the partnership's taxable
year (on or before April 15, for calendar year partnerships).
This is the same deadline by which most individual partners
must file their tax returns.
House Bill
The House bill provides that an electing large
partnership must furnish information returns to partners by the
first March 15 following the close of the partnership's taxable
year. Electing large partnerships are those partnerships
subject to the simplified reporting and audit rules (generally,
any partnership that elects under the reporting provision, if
the number of partners in the preceding taxable year is 100 or
more).
The House bill also provides that, if the partnership is
required to provide copies of the information returns to the
Internal Revenue Service on magnetic media, each schedule (such
as each Schedule K-1) with respect to each partner is treated
as a separate information return with respect to the corrective
periods and penalties that are generally applicable to all
information returns.
Effective date.--The provision is effective for
partnership taxable years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
d. Partnership returns required on magnetic media (sec.
1224 of the House bill and sec. 1024 of the Senate
amendment)
Present Law
Partnerships are permitted, but not required, to provide
the tax return of the partnership (Form 1065), as well as
copies of the schedules sent to each partner (Form K-1), to the
InternalRevenue Service on magnetic media.
House Bill
The House bill provides generally that any partnership is
required to provide the tax return of the partnership (Form
1065), as well as copies of the schedule sent to each partner
(Form K-1), to the Internal Revenue Service on magnetic media.
An exception is provided for partnerships with 100 or fewer
partners.
Effective date.--The provision is effective for
partnership taxable years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
e. Treatment of partnership items of individual retirement
arrangements (sec. 1225 of the House bill and sec.
1025 of the Senate amendment)
Present Law
Return filing requirements
An individual retirement account (``IRA'') is a trust
which generally is exempt from taxation except for the taxes
imposed on income from an unrelated trade or business. A
fiduciary of a trust that is exempt from taxation (but subject
to the taxes imposed on income from an unrelated trade or
business) generally is required to file a return on behalf of
the trust for a taxable year if the trust has gross income of
$1,000 or more included in computing unrelated business taxable
income for that year (Treas. Reg. sec. 1.6012-3(a)(5)).
Unrelated business taxable income is the gross income
(including gross income from a partnership) derived by an
exempt organization from an unrelated trade or business, less
certain deductions which are directly connected with the
carrying on of such trade or business (sec. 512(a)(1). In
calculating unrelated business taxable income, exempt
organizations (including IRAs) generally also are permitted a
specific deduction of $1,000 (sec. 512(b)(12)).
Unified audits of partnerships
All but certain small partnerships are subject to unified
audit rules established by the Tax Equity and Fiscal
Responsibility Act of 1982. These rules require the tax
treatment of all ``partnership items'' to be determined at the
partnership, rather than the partner, level. Partnership items
are those items that are more appropriately determined at the
partnership level than at the partner level, including such
items as gross income and deductions of the partnership.
House Bill
The House bill modifies the filing threshold for an IRA
with an interest in a partnership that is subject to the
partnership-level audit rules. A fiduciary of such an IRA could
treat the trust's share of partnership taxable income as gross
income, for purposes of determining whether the trust meets the
$1,000 gross income filing threshold. A fiduciary of an IRA
that receives taxable income from a partnership that is subject
to partnership-level audit rules of less than $1,000 (before
the $1,000 specific deduction) is not required to file an
income tax return if the IRA does not have any other income
from an unrelated trade or business.
Effective date.--The provision applies to taxable years
beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Other partnership audit rules
a. Treatment of partnership items in deficiency proceedings
(sec. 1231 of the House bill and sec. 1031 of the
Senate amendment)
Present Law
Partnership proceedings under rules enacted in TEFRA
13 must be kept separate from deficiency proceedings
involving the partners in their individual capacities. Prior to
the Tax Court's opinion in Munro v. Commissioner, 92 T.C. 71
(1989), the IRS computed deficiencies by assuming that all
items that were subject to the TEFRA partnership procedures
were correctly reported on the taxpayer's return. However,
where the losses claimed from TEFRA partnerships were so large
that they offset any proposed adjustments to nonpartnership
items, no deficiency could arise from a non-TEFRA proceeding,
and if the partnership losses were subsequently disallowed in a
partnership proceeding, the non-TEFRA adjustments might be
uncollectible because of the expiration of the statute of
limitations with respect to nonpartnership items.
---------------------------------------------------------------------------
\13\ Tax Equity and Fiscal Responsibility Act of 1982.
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Faced with this situation in Munro, the IRS issued a
notice of deficiency to the taxpayer that presumptively
disallowed the taxpayer's TEFRA partnership losses for
computational purposes only. Although the Tax Court ruled that
a deficiency existed and that the court had jurisdiction to
hear the case, the court disapproved of the methodology used by
the IRS to compute the deficiency. Specifically, the court held
that partnership items (whether income, loss, deduction, or
credit) included on a taxpayer's return must be completely
ignored in determining whether a deficiency exists that is
attributable to nonpartnership items.
House Bill
The House bill overrules Munro and allows the IRS to
return to its prior practice of computing deficiencies by
assuming that all TEFRA items whose treatment has not been
finally determined had been correctly reported on the
taxpayer's return. This eliminates the need to do special
computations that involve the removal of TEFRA items from a
taxpayer's return, and will restore to taxpayers a prepayment
forum with respect to the TEFRA items. In addition, the
provision provides a special rule to address the factual
situation presented in Munro.
Specifically, the House bill provides a declaratory
judgment procedure in the Tax Court for adjustments to an
oversheltered return. An oversheltered return is a return that
shows no taxable income and a net loss from TEFRA partnerships.
In such a case, the IRS is authorized to issue a notice of
adjustment with respect to non-TEFRA items, notwithstanding
that no deficiency would result from the adjustment. However,
the IRS could only issue such a notice if a deficiency would
have arisen in the absence of the net loss from TEFRA
partnerships.
The Tax Court is granted jurisdiction to determine the
correctness of such an adjustment as well as to make a
declaration with respect to any other item for the taxable year
to which the notice of adjustment relates, except for
partnership items and affected items which require partner-
level determinations. No tax is due upon such a determination,
but a decision of the Tax Court is treated as a final decision,
permitting an appeal of the decision by either the taxpayer or
the IRS. An adjustment determined to be correct would thus have
the effect of increasing the taxable income that is deemed to
have been reported on the taxpayer's return. If the taxpayer's
partnership items were then adjusted in a subsequent
proceeding, the IRS has preserved its ability to collect tax on
any increased deficiency attributable to the nonpartnership
items.
Alternatively, if the taxpayer chooses not to contest the
notice of adjustment within the 90-day period, the bill
provides that when the taxpayer's partnership items are finally
determined, the taxpayer has the right to file a refund claim
for tax attributable to the items adjusted by the earlier
notice of adjustment for the taxable year. Although a refund
claim is not generally permitted with respect to a deficiency
arising from a TEFRA proceeding, such a rule is appropriate
with respect to a defaulted notice of adjustment because
taxpayers may not challenge such a notice when issued since it
does not require the payment of additional tax.
In addition, the House bill incorporates a number of
provisions intended to clarify the coordination between TEFRA
audit proceedings and individual deficiency proceedings. Under
these provisions, any adjustment with respect to a non-
partnership item that caused an increase in tax liability with
respect to a partnership item would be treated as a
computational adjustment and assessed after the conclusion of
the TEFRA proceeding. Accordingly, deficiency procedures do not
apply with respect to this increase in tax liability, and the
statute of limitations applicable to TEFRA proceedings are
controlling.
Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
b. Partnership return to be determinative of audit
procedures to be followed (sec. 1232 of the House
bill and sec. 1032 of the Senate amendment)
Present Law
TEFRA established unified audit rules applicable to all
partnerships, except for partnerships with 10 or fewer
partners, each of whom is a natural person (other than a
nonresident alien) or an estate, and for which each partner's
share of each partnership item is the same as that partner's
share of every other partnership item. Partners in the exempted
partnerships are subject to regular deficiency procedures.
House Bill
The House bill permits the IRS to apply the TEFRA audit
procedures if, based on the partnership's return for the year,
the IRS reasonably determines that those procedures should
apply. Similarly, the provision permits the IRS to apply the
normal deficiency procedures if, based on the partnership's
return for the year, the IRS reasonably determines that those
procedures should apply.
Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
c. Provisions relating to statute of limitations
i. Suspend statute when an untimely petition is filed (sec.
1233(a) of the House bill and sec. 1033(a) of the
Senate amendment)
Present Law
In a deficiency case, section 6503(a) provides that if a
proceeding in respect of the deficiency is placed on the docket
of the Tax Court, the period of limitations on assessment and
collection is suspended until the decision of the Tax Court
becomes final, and for 60 days thereafter. The counterpart to
this provision with respect to TEFRA cases is contained in
section 6229(d). That section provides that the period of
limitations is suspended for the period during which an action
may be brought under section 6226 and, if an action is brought
during such period, until the decision of the court becomes
final, and for 1 year thereafter. As a result of this
difference in language, the running of the statute of
limitations in a TEFRA case will only be tolled by the filing
of a timely petition whereas in a deficiency case, the statute
of limitations is tolled by the filing of any petition,
regardless of whether the petition is timely.
House Bill
The House bill conforms the suspension rule for the
filing of petitions in TEFRA cases with the rule under section
6503(a) pertaining to deficiency cases. Under the provision,
the statute of limitations in TEFRA cases is suspended by the
filing of any petition under section 6226, regardless of
whether the petition is timely or valid, and the suspension
will remain in effect until the decision of the court becomes
final, and for one year thereafter. Hence, if the statute of
limitations is open at the time that an untimely petition is
filed, the limitations period would no longer continue to run
and possibly expire while the action is pending before the
court.
Effective date.--The provision is effective with respect
to all cases in which the period of limitations has not expired
under present law as of the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
ii. Suspend statute of limitations during bankruptcy
proceedings (sec. 1233(b) of the House bill and
sec. 1033(b) of the Senate amendment)
Present Law
The period for assessing tax with respect to partnership
items generally is the longer of the periods provided by
section 6229 or section 6501. For partnership items that
convert to nonpartnership items, section 6229(f) provides that
the period for assessing tax shall not expire before the date
which is 1 year after the date that the items become
nonpartnership items. Section 6503(h) provides for the
suspension of the limitations period during the pendency of a
bankruptcy proceeding. However, this provision only applies to
the limitations periods provided in sections 6501 and 6502.
Under present law, because the suspension provision in
section 6503(h) applies only to the limitations periods
provided in section 6501 and 6502, some uncertainty exists as
to whether section 6503(h) applies to suspend the limitations
period pertaining to converted items provided in section
6229(f) when a petition naming a partner as a debtor in a
bankruptcy proceeding is filed. As a result, the limitations
period provided in section 6229(f) may continue to run during
the pendency of the bankruptcy proceeding, notwithstanding that
the IRS is prohibited from making an assessment against the
debtor because of the automatic stay provisions of the
Bankruptcy Code.
House Bill
The House bill clarifies that the statute of limitations
is suspended for a partner who is named in a bankruptcy
petition. The suspension period is for the entire period during
which the IRS is prohibited by reason of the bankruptcy
proceeding from making an assessment, and for 60 days
thereafter. The provision does not purport to create any
inference as to the proper interpretation of present law.
Effective date.--The provision is effective with respect
to all cases in which the period of limitations has not expired
under present law as of the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
iii. Extend statute of limitations for bankrupt TMPs (sec.
1233(c) of the House bill and sec. 1033(c) of the
Senate amendment)
Present Law
Section 6229(b)(1)(B) provides that the statute of
limitations is extended with respect to all partners in the
partnership by an agreement entered into between the tax
matters partner (TMP) and the IRS. However, Temp. Treas. Reg.
secs. 301.6231(a)(7)-1T(1)(4) and 301.6231(c)-7T(a) provide
that upon the filing of a petition naming a partner as a debtor
in a bankruptcy proceeding, that partner's partnership items
convert to nonpartnership items, and if the debtor was the tax
matters partner, such status terminates. These rules are
necessary because of the automatic stay provision contained in
11 U.S.C. sec. 362(a)(8). As a result, if a consent to extend
the statute of limitations is signed by a person who would be
the TMP but for the fact that at the time that the agreement is
executed the person was a debtor in a bankruptcy proceeding,
the consent would not be binding on the other partners because
the person signing the agreement was no longer the TMP at the
time that the agreement was executed.
House Bill
The House bill provides that unless the IRS is notified
of a bankruptcy proceeding in accordance with regulations, the
IRS can rely on a statute extension signed by a person who is
the tax matters partner but for the fact that said person was
in bankruptcy at the time that the person signed the agreement.
Statute extensions granted by a bankrupt TMP in these cases are
binding on all of the partners in the partnership. The
provision is not intended to create any inference as to the
proper interpretation of present law.
Effective date.--The provision is effective for extension
agreements entered into after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
d. Expansion of small partnership exception (sec. 1234 of
the House bill and sec. 1034 of the Senate
amendment)
Present Law
TEFRA established unified audit rules applicable to all
partnerships, except for partnerships with 10 or fewer
partners, each of whom is a natural person (other than a
nonresident alien) or an estate, and for which each partner's
share of each partnership item is the same as that partner's
share of every other partnership item. Partners in the exempted
partnerships are subject to regular deficiency procedures.
House Bill
The House bill permits a small partnership to have a C
corporation as a partner or to specially allocate items without
jeopardizing its exception from the TEFRA rules. However, the
provision retains the prohibition of present law against having
a flow-through entity (other than an estate of a deceased
partner) as a partner for purposes of qualifying for the small
partnership exception.
Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
e. Exclusion of partial settlements from 1-year limitation
on assessment (sec. 1235 of the House bill and sec.
1035 of the Senate amendment)
Present Law
The period for assessing tax with respect to partnership
items generally is the longer of the periods provided by
section 6229 or section 6501. For partnership items that
convert to nonpartnership items, section 6229(f) provides that
the period for assessing tax shall not expire before the date
which is 1 year after the date that the items become
nonpartnership items. Section 6231(b)(1)(C) provides that the
partnership items of a partner for a partnership taxable year
become nonpartnership items as of the date the partner enters
into a settlement agreement with the IRS with respect to such
items.
House Bill
The House bill provides that if a partner and the IRS
enter into a settlement agreement with respect to some but not
all of the partnership items in dispute for a partnership
taxable year and other partnership items remain in dispute, the
period for assessing any tax attributable to the settled items
is determined as if such agreement had not been entered into.
Consequently, the limitations period that is applicable to the
last item to be resolved for the partnership taxable year is
controlling with respect to all disputed partnership items for
the partnership taxable year. The provision does not purport to
create any inference as to the proper interpretation of present
law.
Effective date.--The provision is effective for
settlements entered into after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
f. Extension of time for filing a request for
administrative adjustment (sec. 1236 of the House
bill and sec. 1036 of the Senate amendment)
Present Law
If an agreement extending the statute is entered into
with respect to a non-TEFRA statute of limitations, that
agreement also extends the statute of limitations for filing
refund claims (sec. 6511(c)). There is no comparable provision
for extending the time for filing refund claims with respect to
partnership items subject to the TEFRA partnership rules.
House Bill
The House bill provides that if a TEFRA statute extension
agreement is entered into, that agreement also extends the
statute of limitations for filing refund claims attributable to
partnership items or affected items until 6 months after the
expiration of the limitations period for assessments.
Effective date.--The provision is effective as if
included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
g. Availability of innocent spouse relief in context of
partnership proceedings (sec. 1237 of the House
bill and sec. 1037 of the Senate amendment)
Present Law
In general, an innocent spouse may be relieved of
liability for tax, penalties and interest if certain conditions
are met (sec. 6013(e)). However, existing law does not provide
the spouse of a partner in a TEFRA partnership with a judicial
forum to raise the innocent spouse defense with respect to any
tax or interest that relates to an investment in a TEFRA
partnership.
House Bill
The House bill provides both a prepayment forum and a
refund forum for raising the innocent spouse defense in TEFRA
cases.
With respect to a prepayment forum, the provision
provides that within 60 days of the date that a notice of
computational adjustment relating to partnership items is
mailed to the spouse of a partner, the spouse could request
that the assessment be abated. Upon receipt of such a request,
the assessment is abated and any reassessment will be subject
to the deficiency procedures. If an abatement is requested, the
statute of limitations does not expire before the date which is
60 days after the date of the abatement. If the spouse files a
petition with the Tax Court, the Tax Court only has
jurisdiction to determine whether the requirements of section
6013(e) have been satisfied. In making this determination, the
treatment of the partnership items that gave rise to the
liability in question is conclusive.
Alternatively, the House bill provides that the spouse of
a partner could file a claim for refund to raise the innocent
spouse defense. The claim has to be filed within 6 months from
the date that the notice of computational adjustment is mailed
to the spouse. If the claim is not allowed, the spouse could
file a refund action. For purposes of any claim or suit under
this provision, the treatment of the partnership items that
gave rise to the liability in question is conclusive.
Effective date.--The provision is effective as if
included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
h. Determination of penalties at partnership level (sec.
1238 of the House bill and sec. 1038 of the Senate
amendment)
Present Law
Partnership items include only items that are required to
be taken into account under the income tax subtitle. Penalties
are not partnership items since they are contained in the
procedure and administration subtitle. As a result, penalties
may only be asserted against a partner through the application
of the deficiency procedures following the completion of the
partnership-level proceeding.
House Bill
The House bill provides that the partnership-level
proceeding is to include a determination of the applicability
of penalties at the partnership level. However, the provision
allows partners to raise any partner-level defenses in a refund
forum.
Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with technical modifications.
i. Provisions relating to Tax Court jurisdiction (sec. 1239
of the House bill and sec. 1039 of the Senate
amendment)
Present Law
Improper assessment and collection activities by the IRS
during the 150-day period for filing a petition or during the
pendency of any Tax Court proceeding, ``may be enjoined in the
proper court.'' Present law may be unclear as to whether this
includes the Tax Court.
For a partner other than the Tax Matters Partner to be
eligible to file a petition for redetermination of partnership
items in any court or to participate in an existing case, the
period for assessing any tax attributable to the partnership
items of that partner must not have expired. Since such a
partner would only be treated as a party to the action if the
statute of limitations with respect to them was still open, the
law is unclear whether the partner would have standing to
assert that the statute of limitations had expired with respect
to them.
House Bill
The House bill clarifies that an action to enjoin
premature assessments of deficiencies attributable to
partnership items may be brought in the Tax Court. The
provision also permits a partner to participate in an action or
file a petition for the sole purpose of asserting that the
period of limitations for assessing any tax attributable to
partnership items has expired for that person. Additionally,
the provision clarifies that the Tax Court has overpayment
jurisdiction with respect to affected items.
Effective date.--The provision is effective for
partnership taxable years ending after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with technical modifications.
j. Treatment of premature petitions filed by notice
partners or 5-percent groups (sec. 1240 of the
House bill and sec. 1040 of the Senate amendment)
Present Law
The Tax Matters Partner is given the exclusive right to
file a petition for a readjustment of partnership items within
the 90-day period after the issuance of the notice of a final
partnership administrative adjustment (FPAA). If the Tax
Matters Partner does not file a petition within the 90-day
period, certain other partners are permitted to file a petition
within the 60-day period after the close of the 90-day period.
There are ordering rules for determining which action goes
forward and for dismissing other actions.
House Bill
The House bill treats premature petitions filed by
certain partners within the 90-day period as being filed on the
last day of the following 60-day period under specified
circumstances, thus affording the partnership with an
opportunity for judicial review that is not available under
present law.
Effective date.--The provision is effective with respect
to petitions filed after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
k. Bonds in case of appeals from certain proceedings (sec.
1241 of the House bill and sec. 1041 of the Senate
amendment)
Present Law
A bond must be filed to stay the collection of
deficiencies pending the appeal of the Tax Court's decision in
a TEFRA proceeding. The amount of the bond must be based on the
court's estimate of the aggregate deficiencies of the partners.
House Bill
The House bill clarifies that the amount of the bond
should be based on the Tax Court's estimate of the aggregate
liability of the parties to the action (and not all of the
partners in the partnership). For purposes of this provision,
the amount of the bond could be estimated by applying the
highest individual rate to the total adjustments determined by
the Tax Court and doubling that amount to take into account
interest and penalties.
Effective date.--The provision is effective as if
included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
l. Suspension of interest where delay in computational
adjustment resulting from certain settlements (sec.
1242 of the House bill and sec. 1042 of the Senate
amendment)
Present Law
Interest on a deficiency generally is suspended when a
taxpayer executes a settlement agreement with the IRS and
waives the restrictions on assessments and collections, and the
IRS does not issue a notice and demand for payment of such
deficiency within 30 days. Interest on a deficiency that
results from an adjustment of partnership items in TEFRA
proceedings, however, is not suspended.
House Bill
The House bill suspends interest where there is a delay
in making a computational adjustment relating to a TEFRA
settlement.
Effective date.--The provision is effective with respect
to adjustments relating to taxable years beginning after the
date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
m. Special rules for administrative adjustment requests
with respect to bad debts or worthless securities
(sec. 1243 of the House bill and sec. 1043 of the
Senate amendment)
Present Law
The non-TEFRA statute of limitations for filing a claim
for credit or refund generally is the later of (1) three years
from the date the return in question was filed or (2) two years
from the date the claimed tax was paid, whichever is later
(sec. 6511(b)). However, an extended period of time, seven
years from the date the return was due, is provided for filing
a claim for refund of an overpayment resulting from a deduction
for a worthless security or bad debt (sec. 6511(d)).
Under the TEFRA partnership rules, a request for
administrative adjustment (``RAA'') must be filed within three
years after the later of (1) the date the partnership return
was filed or (2) the due date of the partnership return
(determined without regard to extensions) (sec. 6227(a)(1)). In
addition, the request must be filed before a final partnership
administrative adjustment (``FPAA'') is mailed for the taxable
year (sec. 6227(a)(2)). There is no special provision for
extending the time for filing an RAA that relates to a
deduction for a worthless security or an entirely worthless bad
debt.
House Bill
The House bill extends the time for the filing of an RAA
relating to the deduction by a partnership for a worthless
security or bad debt. In these circumstances, in lieu of the
three-year period provided in sec. 6227(a)(1), the period for
filing an RAA is seven years from the date the partnership
return was due with respect to which the request is made
(determined without regard to extensions). The RAA is still
required to be filed before the FPAA is mailed for the taxable
year.
Effective date.--The provision is effective as if
included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Closing of partnership taxable year with respect to deceased partner
(sec. 1246 of the House bill and sec. 1046 of the Senate
amendment)
Present Law
The partnership taxable year closes with respect to a
partner whose entire interest is sold, exchanged, or
liquidated. Such year, however, generally does not close upon
the death of a partner.
Thus, a decedent's entire share of items of income, gain, loss,
deduction and credit for the partnership year in which death
occurs is taxed to the estate or successor in interest rather
than to the decedent on his or her final income tax return. See
Estate of Hesse v. Commissioner, 74 T.C. 1307, 1311 (1980).
House Bill
The House bill provides that the taxable year of a
partnership closes with respect to a partner whose entire
interest in the partnership terminates, whether by death,
liquidation or otherwise. The provision does not change present
law with respect to the effect upon the partnership taxable
year of a transfer of a partnership interest by a debtor to the
debtor's estate (under Chapters 7 or 11 of Title 11, relating
to bankruptcy).
Effective date.--Partnership taxable years beginning
after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
D. Modifications of Rules for Real Estate Investment Trusts (secs.
1251-1263 of the House bill and secs. 1051-1063 of the Senate
amendment)
Present Law
Overview
In general, a real estate investment trust (``REIT'') is
an entity that receives most of its income from passive real
estate related investments and that receives conduit treatment
for income that is distributed to shareholders. If an entity
meets the qualifications for REIT status, the portion of its
income that is distributed to the investors each year generally
is taxed to the investors without being subjected to a tax at
the REIT level; the REIT generally is subject to a corporate
tax only on the income that it retains and on certain income
from property that qualifies as foreclosure property.
Election to be treated as a REIT
In order to qualify as a REIT, and thereby receive
conduit treatment, an entity must elect REIT status. A newly-
electing entity generally cannot have earnings and profits
accumulated from any year in which the entity was in existence
and not treated as a REIT (sec. 857(a)(3)). To satisfy this
requirement, the entity must distribute, during its first REIT
taxable year, any earnings and profits that were accumulated in
non-REIT years. For this purpose, distributions by the entity
generally are treated as being made from the most recently
accumulated earnings and profits.
Taxation of REITs
Overview
In general, if an entity qualifies as a REIT by
satisfying the various requirements described below, the entity
is taxable as a corporation on its ``real estate investment
trust taxable income'' (``REITTI''), and also is taxable on
certain other amounts (sec. 857). REITTI is the taxable income
of the REIT with certain adjustments (sec. 857(b)(2)). The most
significant adjustment is a deduction for dividends paid. The
allowance of this deduction is the mechanism by which the REIT
becomes a conduit for income tax purposes.
Capital gains
A REIT that has a net capital gain for a taxable year
generally is subject to tax on such capital gain under the
capital gains tax regime generally applicable to corporations
(sec. 857(b)(3)). However, a REIT may diminish or eliminate its
tax liability attributable to such capital gain by paying a
``capital gain dividend'' to its shareholders (sec.
857(b)(3)(C)). A capital gain dividend is any dividend or part
of a dividend that is designated by the payor REIT as a capital
gain dividend in a written notice mailed to shareholders.
Shareholders who receivecapital gain dividends treat the amount
of such dividends as long-term capital gain regardless of the holding
period of their stock (sec. 857(b)(3)(C)).
A regulated investment company (``RIC''), but not a REIT,
may elect to retain and pay income tax on net long-term capital
gains it received during the tax year. If a RIC makes this
election, the RIC shareholders must include in their income as
long-term capital gains their proportionate share of these
undistributed long-term capital gains as designated by the RIC.
The shareholder is deemed to have paid the shareholder's share
of the tax, which can be credited or refunded to the
shareholder. Also, the basis of the shareholder's shares is
increased by the amount of the undistributed long-term capital
gains (less the amount of capital gains tax paid by the RIC)
included in the shareholder's long-term capital gains.
Income from foreclosure property
In addition to tax on its REITTI, a REIT is subject to
tax at the highest rate of tax paid by corporations on its net
income from foreclosure property (sec. 857(b)(4)). Net income
from foreclosure property is the excess of the sum of gains
from foreclosure property that is held for sale to customers in
the ordinary course of a trade or business and gross income
from foreclosure property (other than income that otherwise
would qualify under the 75-percent income test described below)
over all allowable deductions directly connected with the
production of such income.
Foreclosure property is any real property or personal
property incident to such real property that is acquired by a
REIT as a result of default or imminent default on a lease of
such property or indebtedness secured by such property,
provided that (unless acquired as foreclosure property), such
property was not held by the REIT for sale to customers (sec.
856(e)). A property generally may be treated as foreclosure
property for a period of two years after the date the property
is acquired by the REIT. The IRS may grant extensions of the
period for treating the property as foreclosure property if the
REIT establishes that an extension of the grace period is
necessary for the orderly liquidation of the REIT's interest in
the property. The grace period cannot be extended beyond six
years from the date the property is acquired by the REIT.
Property will cease to be treated as foreclosure property
if, after 90 days after the date of acquisition, the REIT
operates the foreclosure property in a trade or business other
than through an independent contractor from whom the REIT does
not derive or receive any income (sec. 856(e)(4)(C)).
Income or loss from prohibited transactions
In general, a REIT must derive its income from passive
sources and not engage in any active trade or business.
Accordingly, in addition to the tax on its REITTI and on its
net income from foreclosure property, a 100 percent tax is
imposed on the net income of a REIT from ``prohibited
transactions'' (sec. 857(b)(6)). A prohibited transaction is
the sale or other disposition of property described in section
1221(1) of the Code (property held for sale in the ordinary
course of a trade or business) other than foreclosure property.
Thus, the 100 percent tax on prohibited transactions helps to
ensure that the REIT is a passive entity and may not engage in
ordinary retailing activities such as sales to customers of
condominium units or subdivided lots in a development project.
A safe harbor is provided for certain sales that otherwise
might be considered prohibited transactions (sec.
857(b)(6)(C)). The safe harbor is limited to seven or fewer
sales a year or, alternatively, any number of sales provided
that the aggregate adjusted basis of the property sold does not
exceed 10 percent of the aggregate basis of all the REIT's
assets at the beginning of the REIT's taxable year.
Requirements for REIT status
A REIT must satisfy four tests on a year-by-year basis:
organizational structure, source of income, nature of assets,
and distribution of income. These tests are intended to allow
conduit treatment in circumstances in which a corporate tax
otherwise would be imposed, only if there really is a pooling
of investment arrangement that is evidenced by its
organizational structure, if its investments are basically in
real estate assets, and if its income is passive income from
real estate investment, as contrasted with income from the
operation of business involving real estate. In addition,
substantially all of the entity's income must be passed through
to its shareholders on a current basis.
Organizational structure requirements
To qualify as a REIT, an entity must be for its entire
taxable year a corporation or an unincorporated trust or
association that would be taxable as a domestic corporation but
for the REIT provisions, and must be managed by one or more
trustees (sec. 856(a)). The beneficial ownership of the entity
must be evidenced by transferable shares or certificates of
ownership. Except for the first taxable year for which an
entity elects to be a REIT, the beneficial ownership of the
entity must be held by 100 or more persons, and the entity may
not be so closely held by individuals that it would be treated
as a personal holding company if all its adjusted gross income
constituted personal holding company income. A REIT is
disqualified for any year in which it does not comply with
regulations to ascertain the actual ownership of the REIT's
outstanding shares. Treasury regulations require that the
entity request information from certain shareholders regarding
shares directly or indirectly owned by them.
Income requirements
Overview
In order for an entity to qualify as a REIT, at least 95
percent of its gross income generally must be derived from
certain passive sources (the ``95-percent test''). In addition,
at least 75 percent of its income generally must be from
certain real estate sources (the ``75-percent test''),
including rents from real property.
In addition, less than 30 percent of the entity's gross
income may be derived from gainfrom the sale or other
disposition of stock or securities held for less than one year, real
property held less than four years (other than foreclosure property, or
property subject to an involuntary conversion within the meaning of
sec. 1033), and property that is sold or disposed of in a prohibited
transaction (sec. 856(c)(4)).
Definition of rents from real property
For purposes of the income requirements, rents from real
property generally include: (1) rents from interests in real
property; (2) charges for services customarily rendered or
furnished in connection with the rental of real property,
whether or not such charges are separately stated; and (3) rent
attributable to personal property that is leased under or in
connection with a lease of real property, but only if the rent
attributable to such personal property does not exceed 15
percent of the total rent for the year under the lease (sec.
856(d)(1)).
Services provided to tenants are regarded as customary
if, in the geographic market within which the building is
located, tenants in buildings that are of a similar class (for
example, luxury apartment buildings) are customarily provided
with the service. The furnishing of water, heat, light, and air
conditioning, the cleaning of windows, public entrances, exits,
and lobbies, the performance of general maintenance, and of
janitorial and cleaning services, the collection of trash, the
furnishing of elevator services, telephone answering services,
incidental storage space, laundry equipment, watchman or guard
service, parking facilities and swimming pool facilities are
examples of services that are customarily furnished to tenants
of a particular class of buildings in many geographical
marketing areas (Treas. Reg. sec. 1.856-4(b)).
Exclusion of rents from related tenants
Amounts are not treated as qualified rent if they are
received from corporate or noncorporate tenants in which the
REIT, directly or indirectly, has an ownership interest of 10
percent or more (sec. 856(d)(2)(B)).
Exclusion of rents where services to tenants are performed
by related contractors
Where a REIT furnishes or renders services to the
tenants, amounts received or accrued with respect to such
property generally are not treated as qualifying rents unless
the services are furnished through an independent contractor
(sec. 856(d)(2)(C)). A REIT may furnish or render a service
directly, however, if the service would not generate unrelated
business taxable income under section 512(b)(3) if provided by
an organization described in section 511(a)(2). In general, an
independent contractor is a person who does not own more than a
35 percent interest in the REIT (sec. 856(d)(3)(A)), and in
which no more than a 35 percent interest is held by persons
with a 35 percent or greater interest in the REIT (sec.
856(d)(3)(B)).
Constructive ownership rules involving corporations
For purposes of determining the REIT's ownership interest
in a tenant and whether a contractor is independent, the
attribution rules of section 318 apply, except that 10 percent
is substituted for 50 percent where it appears in subparagraph
(C) of section 318(a)(2) and 318(a)(3) (sec. 856(d)(5)). Thus,
under section 318(a)(2)(C) (as so modified), if 10 or more
percent of a REIT or other corporation is owned, directly or
indirectly, by or for a person, that person is treated as
owning that person's proportionate share of any stock owned
directly or indirectly by that corporation.
Constructive ownership rules involving partnerships
Under section 318, stock owned, directly or indirectly,
by or for a partnership is considered owned proportionately by
its partners (sec. 318(a)(2)(A)). In addition, stock owned,
directly or indirectly, by or for a partner is considered owned
by the partnership (sec. 318(a)(3)(A)). However, stock
constructively owned by a partnership is not considered as
owned for purposes of being constructively owned by partners
(sec. 318(a)(5)(C)). The following examples illustrate the
application of these provisions for purposes of the related
tenant and independent contractor rules.
Constructive ownership of tenant
If a REIT owns a 10 percent or greater interest in a
person that is a tenant of the REIT, rents paid by that person
to the REIT are not qualifying rents to the REIT (sec.
856(d)(2)(B)). Example #1.--If 10 percent or more of a REIT's
shares are owned by a partnership and a partner owning a one-
percent interest in that partnership also owns a 10-percent or
greater interest in a person that is a tenant of the REIT,
rents paid by the tenant to the REIT are not qualifying rents
to the REIT; the 10-percent or greater interest in the tenant
is considered owned by the partnership (sec. 318(a)(3)(A)) and
in turn by the REIT (secs. 318(a)(3)(C) and 856(d)(5)). Example
#2.--If a REIT owns a 30-percent interest in a partnership that
in turn owns a 40-percent interest in a person that is a tenant
of the REIT, rents paid by that person to the REIT are not
qualifying rents to the REIT because the REIT is considered to
own more than 10 percent of the tenant (sec. 318(a)(2)(A)).
Example #3.--If 10 percent or more of a REIT's shares are owned
by persons who are 50-percent partners in a partnership whose
other partners own the entirety of the interests in a tenant of
the REIT, none of the interests in the tenant are considered
owned by the partners who own interests in the REIT (sec.
318(a)(5)(C)).
Constructive ownership of contractor
If a person providing services to tenants of the REIT
owns a greater-than-35-percent interest in the REIT, or if
another person owns a greater-than-35-percent interest in both
the REIT and a person providing services, amounts received or
accrued by the REIT with respect to the property are not
qualifying rents because the service provider does not qualify
as an independent contractor (sec. 856(d)(3)). Example #4.--If
more than 35 percent of a REIT's shares are owned by a
partnership and a partner owning a one-percent interest in that
partnership also owns a greater-than-35-percent interest in a
contractor, that person will not be considered an independent
contractor because the partnership owns more than 35 percent of
the REIT's sharesand will also be considered to own a greater-
than-35-percent interest in the contractor (sec. 318(a)(3)A)). Example
#5.--If more than 35 percent of a REIT's shares are owned by a person
who owns a one-percent interest in a partnership and another one-
percent partner in that partnership owns more than 35 percent of the
interests in a contractor, the independent contractor definition will
not be met because the partnership will be considered to own more than
35 percent interests in both the REIT and the contractor (sec. 318
(a)(3)(A)).
Hedging instruments
Interest rate swaps or cap agreements that protect a REIT
from interest rate fluctuations on variable rate debt incurred
to acquire or carry real property are treated as securities
under the 30-percent test and payments under these agreements
are treated as qualifying under the 95-percent test (sec.
856(c)(6)(G)).
Treatment of shared appreciation mortgages
For purposes of the income requirements for qualification
as a REIT, and for purposes of the prohibited transaction
provisions, any income derived from a ``shared appreciation
provision'' is treated as gain recognized on the sale of the
``secured property.'' For these purposes, a shared appreciation
provision is any provision that is in connection with an
obligation that is held by the REIT and secured by an interest
in real property, which provision entitles the REIT to receive
a specified portion of any gain realized on the sale or
exchange of such real property (or of any gain that would be
realized if the property were sold on a specified date).
Secured property for these purposes means the real property
that secures the obligation that has the shared appreciation
provision.
In addition, for purposes of the income requirements for
qualification as a REIT, and for purposes of the prohibited
transactions provisions, the REIT is treated as holding the
secured property for the period during which it held the shared
appreciation provision (or, if shorter, the period during which
the secured property was held by the person holding such
property), and the secured property is treated as property
described in section 1221(1) if it is such property in the
hands of the obligor on the obligation to which the shared
appreciation provision relates (or if it would be such property
if held by the REIT). For purposes of the prohibited
transaction safe harbor, the REIT is treated as having sold the
secured property at the time that it recognizes income on
account of the shared appreciation provision, and any
expenditures made by the holder of the secured property are
treated as made by the REIT.
Asset requirements
To satisfy the asset requirements to qualify for
treatment as a REIT, at the close of each quarter of its
taxable year, an entity must have at least 75 percent of the
value of its assets invested in real estate assets, cash and
cash items, and government securities (sec. 856(c)(5)(A)).
Moreover, not more than 25 percent of the value of the entity's
assets can be invested in securities of any one issuer (other
than government securities and other securities described in
the preceding sentence). Further, these securities may not
comprise more than five percent of the entity's assets or more
than 10 percent of the outstanding voting securities of such
issuer (sec. 856(c)(5)(B)). The term real estate assets is
defined to mean real property (including interests in real
property and mortgages on real property) and interests in REITs
(sec. 856(c)(6)(B)).
REIT subsidiaries
Under present law, all the assets, liabilities, and items
of income, deduction, and credit of a ``qualified REIT
subsidiary'' are treated as the assets, liabilities, and
respective items of the REIT that owns the stock of the
qualified REIT subsidiary. A subsidiary of a REIT is a
qualified REIT subsidiary if and only if 100 percent of the
subsidiary's stock is owned by the REIT at all times that the
subsidiary is in existence. If at any time the REIT ceases to
own 100 percent of the stock of the subsidiary, or if the REIT
ceases to qualify for (or revokes an election of) REIT status,
such subsidiary is treated as a new corporation that acquired
all of its assets in exchange for its stock (and assumption of
liabilities) immediately before the time that the REIT ceased
to own 100 percent of the subsidiary's stock, or ceased to be a
REIT as the case may be.
Distribution requirements
To satisfy the distribution requirement, a REIT must
distribute as dividends to its shareholders during the taxable
year an amount equal to or exceeding (i) the sum of 95 percent
of its REITTI other than net capital gain income and 95 percent
of the excess of its net income from foreclosure property over
the tax imposed on that income minus (ii) certain excess
noncash income. Excess noncash items include (1) the excess of
the amounts that the REIT is required to include in income
under section 467 with respect to certain rental agreements
involving deferred rents, over the amounts that the REIT
otherwise would recognize under its regular method of
accounting, (2) in the case of a REIT using the cash method of
accounting, the excess of the amount of original issue discount
and coupon interest that the REIT is required to take into
account with respect to a loan to which section 1274 applies,
over the amount of money and fair market value of other
property received with respect to the loan, and (3) income
arising from the disposition of a real estate asset in certain
transactions that failed to qualify as like-kind exchanges
under section 1031.
House Bill
Overview
The House bill modifies many of the provisions relating
to the requirements for qualification as, and the taxation of,
a REIT. In particular, the modifications relate to the general
requirements for qualification as a REIT, the taxation of a
REIT, the income requirements for qualification as a REIT, and
certain other provisions.
Alternative penalty for failure to make requests of shareholders (sec.
1251 of the House bill)
The House bill replaces the rule that disqualifies a REIT
for any year in which the REIT failed to comply with Treasury
regulations to ascertain its ownership, with an intermediate
penalty for failing to do so. The penalty is $25,000 ($50,000
for intentional violations) for any year in which the REIT did
not comply with the ownership regulations. The REIT also is
required, when requested by the IRS, to send curative demand
letters.
In addition, a REIT that complied with the Treasury
regulations for ascertaining its ownership, and which did not
know, or have reason to know, that it was so closely held as to
be classified as a personal holding company, is treated as
meeting the requirement that it not be a personal holding
company.
De minimis rule for tenant service income (sec. 1252 of the House bill)
The House bill permits a REIT to render a de minimis
amount of impermissible services to tenants, or in connection
with the management of property, and still treat amounts
received with respect to that property as rent. The value of
the impermissible services may not exceed one percent of the
gross income from the property. For these purposes, the
services may not be valued at less than 150 percent of the
REIT's direct cost of the services.
Attribution rules applicable to tenant ownership (sec. 1253 of the
House bill)
The House bill modifies the application the rule
attributing ownership from partners to partnerships (sec.
318(a)(3)(A)) for purposes of defining non-qualifying rent from
related persons (sec. 856(d)(2)), so that attribution occurs
only when a partner owns directly or indirectly a 25-percent or
greater interest in the partnership. Thus, a REIT and a tenant
will not be treated as related (and, therefore, rents paid by
the tenant to the REIT will not be treated as non-qualifying
rents) if the REIT's shares are owned by a partnership and a
partner owning a directly and indirectly less-than-25-percent
interest in that partnership also owns an interest in the
tenant. The related tenant rule (sec. 856(d)(2)(B)) also will
not be violated where owners of the REIT and owners of the
tenant are partners in a partnership and either the owners of
the REIT or the owners of the tenant are directly and
indirectly less-than-25-percent partners in the partnership.
Credit for tax paid by REIT on retained capital gains (sec. 1254 of the
House bill)
The House bill permits a REIT to elect to retain and pay
income tax on net long-term capital gains it received during
the tax year, just as a RIC is permitted under present law.
Thus, if a REIT made this election, the REIT shareholders would
include in their income as long-term capital gains their
proportionate share of the undistributed long-term capital
gains as designated by the REIT. The shareholder would be
deemed to have paid the shareholder's share of the tax, which
would be credited or refunded to the shareholder. Also, the
basis of the shareholder's shares would be increased by the
amount of the undistributed long-term capital gains (less the
amount of capital gains tax paid by the REIT) included in the
shareholder's long-term capital gains.
Repeal of 30-percent gross income requirement (sec. 1255 of the House
bill)
The House bill repeals the rule that requires less than
30 percent of a REIT's gross income be derived from gain from
the sale or other disposition of stock or securities held for
less than one year, certain real property held less than four
years, and property that is sold or disposed of in a prohibited
transaction.
Modification of earnings and profits for determining whether REIT has
earnings and profits from non-REIT year (sec. 1256 of the House
bill)
The House bill changes the ordering rule for purposes of
the requirement that newly-electing REITs distribute earnings
and profits that were accumulated in non-REIT years.
Distributions of accumulated earnings and profits generally are
treated as made from the entity's earliest accumulated earnings
and profits, rather than the most recently accumulated earnings
and profits. These distributions are not treated as
distributions for purposes of calculating the dividends paid
deduction.
Treatment of foreclosure property (sec. 1257 of the House bill)
The House bill lengthens the original grace period for
foreclosure property until the last day of the third full
taxable year following the election. The grace period also
could be extended for an additional three years by filing a
request to the IRS. A REIT could revoke an election to treat
property as foreclosure property for any taxable year by filing
a revocation on or before its due date for filing its tax
return.
In addition, the House bill conforms the definition of
independent contractor for purposes of the foreclosure property
rule (sec. 856(e)(4)(C)) to the definition of independent
contractor for purposes of the general rules (sec.
856(d)(2)(C)).
Payments under hedging instruments (sec. 1258 of the House bill)
The House bill treats income from all hedges that reduce
the interest rate risk of REIT liabilities, not just from
interest rate swaps and caps, as qualifying income under the
95-percent test. Thus, payments to a REIT under an interest
rate swap, cap agreement, option, futures contract, forward
rate agreement or any similar financial instrument entered into
by the REIT to hedge its indebtedness incurred or to be
incurred (and any gain from the sale or other disposition of
these instruments) are treated as qualifying income for
purposes of the 95-percent test.
Excess noncash income (sec. 1259 of the House bill)
The House bill (1) expands the class of excess noncash
items that are not subject to the distribution requirement to
include income from the cancellation of indebtedness and (2)
extends the treatment of original issue discount and coupon
interest as excess noncash items to REITs that use an accrual
method of taxation.
Prohibited transaction safe harbor (sec. 1260 of the House bill)
The House bill excludes from the prohibited sales rules
property that was involuntarily converted.
Shared appreciation mortgages (sec. 1261 of the House bill)
The House bill provides that interest received on a
shared appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject to the
mortgage is sold within four years of the REIT's acquisition of
the mortgage pursuant to a bankruptcy plan of the mortgagor
unless the REIT acquired the mortgage knew or had reason to
know that the property subject to the mortgage would be sold in
a bankruptcy proceeding.
Wholly-owned REIT subsidiaries (sec. 1262 of the House bill)
The House bill permits any corporation wholly-owned by a
REIT to be treated as a qualified subsidiary, regardless of
whether the corporation had always been owned by the REIT.
Where the REIT acquired an existing corporation, any such
corporation is treated as being liquidated as of the time of
acquisition by the REIT and then reincorporated (thus, any of
the subsidiary's pre-REIT built-in gain would be subject to tax
under the normal rules of sec. 337). In addition, any pre-REIT
earnings and profits of the subsidiary must be distributed
before the end of the REIT's taxable year.
Effective date
The House bill is effective for taxable years beginning
after the date of enactment.
Senate Amendment
The Senate amendment is identical to the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. In addition, the conference agreement
extends, to the definition of an independent contractor under
section 856(d)(3), the modification to the attribution to
partnerships of section 318(a)(3)(A) so that attribution occurs
only when a partner owns a 25-percent or greater interest in
the partnership. Thus, a person providing services will not
fail to be an independent contractor (and, therefore, amounts
received or accrued by the REIT with respect to the property
will not be treated as non-qualifying rents) where the REIT's
shares are owned by a partnership and a partner owning a
directly and indirectly a less-than-25-percent interest in the
partnership also owns an interest in a contractor. Similarly, a
contractor will not fail to be an independent contractor where
owners of the REIT and owners of the contractor are partners in
a partnership and either the owners of the REIT or owners of
the tenant are directly and indirectly less-than-25-percent
partners in the partnership.
Effective date.--The conference agreement is effective
for taxable years beginning after the date of enactment.
E. Repeal the ``Short-Short'' Test for Regulated Investment Companies
(sec. 1271 of the House bill and sec. 1071 of the Senate amendment)
Present Law
To qualify as a regulated investment company (``RIC''), a
company must derive less than 30 percent of its gross income
from the sale or other disposition of stock or securities held
for less than 3 months (the ``30-percent test'' or ``short-
short rule'').
House Bill
The 30-percent test (or short-short rule) is repealed
effective for taxable years ending after the date of enactment.
Senate Amendment
The 30-percent test (or short-short rule) is repealed
effective for taxable years beginning after the December 31,
1997.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment effective for taxable years beginning after
the date of enactment.
F. Taxpayer Protections
1. Provide reasonable cause exception for additional penalties (sec.
1281 of the House bill and sec. 1081 of the Senate amendment)
Present Law
Many penalties in the Code may be waived if the taxpayer
establishes reasonable cause. For example, the accuracy-related
penalty (sec. 6662) may be waived with respect to any item if
the taxpayer establishes reasonable cause for his treatment of
the item and that he acted in good faith (sec. 6664(c)).
House Bill
The House bill provides that the following penalties may
be waived if the failure is shown to be due to reasonable cause
and not willful neglect:
(1) the penalty for failure to make a report in
connection with deductible employee contributions to a
retirement savings plan (sec. 6652(g));
(2) the penalty for failure to make a report as to
certain small business stock (sec. 6652(k));
(3) the penalty for failure of a foreign
corporation to file a return of personal holding
company tax (sec. 6683); and
(4) the penalty for failure to make required
payments for entities electing not to have the required
taxable year (sec. 7519).
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Clarification of period for filing claims for refunds (sec. 1282 of
the House bill and sec. 1082 of the Senate amendment)
Present Law
The Code contains a series of limitations on tax refunds.
Section 6511 of the Code provides both a limitation on the time
period in which a claim for refund can be made (section
6511(a)) and a limitation on the amount that can be allowed as
a refund (section 6511(b)). Section 6511(a) provides the
general rule that a claim for refund must be filed within 3
years of the date of the return or 2 years of the date of
payment of the taxes at issue, whichever is later. Section
6511(b) limits the refund amount that can be covered: if a
return was filed, a taxpayer can recover amounts paid within 2
years before the claim. Section 6512(b)(3) incorporates these
rules where taxpayers who challenge deficiency notices in Tax
Court are found to be entitled to refunds.
In Commissioner v. Lundy, 116 S. Ct. 647 (1996), the
taxpayer had not filed a return, but received a notice of
deficiency within 3 years after the date the return was due and
challenged the proposed deficiency in Tax Court. The Supreme
Court held that the taxpayer could not recover overpayments
attributable to withholding during the tax year, because no
return was filed and the 2-year ``look back'' rule applied.
Since overwithheld amounts are deemed paid as of the date the
taxpayer's return was first due (i.e., more than 2 years before
the notice of deficiency was issued), such overpayments could
not be recovered. By contrast, if the same taxpayer had filed a
return on the date the notice of deficiency was issued, and
then claimed a refund, the 3-year ``look back'' rule would
apply, and the taxpayer could have obtained a refund of the
overwithheld amounts.
House Bill
The House bill permits taxpayers who initially fail to
file a return, but who receive a notice of deficiency and file
suit to contest it in Tax Court during the third year after the
return due date, to obtain a refund of excessive amounts paid
within the 3-year period prior to the date of the deficiency
notice.
Effective date.--The provision applies to claims for
refund with respect to tax years ending after the date of
enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Repeal of authority to disclose whether a prospective juror has been
audited (sec. 1283 of the House bill and sec. 1083 of the
Senate amendment)
Present Law
In connection with a civil or criminal tax proceeding to
which the United States is a party, the Secretary must
disclose, upon the written request of either party to the
lawsuit, whether an individual who is a prospective juror has
or has not been the subject of an audit or other tax
investigation by the Internal Revenue Service (sec.
6103(h)(5)).
This disclosure requirement, as it has been interpreted
by several recent court decisions, has created significant
difficulties in the civil and criminal tax litigation process.
First, the litigation process can be substantially slowed. It
can take the Secretary a considerable period of time to compile
the information necessary for a response (some courts have
required searches going back as far as 25 years). Second,
providing early release of the list of potential jurors to
defendants (which several recent court decisions have required,
to permit defendants to obtain disclosure of the information
from the Secretary) can provide an opportunity for harassment
and intimidation of potential jurors in organized crime, drug,
and some tax protester cases. Third, significant judicial
resources have been expended in interpreting this procedural
requirement that might better be spent resolving substantive
disputes. Fourth, differing judicial interpretations of this
provision have caused confusion. In some instances, defendants
convicted of criminal tax offenses have obtained reversals of
those convictions because of failures to comply fully with this
provision.
House Bill
The House bill repeals the requirement that the Secretary
disclose, upon the written request of either party to the
lawsuit, whether an individual who is a prospective juror has
or has not been the subject of an audit or other tax
investigation by the Internal Revenue Service.
Effective date.--The provision is effective for judicial
proceedings commenced after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Clarify statute of limitations for items from pass-through entities
(sec. 1284 of the House bill and sec. 1084 of the Senate
amendment)
Present Law
Pass-through entities (such as S corporations,
partnerships, and certain trusts) generally are not subject to
income tax on their taxable income. Instead, these entities
file information returns and the entities' shareholders (or
beneficial owners) report their pro rata share of the gross
income and are liable for any taxes due.
Some believe that, prior to 1993, it may have been
unclear as to whether the statute of limitations for
adjustments that arise from distributions from pass-through
entities should be applied at the entity or individual level
(i.e., whether the 3-year statute of limitations for
assessments runs from the time that the entity files its
information return or from the time that a shareholder timely
files his or her income tax return). In 1993, the Supreme Court
held that the limitations period for assessing the income tax
liability of an S corporation shareholder runs from the date
the shareholder's return is filed (Bufferd v. Comm., 113 S. Ct.
927 (1993)).
House Bill
The House bill clarifies that the return that starts the
running of the statute of limitations for a taxpayer is the
return of the taxpayer and not the return of another person
from whom the taxpayer has received an item of income, gain,
loss, deduction, or credit.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
5. Awarding of administrative costs and attorneys fees (sec. 1285 of
the House bill)
Present Law
Any person who substantially prevails in any action
brought by or against the United States in connection with the
determination, collection, or refund of any tax, interest, or
penalty may be awarded reasonable administrative costs incurred
before the IRS and reasonable litigation costs incurred in
connection with any court proceeding.
No time limit is specified for the taxpayer to apply to
the IRS for an award of administrative costs. In addition, no
time limit is specified for a taxpayer to appeal to the Tax
Court an IRS decision denying an award of administrative costs.
Finally, the procedural rules for adjudicating a denial of
administrative costs are unclear.
House Bill
The House bill provides that a taxpayer who seeks an
award of administrative costs must apply for such costs within
90 days of the date on which the taxpayer was determined to be
aprevailing party. The House bill also provides that a taxpayer
who seeks to appeal an IRS denial of an administrative cost award must
petition the Tax Court within 90 days after the date that the IRS mails
the denial notice.
The House bill clarifies that dispositions by the Tax
Court of petitions relating only to administrative costs are to
be reviewed in the same manner as other decisions of the Tax
Court.
Effective date.--The provision is effective with respect
to costs incurred in civil actions or proceedings commenced
after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
6. Prohibition on browsing (secs. 1286 and 1287 of the House bill and
secs. 1085 and 1086 of the Senate amendment)
Present Law
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized willful disclosure is a felony punishable
by a fine not exceeding $5,000 or imprisonment of not more than
five years, or both (sec. 7213). An action for civil damages
also may be brought for unauthorized disclosure (sec. 7431).
There is no explicit criminal penalty in the Internal
Revenue Code for unauthorized inspection (absent subsequent
disclosure) of tax returns and return information. Such
inspection is, however, explicitly prohibited by the Internal
Revenue Service (``IRS'').14 In a recent case, an
individual was convicted of violating the Federal wire fraud
statute (18 U.S.C. 1343 and 1346) and a Federal computer fraud
statute (18 U.S.C. 1030) for unauthorized inspection. However,
the U.S. First Circuit Court of Appeals overturned this
conviction.15 Unauthorized inspection of information
of any department or agency of the United States (including the
IRS) via computer was made a crime under 18 U.S.C. 1030 by the
Economic Espionage Act of 1996.16 This provision
does not apply to unauthorized inspection of paper documents.
---------------------------------------------------------------------------
\14\ IRS Declaration of Privacy Principles, May 9, 1994.
\15\ U.S. v. Czubinski, DTR 2/25/97, p. K-2.
\16\ P.L. 104-294, sec. 201 (October 11, 1996).
---------------------------------------------------------------------------
House Bill
Criminal penalties
The House bill creates a new criminal penalty in the
Internal Revenue Code. The penalty is imposed for willful
inspection (except as authorized by the Code) of any tax return
or return information by any Federal employee or IRS
contractor. The penalty also applies to willful inspection
(except as authorized) by any State employee or other person
who acquired the tax return or return information under
specific provisions of section 6103. Upon conviction, the
penalty is a fine in any amount not exceeding
$1,000,17 or imprisonment of not more than 1 year,
or both, together with the costs of prosecution. In addition,
upon conviction, an officer or employee of the United States
would be dismissed from office or discharged from employment.
---------------------------------------------------------------------------
\17\ Pursuant to 18 U.S.C. sec. 3571 (added by the Sentencing
Reform Act of 1984), the amount of the fine is not more than the
greater of the amount specified in this new Code section or $100,000.
---------------------------------------------------------------------------
The Congress views any unauthorized inspection of tax
returns or return information as a very serious offense; this
new criminal penalty reflects that view. The Congress also
believes that unauthorized inspection warrants very serious
personnel sanctions against IRS employees who engage in
unauthorized inspection, and that it is appropriate to fire
employees who do this.
Civil damages
The House bill amends the provision providing for civil
damages for unauthorized disclosure by also providing for civil
damages for unauthorized inspection. Damages are available for
unauthorized inspection that occurs either knowingly or by
reason of negligence. Accidental or inadvertent inspection that
may occur (such as, for example, by making an error in typing
in a TIN) would not be subject to damages because it would not
meet this standard. The House bill also provides that no
damages are available to a taxpayer if that taxpayer requested
the inspection or disclosure.
The House bill also requires that, if any person is
criminally charged by indictment or information with inspection
or disclosure of a taxpayer's return or return information in
violation of section 7213 (a) or (b), section 7213A (as added
by the bill), or 18 U.S.C. section 1030(a)(2)(B), the Secretary
notify that taxpayer as soon as practicable of the inspection
or disclosure.
Effective date.--The provision is effective for
violations occurring on or after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement does not include these
provisions, because they are identical to the provisions of
H.R. 1226, which passed the House on April 15, 1997, and which
passed the Senate on July 23, 1997, clearing the measure for
the President's signature.
XIII. ESTATE, GIFT, AND TRUST SIMPLIFICATION PROVISIONS
1. Eliminate gift tax filing requirements for gifts to charities (sec.
1301 of the House bill and sec. 1101 of the Senate amendment)
Present Law
A gift tax generally is imposed on lifetime transfers of
property by gift (sec. 2501). In computing the amount of
taxable gifts made during a calendar year, a taxpayer generally
may deduct the amount of any gifts made to a charity (sec.
2522). Generally, this charitable gift deduction is available
for outright gifts to charity, as well as gifts of certain
partial interests in property (such as a remainder interest). A
gift of a partial interest in property must be in a prescribed
form in order to qualify for the deduction.
Individuals who make gifts in excess of $10,000 to any
one donee during the calendar year generally are required to
file a gift tax return (sec. 6019). This filing requirement
applies to all gifts, whether charitable or noncharitable, and
whether or not the gift qualifies for a gift tax charitable
deduction. Thus, under current law, a gift tax return is
required to be filed for gifts to charity in excess of $10,000,
even though no gift tax is payable on the transfer.
House Bill
The House bill provides that gifts to charity are not
subject to the gift tax filing requirements of section 6019, as
long as the entire value of the transferred property qualifies
for the gift tax charitable deduction under section 2522. The
filing requirements for gifts of partial interests in property
remain unchanged.
Effective date.--The provision is effective for gifts
made after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with a technical clarification that the
property given to charity must be the donor's entire interest
in the property.
2. Clarification of waiver of certain rights of recovery (sec. 1302 of
the House bill and sec. 1102 of the Senate amendment)
Present Law
For estate and gift tax purposes, a marital deduction is
allowed for qualified terminable interest property (QTIP). Such
property generally is included in the surviving spouse's gross
estate upon his or her death. The surviving spouse's estate is
entitled to recover the portion of the estate tax attributable
to inclusion of QTIP from the person receiving the property,
unless the spouse directs otherwise by will (sec. 2207A). For
this purpose, a will provision specifying that all taxes shall
be paid by the estate is sufficient to waive the right of
recovery.
A decedent's gross estate includes the value of
previously transferred property in which the decedent retains
enjoyment or the right to income (sec. 2036). The estate is
entitled to recover from the person receiving the property a
portion of the estate tax attributable to the inclusion (sec.
2207B). This right may be waived only by a provision in the
will (or revocable trust) specifically referring to section
2207B.
House Bill
The House bill provides that the right of recovery with
respect to QTIP is waived only to the extent that language in
the decedent's will or revocable trust specifically so
indicates (e.g., by a specific reference to QTIP, the QTIP
trust, section 2044, or section 2207A). Thus, a general
provision specifying that all taxes be paid by the estate is no
longer sufficient to waive the right of recovery.
The House bill also provides that the right of
contribution for property over which the decedent retained
enjoyment or the right to income is waived by a specific
indication in the decedent's will or revocable trust, but
specific reference to section 2207B is no longer required.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Transitional rule under section 2056A (sec. 1303 of the House bill
and sec. 1103 of the Senate amendment)
Present Law
A ``marital deduction'' generally is allowed for estate
and gift tax purposes for the value of property passing to a
spouse. The Technical and Miscellaneous Revenue Act of 1988
(``TAMRA'') denied the marital deduction for property passing
to an alien spouse outside a qualified domestic trust
(``QDT''). An estate tax generally is imposed on corpus
distributions from a QDT.
TAMRA defined a QDT as a trust that, among other things,
required all trustees be U.S. citizens or domestic
corporations. This provision was modified in the Omnibus Budget
Reconciliation Acts of 1989 and 1990 to require that at least
one trustee be a U.S. citizen or domestic corporation and that
no corpus distribution be made unless such trustee has the
right to withhold any estate tax imposed on the distribution
(the ``withholding requirement'').
House Bill
The House bill provides that certain trusts created
before the enactment of the Omnibus Budget Reconciliation Act
of 1990 are treated as satisfying the withholding requirement
if the governing instruments require that all trustees be U.S.
citizens or domestic corporations.
Effective date.--The provision applies as if included in
the Omnibus Budget Reconciliation Act of 1990.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Clarifications relating to disclaimers (sec. 1304 of the House bill)
Present Law
Historically, there must be acceptance of a gift in order
for the gift to be completed under State law and there is no
taxable gift for Federal gift tax purposes unless there is a
completed gift. Most States have rules that provide that, where
there is a disclaimer of a gift, the property passes to the
person who is entitled to the property had the disclaiming
party died before the purported transfer.
In the Tax Reform Act of 1976, Congress provided a
uniform disclaimer rule (sec. 2518) that specified how and when
a disclaimer under State law must be made in order to be
effective for Federal transfer tax purposes. Under section
2518, a State law type disclaimer is effective for Federal
transfer tax purposes if it is an irrevocable and unqualified
refusal to accept an interest in property and certain other
requirements are satisfied. One of these other requirements is
that the disclaimer generally must be made in writing not later
than nine months after the transfer creating the interest
occurs. Section 2518 is not currently effective for Federal tax
purposes other than transfer taxes.
In 1981, Congress added a rule to section 2518 that
allowed certain transfers of property to be treated as a
qualified disclaimer. In order to qualify, these transfer-type
disclaimers must be a written transfer of the disclaimant's
``entire interest in the property'' to persons who would have
received the property had there been a valid disclaimer under
State law (sec. 2518(c)(3)). Like other disclaimers, the
transfer-type disclaimer generally must be made within nine
months of the transfer creating the interest.
House Bill
The House bill allows a transfer-type disclaimer of an
``undivided portion'' of the disclaimant transferor's interest
in property to qualify under section 2518. Also, the House bill
allows a spouse to make a qualified transfer-type disclaimer
where the disclaimed property is transferred to a trust in
which the disclaimant spouse has an interest (e.g., a credit
shelter trust). Further, the House bill provides that a
qualified disclaimer for transfer tax purposes under section
2518 also is effective for Federal income tax purposes (e.g.,
disclaimers of interests in annuities and income in respect of
a decedent).
None of the foregoing provisions are intended to create
an inference regarding the Federal tax treatment of disclaimers
under present law.
Effective date.--The provision applies to disclaimers
made after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
5. Amend ``5 or 5 power'' (sec. 1305 of the House bill)
Present Law
The exercise or release of a general power of appointment
generally is considered a gift by the person holding the power
(sec. 2514(b)). A special rule, however, provides that the
lapse of a power of appointment during the life of the person
holding the power is considered a release (and thus a taxable
gift) only to the extent that the value of the property over
which the power lapsed exceeds the greater of $5,000 or five
percent (``5 or 5 power'') of the value of the assets of the
trust (sec. 2514(e)). A similar provision applies for purposes
of estate taxation (sec. 2041(b)(2)).
House Bill
The House bill increases the limitations in sections
2514(e) and 2041(b)(2) to the greater of $10,000 or 5 percent.
Effective date.--The provision applies to lapses
occurring in taxable years beginning after the date of
enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
6. Treatment for estate tax purposes of short-term obligations held by
nonresident aliens (sec. 1306 of the House bill and sec. 1104
of the Senate amendment)
Present Law
The United States imposes estate tax on assets of
noncitizen nondomiciliaries that were situated in the United
States at the time of the individual's death. Debt obligations
of a U.S. person, the United States, a political subdivision of
a State, or the District of Columbia are considered property
located within the United States if held by a nonresident not a
citizen of the United States (sec. 2014(c)).
Special rules apply to treat certain bank deposits and
debt instruments the income from which qualifies for the bank
deposit interest exemption and the portfolio interest exemption
as property from without the United States despite the fact
that such items are obligations of a U.S. person, the United
States, a political subdivision of a State, or the District of
Columbia (sec. 2105(b)). Income from such items is exempt from
U.S. income tax in the hands of the nonresident recipient
(secs. 871(h) and 871(i)(2)(A)). The effect of these special
rules is to exclude these items from the U.S. gross estate of a
nonresident not a citizen of the United States. However,
because of an amendment to section 871(h) made by the Tax
Reform Act of 1986, these special rules no longer cover
obligations that generate short-term OID income despite the
fact that such income is exempt from U.S. income tax in the
hands of the nonresident recipient (sec. 871(g)(1)(B)(i)).
House Bill
The House bill provides that any debt obligation, the
income from which would be eligible for the exemption for
short-term OID under section 871(g)(1)(B)(i) if such income
were received by the decedent on the date of his death, is
treated as property located outside of the United States in
determining the U.S. estate tax liability of a nonresident not
a U.S. citizen. No inference is intended with respect to the
estate tax treatment of such obligations under present law.
Effective date.--The provision is effective for estates
of decedents dying after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
7. Certain revocable trusts treated as part of estate (sec. 1307 of the
House bill)
Present Law
Both estates and revocable inter vivos trusts can
function to settle the affairs of a decedent and distribute
assets to heirs. In the case of revocable inter vivos trusts,
the grantor transfers property into a trust which is revocable
during his or her lifetime. Upon the grantor's death, the power
to revoke ceases and the trustee then performs the settlement
functions typically performed by the executor of an estate.
While both estates and revocable trusts perform essentially the
same function after the testator or grantor's death, there are
a number of ways in which an estate and a revocable trust
operate differently. First, there can be only one estate per
decedent while there can be more than one revocable trust.
Second, estates are in existence only for a reasonable period
of administration; revocable trusts can perform the same
settlement functions as an estate, but may continue in
existence thereafter as testamentary trusts.
Numerous differences presently exist between the income
tax treatment of estates and revocable trusts, including: (1)
estates are allowed a charitable deduction for amounts
permanently set aside for charitable purposes while post death
revocable trusts are allowed a charitable deduction only for
amounts paid to charities; (2) the active participation
requirement the passive loss rules under section 469 is waived
in the case of estates (but not revocable trusts) for two years
after the owner's death; and (3) estates (but not revocable
trusts) can qualify for section 194 amortization of
reforestation expenditures.
House Bill
The House bill provides an irrevocable election to treat
a qualified revocable trust as part of the decedent's estate
for Federal income tax purposes. This elective treatment is
effective from the date of the decedent's death until two years
after his or her death (if no estate tax return is required)
or, if later, six months after the final determination of
estate tax liability (if an estate tax return is required). The
election must be made by both the executor of the decedent's
estate (if any) and the trustee of the revocable trust no later
than the time required for filing the income tax return of the
estate for its first taxable year, taking into account any
extensions. A conforming change is made to section 2652(b) for
generation-skipping transfer tax purposes.
For this purpose, a qualified revocable trust is any
trust (or portion thereof) which was treated under section 676
as owned by the decedent with respect to whom the election is
being made, by reason of a power in the grantor (i.e., trusts
that are treated as owned by the decedent solely by reason of a
power in a nonadverse party would not qualify).
The separate share rule (described below) generally will
apply when a qualified revocable trust is treated as part of
the decedent's estate.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
8. Distributions during first 65 days of taxable year of estate (sec.
1308 of the House bill and sec. 1105 of the Senate amendment)
Present Law
In general, trusts and estates are treated as conduits
for Federal income tax purposes; income received by a trust or
estate that is distributed to a beneficiary in the trust or
estate's taxable year ``ending with or within'' the taxable
year of the beneficiary is taxable to the beneficiary in that
year; income that is retained by the trust or estate is
initially taxable to the trust or estate. In the case of
distributions of previously accumulated income by trusts (but
not estates), there may be additional tax under the so-called
``throwback'' rules if the beneficiary to whom the
distributions were made has marginal rates higher than those of
the trust. Under the ``65-day rule,'' a trust may elect to
treat distributions paid within 65 days after the close of its
taxable year as paid on the last day of its taxable year. The
65-day rule is not applicable to estates.
House Bill
The House bill extends application of the 65-day rule to
distributions by estates. Thus, an executor can elect to treat
distributions paid by the estate within 65 days after the close
of the estate's taxable year as having been paid on the last
day of such taxable year.
Effective date.--The provision applies to taxable years
beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
9. Separate share rules available to estates (sec. 1309 of the House
bill and sec. 1106 of the Senate amendment)
Present Law
Trusts with more than one beneficiary must use the
``separate share'' rule in order to provide different tax
treatment of distributions to different beneficiaries to
reflect the income earned by different shares of the trust's
corpus. 18 Treasury regulations provide that ``[t]he
application of the separate share rule * * * will generally
depend upon whether distributions of the trust are to be made
in substantially the same manner as if separate trusts had been
created. * * * Separate share treatment will not be applied to
a trust or portion of a trust subject to a power to distribute,
apportion, or accumulate income or distribute corpus to or for
the use of one or more beneficiaries within a group or class of
beneficiaries, unless the payment of income, accumulated
income, or corpus of a share of one beneficiary cannot affect
the proportionate share of income, accumulated income, or
corpus of any shares of the other beneficiaries, or unless
substantially proper adjustment must thereafter be made under
the governing instrument so that substantially separate and
independent shares exist.'' (Treas. Reg. sec. 1.663(c)-3). The
separate share rule presently does not apply to estates.
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\18\ Application of the separate share rule is not elective; it is
mandatory if there are separate shares in the trust.
---------------------------------------------------------------------------
House Bill
The House bill extends the application of the separate
share rule to estates. There are separate shares in an estate
when the governing instrument of the estate (e.g., the will and
applicable local law) creates separate economic interests in
one beneficiary or class of beneficiaries such that the
economic interests of those beneficiaries (e.g., rights to
income or gains from specified items of property) are not
affected by economic interests accruing to another separate
beneficiary or class of beneficiaries. For example, a separate
share in an estate would exist where the decedent's will
provides that all of the shares of a closely-held corporation
are devised to one beneficiary and that any dividends paid to
the estate by that corporation should be paid only to that
beneficiary and any such dividends would not affect any other
amounts which that beneficiary would receive under the will. As
in the case of trusts, the application of the separate share
rule is mandatory where separate shares exist.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
10. Executor of estate and beneficiaries treated as related persons for
disallowance of losses (sec. 1310 of the House bill and sec.
1107 of the Senate amendment)
Present Law
Section 267 disallows a deduction for any loss on the
sale of an asset to a person related to the taxpayer. For the
purposes of section 267, the following parties are related
persons: (1) a trust and the trust's grantor, (2) two trusts
with the same grantor, (3) a trust and a beneficiary of the
trust, (4) a trust and a beneficiary of another trust, if both
trusts have the same grantor, and (5) a trust and a corporation
the stock of which is more than 50 percent owned by the trust
or the trust's grantor.
Section 1239 disallows capital gain treatment on the sale
of depreciable property to a related person. For purposes of
section 1239, a trust and any beneficiary of the trust are
treated as related persons, unless the beneficiary's interest
is a remote contingent interest.
Neither section 267 or section 1239 presently treat an
estate and a beneficiary of the estate as related persons.
House Bill
Under the House bill, an estate and a beneficiary of that
estate are treated as related persons for purposes of sections
267 and 1239, except in the case of a sale or exchange in
satisfaction of a pecuniary bequest.
Effective date.--The provision applies to taxable years
beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
11. Limitation on taxable year of estates (sec. 1311 of the House bill)
Present Law
The taxability of distributions from a trust or estate is
based on the amount of income received by the trust or estate
in the trust or estate's taxable year ``ending with or within''
the taxable year of the beneficiary (typically a calendar
year). Trusts are required to use a calendar year and,
consequently, income of a trust that is distributed to a
calendar-year beneficiary in the year earned is taxed to the
beneficiary in the year earned. Estates, on the other hand, are
allowed to use any fiscal year. Consequently, in the case of
estates, the taxation of distributions to a calendar-year
beneficiary in up to the last 11 months of the calendar year
can be deferred until the next taxable year depending upon the
fiscal year selected.
House Bill
The House bill limits the taxable year of an estate to a
year ending on October 31, November 30, or December 31.
19 Thus, the maximum deferral allowable to a
calendar-year beneficiary is with respect to distributions made
in the last two months of the calendar year.
---------------------------------------------------------------------------
\19\ If an election is made to treat a revocable trust as part of
the estate under section 14601 of the bill, such trust would switch to
the taxable year of the estate during the period that the election was
effective.
---------------------------------------------------------------------------
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
12. Simplified taxation of earnings of pre-need funeral trusts (sec.
1312 of the House bill and sec. 1108 of the Senate amendment)
Present Law
A pre-need funeral trust is an arrangement where an
individual purchases funeral services or merchandise from a
funeral home for the benefit of a specified person in advance
of that person's death. (The beneficiary may be either the
purchaser or another person.) The purchaser enters into a
contract with the provider of such services or merchandise
whereby the purchaser selects the services or merchandise to be
provided upon the death of the beneficiary, and agrees to pay
for them in advance of the beneficiary's death. Such amounts
(or a portion thereof) are held in trust during the
beneficiary's lifetime and are paid to the seller upon the
beneficiary's death.
Under present law, pre-need funeral trusts generally are
treated as grantor trusts, and the annual income earned by such
trusts is taxed to the purchaser/grantor of the trust. Rev.
Rul. 87-127. Any amount received from the trust by the seller
(as payment for services or merchandise) is includible in the
gross income of the seller.
House Bill
The House bill allows the trustee of a pre-need funeral
trust to elect special tax treatment for such a trust, to the
extent the trust would otherwise be treated as a grantor trust.
A qualified funeral trust is defined as one which meets the
following requirements: (1) the trust arises as the result of a
contract between a person engaged in the trade or business of
providing funeral or burial services or merchandise and one or
more individuals to have such services or property provided
upon such individuals' death; (2) the only beneficiaries of the
trust are individuals who have entered into contracts to have
such services or merchandise provided upon their death; (3) the
only contributions to the trust are contributions by or for the
benefit of the trust beneficiaries; (4) the trust's only
purpose is to hold and invest funds that will be used to make
payments for funeral or burial services or merchandise for the
trust beneficiaries; and (5) the trust has not accepted
contributions totaling more than $7,000 by or for the benefit
of any individual. For this purpose, ``contributions'' include
all amounts transferred to the trust, regardless of how
denominated in the contract. Contributions do not, however,
include income or gain earned with respect to property in the
trust. For purposes of applying the $7,000 limit, if a
purchaser has more than one contract with a single trustee (or
related trustees), all such trusts are treated as one trust.
Similarly, if the Secretary of Treasury determines that a
purchaser has entered into separate contracts with unrelated
trustees to avoid the $7,000 limit described above, the
Secretary may require that such trusts be treated as one trust.
For contracts entered into after 1998, the $7,000 limit is
indexed annually for inflation.
The trustee's election to have this provision apply to a
qualified funeral trust is to be made separately with respect
to each purchaser's trust. It is anticipated that the
Department of Treasury will issue prompt guidance with respect
to the simplified reporting requirements so that if the
election is made, a single annual trust return may be filed by
the trustee, separately listing the amount of income earned
with respect to each purchaser. If the election is made, the
trust is not treated as a grantor trust and the amount of tax
paid with respect to each purchaser's trust is determined in
accordance with the income tax rate schedule generally
applicable to estates and trusts (Code sec. 1(e)), but no
deduction is allowed under section 642(b). The tax on the
annual earnings of the trust is payable by the trustee.
As under present law, amounts received from the trust by
the seller are treated as payments for services and merchandise
and are includible in the gross income of the seller. No gain
or loss is recognized to the beneficiary of the trust for
payments from the trust to the beneficiary upon cancellation of
the contract, and the beneficiary takes a carryover basis in
any assets received from the trust upon cancellation.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
Senate Agreement
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with modifications that would (1) allow the
provision to be applied to contracts purchased by one
individual to have funeral or burial services or merchandise
provided for another individual upon that individual's death
(to the extent that such arrangements would otherwise be
treated as grantor trusts), and (2) allow the election to be
made for taxable years ending after the date of enactment.
Effective date.--The provision is effective for taxable
years ending after the date of enactment.
13. Adjustments for gifts within 3 years of decedent's death (sec. 1313
of the House bill and sec. 1109 of the Senate amendment)
Present Law
The first $10,000 of gifts of present interests to each
donee during any one calendar year are excluded from Federal
gift tax.
The value of the gross estate includes the value of any
previously transferred property if the decedent retained the
power to revoke the transfer (sec. 2038). The gross estate also
includes the value of any property with respect to which such
power is relinquished during the three years before death (sec.
2035). There has been significant litigation as to whether
these rules require that certain transfers made from a
revocable trust within three years of death be includible in
the gross estate. See, e.g., Jalkut Estate v. Commissioner, 96
T.C. 675 (1991) (transfers from revocable trust includible in
gross estate); McNeely v. Commissioner, 16 F.3d 303 (8th Cir.
1994) (transfers from revocable trust not includible in gross
estate); Kisling v. Commissioner, 32 F.3d 1222 (8th Cir. 1994)
(acq.) (transfers from revocable trust not includible in gross
estate).
House Bill
The House bill codifies the rule set forth in the McNeely
and Kisling cases to provide that a transfer from a revocable
trust (i.e., a trust described under section 676) is treated as
if made directly by the grantor. Thus, an annual exclusion gift
from such a trust is not included in the gross estate.
The House bill also revises section 2035 to improve its
clarity.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. The provision is not intended to modify the
result reached in the Kisling case.
14. Clarify relationship between community property rights and
retirement benefits (sec. 1314 of the House bill and sec. 1110
of the Senate amendment)
Present Law
Community property
Under State community property laws, each spouse owns an
undivided one-half interest in each community property asset.
In community property jurisdictions, a nonparticipant spouse
may be treated as having a vested community property interest
in either his or her spouse's qualified plan, individual
retirement arrangement (``IRA''), or simplified employee
pension (``SEP'') plan.
Transfer tax treatment of qualified plans
In the Retirement Equity Act of 1984 (``REA''), qualified
retirement plans were required to provide automatic survivor
benefits (1) in the case of a participant who retires under the
plan, in the form of a qualified joint and survivor annuity,
and (2) in the case of a vested participant who dies before the
annuity starting date and who has a surviving spouse, in the
form of a preretirement survivor annuity. A participant
generally is permitted to waive such annuities, provided he or
she obtains the written consent of his or her spouse.
The Tax Reform Act of 1986 repealed the estate tax
exclusion, formerly contained in sections 2039(c) and 2039(d),
for certain interests in qualified plans owned by a
nonparticipant spouse attributable to community property laws
and made certain other changes to conform the transfer tax
treatment of qualified and nonqualified plans.
As a result of these changes made by REA and the Tax
Reform Act of 1986, the transfer tax treatment of married
couples residing in a community property State is unclear where
either spouse is covered by a qualified plan.
House Bill
The House bill clarifies that the marital deduction is
available with respect to a nonparticipant spouse's interest in
an annuity attributable to community property laws where he or
she predeceases the participant spouse. Under the House bill,
the nonparticipant spouse's interest in an annuity arising
under the community property laws of a State that passes to the
surviving participant spouse may qualify for treatment as QTIP
under section 2056(b)(7).
The provision is not intended to create an inference
regarding the treatment under present law of a transfer to a
surviving spouse of the decedent spouse's interest in an
annuity arising under community property laws.
Effective date.--The provision applies to decedents
dying, or waivers, transfers and disclaimers made, after the
date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. The provision is not intended to modify the
result of the Supreme Court's decision in Boggs v. Boggs, 117
S.Ct. 1754 (1997).
15. Treatment under qualified domestic trust rules of forms of
ownership which are not trusts (sec. 1315 of the House bill and
sec. 1111 of the Senate amendment)
Present Law
A marital deduction generally is allowed for estate and
gift tax purposes for the value of property passing to a
spouse. The marital deduction is not available for property
passing to an alien spouse outside a qualified domestic trust
(``QDT'). An estate tax generally is imposed on corpus
distributions from a QDT.
Trusts are not permitted in some countries (e.g., many
civil law countries). 20 As a result, it is not
possible to create a QDT in those countries.
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\20\ Note that in some civil law States (e.g., Louisiana), an
entity similar to a trust, called a usufruct, exists.
---------------------------------------------------------------------------
House Bill
The House bill provides the Treasury Department with
regulatory authority to treat as trusts legal arrangements that
have substantially the same effect as a trust. It is
anticipated that such regulations, if any, would only permit a
marital deduction with respect to non-trust arrangements under
which the U.S. would retain jurisdiction and adequate security
to impose U.S. transfer tax on transfers by the surviving
spouse of the property transferred by the decedent. Possible
arrangements could include the adoption of a bilateral treaty
that provides for the collection of U.S. transfer tax from the
noncitizen surviving spouse or a closing agreement process
under which the surviving spouse waives treaty benefits, allows
the U.S. to retain taxing jurisdiction and provides adequate
security with respect to such transfer taxes.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
16. Opportunity to correct certain failures under section 2032A (sec.
1316 of the House bill and sec. 1112 of the Senate amendment)
Present Law
For estate tax purposes, an executor may elect to value
certain real property used in farming or other closely held
business operations at its current use value rather than its
highest and best use (sec. 2032A). A written agreement signed
by each person with an interest in the property must be filed
with the election.
In 1984, section 2032A was amended to provide that if an
executor makes a timely election that substantially complies
with Treasury regulations, but fails to provide all required
information or the signatures of all persons required to enter
into the agreement, the executor may supply the missing
information within a reasonable period of time (not exceeding
90 days) after notification by the Treasury Department.
Treasury regulations require that a notice of election
and certain information be filed with the Federal estate tax
return (Treas. Reg. sec. 20.2032A-8). The administrative policy
of the Treasury Department is to disallow current use valuation
elections unless the required information is supplied.
House Bill
The House bill extends the procedures allowing subsequent
submission of information to any executor who makes the
election and submits the recapture agreement, without regard to
compliance with the Treasury regulations. Thus, the House bill
allows the current use valuation election if the executor
supplies the required information within a reasonable period of
time (not exceeding 90 days) after notification by the IRS.
During that time period, the House bill also allows the
addition of signatures to a previously filed agreement.
The Committee report on the House bill indicates that the
Treasury Department has taken an unnecessarily restrictive view
of the 1984 amendment to section 2032A and intends no inference
that the Treasury Department lacks the power, under the law in
effect prior to the date of enactment, to correct the situation
addressed by this provision. The House bill intends that, with
respect to technically defective 2032A elections made prior to
the date of enactment, prior law should be applied in a manner
consistent with the provision.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
17. Authority to waive requirement of U.S. trustee for qualified
domestic trusts (sec. 1317 of the House bill and sec. 1113 of
the Senate amendment)
Present Law
In order for a trust to be a QDT, a U.S. trustee must
have the power to approve all corpus distributions from the
trust. In some countries, trusts cannot have any U.S. trustees.
As a result, trusts established in those countries cannot
qualify as a QDT.
House Bill
In order to permit the establishment of a QDT in those
situations where a country prohibits a trust from having a U.S.
trustee, the House bill provides the Treasury Department with
regulatory authority to waive the requirement that a QDT have a
U.S. trustee. It is anticipated that such regulations, if any,
provide an alternative mechanism under which the U.S. would
retain jurisdiction and adequate security to impose U.S.
transfer tax on transfers by the surviving spouse of the
property transferred by the decedent.
Effective date.--The provision applies to decedents dying
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
XIV. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS
A. Excise Tax Simplification Provisions
1. Increase de minimis limit for after-market alterations subject to
heavy truck and luxury automobile excise taxes (sec. 1401 of
the House bill and sec. 1201 of the Senate amendment)
Present Law
An excise tax is imposed on retail sales of truck chassis
and truck bodies suitable for use in a vehicle with a gross
vehicle weight of over 33,000 pounds. The tax is equal to 12
percent of the retail sales price. An excise tax also is
imposed on retail sales of luxury automobiles. The tax
currently is equal to 8 percent of the amount by which the
retail sales price exceeds an inflation-adjusted base. (The
rate is reduced by 1 percentage point per year through 2002,
and the tax is not imposed after 2002.) Anti-abuse rules
prevent the avoidance of these taxes through separate purchases
of major component parts. With certain exceptions, tax at the
rate applicable to the vehicle is imposed on the subsequent
installation of parts and accessories within six months after
purchase of a taxable vehicle. The exceptions include a de
minimis exception for parts and accessories with an aggregate
price that does not exceed $200 (or such other amount as
Treasury may by regulation prescribe).
House Bill
The tax on subsequent installation of parts and
accessories does not apply to parts and accessories with an
aggregate price that does not exceed $1,000. Parts and
accessories installed on a vehicle on or before that date are
taken into account in determining whether the $1,000 threshold
is exceeded. If the aggregate price of the pre-effective date
parts and accessories does not exceed $200, they are not to be
subject to tax unless the aggregate price of all additions
exceeds $1,000.
Effective date.--The increase in the threshold for taxing
after-market additions under the heavy truck and luxury car
excise taxes is effective on January 1, 1998.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Simplification of excise taxes on distilled spirits, wine, and beer
(secs. 1411-1422 of the House bill and secs. 1211-1222 of the
Senate amendment)
Present Law
Imported distilled spirits returned to plant.--Excise tax
that has been paid on domestic distilled spirits is credited or
refunded if the spirits are later returned to bonded premises.
Tax is imposed on imported bottled spirits when they are
withdrawn from customs custody, but the tax is not refunded or
credited if the spirits are later returned to bonded premises.
Cancellation of export bonds.--An exporter that withdraws
distilled spirits from bonded warehouses for export or
transportation to a customs bonded warehouse without the
payment of tax must furnish a bond to cover the withdrawal. The
required bonds are canceled ``on the submission of such
evidence, records, and certification indicating exportation as
the Secretary may by regulations prescribe.''
Location of records of distilled spirits plant.--
Proprietors of distilled spirits plants are required to
maintain records and reports relating to their production,
storage, denaturation, and processing activities on the
premises where the operations covered by the record are carried
on.
Transfers from brewery to distilled spirits plant.--A
distilled spirits plant may receive on its bonded premises beer
to be used in the production of distilled spirits only if the
beer is produced on contiguous brewery premises.
Sign not required for wholesale dealers.--Wholesale
liquor dealers are required to post a sign identifying the firm
as such. Failure to do so may subject the wholesaler dealer to
a penalty.
Refund on returns of merchantable wine.--Excise tax paid
on domestic wine that is returned to bond as unmerchantable is
refunded or credited, and the wine is once again treated as
wine in bond on the premises of a bonded wine cellar.
Increased sugar limits for certain wine.--Natural wines
may be sweetened to correct high acid content. For most wines,
however, sugar cannot constitute more than 35 percent (by
volume) of the combined sugar and juice used to produce the
wine. Up to 60 percent sugar may be used in wine made from
loganberries, currants, and gooseberries. If the amount of
sugar used exceeds the applicable limitation, the wine must be
labeled ``substandard.''
Beer withdrawn for embassy use.--Imported beer to be used
for the family and official use of representatives of foreign
governments or public international organizations may be
withdrawn from customs bonded warehouses without payment of
excise tax. No similar exemption applies to domestic beer
withdrawn from a brewery or entered into a bonded customs
warehouse for the same authorized use.
Beer withdrawn for destruction.--Removals of beer from a
brewery are exempt from tax if the removal is for export,
because the beer is unfit for beverage use, for laboratory
analysis, research, development and testing, for the brewer's
personal or family use, or as supplies forcertain vessels and
aircraft.
Drawback on exported beer.--A domestic producer that
exports beer may recover the tax (receive a ``drawback'') found
to have been paid on the exported beer upon the ``submission of
such evidence, records and certificates indicating
exportation'' required by regulations.
Imported beer transferred in bulk to brewery and imported
wine transferred in bulk to wineries.--Imported beer and wine
are subject to tax when removed from customs custody.
House Bill
Imported distilled spirits returned to plant.--Refunds or
credits of the tax are available for imported bottled spirits
that are returned to distilled spirits plants.
Cancellation of export bonds.--The certification
requirements are relaxed to allow the bonds to be canceled if
there is such proof of exportation as the Secretary may
require.
Location of records of distilled spirits plant.--Records
and reports are permitted to be maintained elsewhere other than
on the plant premises
Transfers from brewery to distilled spirits plant.--Beer
may be brought from any brewery for use in the production of
spirits. Such beer is exempt from excise tax, subject to
Treasury regulations.
Sign not required for wholesale dealers.--The requirement
that a sign be posted is repealed.
Refund on returns of merchantable wine.--A refund or
credit is available in the case of all domestic wine returned
to bond, whether or not unmerchantable.
Increased sugar limits for certain wine.--Up to 60
percent sugar is permitted in any wine made from juice, such as
cranberry or plum juice, with an acid content of 20 or more
parts per thousand.
Beer withdrawn for embassy use.--Subject to Treasury's
regulatory authority, an exemption similar to that currently
available for imported beer is provided for domestic beer.
Beer withdrawn for destruction.--An exemption from tax is
added for removals for destruction, subject to Treasury
regulations.
Drawback on exported beer.--The certification requirement
is relaxed to allow a drawback of tax paid if there is such
proof of exportation as the Secretary may by regulations
require.
Imported beer transferred in bulk to brewery and imported
wine transferred in bulk to wineries.--Subject to Treasury
regulations, beer and wine imported in bulk may be withdrawn
from customs custody and transferred in bulk to a brewery
(beer) or a winery (wine) without payment of tax. The
proprietor of the brewery to which the beer is transferred or
of the winery to which the wine is transferred is liable for
the tax imposed on the withdrawal from customs custody and the
importer is relieved of liability.
Effective date.--The provision to repeal the requirement
that wholesale liquor dealers post a sign outside their place
of business takes effect on the date of enactment. The other
provisions take effect on the first day of the calendar quarter
that begins at least 90 days after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with a modification delaying the effective
date of certain provisions from the first day of the calendar
quarter that begins at least 90 days after the date of
enactment to the first day of the quarter beginning at least
180 days after such date.
3. Authority for Internal Revenue Service to grant exemptions from
excise tax registration requirements (sec. 1431 of the House
bill and sec. 1231 of the Senate amendment)
Present Law
The Code exempts certain types of sales (e.g., sales for
use in further manufacture, sales for export, and sales for use
by a State or local government or a nonprofit educational
organization) from excise taxes imposed on manufacturers and
retailers. These exemptions generally apply only if the seller,
the purchaser, and any person to whom the article is resold by
the purchaser (the second purchaser) are registered with the
Internal Revenue Service. The IRS can waive the registration
requirement for the purchaser and second purchaser in some but
not all cases.
House Bill
The IRS is authorized to waive the registration
requirement for purchasers and second purchasers in all cases.
Effective date.--The provision applies to sales made
pursuant to waivers issued after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Repeal of expired excise tax provisions (sec. 1432 of the House bill
and sec. 1232 of the Senate amendment)
Present Law
The Code includes a provision relating to a temporary
reduction in the tax on piggyback trailers sold before July 18,
1985, and provisions relating to the tax on the removal of hard
minerals from the deep seabed before June 28, 1990.
An excise tax is imposed on the sale or use by the
manufacturer or importer of certain ozone-depleting chemicals
(sec. 4681). The amount of the tax generally is determined by
multiplying the base tax amount applicable for the calendar
year by an ozone-depleting factor assigned to each taxable
chemical. The base tax amount was $5.80 per pound in 1996 and
will increase by 45 cents per pound per year thereafter. The
Code contains provisions for special rates of tax applicable to
years before 1996 (e.g., sec. 4282 (g)(1), (2), (3), and (5)).
House Bill
These provisions are repealed, as ``deadwood''.
Effective date.--The provisions are effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
5. Modifications to excise tax on certain arrows (sec. 1233 of the
Senate amendment)
Present Law
An 11-percent manufacturer's excise tax is imposed on
bows having a draw weight of more than 10 pounds and on arrows
that either are greater than 18 inches in length or are
suitable for use with a taxable bow. The tax is imposed on the
manufacturer's sales price of the completed arrow.
House Bill
No provision.
Senate Amendment
The current excise tax on arrows tax is replaced with a
manufacturer's excise tax on the four component parts of the
arrow: shafts, points, nocks, and vanes. The tax rate is
increased to 12.4 percent of the value of each of these four
components to offset the reduction in aggregate value subjected
to tax compared to present-law valuation of the completed
arrow.
Effective date.--The provision is to be effective for
arrow components sold after September 30, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
6. Modifications to heavy highway vehicle retail excise tax (sec. 1234
of the Senate amendment)
Present Law
A 12-percent retail excise tax is imposed on certain
heavy highway trucks and trailers, and on highway tractors.
Small trucks (those with a gross vehicle weight not over 33,000
pounds) and lighter trailers (those with a gross vehicle weight
not over 26,000 pounds) are exempt from the tax. The tax
applies to the first retail sale of a new or remanufactured
vehicle. The determination under present law of whether a
particular modification to an existing vehicle constitutes
remanufacture (taxable) or a repair (nontaxable) is factual and
generally is based on whether the function of the vehicle is
changed or, in the case of worn vehicles, whether the cost of
the modification exceeds 75 percent of the value of the
modified vehicle.
No tax is imposed on trucks, tractors, and trailers when
they are sold for resale or long-term lease, if the purchaser
is registered with the Treasury Department. In such cases,
purchasers are liable for the tax when the vehicle is sold or
leased. The tax is based on the sales price in the transaction
to which it applies.
House Bill
No provision.
Senate Amendment
The Senate amendment makes two changes to the heavy
vehicle excise tax:
(1) Clarification is provided that the 75-percent-
of-value threshold applies in determining whether
repairs to a wrecked vehicle constitute remanufacture;
and
(2) The registration requirement currently
applicable to certain sales of trucks, tractors, and
trailers for resale is replaced with a certification
requirement.
Effective date.--The provision is effective after
December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
7. Treatment of skydiving flights as noncommercial aviation (sec. 1235
of the Senate amendment)
Present Law
Commercial passenger aviation, or air transportation for
which a fare is charged, is subject to a 10-percent ad valorem
excise tax for the Airport and Airway Trust Fund. Noncommercial
aviation, or air transportation which is not ``for hire,'' is
subject to a fuels tax for the Trust Fund. In the case of
skydiving flights, questions have arisen as to when the flight
is commercial aviation subject to the ticket tax and when it is
noncommercial aviation subject to the fuels tax. In general, if
instruction is offered, the flight is noncommercial aviation.
Otherwise, the flight is treated as commercial aviation. Many
skydiving flights carry both persons receiving instruction and
others not receiving instruction.
House Bill
No provision.
Senate Amendment
The Senate amendment specifies that flights which are
exclusively dedicated to skydiving are taxed as noncommercial
aviation flights, regardless of whether instruction is offered
to any of the passengers.
Effective date.--The provision is effective for flights
beginning after September 30, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
8. Eliminate double taxation of certain aviation fuels sold to
producers by ``fixed base operators'' (sec. 1236 of the Senate
amendment)
Present Law
Section 4091 imposes a tax on the sale of aviation fuel
by any producer (defined to include a wholesale distributor).
Fuel sold at many rural airports is sold by retail dealers who
do not qualify as wholesale distributors. This fuel is
purchased by the retailers tax-paid. In certain instances, fuel
which has been purchased tax-paid by a retailer will be re-sold
to a producer, e.g., to enable the producer to serve one of its
customers at the airport. When this fuel is resold at retail by
the producer, a second tax is imposed. The Code contains no
provision allowing a refund of the first tax in such cases.
House Bill
No provision.
Senate Amendment
The Senate amendment permits a refund of the tax
previously paid on aviation fuel when a registered producer
acquires the fuel.
Effective date.--The provision is effective for fuel sold
after September 30, 1997.
Conference Agreement
The conference agreement follows the Senate amendment,
with a clarification that the provision applies to tax-paid
fuel purchased by registered producers after September 30,
1997.
B. Tax-Exempt Bond Provisions
Overview
Interest on State and local government bonds generally is
excluded from gross income for purposes of the regular
individual and corporate income taxes if the proceeds of the
bonds are used to finance direct activities of these
governmental units (Code sec. 103).
Unlike the interest on governmental bonds, described
above, interest on private activity bonds generally is taxable.
A private activity bond is a bond issued by a State or local
governmental unit acting as a conduit to provide financing for
private parties in a manner violating either (1) a private
business use and payment test or (2) a private loan
restriction. However, interest on private activity bonds is not
taxable if (1) the financed activity is specified in the Code
and (2) at least 95 percent of the net proceeds of the bond
issue is used to finance the specified activity.
Issuers of State and local government bonds must satisfy
numerous other requirements, including arbitrage restrictions
(for all such bonds) and annual State volume limitations (for
most private activity bonds) for the interest on these bonds to
be excluded from gross income.
1. Repeal of $100,000 limitation on unspent proceeds under 1-year
exception from rebate (sec. 1441 of the House bill and sec.
1241 of the Senate amendment)
Present Law
Subject to limited exceptions, arbitrage profits from
investing bond proceeds in investments unrelated to the
governmental purpose of the borrowing must be rebated to the
Federal Government. No rebate is required if the gross proceeds
of an issue are spent for the governmental purpose of the
borrowing within six months after issuance.
This six-month exception is deemed to be satisfied by
issuers of governmental bonds (other than tax and revenue
anticipation notes) and qualified 501(c)(3) bonds if (1) all
proceeds other than an amount not exceeding the lesser of 5
percent or $100,000 are so spent within six months and (2) the
remaining proceeds are spent within one year after the bonds
are issued.
House Bill
Under the House bill, the $100,000 limit on proceeds that
may remain unspent after six months for certain governmental
and qualified 501(c)(3) bonds otherwise exempt from the rebate
requirement is deleted. Thus, if at least 95 percent of the
proceeds of these bonds is spent within six months after their
issuance, and the remainder is spent within one year, the six-
month exception is deemed to be satisfied.
Effective date.--The provision applies to bonds issued
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Exception from rebate for earnings on bona fide debt service fund
under construction bond rules (sec. 1442 of the House bill and
sec. 1242 of the Senate amendment)
Present Law
In general, arbitrage profits from investing bond
proceeds in investments unrelated to the governmental purpose
of the borrowing must be rebated to the Federal Government. An
exception is provided for certain construction bond issues if
the bonds are governmental bonds, qualified 501(c)(3) bonds, or
exempt-facility private activity bonds for governmentally-owned
property.
This exception is satisfied only if the available
construction proceeds of the issue are spent at minimum
specified rates during the 24-month period after the bonds are
issued. The exception does not apply to bond proceeds invested
after the 24-month expenditure period as part of a reasonably
required reserve or replacement fund, a bona fide debt service
fund, or to certain other investments (e.g., sinking funds).
Issuers of these construction bonds also may elect to comply
with a penalty regime in lieu of rebating arbitrage profits if
they fail to satisfy the exception's spending requirements.
House Bill
The House bill exempts earnings on bond proceeds invested
in bona fide debt service funds from the arbitrage rebate
requirement and the penalty requirement of the 24-month
exception if the spending requirements of that exception are
otherwise satisfied.
Effective date.--The provision applies to bonds issued
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Repeal of debt service-based limitation on investment in certain
nonpurpose investments (sec. 1443 of the House bill and sec.
1243 of the Senate amendment)
Present Law
Issuers of all tax-exempt bonds generally are subject to
two sets of restrictions on investment of their bond proceeds
to limit arbitrage profits. The first set requires that tax-
exempt bond proceeds be invested at a yield that is not
materially higher (generally defined as 0.125 percentage
points) than the bond yield (``yield restrictions'').
Exceptions are provided to this restriction for investments
during any of several ``temporary periods'' pending use of the
proceeds and, throughout the term of the issue, for proceeds
invested as part of a reasonably required reserve or
replacement fund or a ``minor'' portion of the issue proceeds.
Except for temporary periods and amounts held pending use
to pay current debt service, present law also limits the amount
of the proceeds of private activity bonds (other than qualified
501(c)(3) bonds) that may be invested at materially higher
yields at any time during a bond year to 150 percent of the
debt service for that bond year. This restriction affects
primarily investments in reasonably required reserve or
replacement funds. Present law further restricts the amount of
proceeds from the sale of bonds that may be invested in these
reserve funds to ten percent of such proceeds.
The second set of restrictions requires generally that
all arbitrage profits earned on investments unrelated to the
governmental purpose of the borrowing be rebated to the Federal
Government (``arbitrage rebate''). Arbitrage profits include
all earnings (in excess of bond yield) derived from the
investment of bond proceeds (and subsequent earnings on any
such earnings).
House Bill
The House bill repeals the 150-percent of debt service
yield restriction.
Effective date.-- The provision applies to bonds issued
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
4. Repeal of expired provisions relating to student loan bonds (sec.
1444 of the House bill and sec. 1244 of the Senate amendment)
Present Law
Present law includes two special exceptions to the
arbitrage rebate and pooled financing temporary period rules
for certain qualified student loan bonds. These exceptions
applied only to bonds issued before January 1, 1989.
House Bill
These special exceptions are deleted as ``deadwood.''
Effective date.--The provision applies to bonds issued
after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
C. Tax Court Procedures
1. Overpayment determinations of Tax Court (sec. 1451 of the House bill
and sec. 1251 of the Senate amendment)
Present Law
The Tax Court may order the refund of an overpayment
determined by the Court, plus interest, if the IRS fails to
refund such overpayment and interest within 120 days after the
Court's decision becomes final. Whether such an order is
appealable is uncertain.
In addition, it is unclear whether the Tax Court has
jurisdiction over the validity or merits of certain credits or
offsets (e.g., providing for collection of student loans, child
support, etc.) made by the IRS that reduce or eliminate the
refund to which the taxpayer was otherwise entitled.
House Bill
The House bill clarifies that an order to refund an
overpayment is appealable in the same manner as a decision of
the Tax Court. The House bill also clarifies that the Tax Court
does not have jurisdiction over the validity or merits of the
credits or offsets that reduce or eliminate the refund to which
the taxpayer was otherwise entitled.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Redetermination of interest pursuant to motion (sec. 1452 of the
House bill and sec. 1252 of the Senate amendment)
Present Law
A taxpayer may seek a redetermination of interest after
certain decisions of the Tax Court have become final by filing
a petition with the Tax Court. It would be beneficial to
taxpayers if a proceeding for a redetermination of interest
supplemented the original deficiency action brought by the
taxpayer to redetermine the deficiency determination of the
IRS. A motion, rather than a petition, is a more appropriate
pleading for relief in these cases.
House Bill
The House bill provides that a taxpayer must file a
``motion'' (rather than a ``petition'') to seek a
redetermination of interest in the Tax Court. The House bill
also clarifies that the Tax Court's jurisdiction to redetermine
the amount of interest under section 7481(c) does not depend on
whether the interest is underpayment interest or overpayment
interest.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. In clarifying the Tax Court's jurisdiction
over interest determinations, the conferees do not intend to
limit any other remedies that taxpayers may currently have with
respect to such determinations, including in particular refund
proceedings relating solely to the amount of interest due.
3. Application of net worth requirement for awards of litigation costs
(sec. 1453 of the House bill and sec. 1253 of the Senate
amendment)
Present Law
Any person who substantially prevails in any action
brought by or against the United States in connection with the
determination, collection, or refund of any tax, interest, or
penalty may be awarded reasonable administrative costs incurred
before the IRS and reasonable litigation costs incurred in
connection with any court proceeding. A person who
substantially prevails must meet certain net worth requirements
to be eligible for an award of administrative or litigation
costs. In general, only an individual whose net worth does not
exceed $2,000,000 is eligible for an award, and only a
corporation or partnership whose net worth does not exceed
$7,000,000 is eligible for an award. (The net worth
determination with respect to a partnership or S corporation
applies to all actions that are in substance partnership
actions or S corporation actions, including unified entity-
level proceedings under sections 6226 or 6228, that are
nominally brought in the name of a partner or a shareholder.)
House Bill
The House bill provides that the net worth limitations
currently applicable to individuals also apply to estates and
trusts. The House bill also provides that individuals who file
a joint tax return shall be treated as one individual for
purposes of computing the net worth limitations. Consequently,
the net worth of both spouses is aggregated for purposes of
this computation. Anexception to this rule is provided in the
case of a spouse otherwise qualifying for innocent spouse relief.
Effective date.--The provision applies to proceedings
commenced after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill with
respect to estates and trusts. The Senate amendment provides
that individuals who file a joint return are treated as
separate individuals (resulting in a net worth limitation of
$4,000,000 for individuals who file a joint return).
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with respect to estates and trusts. The
conference agreement follows the Senate amendment with respect
to individuals.
4. Tax Court jurisdiction for determination of employment status (sec.
1454 of the House bill and sec. 1254 of the Senate amendment)
Present Law
The Tax Court is a court of limited jurisdiction,
established under Article I of the Constitution. The Tax Court
only has the jurisdiction that is expressly conferred on it by
statute (sec. 7442).
House Bill
The House bill provides that, in connection with the
audit of any person, if there is an actual controversy
involving a determination by the IRS as part of an examination
that (1) one or more individuals performing services for that
person are employees of that person or (2) that person is not
entitled to relief under section 530 of the Revenue Act of
1978, the Tax Court would have jurisdiction to determine
whether the IRS is correct. For example, one way the IRS could
make the required determination is through a mechanism similar
to the employment tax early referral procedures. 21
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\21\ See Announcement 96-13 and Announcement 97-52.
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The House bill provides for de novo review (rather than
review of the administrative record). Assessment and collection
of the tax would be suspended while the matter is pending in
the Tax Court. Any determination by the Tax Court would have
the force and effect of a decision of the Tax Court and would
be reviewable as such; accordingly, it would be binding on the
parties. Awards of costs and certain fees (pursuant to sec.
7430) would be available to eligible taxpayers with respect to
Tax Court determinations pursuant to this proposal. The House
bill also provides a number of procedural rules to incorporate
this new jurisdiction within the existing procedures applicable
in the Tax Court.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill, with
technical modifications.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment, with additional technical modifications.
D. Other Provisions
1. Due date for first quarter estimated tax payments by private
foundations (sec. 1461 of the House bill and sec. 1261 of the
Senate amendment)
Present Law
Under section 4940, tax-exempt private foundations
generally are required to pay an excise tax equal to two
percent of their net investment income for the taxable year.
Under section 6655(g)(3), private foundations are required to
pay estimated tax with respect to their excise tax liability
under section 4940 (as well as any unrelated business income
tax (UBIT) liability under section 511).22 Section
6655(c) provides that this estimated tax is payable in
quarterly installments and that, for calendar-year foundations,
the first quarterly installment is due on April 15th. Under
section 6655(I), foundations with taxable years other than the
calendar year must make their quarterly estimated tax payments
no later than the dates in their fiscal years that correspond
to the dates applicable to calendar-year foundations.
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\22\ Generally, the amount of the first quarter payment must be at
least 25 percent of the lesser of (1) the preceding year's tax
liability, as shown on the foundation's Form 990-PF, or (2) 95 percent
of the foundation's current-year tax liability.
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House Bill
The House bill amends section 6655(g)(3) to provide that
a calendar-year foundation's first-quarter estimated tax
payment is due on May 15th (which is the same day that its
annual return, Form 990-PF, for the preceding year is due). As
a result of the operation of present-law section 6655(I),
fiscal-year foundations will be required to make their first-
quarter estimated tax payment no later than the 15th day of the
fifth month of their taxable year.
Effective date.--The provision applies to taxable years
beginning after the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
2. Withholding of Commonwealth income taxes from the wages of Federal
employees (sec. 1462 of the House bill and sec. 1262 of the
Senate amendment)
Present Law
If State law provides generally for the withholding of
State income taxes from the wages of employees in a State, the
Secretary of the Treasury shall (upon the request of the State)
enter into an agreement with the State providing for the
withholding of State income taxes from the wages of Federal
employees in the State. For this purpose, a State is a State,
territory, or possession of the United States. The Court of
Appeals for the Federal Circuit recently held in Romero v.
United States (38 F.3d 1204 (1994)) that Puerto Rico was not
encompassed within this definition; consequently, the court
invalidated an agreement between the Secretary of the Treasury
and Puerto Rico that provided for the withholding of Puerto
Rico income taxes from the wages of Federal employees.
House Bill
The House bill makes any Commonwealth eligible to enter
into an agreement with the Secretary of the Treasury that would
provide for income tax withholding from the wages of Federal
employees.
Effective date.--The provision is effective January 1,
1998.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
3. Certain notices disregarded under provision increasing interest rate
on large corporate underpayments (sec. 1463 of the House bill
and sec. 1263 of the Senate amendment)
Present Law
The interest rate on a large corporate underpayment of
tax is the Federal short-term rate plus five percentage points.
A large corporate underpayment is any underpayment by a
subchapter C corporation of any tax imposed for any taxable
period, if the amount of such underpayment for such period
exceeds $100,000. The large corporate underpayment rate
generally applies to periods beginning 30 days after the
earlier of the date on which the first letter of proposed
deficiency, a statutory notice of deficiency, or a
nondeficiency letter or notice of assessment or proposed
assessment is sent. For this purpose, a letter or notice is
disregarded if the taxpayer makes a payment equal to the amount
shown on the letter or notice within that 30 day period.
House Bill
The House bill provides that, for purposes of determining
the period to which the large corporate underpayment rate
applies, any letter or notice is disregarded if the amount of
the deficiency, proposed deficiency, assessment, or proposed
assessment set forth in the letter or notice is not greater
than $100,000 (determined by not taking into account any
interest, penalties, or additions to tax).
Effective date.--The provision is effective for purposes
of determining interest for periods after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment.
XV. PENSION AND EMPLOYEE BENEFIT PROVISIONS
A. Miscellaneous Provisions Relating to Pensions and Other Benefits
1. Cash or deferred arrangements for irrigation and drainage entities
(sec. 911 of the House bill)
Present Law
Under present law, taxable and tax-exempt employers may
maintain qualified cash or deferred arrangements. State and
local government organizations generally are prohibited from
establishing qualified cash or deferred arrangements (``section
401(k) plans''). This prohibition does not apply to qualified
cash or deferred arrangements adopted by a State or local
government before May 6, 1986.
Mutual irrigation or ditch companies are exempt from tax
if at least 85 percent of the income of the company consists of
amounts collected from members for the sole purpose of meeting
losses and expenses.
House Bill
Under the House bill, mutual irrigation or ditch
companies and districts organized under the laws of a State as
a municipal corporation for the purpose of irrigation, water
conservation or drainage (or a national association of such
organizations) are permitted to maintain qualified cash or
deferred arrangements, even if the company or district is a
State or local government organization.
Effective date.--The provision is effective with respect
to years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
2. Permanent moratorium on application of nondiscrimination rules to
State and local governmental plans (sec. 912 of the House bill
and sec. 1308 of the Senate amendment)
Present Law
Under present law, the rules applicable to governmental
plans require that such plans satisfy certain nondiscrimination
and minimum participation rules. In general, the rules require
that a plan not discriminate in favor of highly compensated
employees with regard to the contribution and benefits provided
under the plan, participation in the plan, coverage under the
plan, and compensation taken into account under the plan.
Nondiscrimination rules apply to all governmental plans,
qualified retirement plans (including cash or deferred
arrangements (sec. 401(k) plans) in effect before May 6, 1986),
and annuity plans (sec. 403(b) plans). Elective deferrals under
section 401(k) plans are required to satisfy a special
nondiscrimination test called the average deferral percentage
(``ADP'') test. Employer matching and after-tax employee
contributions are subject to a similar test called the average
contribution percentage (``ACP'') test.
For purposes of satisfying the nondiscrimination rules,
the Internal Revenue Service has issued several Notices which
extended the effective date for compliance for governmental
plans. Governmental plans will be required to comply with the
nondiscrimination rules beginning with plan years beginning on
or after the later of January 1, 1999, or 90 days after the
opening of the first legislative session beginning on or after
January 1, 1999, of the governing body with authority to amend
the plan, if that body does not meet continuously. For plan
years beginning before the extended effective date,
governmental plans are deemed to satisfy the nondiscrimination
requirements.
House Bill
The House bill provides that State and local governmental
plans are exempt from the nondiscrimination and minimum
participation rules.
Effective date.--Taxable years beginning on or after the
date of enactment. A governmental plan is treated as satisfying
the coverage and nondiscrimination tests for taxable years
beginning before the date of enactment.
Senate Amendment
The Senate amendment is the same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment and clarifies that the exemption from the
nondiscrimination and participation rules includes exemption
from the ACP and ADP tests. The conference agreement provides
that a cash or deferred arrangement under a governmental plan
is treated as a qualified cash or deferred arrangement even
though the ADP test is not in fact satisfied. Thus, for
example, elective contributions made by a government employer
on behalf of an employee are not treated as distributed or made
available to the employee (in accordance with section 402(e)(3)
of the Code).
Effective date.--Same as the House bill and Senate
amendment.
3. Treatment of certain disability payments to public safety employees
(sec. 913 of the House bill and sec. 785 of the Senate
amendment)
Present Law
Under present law, amounts received under a workmen's
compensation act as compensation for personal injuries or
sickness incurred in the course of employment are excluded from
gross income. Compensation received under a workmen's
compensation act by the survivors of a deceased employee also
are excluded from gross income. Nonoccupational death and
disability benefits are not excludable from income as workmen's
compensation benefits.
House Bill
Under the House bill, certain payments made on behalf of
full-time employees of any police or fire department organized
and operated by a State (or any political subdivision, agency,
or instrumentality thereof) are excludable from income. The
House bill applies to payments made on account of heart disease
or hypertension of the employee and that were received in 1989,
1990, 1991 pursuant to a State law as amended on May 19, 1992,
which irrebuttably presumed that heart disease and hypertension
are work-related illnesses, but only for employees separating
from service before July 1, 1992. Claims for refund or credit
for overpayment of tax resulting from the provision may be
filed up to 1 year after the date of enactment, without regard
to the otherwise applicable statute of limitations.
Effective date.--The provision is effective on the date
of enactment.
Senate Amendment
The Senate amendment is the same as the House bill,
except that the provision applies to amounts payable under a
State law (as in existence on July 1, 1992) which irrebuttably
presumed that heart disease and hypertension are work-related
illnesses, but only for employees separating from service
before such date.
Effective date.--Same as the House bill.
Conference Agreement
The conference agreement follows the House bill.
4. Portability of permissive service credit under governmental pension
plans (sec. 914 of the House bill)
Present Law
Under present law, limits are imposed on the
contributions and benefits under qualified pension plans (Code
sec. 415). Certain special rules apply in the case of State and
local governmental plans.
In the case of a defined contribution plan, the limit on
annual additions is the lesser of $30,000 or 25 percent of
compensation. Annual additions include employer contributions,
as well as after-tax employee contributions. In the case of a
defined benefit pension plan, the limit on the annual
retirement benefit is the lesser of (1) 100 percent of
compensation or (2) $125,000 (indexed for inflation). The 100
percent of compensation limitation does not apply in the case
of State and local governmental pension plans.
Amounts contributed by employees to a State or local
governmental plan are treated as made by the employer if the
employer ``picks up'' the contribution.
House Bill
Under the House bill, in applying the defined benefit
pension plan limit, the annual benefit under a State or local
governmental plan includes the accrued benefit derived from
contributions to purchase permissive service credit. Such
contributions are not taken into account in determining annual
additions.
Permissive service credit means credit for a period of
service recognized by the governmental plan if the employee
contributes to the plan an amount (as determined by the plan)
which does not exceed the amount necessary to fund the accrued
benefit attributable to such period of service.
The House bill does not affect the treatment of ``pick
up'' contributions.
Effective date.--The provision is effective with respect
to years beginning after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with
modifications. Under the conference agreement, contributions by
a participant in a State or local governmental plan to purchase
permissive service credits are subject to one of two limits.
Either (1) the accrued benefit derived from all contributions
to purchase permissive service credit must be taken into
account in determining whether the defined benefit pension plan
limit is satisfied, or (2) all such contributions must be taken
into account in determining whether the $30,000 limit on annual
additions is met for the year (taking into account any other
annual additions of the participant).Under the first
alternative, a plan will not fail to satisfy the reduced defined
benefit pension plan limit that applies in the case of early retirement
due to the accrued benefit derived from the purchase of permissive
service credits. These limits may be applied on a participant-by-
participant basis. That is, contributions to purchase permissive
service credits by all participants in the same plan do not have to
satisfy the same limit.
Under the conference agreement, permissive service credit
is defined as under the House bill. Thus, it is credit for a
period of service that is recognized by the governmental plan
only if the employee voluntarily contributes to the plan an
amount (as determined by the plan) which does not exceed the
amount necessary to fund the benefit attributable to the period
of service and which is in addition to the regular employee
contributions, if any, under the plan. Section 415 is violated
if more than 5 years of permissive service credit is purchased
for ``nonqualified service''. In addition, section 415 is
violated if nonqualified service is taken into account for an
employee who has less than 5 years of participation under the
plan. Nonqualified service is service other than service (1) as
a Federal, State, or local government employee, (2) as an
employee of an association representing Federal, State or local
government employees, (3) as an employee of an educational
institution which provides elementary or secondary education,
or (4) for military service. Service under (1), (2) or (3) is
not qualified if it enables a participant to receive a
retirement benefit for the same service under more than one
plan.
The conference agreement provides that in the case of any
repayment of contributions and earnings to a governmental plan
with respect to an amount previously refunded upon a forfeiture
of service credit under the plan (or another plan maintained by
a State or local government employer within the same State) any
such repayment shall not be taken into account for purposes of
section 415 and service credit obtained as a result of the
repayment shall not be considered permissive service credit.
The provision is not intended to affect the application
of ``pick up'' contributions to purchase permissive service
credit or the treatment of pick up contributions under section
415. The provision does not apply to purchases of service
credit for qualified military service under the rules relating
to veterans' reemployment rights (sec. 414(u)).
Effective date.--In general, the conference agreement is
effective with respect to contributions to purchase permissive
service credits made in years beginning after December 31,
1997.
The conference agreement provides a transition rule for
plans that provided for the purchase of permissive service
credit prior to enactment of this Act. Under this rule, the
defined contribution limits will not reduce the amount of
permissive service credit of an eligible participant allowed
under the terms of the plan as in effect on the date of
enactment. For this purpose an eligible participant is an
individual who first became a participant in the plan before
the first plan year beginning after the last day of the
calendar year in which the next regular session (following the
date of the enactment of this Act) of the governing body with
authority to amend the plan ends.
5. Gratuitous transfers for the benefit of employees (sec. 915 of the
House bill)
Present Law
An employee stock ownership plan (``ESOP'') is a
qualified stock bonus plan or a combination stock bonus and
money purchase pension plan under which employer securities are
held for the benefit of employees.
A deduction is allowed for Federal estate tax purposes
for transfers by a decedent to charitable, religious,
scientific, etc. organizations. In the case of a transfer of a
remainder interest to a charity, the remainder interest must be
in a charitable remainder trust. A charitable remainder trust
generally is a trust that is required to pay, no less often
than annually, a fixed dollar amount (charitable remainder
annuity trust) or a fixed percentage of the fair market value
of the trust's assets determined at least annually (charitable
remainder unitrust) to noncharitable beneficiaries, and the
remainder of the trust (i.e., after termination of the annuity
or unitrust amounts) to a charitable, religious, scientific,
etc. organization.
House Bill
The House bill permits certain limited transfers of
qualified employer securities by charitable remainder trusts to
ESOPs without adversely affecting the status of the charitable
remainder trusts. As a result, the bill provides that a
qualified gratuitous transfer of employer securities to an ESOP
is deductible from the gross estate of a decedent under Code
section 2055 to the extent of the present value of the
remainder interest. In addition, an ESOP will not fail to be a
qualified plan because it complies with the requirements with
respect to a qualified gratuitous transfer.
In order for a transfer of securities to be a qualified
gratuitous transfer, a number of requirements must be
satisfied, including the following: (1) the securities
transferred to the ESOP must previously have passed from the
decedent to a charitable remainder trust; (2) at the time of
the transfer to the ESOP, family members of the decedent own
(directly or indirectly) no more than 10 percent of the value
of the outstanding stock of the company; (3) immediately after
the transfer to the ESOP, the ESOP owns at least 60 percent of
the value of outstanding stock of the company; and (4) the plan
meets certain requirements. The provision applies in cases in
which the ESOPs was in existence on August 1, 1996 and the
decedent dies on or before December 31, 1998.
Effective date.--The provision is effective with respect
to transfers to an ESOP after the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill.
6. Treatment of certain transportation on noncommercially operated
aircraft as a fringe benefit (sec. 916 of the House bill)
Present Law
Under present law, the value of an employer-provided
flight taken for personal purposes is generally includible in
income. However, under a special rule in regulations, the value
of a personal flight is deemed to be zero (and, therefore,
there is no income inclusion) if at least 50 percent of the
regular passenger seating capacity of the aircraft is occupied
by individuals whose flights are primarily for the employer's
business (and therefore, excludable from income).
House Bill
Under the House bill, the value of air transportation for
personal purposes is excludable from income if the flight is
made in the ordinary course of the trade or business of an
employer and the flight would have been made whether or not the
employee was transported on the flight, and the employer incurs
no substantial additional cost (including foregone revenue) in
providing the flight to the employee.
Effective date.--The provision is effective for
transportation services provided after December 31, 1997.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
7. Clarification of certain rules relating to ESOPs of S corporations
(sec. 918 of the House bill and sec. 1309 of the Senate
amendment)
Present Law
Under present law, an S corporation can have no more than
75 shareholders. For taxable years beginning after December 31,
1997, certain tax-exempt organizations, including employee
stock ownership plans (``ESOPs'') can be a shareholder of an S
corporation.
ESOPs are generally required to make distributions in the
form of employer securities. If the employer securities are not
readily tradable, the employee has a right to require the
employer to buy the securities. In the case of an employer
whose bylaws or charter restricts ownership of substantially
all employer securities to employees or a pension plan, the
plan may provide that benefits are distributed in the form of
cash. Such a plan may distribute employer securities, if the
employee has a right to require the employer to purchase the
securities.
ESOPs are subject to certain prohibited transaction rules
under the Internal Revenue Code and title I of the Employee
Retirement Income Security Act (``ERISA'') which are designed
to prohibit certain transactions between the plan and certain
persons close to the plan. A number of statutory exceptions are
provided to the prohibited transaction rules. These statutory
exceptions do not apply to any transaction in which a plan
(directly or indirectly) (1) lends any part of the assets of
the plan to, (2) pays any compensation for personal services
rendered to the plan to, or (3) acquires for the plan any
property from or sells any property to a shareholder employee
of an S corporation, a member of the family of such a
shareholder employee, or a corporation controlled by the
shareholder employee. An administrative exception from the
prohibited transactions rules may be obtained from the
Secretary of Labor, even if a statutory exception does not
apply.
House Bill
The House bill provides that ESOPs of S corporations may
distribute cash to plan participants as long as the employee
has a right to require the employer to purchase employer
securities (as under the present-law rules). In addition, the
House bill extends the Code's statutory exceptions to certain
prohibited transactions rules to shareholder employees of S
corporations.
Effective date.--The provision is effective for taxable
years beginning after December 31, 1997.
Senate Amendment
The Senate amendment is the same as the House bill with
respect to the provision that permits ESOPs of S corporations
to distribute stock in certain cases.
The Senate amendment provides that the sale of stock by a
shareholder employee of an S corporation is not a prohibited
transaction under the Code or ERISA.
Effective date.--Same as the House bill.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment with respect to the provision permitting ESOPs
maintained by S corporations to distribute employer securities
in certain circumstances.
The conference agreement follows the Senate amendment
with respect to the provision relating to prohibited
transaction rules, as modified. Under the conference agreement,
the statutory exceptions do not fail to apply merely because a
transaction involves the sale of employer securities to an ESOP
maintained by an S corporation by a shareholder employee, a
family member of the shareholder employee, or a corporation
controlled by the shareholder employee. Thus, the statutory
exemptions for such a transaction (including the exemption for
a loan to the ESOP to acquire employer securities in connection
with such a sale or a guarantee of such a loan) apply.
Effective date.--Same as the House bill and the Senate
amendment.
8. Repeal application of UBIT to ESOPs of S corporations (sec. 716 of
the Senate amendment)
Present Law
Under present law, for taxable years beginning after
December 31, 1997, certain tax-exempt organizations, including
employee stock ownership plans (``ESOPs'') can be a shareholder
of an S corporation. Items of income or loss of the S
corporation will flow through to qualified tax-exempt
shareholders as unrelated business taxable income (``UBTI''),
regardless of the source of the income.
House Bill
No provision.
Senate Amendment
The Senate amendment repeals the provision treating items
of income or loss of an S corporation as unrelated business
taxable income in the case of an employee stock ownership plan
that is an S corporation shareholder.
Effective date.--Taxable years beginning after December
31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment,
and clarifies that the repeal of the provision treating items
of income or loss of an S corporation as unrelated business
taxable income applies only with respect to employer securities
held by an employee stock ownership plan (as defined in section
4975(e)(7) of the Code) maintained by an S corporation.
9. Treatment of multiemployer plans under section 415 (sec. 711 of the
Senate amendment)
Present Law
Present law imposes limits on contributions and benefits
under qualified plans based on the type of plan. In the case of
defined benefit pension plans, the limit on the annual
retirement benefit is the lesser of (1) 100 percent of
compensation or (2) $125,000 (indexed for inflation).
House Bill
No provision.
Senate Amendment
The Senate amendment eliminates the application of the
100 percent of compensation limitation for multiemployer
defined benefit pension plans. Such plans would only be subject
to the dollar limitation.
Effective date.--The provision is effective for years
beginning after December 31, 1997.
Conference Agreement
The conference agreement does not include the Senate
amendment.
10. Modification of partial termination rules (sec. 712 of the Senate
amendment)
Present Law
Under the Internal Revenue Code, pension plan benefits
are required to become fully vested upon termination or partial
termination of the plan. The plan document is required to
contain a provision reflecting this rule. Under section 552 of
the Deficit Reduction Act of 1984 (``DEFRA''), for purposes of
this rule, a partial termination is treated as not occurring if
(1) the partial termination is a result of a decline in plan
participation which occurs by reason of the completion of the
Trans-Alaska Oil Pipeline construction project and occurred
after December 31, 1975, and before January 1, 1980, with
respect to participants employed in Alaska; (2) no
discrimination occurred with respect to the partial
termination; and (3) it is established to the satisfaction of
the Secretary of the Treasury that the benefits of the
provision will not accrue to the employers under the plan.
House Bill
No provision.
Senate Amendment
The Senate amendment clarifies that section 552 of DEFRA
applies for the Code, any other provision of law, and any plan
or trust provision.
Effective date.--The provision is effective as if
included in section 552 of DEFRA.
Conference Agreement
The conference agreement does not include the Senate
amendment.
11. Increase in full funding limit (sec. 713 of the Senate amendment)
Present Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements. In addition, there is
a maximum limit on contributions that can be made to a plan,
called the full funding limit. The full funding limit is the
lesser of a plan's accrued liability and 150 percent of current
liability. In general, current liability is all liabilities to
plan participants and beneficiaries. Current liability
represents benefits accrued to date, whereas the accrued
liability full funding limit is based on projected benefits.
Under IRS rules, amounts that cannot be contributed because of
the current liability full funding limit are amortized over 10
years.
House Bill
No provision.
Senate Amendment
The Senate amendment increases the 150-percent of full
funding limit as follows: 155 percent for plan years beginning
in 1999 or 2000, 160 percent for plan years beginning in 2001
or 2002, 165 percent for plan years beginning in 2003 and 2004,
and 170 percent for plan years beginning in 2005 and
thereafter.
In addition, under the provision, amounts that cannot be
contributed due to the current liability full funding limit are
amortized over 20 years. Amounts that could not be contributed
because of such full funding limit and that have not been
amortized as of the last day of the plan year beginning in 1998
are amortized over this 20-year period.
Effective date.--Plan years beginning after December 31,
1998.
Conference Agreement
The conference agreement follows the Senate amendment,
with the modification that, with respect to amortization bases
remaining at the end of the 1998 plan year, the 20-year
amortization period is reduced by the number of years since the
amortization base had been established. The conference
agreement also clarifies that no amortization is required with
respect to funding methods that do not provide for amortization
bases.
12. Spousal consent required for distributions from section 401(k)
plans (sec. 714 of the Senate amendment)
Present Law
Under present law, pension plans that provide automatic
survivor benefits (i.e., joint and survivor annuities and
preretirement survivor annuities) require spousal consent to
the payment of a participant's benefit in a form other than a
survivor annuity. A qualified cash or deferred arrangement (a
``section 401(k) plan'') is not subject to the automatic
survivor benefit rules if the plan provides that the spouse of
a participant is the beneficiary of the participant's entire
account under the plan, the participant's benefit is not paid
in the form of an annuity, and the participant's account does
not include amounts transferred from another plan that was
subject to the automatic survivor benefit rules. In general,
spousal consent is not required for an involuntary cash-out of
a participant's benefit or distributions made to satisfy the
minimum distribution rules.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that written spousal
consent is required for all distributions, including plan
loans, from plans containing a qualified cash or deferred
arrangement. As under present law, spousal consent is not
required for an involuntary cash-out or a participant's benefit
or for the payment of distributions required under the minimum
distribution rules. If spousal consent is not obtained, the
benefit must be distributed in equal periodic payments over the
life (or life expectancy) of the participant, the lives (or
life expectancies) of the participant and beneficiary, or over
a period of 10 years or more. A plan which complies with the
spousal consent requirement will not be treated as failing to
satisfy the anti-cutback rules related to optional forms of
benefit.
Effective date.--The provision is effective for plan
years beginning after December 31, 1998.
Conference Agreement
The conference agreement does not include the Senate
amendment.
13. Contributions on behalf of a minister to a church plan (sec. 715 of
the Senate amendment)
Present Law
Under present law, contributions made to retirement plans
by ministers who are self-employed are deductible to the extent
such contributions do not exceed certain limitations applicable
to retirement plans. These limitations include the limit on
elective deferrals, the exclusion allowance, and the limit on
annual additions to a retirement plan.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that in the case of a
contribution made on behalf of a minister who is self-employed
to a church plan, the contribution is excludable from the
income of the minister to the extent that the contribution
would be excludable if the minister were an employee of a
church and the contribution were made to the plan.
Effective date.--The provision is effective for years
beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
The provision does not alter present law under which amounts
contributed for a minister in connection with section 403(b),
either by the minister's actual employer or by any church or
convention or association of churches that is treated as the
minister's employer under section 414(e), are excluded from the
minister's income, and amounts contributed in accordance with
section 403(b) by the minister (whether the minister is an
employee or is self employed) are deductible by the minister as
provided in section 404 taking into account the other special
rules of section 414(e).
14. Exclusion of ministers from discrimination testing of certain non-
church retirement plans (sec. 715 of the Senate amendment)
Present Law
Under present law, ministers who are employed by an
organization other than a church are treated as if employed by
the church and may participate in the retirement plan sponsored
by the church. If the organization also sponsors a retirement
plan, such plan does not have to include the ministers as
employees for purposes of satisfying the nondiscrimination
rules applicable to qualified plans provided the organization
is not eligible to participate in the church plan.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that if a minister is
employed by an organization other than a church and the
organization is not otherwise participating in the church plan,
then the minister does not have to be included as an employee
under the retirement plan of the organization for purposes of
the nondiscrimination rules.
Effective date.--The provision is effective for years
beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
15. Diversification in section 401(k) plan investments (sec. 717 of the
Senate amendment)
Present Law
The Employee Retirement Income Security Act of 1974, as
amended (``ERISA'') prohibits certain employee benefit plans
from investing more than 10 percent of the plan's assets in the
securities and real property of the employer who sponsors the
plan. The 10-percent limitation does not apply to ``eligible
individual account plans'' that specifically authorize such
investments. Generally, eligible individual account plans are
defined contribution plans, including plans containing a cash
or deferred arrangement (``401(k) plans''). The assets of such
plans may be invested in employer securities and real property
without regard to the 10-percent limitation.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that the term ``eligible
individual account plan'' does not include the portion of a
plan that consists of elective deferrals (and earnings on the
elective deferrals) made under section 401(k) if elective
deferrals equal to more than 1 percent of a participant's
compensation are required to be invested in employer securities
at the direction of a person other than the participant. Such
portion of the plan is treated as a separate plan subject to
the 10-percent limitation on investment in employer securities
and real property.
The Senate amendment does not apply to an individual
account plan if the value of the assets of all individual
account plans maintained by the employer does not exceed 10
percent of the value of the assets of all pension plans
maintained by the employer. The Senate amendment does not apply
to an employee stock ownership plan as defined in sections
409(a) and 4975(e)(7) of the Internal Revenue Code.
Effective date.--The provision is effective with respect
to employer securities and employer real property acquired
after the beginning of the first plan year beginning after the
90th day after the date of enactment. The provision does not
apply to employer securities and real property acquired
pursuant to a binding written contract to acquire such
securities or real property in effect on the date of enactment
and at all times thereafter.
Conference Agreement
The conference agreement follows the Senate amendment,
with modifications. The conference agreement clarifies that the
provision applies if elective deferrals equal to more than 1
percent of an employee's eligible compensation are required to
be invested in employer securities and employer real property.
Eligible compensation is compensation that is eligible to be
deferred. As under the Senate amendment, if the 1 percent
threshold is exceeded, then the portion of the plan that
consists of elective deferrals (and earnings thereon) is still
treated as an individual account plan as long as elective
deferrals (and earnings thereon) are not required to be
invested in employer securities and employer real property.
The conference agreement provides that multiemployer
plans are not taken into account in determining whether the
value of the assets of all individual account plans maintained
by the employer does not exceed 10 percent of the value of the
assets of all pension plans maintained by the employer. The
conference agreement provides that the provision does not apply
to an employee stock ownership plan as defined in section
4975(e)(7) of the Internal Revenue Code.
Effective date.--Under the conference agreement, the
provision is effective with respect to elective deferrals in
plan years beginning after December 31, 1998 (and earnings
thereon). The provision does not apply with respect to earnings
on elective deferrals for years beginning before January 1,
1999.
16. Removal of dollar limitation on benefit payments from a defined
benefit plan for police and fire employees (sec. 786 of the
Senate amendment)
Present Law
Under present law, limits are imposed on the
contributions and benefits under qualified pension plans.
Certain special rules apply in the case of State and local
governmental plans.
In the case of a defined benefit pension plan, the limit
on the annual retirement benefit is the lesser of (1) 100
percent of compensation or (2) $125,000 (for 1997, indexed for
inflation). The 100 percent of compensation limitation does not
apply in the case of State and local governmental pension
plans. In general, the dollar limit is reduced if benefits
begin before social security retirement age and increased if
benefits begin after social security retirement age. In the
case of State and local government plans, the dollar limit is
not reduced unless benefits begin before age 62 and in any case
is not less than $75,000, and the dollar limit is increased if
benefits begin after age 65. In the case of certain police and
fire department employees, the dollar limit cannot be reduced
below $50,000 (indexed), regardless of the age at which
benefits commence.1
---------------------------------------------------------------------------
\1\ This special rule applies to participants (1) in a defined
benefit plan of a State or local government plan, and (2) with respect
to whom the period of service taken into account in determining the
amount of the benefit under such plan includes at least 15 years of
service of the participant as (a) a full-time employee of a police or
fire department organized by a State or political subdivision to
provide police protection, firefighting services, or emergency medical
services or (b) as a member of the Armed Services of the United States.
---------------------------------------------------------------------------
House Bill
No provision.
Senate Amendment
The dollar limit on defined benefit plans does not apply
to individuals who receive the special rule for certain police
and fire department employees under present law.
Effective date.--Years beginning after December 31, 1996.
Conference Agreement
The conference agreement follows the Senate amendment,
with the clarification that the exception from the dollar limit
for police and fire department employees only applies to the
reduction for early retirement benefits. Thus, the defined
benefit plan dollar limit continues to apply, but is not
reduced in the case of early retirement. As under present law,
the dollar limit is increased for such employees if benefits
begin after age 65.
Effective date.--Same as the Senate amendment.
17. Church plan exception to prohibition on discrimination against
individuals based on health status
Present Law
Under the Health Insurance Portability and Accountability
Act (``HIPAA''), group health plans generally may not establish
rules for eligibility based on any of the following factors
relating to an individual or a dependent of the individual: (1)
health status, (2) medical condition, (3) claims experience,
(4) receipt of health care, (5) medical history, (6) genetic
information, (7) evidence of insurability, or (8) disability.
In addition, a group health plan may not charge an individual a
greater premium based on any of such factors.
A excise tax is imposed on the failure of a group plan to
satisfy the nondiscriminationrule. In general, the excise tax
is imposed on the employer sponsoring the plan and is equal to $100 per
day per individual as long as the plan is not in compliance.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
The conference agreement provides that certain church
plans are not treated as violating the nondiscrimination
requirement merely because the plan requires evidence of good
health in order for an individual to enroll in the plan for (1)
individuals who are employees of employers with 10 or fewer and
for self-employed individuals or (2) any individual who enrolls
after the first 90 days of eligibility under the plan. The
provision applies to a church plan for a year if the plan
included such provisions requiring evidence of good health on
July 15, 1997, and at all times thereafter before the beginning
of the year.
Effective date.--The provision is effective as if
included in HIPAA.
18. Newborns' and mothers' health protection; mental health parity
Present Law
The Newborns' and Mothers' Health Protection Act of 1996
amended the Employee Retirement Income Security Act (``ERISA'')
and the Public Health Service Act to impose certain
requirements on group health plans with respect to coverage of
newborns and mothers, including a requirement that a group
health plan cannot restrict benefits for a hospital stay in
connection with childbirth for the mother or newborn to less
than 48 hours following a normal vaginal delivery or less than
96 hours following a cesarean section. These provisions are
effective with respect to plan years beginning on or after
January 1, 1998.
The Mental Health Parity Act of 1996 amended ERISA and
the Public Health Service Act to provide that group health
plans that provide both medical and surgical benefits and
mental health benefits cannot impose limits on mental health
benefits that are not imposed on substantially all medical and
surgical benefits. The provisions of the Mental Health Parity
Act are effective with respect to plan years beginning on or
after January 1, 1998, but do not apply to benefits for
services furnished on or after September 30, 2001.
The Internal Revenue Code requires that group health
plans meet certain requirements with respect to limitations on
exclusions of preexisting conditions and that group health
plans not discriminate against individuals based on health
status. An excise tax of $100 per day during the period of
noncompliance is imposed on the employer sponsoring the plan if
the plan fails to meet these requirements. The maximum tax that
can be imposed during a taxable year cannot exceed the lesser
of 10 percent of the employer's group health plan expenses for
the prior year or $500,000. No tax is imposed if the Secretary
determines that the employer did not know, and exercising
reasonable diligence would not have known, that the failure
existed.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
The conference agreement incorporates into the Internal
Revenue Code the provisions of the Newborns' and Mothers'
Health Protection Act of 1996 and the Mental Health Parity Act
of 1996 relating to group health plans. Failures to comply with
such provisions are subject to the present-law excise tax
applicable to failures to comply with present-law group health
plan requirements.
Effective date.--The provisions are effective with
respect to plan years beginning on or after January 1, 1998.
B. Pension Simplification Provisions
1. Matching contributions of self-employed individuals not treated as
elective deferrals (sec. 1301 of the Senate amendment)
Present Law
A qualified cash or deferred arrangement (a ``section
401(k) plan'') is a type of tax-qualified pension plan under
which employees can elect to make pre-tax contributions. An
employee's annual elective contributions are subject to a
dollar limit ($9,500 for 1997). Employers may make matching
contributions based on employees' elective contributions. In
the case of employees, such matching contributions are not
subject to the $9,500 limit on elective contributions. Elective
contributions are subject to a special nondiscrimination test
called the average deferral percentage (``ADP'') test. Matching
contributions are subject to a similar nondiscrimination test
called the average contributions percentage (``ACP'') test. The
employer may elect to treat certain matching contributions as
elective contributions for purposes of the ACP test.
Under present law, matching contributions made for a
self-employed individual are generally treated as additional
elective contributions by the self-employed individual who
receives the matching contribution. Accordingly, matching
contributions for a self-employed individual are subject to the
dollar limit on elective contributions (along with the
individual's other elective deferrals) and are subject to the
ACP test.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that matching contributions
for self-employed individuals are treated the same as matching
contributions for employees, i.e., they are not treated as
elective contributions and are not subject to the elective
contribution limits.
Effective date.--The provision is effective for years
beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment,
and clarifies that the provision does not apply to qualified
matching contributions that are treated as elective
contributions for purposes of satisfying the ADP test.
Effective date.--Same as the Senate amendment, except
that the conference agreement provides that the provision is
effective for years beginning after December 31, 1996, in the
case of SIMPLE retirement plans.
2. Contributions to IRAs through payroll deductions (sec. 1302 of the
Senate amendment)
Present Law
Under present law, employer involvement in the
establishment or maintenance of individual retirement
arrangements (``IRAs'') of its employees can result in the
employer being considered to maintain a retirement plan for
purposes of title I of the Employee Retirement Income Security
Act of 1974, as amended (``ERISA''), thus subjecting the
employer to ERISA's fiduciary rules.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that an employer that
facilitates IRA contributions by its employees by establishing
a system under which employees, through employer payroll
deductions, may make contributions to IRAs will not be
considered to sponsor a retirement plan subject to ERISA. Under
the system, employees would be required to provide their
employer with a contribution certificate which establishes the
IRA and specifies the contribution amount to be deducted from
the employee's wages and remitted to the employee's IRA. As
under present law, the amount contributed through payroll
deduction would be includible in the employee's gross income
and wages for employment tax purposes, and deductible by the
employee in accordance with the rules relating to IRAs.
The provision does not apply to an employee employed by
an employer who maintains a tax-qualified retirement plan.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 1997.
Conference Agreement
The conference agreement does not include the Senate
amendment. The conference agreement provides that employers
that choose not to sponsor a retirement plan should be
encouraged to set up a payroll deduction system to help
employees save for retirement by making payroll deduction
contributions to their IRAs. The Secretary of Treasury is
encouraged to continue his efforts to publicize the
availability of these payroll deduction IRAs.
3. Plans not disqualified merely by accepting rollover contributions
(sec. 1303 of the Senate amendment)
Present Law
Under present law, a qualified retirement plan that
accepts rollover contributions from other plans will not be
disqualified because the plan making the distribution is, in
fact, not qualified at the time of the distribution, if, prior
to accepting the rollover, the receiving plan reasonably
concluded that the distributing plan was qualified. The
receiving plan can reasonably conclude that the distributing
plan was qualified if, for example, prior to accepting the
rollover, the distributing plan provided a statement that the
distributing plan had a favorable determination letter issued
by the Internal Revenue Service (``IRS''). The receiving plan
is not required to verify this information.
House Bill
No provision.
Senate Amendment
The Senate amendment clarifies the circumstances under
which a qualified plan could accept rollover contributions
without jeopardizing its qualified status. Under the provision,
if the trustee of the plan making the distribution verifies
that the distributing plan is intended to be a qualified plan,
the plan receiving the rollover will not be disqualified if the
distributing plan was not in fact a qualified plan.
Effective date.--The Senate amendment is effective for
rollover contributions made after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment, as
modified. Under the conference agreement, the Secretary of the
Treasury is directed to clarify that, under its regulations
protecting plans from disqualification because they receive
invalid rollover contributions, it is not necessary for a
distributing plan to have a determination letter in order for
the administrator of the receiving plan to reasonably conclude
that a contribution is a valid rollover.
4. Modification of prohibition on assignment or alienation (sec. 1304
of the Senate amendment)
Present Law
Under present law, amounts held in a qualified retirement
plan for the benefit of a participant are not, except in very
limited circumstances, assignable or available to personal
creditors of the participant. A plan may permit a participant,
at such time as benefits under the plan are in pay status, to
make a voluntary revocable assignment of an amount not in
excess of 10-percent of any benefit payment, provided the
purpose is not to defray plan administration costs. In
addition, a plan may comply with a qualified domestic relations
order issued by a state court requiring benefit pay-
ments to former spouses or other ``alternate payees'' even if
the participant is not in pay status.
There is no specific exception from the Employee
Retirement Income Security Act of 1974, as amended (``ERISA'')
or the Internal Revenue Code which would permit the offset of a
participant's benefit against the amount owed to a plan by the
participant as a result of a breach of fiduciary duty to the
plan or criminality involving the plan. Courts have been
divided in their interpretation of the prohibition on
assignment or alienation in these cases. Some courts have ruled
that there is no exception in ERISA for the offset of a
participant's benefit to make a plan whole in the case of a
fiduciary breach. Other courts have reached a different result
and permitted an offset of a participant's benefit for breach
of fiduciary duties.
House Bill
No provision.
Senate Amendment
The Senate amendment permits a participant's benefit in a
qualified plan to be reduced to satisfy liabilities of the
participant to the plan due to (1) the participant is being
convicted of committing a crime involving the plan, (2) a civil
judgment (or consent order or decree) entered by a court in an
action brought in connection with a violation of the fiduciary
provisions of title I of ERISA, or (3) a settlement agreement
between the Secretary of Labor or the Pension Benefit Guaranty
Corporation and the participant in connection with a violation
of the fiduciary provisions of ERISA. The court order
establishing such liability must require that the participant's
benefit in the plan be applied to satisfy the liability. If the
participant is married at the time his or her benefit under the
plan is offset to satisfy the liability, spousal consent to
such offset would be required unless the spouse is also
required to pay an amount to the plan in the judgment, order,
decree or settlement or the judgment, order, decree or
settlement provides a 50-percent survivor annuity for the
spouse.
Effective date.--The Senate amendment is effective for
judgments, orders, and decrees issued, and settlement
agreements entered into, on or after the date of enactment.
Conference Agreement
The conference agreement follows the Senate amendment.
The conference agreement clarifies that an offset is includible
in income on the date of the offset.
5. Elimination of paperwork burdens on plans (sec. 1305 of the Senate
amendment)
Present Law
Under present law, employers are required to prepare
summary plan descriptions of employee benefit plans (``SPDs''),
and summaries of material modifications to such plans
(``SMMs''). The SPDs and SMMs generally provide information
concerning the ben-
efits provided by the plan and the participants' rights and
obligations under the plan. The SPDs and SMMs must be furnished
to plan participants and beneficiaries and filed with the
Secretary of Labor.
House Bill
No provision.
Senate Amendment
The Senate amendment eliminates the requirement that SPDs
and SMMs be filed with the Secretary of Labor. Employers would
be required to furnish these documents to the Secretary of
Labor upon request. A civil penalty could be imposed by the
Secretary of Labor on the plan administrator for failure to
comply with such requests. The penalty would be up to $100 per
day of failure, up to a maximum of $1,000 per request. No
penalty would be imposed if the failure was due to matters
reasonably outside the control of the plan administrator.
Effective date.--The provision is effective on the date
of enactment.
Conference Agreement
The conference agreement follows the Senate amendment.
6. Modification of section 403(b) exclusion allowance to conform to
section 415 modifications (sec. 1306 of the Senate amendment)
Present Law
Under present law, annual contributions to a section
403(b) annuity cannot exceed the exclusion allowance. In
general, the exclusion allowance for a taxable year is the
excess, if any, of (1) 20 percent of the employee's includible
compensation multiplied by his or her years of service, over
(2) the aggregate employer contributions for an annuity
excludable for any prior taxable years.
Alternatively, an employee may elect to have the
exclusion allowance determined under the rules relating to tax-
qualified defined contribution plans (sec. 415). Tax-qualified
defined contributions plans are subject to limitations on
annual additions. In addition, for years beginning before
January 1, 2000, an overall limit applies if an employee is a
participant in both a defined contribution plan and defined
benefit plan of the same employer (sec. 415(e)).
House Bill
No provision.
Senate Amendment
The provision conforms the section 403(b) exclusion
allowance to the section 415 limits by providing that
includible compensation includes elective deferrals (and
similar pre-tax contributions) of the employee.
The Secretary of the Treasury is directed to revise the
regulations regarding the exclusion allowance to reflect the
fact that the overall limit on benefits and contributions is
repealed (sec. 415(e)). The revised regulations are to be
effective for limitation years beginning after December 31,
1999.
Effective date.--The modification to the definition of
includible compensation is effective for years beginning after
December 31, 1997. The direction to the Secretary is effective
on the date of enactment.
Conference Agreement
The conference agreement follows the Senate amendment,
with the clarification that the revised Treasury regulations
are to be effective for years (rather than limitation years)
beginning after December 31, 1999. In addition, the conference
agreement clarifies that the revised regulations are to relate
to the election to have the exclusion allowance determined
under section 415.
7. New technologies in retirement plans (sec. 1307 of the Senate
amendment)
Present Law
Under present law, it is not clear if sponsors of
employee benefit plans may use new technologies (telephonic
response systems, computers, E-mail) to satisfy the various
ERISA requirements for notice, election, consent,
recordkeeping, and participant disclosure.
House Bill
No provision.
Senate Amendment
The Senate amendment directs the Secretaries of the
Treasury and Labor to issue guidance facilitating the use of
new technology for plan purposes. The guidance is to be
designed to (1) interpret the notice, election, consent,
disclosure, and time requirements (and related recordkeeping
requirements) under the Internal Revenue Code of 1986 (``IRC'')
and the Employee Retirement Income Security Act of 1974, as
amended (``ERISA'') relating toretirement plans as applied to
the use of new technologies by plan sponsors and administrators while
maintaining the protection of the rights of participants and
beneficiaries, and (2) clarify the extent to which writing requirements
under the IRC shall be interpreted to permit paperless transactions.
Effective date.--The provision is effective on the date
of enactment and requires that the guidance be issued not later
than December 31, 1998.
Conference Agreement
The conference agreement follows the Senate amendment.
8. Modification of 10-percent tax on nondeductible contributions (sec.
1310 of the Senate amendment)
Present Law
Under present law, if an employer sponsors both a defined
benefit plan and a defined contribution plan that covers some
of the same employees, the total deduction for all plans for a
plan year is generally limited to the greater of (1) 25 percent
of compensation or (2) the contribution necessary to meet the
minimum funding requirements of the defined benefit plan for
the year.
A 10-percent nondeductible excise tax is imposed on
contributions that are not deductible. This excise tax does not
apply to contributions to one or more defined contribution
plans that are nondeductible because they exceed the combined
plan deduction limit to the extent such contributions do not
exceed 6 percent of compensation in the year for which the
contribution is made.
House Bill
No provision.
Senate Amendment
The Senate amendment adds an additional exception to the
10-percent excise tax on nondeductible contributions. Under the
provision, the excise tax does not apply to contributions to
one or more defined contribution plans that are not deductible
because they exceed the combined plan deduction limit to the
extent such contributions do not exceed the amount of the
employer's matching contributions plus the elective deferral
contributions to a section 401(k) plan.
Effective date.--The provision is effective with respect
to taxable years beginning after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
9. Modify funding requirements for certain plans (sec. 1311 of the
Senate amendment)
Present Law
Under present law, defined benefit pension plans are
required to meet certain minimum funding rules. Underfunded
plans are required to satisfy certain faster funding
requirements. In general, these additional requirements do not
apply in the case of plans with a funded current liability
percentage of at least 90 percent.
The Pension Benefit Guaranty Corporation (``PBGC'')
insures benefits under most defined benefit pension plans in
the event the plan is terminated with insufficient assets to
pay for plan benefits. The PBGC is funded in part by a flat-
rate premium per plan participant, and a variable rate premium
based on plan underfunding.
House Bill
No provision.
Senate Amendment
The Senate amendment modifies the minimum funding
requirements in the case of certain plans. The provision
applies in the case of plans that (1) were not required to pay
a variable rate PBGC premium for the plan year beginning in
1996, (2) do not, in plan years beginning after 1995 and before
2009, merge with another plan (other than a plan sponsored by
an employer that was a member of the controlled group of the
employer in 1996), and (3) are sponsored by a company that is
engaged primarily in the interurban or interstate passenger bus
service.
The provision treats a plan to which it applies as having
a funded current liability percentage of at least 90 percent
for plan years beginning after 1996 and before 2005. For plan
years beginning after 2004, the funded current liability
percentage will be deemed to be at least 90 percent if the
actual funded current liability percentage is at least at
certain specified levels.
The relief from the minimum funding requirements applies
for the plan year beginning in 2005, 2006, 2007, and 2008 only
if contributions to the plan equal at least the expected
increase in current liability due to benefits accruing during
the plan year.
Effective date.--The provision is effective with respect
to contributions due after December 31, 1997.
Conference Agreement
The conference agreement follows the Senate amendment.
Effective date.--The provision is effective with respect
to plan years beginning after December 31, 1996.
10. Date for adoption of plan amendments
Present Law
Plan amendments to reflect amendments to the law
generally must be made by the time prescribed by law for filing
the income tax return of the employer for the employer's
taxable year in which the change in law occurs.
House Bill
No provision.
Senate Amendment
No provision.
Conference Agreement
The conference agreement provides that any amendments to
a plan or annuity contract required to be made by the Act are
not required to be made before the first day of the first plan
year beginning on or after January 1, 1999. In the case of a
governmental plan, the date for amendments is extended to the
first plan year beginning on or after January 1, 2001. The
conference agreement also provides that if an amendment is made
pursuant to the Act (whether or not the amendment is required)
before the date for required plan amendments, the plan or
contract is operated in a manner consistent with the amendment
during a period and the amendment is effective retroactively to
such period (1) the plan or contract will not fail to be
treated as operated in accordance with its terms for such
period merely because it is operated in a manner consistent
with the amendment, and (2) the plan will not fail to meet the
anti-cutback provisions applicable to qualified retirement
plans by reason of such a plan amendment.
XVI. SENSE OF THE SENATE RESOLUTIONS
A. Sense of the Senate Regarding Reform of the Internal Revenue Code of
1986 (sec. 780 of the Senate amendment)
Present Law
The Federal Government imposes an individual income tax,
a corporate income tax, a payroll tax collected from both
employees and employers, certain excise taxes, and transfer
taxes on certain transfers of wealth by gift or from an estate.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a Sense of the Senate
resolution that the Internal Revenue Code of 1986 needs broad-
based reform, and that the President should submit a
comprehensive proposal for reform.
Conference Agreement
The conference agreement does not include the Senate
amendment.
B. Sense of the Senate Regarding Tax Treatment of Stock Options (sec.
781 of the Senate amendment)
Present Law
Under present law, an employer is generally entitled to a
deduction with respect to stock options when the options are
exercised by the employee. The deduction is generally the
difference between the option price and the fair market value
of the stock when the option is exercised.
House Bill
No provision.
Senate Amendment
The Senate amendment includes a Sense of the Senate
resolution that finds that businesses can deduct the value of
stock options as a business expense even though the options are
not treated as an expense on the books of the business. It is
the sense of the Senate that the Committee on Finance should
hold hearings on the tax treatment of stock options.
Conference Agreement
The conference agreement does not include the Senate
amendment.
C. Sense of the Senate Resolution Regarding Estate Taxes (sec. 782 of
the Senate amendment)
Present Law
A gift tax is imposed on lifetime transfers by gift and
an estate tax is imposed on transfers at death under a single
unified graduated rate schedule that effectively begins at 37
percent and reaches 55 percent on cumulative taxable transfers
over $3 million. A unified credit effectively exempts the first
$600,000 in cumulative taxable transfers from estate and gift
tax (sec. 2010).
An executor may elect to value certain qualified real
property used in farming or another qualifying closely-held
trade or business at its current use value, rather than its
highest and best use value (up to a maximum reduction of
$750,000). In addition, an executor may elect to pay the
Federal estate tax attributable to a qualified closely-held
business in installments over, at most, a 14-year period with a
portion bearing 4-percent interest.
House Bill
No provision.
Senate Amendment
The Senate amendment provides a Sense of the Senate
resolution that (1) estate tax relief provided by this bill is
an important step that will enable more family-owned farms and
small businesses to survive and continue to provide economic
security and job creation in American communities and (2)
Congress should eliminate the Federal estate tax liability for
family-owned businesses by the end of 2002 on a deficit-neutral
basis.
Conference Agreement
The conference agreement does not include the Senate
amendment.
D. Sense of the Senate Regarding Who Should Benefit from Tax Cuts (sec.
791 of the Senate amendment)
Present Law
No provision.
House Bill
No provision.
Senate Amendment
The Senate amendment includes a Sense of the Senate
resolution that only those who pay Federal income taxes should
benefit from the tax reduction provisions of the Act.
Conference Agreement
The conference agreement does not include the Senate
amendment.
E. Sense of the Senate Regarding Self-Employment Taxes of Limited
Partners (sec. 734 of the Senate amendment)
Present Law
Under the Self-Employment Contributions Act, taxes are
imposed on an individual's net earnings from self employment. A
limited partner's net earnings from self employment include
guaranteed payments made to the individual for services
actually rendered and do not include a limited partner's
distributive share of the income or loss of the partnership.
The Department of the Treasury has issued proposed regulations
defining a limited partner for this purpose. These regulations
provide, among other things, that an individual is not a
limited partner if the individual participates in the
partnership business for more than 500 hours during the taxable
year. The regulations are proposed to be effective beginning
with the individual's first taxable year beginning on or after
the date the regulations are published as final regulations in
the Federal Register.
House Bill
No provision.
Senate Amendment
It is the Sense of the Senate that the Department of the
Treasury should withdraw the proposed regulations defining
limited partner, and that the Congress should determine the tax
law governing self-employment income.
Conference Agreement
The conference agreement provides that any regulations
relating to the definition of a limited partner for self-
employment tax purposes shall not be issued or effective before
July 1, 1998.
XVII. TECHNICAL CORRECTIONS PROVISIONS
House Bill
The House bill contains technical, clerical, and
conforming amendments to the Small Business Job Protection Act
of 1996, the Health Insurance Portability and Accountability
Act of 1996, the Taxpayer Bill of Rights 2, and other recently
enacted tax legislation.
Senate Amendment
The Senate amendment is the same as the House bill,
except that the Senate amendment (1) does not contain the
provision that defines the term ``former reservations in
Oklahoma'' for purposes of section 168(j)(6) (relating to
certain tax benefits provided with reference to activities
occurring on Indian reservations) and (2) makes certain
clarifications to the provisions relating to church plans
included in the Small Business Job Protection Act of 1996.
Conference Agreement
The conference agreement follows the House bill and the
Senate amendment. Thus, the conference agreement contains both
the provision in the House bill relating to the definition of
the term ``former reservations in Oklahoma'' and the provisions
in the Senate amendment relating to church plans.
In addition, the conference agreement makes the following
additions, modifications, and clarifications relating to
technical correction provisions.
(1) The conference agreement amends section 205(c) of the
Employee Retirement Income Security Act (as amended by the
Small Business Job Protection Act of 1996) to clarify that the
reference to ``the Secretary'' is to the Secretary of the
Treasury.
(2) The conference agreement clarifies that, for purposes
of the section 833 deduction, liabilities incurred during the
taxable year under cost-plus contracts are added to claims
incurred under section 833(b)(1)(A)(i). Similarly, for purposes
of the section 833 deduction, expenses incurred during the
taxable year in connection with cost-plus contracts are added
to expenses incurred under section 833(b)(1)(A)(ii). The
provision is effective as if included in the Tax Reform Act of
1986.
(3) The conference agreement provides that the technical
correction provisions clarifying the phased reduction in luxury
excise tax rates for automobiles will be effective for sales
after the date of enactment of this Act.
(4) The conference agreement clarifies that, under the
transition relief provided under the company-owned life
insurance rule, the 4-out-of-7 rule and the single premium rule
of present law are not to apply solely by reason of a lapse
occurring after October 13, 1995, by reason of no additional
premiums being received under the contract.
XVIII. OTHER TAX PROVISION
A. Estimated Tax Requirements of Individuals (sec. 311(d) of the House
bill)
Under present law, an individual taxpayer generally is
subject to an addition to tax for any underpayment of estimated
tax. An individual generally does not have an underpayment of
estimated tax if he or she makes timely estimated tax payments
at least equal to: (1) 100 percent of the tax shown on the
return of the individual for the preceding year (the ``100
percent of last year's liability safe harbor'') or (2) 90
percent of the tax shown on the return for the current year.
The 100 percent of last year's liability safe harbor is
modified to be a 110 percent of last year's liability safe
harbor for any individual with an AGI of more than $150,000 as
shown on the return for the preceding taxable year.
House Bill
The House bill changes the 110 percent of last year's
liability safe harbor to be a 109 percent of last year's
liability safe harbor for taxable years beginning in 1997 and a
105 percent of last year's liability safe harbor for taxable
years beginning in 1998.
Senate Amendment
No provision.
Conference Agreement
The conference agreement changes the 110 percent of last
year's liability safe harbor to be a 100 percent of last year's
liability safe harbor for taxable years beginning in 1998, a
105 percent of last year's liability safe harbor for taxable
years beginning in 1990, 2000, and 2001, and a 112 percent of
last year's liability safe harbor for taxable years beginning
in 2002. In addition, no estimated tax penalties will be
imposed under section 6654 or 6655 for any period before
January 1, 1998, for any payment the due date of which is
before January 16, 1998, with respect to an underpayment to the
extent the underpayment is created or increased by a provision
of the Act.
XIX. TRADE PROVISIONS
A. Extension of Duty-Free Treatment Under the Generalized System of
Preferences (sec. 971 of the House bill)
Present Law
Title V of the Trade Act of 1974, as amended (Generalized
System of Preferences (``GSP'')), grants authority to the
President to provide duty-free treatment on imports of eligible
articles from designated beneficiary developing countries,
subject to specific conditions and limitations. To qualify for
GSP privileges, each beneficiary country is subject to various
mandatory and discretionary eligibility criteria. Import
sensitive products are ineligible for GSP. The President's
authority to grant GSP benefits expired on May 31, 1997.
House Bill
Under the House bill, the GSP program is reauthorized for
two years, to expire on May 31, 1999. Refunds of any duty paid
between May 31, 1997 and the date of enactment are provided
upon request of the importer.
Effective date.--The provision is effective upon date of
enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement follows the House bill, with a
modification to extend the GSP reauthorization through June 30,
1998.
B. Temporary Suspension of Vessel Repair Duty (sec. 972 of the House
bill)
Present Law
Section 466 of the Tariff Act of 1930 establishes a 50-
percent duty on repairs made outside the United States to U.S.
flag vessels.
House Bill
The current 50-percent duty on repairs to U.S. flag
vessels made in countries that are signatories to the OECD
Shipbuilding Agreement is suspended for a one-year period.
Effective date.--The provision is effective with respect
to repair activities occurring for a one-year period beginning
on the date of enactment.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
C. United States-Caribbean Basin Trade Partnership Act (secs. 981-988
of the House bill)
Present Law
The Caribbean Basin Initiative (``CBI'') program was
established by the Caribbean Basin Economic Recovery Act
(``CBERA''), which was enacted on August 5, 1983. This
legislation authorized the President to grant duty-free
treatment to the imports of eligible articles from designated
countries in the Caribbean Basin region. Certain products
(textiles, apparel, canned tuna, petroleum and petroleum
products, footwear, handbags, luggage, flatgoods, work gloves,
leather wearing apparel, watches and watch parts) were excluded
under the statute from eligibility for duty-free treatment.
CBI trade benefits were made permanent in 1990.
House Bill
The House bill amends the Caribbean Basin Economic
Recovery Act to provide additional temporary transitional trade
benefits to products that are excluded from eligibility for
duty-free treatment under CBI. These products are provided
tariff and quota treatment which is comparable to treatment
accorded to like articles imported from Mexico under the North
American Free Trade Agreement (``NAFTA'') subject to certain
rule-of-origin and customs requirements and other limitations.
The President must review periodically country adherence to
eligibility criteria, and consult with beneficiary countries
about free trade agreement negotiations.
Effective date.--The provision is effective for one year
beginning January 1, 1998.
Senate Amendment
No provision.
Conference Agreement
The conference agreement does not include the House bill
provision.
XX. LIMITED TAX BENEFITS SUBJECT TO THE LINE ITEM VETO ACT
The Line Item Veto Act amended the Congressional Budget
and Impoundment Act of 1974 to grant the President the limited
authority to cancel specific dollar amounts of discretionary
budget authority, certain new direct spending, and limited tax
benefits. The Line Item Veto Act provides that the Joint
Committee on Taxation is required to examine any revenue or
reconciliation bill or joint resolution that amends the
Internal Revenue Code of 1986 prior to its filing by a
conference committee in order to determine whether or not the
bill or joint resolution contains any limited tax benefits and
to provide a statement to the conference committee that either
(1) identifies each limited tax benefit contained in the bill
or resolution, or (2) states that the bill or resolution
contains no limited tax benefits. The conferees determine
whether or not to include the Joint Committee's statement in
the conference report. If the conference report includes the
information from the Joint Committee on Taxation identifying
provisions that are limited tax benefits, then the President
may cancel one or more of those, but only those, provisions
that have been identified. If such a conference report contains
a statement from the Joint Committee on Taxation that none of
the provisions in the conference report are limited tax
benefits, then the President has no authority to cancel any of
the specific tax provisions, because there are no tax
provisions that are eligible for cancellation under the Line
Item Veto Act.
The conference report contains a list of provisions that
have been identified by the Joint Committee on Taxation as
limited tax benefits within the meaning of the Line Item Veto
Act. These provisions are listed below
(1) Sec. 101(c) (relating to high risk pools permitted to
cover dependents of high risk individuals)
(2) Sec. 222 (relating to limitation on qualified
501(c)(3) bonds other than hospital bonds)
(3) Sec. 224 (relating to contributions of computer
technology and equipment for elementary or secondary school
purposes)
(4) Sec. 312(a) (relating to treatment of remainder
interests for purposes of provision relating to gain from sale
of principal residence)
(5) Sec. 501(b) (relating to indexing of alternative
valuation of certain farm, etc., real property)
(6) Sec. 504 (relating to extension of treatment of
certain rents under section 2032A to lineal descendants)
(7) Sec. 505 (relating to clarification of judicial
review of eligibility for extension of time for payment of
estate tax)
(8) Sec. 508 (relating to treatment of land subject to
qualified conservation easement)
(9) Sec. 511 (relating to expansion of exception from
generation-skipping transfer tax for transfers to individuals
with deceased parents)
(10) Sec. 601 (relating to the research tax credit)
(11) Sec. 602 (relating to contributions of stock to
private foundations)
(12) Sec. 603 (relating to the work opportunity tax
credit)
(13) Sec. 604 (relating to orphan drug tax credit)
(14) Sec. 701 (relating to incentives for revitalization
of the District of Columbia) to the extent it amends the
Internal Revenue Code of 1986 to create sections 1400 and 1400A
(relating to tax-exempt economic development bonds)
(15) Sec. 701 (relating to incentives for revitalization
of the District of Columbia) to the extent it amends the
Internal Revenue Code of 1986 to create section 1400C (relating
to first-time homebuyer credit for District of Columbia)
(16) Sec. 801 (relating to incentives for employing long-
term family assistance recipients)
(17) Sec. 904(b) (relating to uniform rate of tax on
vaccines) as it relates to any vaccine containing pertussis
bacteria, extracted or partial cell bacteria, or specific
pertussis antigens
(18) Sec. 904(b) (relating to uniform rate of tax on
vaccines) as it relates to any vaccine against measles
(19) Sec. 904(b) (relating to uniform rate of tax on
vaccines) as it relates to any vaccine against mumps
(20) Sec. 904(b) (relating to uniform rate of tax on
vaccines) as it relates to any vaccine against rubella
(21) Sec. 905 (relating to operators of multiple retail
gasoline outlets treated as wholesale distributors for refund
purposes)
(22) Sec. 906 (relating to exemption of electric and
other clean-fuel motor vehicles from luxury automobile
classification)
(23) Sec. 907(a) (relating to rate of tax on liquified
natural gas determined on basis of BTU equivalency with
gasoline)
(24) Sec. 907(b) (relating to rate of tax on methanol
from natural gas determined on basis of BTU equivalency with
gasoline)
(25) Sec. 908 (relating to modification of tax treatment
of hard cider)
(26) Sec. 914 (relating to mortgage financing for
residences located in disaster areas)
(27) Sec. 962 (relating to assignment of workmen's
compensation liability eligible for exclusion relating to
personal injury liability assignments)
(28) Sec. 963 (relating to tax-exempt status for certain
State worker's compensation act companies)
(29) Sec. 967 (relating to additional advance refunding
of certain Virgin Island bonds)
(30) Sec. 968 (relating to nonrecognition of gain on sale
of stock to certain farmers' cooperatives)
(31) Sec. 971 (relating to exemption of the incremental
cost of a clean fuel vehicle from the limits on depreciation
for vehicles)
(32) Sec. 974 (relating to clarification of treatment of
certain receivables purchased by cooperative hospital service
organizations)
(33) Sec. 975 (relating to deduction in computing
adjusted gross income for expenses in connection with service
performed by certain officials) with respect to taxable years
beginning before 1991
(34) Sec. 977 (relating to elective carryback of existing
carryovers of National Railroad Passenger Corporation)
(35) Sec. 1005(b)(2)(B) (relating to transition rule for
instruments described in a rulingrequest submitted to the
Internal Revenue Service on or before June 8, 1997)
(36) Sec. 1005(b)(2)(C) (relating to transition rule for
instruments described on or before June 8, 1997, in a public
announcement or in a filing with the Securities and Exchange
Commission) as it relates to a public announcement
(37) Sec. 1005(b)(2)(C) (relating to transition rule for
instruments described on or before June 8, 1997, in a public
announcement or in a filing with the Securities and Exchange
Commission) as it relates to a filing with the Securities and
Exchange Commission
(38) Sec. 1011(d)(2)(B) (relating to transition rule for
distributions made pursuant to the terms of a tender offer
outstanding on May 3, 1995)
(39) Sec. 1011(d)(3) (relating to transition rule for
distributions made pursuant to the terms of a tender offer
outstanding on September 13, 1995)
(40) Sec. 1012(d)(3)(B) (relating to transition rule for
distributions pursuant to an acquisition described in section
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described
in a ruling request submitted to the Internal Revenue Service
on or before April 16, 1997)
(41) Sec. 1012(d)(3)(C) (relating to transition rule for
distributions pursuant to an acquisition described in section
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described
in a public announcement or filing with the Securities and
Exchange Commission) as it relates to a public announcement
(42) Sec. 1012(d)(3)(C) (relating to transition rule for
distributions pursuant to an acquisition described in section
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described
in a public announcement or filing with the Securities and
Exchange Commission) as it relates to a filing with the
Securities and Exchange Commission
(43) Sec. 1013(d)(2)(B) (relating to transition rule for
distributions or acquisitions after June 8, 1997, described in
a ruling request submitted to the Internal Revenue Service
submitted on or before June 8, 1997)
(44) Sec. 1013(d)(2)(C) (relating to transition rule for
distributions or acquisitions after June 8, 1997, described in
a public announcement or filing with the Securities and
Exchange Commission on or before June 8, 1997) as it relates to
a public announcement
(45) Sec. 1013(d)(2)(C) (relating to transition rule for
distributions or acquisitions after June 8, 1997, described in
a public announcement or filing with the Securities and
Exchange Commission on or before June 8, 1997) as it relates to
a filing with the Securities and Exchange Commission
(46) Sec. 1014(f)(2)(B) (relating to transition rule for
any transaction after June 8, 1997, if such transaction is
described in a ruling request submitted to the Internal Revenue
Service on or before June 8, 1997)
(47) Sec. 1014(f)(2)(C) (relating to transition rule for
any transaction after June 8, 1997, if such transaction is
described in a public announcement or filing with the
Securities and Exchange Commission on or before June 8, 1997)
as it relates to a public announcement
(48) Sec. 1014(f)(2)(C) (relating to transition rule for
any transaction after June 8, 1997, if such transaction is
described in a public announcement or filing with the
Securities and Exchange Commission on or before June 8, 1997)
as it relates to a filing with the Securities and Exchange
Commission
(49) Sec. 1042(b) (relating to special rules for
provision terminating certain exceptions from rules relating to
exempt organizations which provide commercial-type insurance)
(50) Sec. 1081(a) (relating to termination of suspense
accounts for family corporations required to use accrual
accounting) as it relates to the repeal of Internal Revenue
Code section 447(i)(3)
(51) Sec. 1089(b)(3) (relating to reformations)
(52) Sec. 1089(b)(5)(B)(i) (relating to persons under a
mental disability)
(53) Sec.1171 (relating to treatment of computer software
as FSC export property)
(54) Sec. 1175 (relating to exemption for active
financing income)
(55) Sec. 1204 (relating to travel expenses of Federal
employees doing criminal investigations)
(56) Sec. 1236 (relating to extension of time for filing
a request for administrative adjustment)
(57) Sec. 1243 (relating to special rules for
administrative adjustment request with respect to bad debts or
worthless securities)
(58) Sec. 1251 (relating to clarification on limitation
on maximum number of shareholders)
(59) Sec. 1253 (relating to attribution rules applicable
to tenant ownership)
(60) Sec. 1256 relating to modification of earnings and
profits rules for determining whether REIT has earnings and
profits from non-REIT years)
(61) Sec. 1257 (relating to treatment of foreclosure
property)
(62) Sec. 1261 (relating to shared appreciation
mortgages)
(63) Sec. 1302 (relating to clarification of waiver of
certain rights of recovery)
(64) Sec. 1303 (relating to transitional rule under
section 2056A)
(65) Sec. 1304 (relating to treatment for estate tax
purposes of short-term obligations held by nonresident alien)
(66) Sec. 1311 (relating to clarification of treatment of
survivor annuities under qualified terminable interest rules)
(67) Sec. 1312 (relating to treatment of qualified
domestic trust rules of forms of ownership which are not
trusts)
(68) Sec. 1313 (relating to opportunity to correct
failures under section 2032A)
(69) Sec. 1414 (relating to fermented material from any
brewery may be received at a distilled spirits plant)
(70) Sec. 1417 (relating to use of additional
ameliorating material in certain wines)
(71) Sec. 1418 (relating to domestically produced beer
may be withdrawn free of tax for use of foreign embassies,
legations, etc.)
(72) Sec. 1421 (relating to transfer to brewery of beer
imported in bulk without payment of tax)
(73) Sec. 1422 (relating to transfer to bonded wine
cellars of wine imported in bulk without payment of tax)
(74) Sec. 1506 (relating to clarification of certain
rules relating to employee stock ownership plans of S
corporations)
(75) Sec. 1507 (relating to modification of 10 percent
tax for nondeductible contributions)
(76) Sec. 1523 (relating to repeal of application of
unrelated business income tax to ESOPs)
(77) Sec. 1530 (relating to gratuitous transfers for the
benefit of employees)
(78) Sec. 1532 (relating to special rules relating to
church plans)
(79) Sec. 1604(c)(2) (relating to amendment related to
Omnibus Budget Reconciliation Act of 1993)
ESTIMATED BUDGET EFFECTS OF THE CONFERENCE AGREEMENT ON THE REVENUE PROVISIONS OF H.R. 2014, THE ``TAXPAYER RELIEF ACT OF 1997''
[Fiscal Years 1997-2007, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1997-2002 1997-2007
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
I. Child and Dependent Care
Tax Credits; Health Care for
Children
1. Tax credit for 1/1/98.......... ......... -2,710 -18,119 -21,549 -21,401 -21,258 -20,901 -20,430 -19,702 -18,997 -18,317 -85,037 -183,384
children under age 17
($400 in 1998, and $500
thereafter; $75,000/
$110,000 AGI phaseout
for credit;
nonrefundable for small
families, refundable and
limited to tax plus
employee FICA minus EIC
for large families \1\
\2\.
2. Expand State high-risk tyba 12/31/97... ......... -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 -8 -17
pools to include spouses
and children of high-
risk individuals.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Child and ................ ......... 2,711 -18,121 -21,551 -21,403 -21,260 -20,903 -20,432 -19,704 -18,999 -18,319 -85,045 -183,401
Dependent Care Tax
Credits; Health Care
for Children.
================================================================================================================================================
II. Education Tax
Incentives
A. Tax Benefits Relating
to Education Expenses:
1. Administration's pma & tyba 12/31/ ......... -2,083 -6,469 -7,393 -7,907 -7,707 -8,620 -8,754 -8,893 -9,035 -9,180 -31,559 -76,041
HOPE credit for 97.
first 2 years; 100%
credit for first
$1,000 of eligible
expenses; 50% credit
for next $1,000; 20%
credit for third and
fourth year students
for up to $5,000 of
expenses; for years
after 2002, expenses
are increased to
$10,000 (effective
date of the 20%
credit is 7/1/98);
eligible expenses
for HOPE credit are
indexed in 2001;
income limits for
both credits indexed
in 2001.
2. Expand State- tyba 12/31/97... ......... -36 -107 -118 -130 -143 -157 -173 -190 -209 -230 -533 -1,491
sponsored prepaid
tuition and State
savings programs to
include room and
board\3\.
3. Student loan poida 12/31/97.. ......... -18 -69 -122 -204 -277 -308 -326 -346 -368 -391 -690 -2,429
interest deduction:
$1,000 above-the-
line deduction in
1998, $1,500 in
1999, $2,000 in
2000, $2,500 in 2001
and thereafter;
phaseout $40,000-
$55,000 single
filers ($60,000-
$75,000 joint
filers); income
limits indexed
beginning in 2003.
4. Penalty-free tyba 12/31/97... ......... -78 -201 -181 -175 -177 -179 -182 -184 -186 -189 -812 -1,732
withdrawals from all
IRAs for
undergraduate, post-
secondary
vocational, and
graduate education
expenses.
5. Education IRA-- tyba 12/31/97... ......... -156 -644 -912 -1,060 -1,126 -1,448 -1,752 -2,054 -2,360 -2,680 -3,899 -14,193
permit contributions
to Education IRA for
a child under age
18; annual
contributions
limited to $500 per
child; impose
phaseout range of
$95,000-$110,000 for
single filers and
$150,000-$160,000
for joint filers \4\.
B. Other Education-
Related Tax Provisions:
1. Extend employer- tyba 12/31/96... ......... -534 -369 -250 ......... ......... ......... ......... ......... ......... ......... -1,153 -1,153
provided education
assistance for
undergraduates
through 5/31/00
[\1\].
2. Repeal $150 1/1/98.......... ......... -6 -45 -75 -89 -99 -106 -115 -125 -138 -162 -315 -962
million limit on tax-
exempt section
501(c)(3) bonds for
new capital
expenditures.
3. Enhanced deduction tyba 12/31/97... ......... -46 -48 -77 -49 -5 -1 ......... ......... ......... ......... -225 -227
for corporate
contributions of
computer technology
and equipment for
grades K-12; sunset
after 3 years.
4. Raise small issuer bia 12/31/97.... ......... -1 -4 -7 -11 -14 -27 -30 -33 -36 -38 -36 -199
arbitrage rebate
exception for
governmental bonds
used to finance
education facilities
from $5 million to
$10 million.
5. Treatment of Da DOE.......... .........
cancellation of
certain student
loans; with
modification.
(11) Negligible Revenue
Effect
6. Tax credit for oia 12/31/97.... ......... -8 -27 -43 -47 -47 -47 -47 -47 -47 -47 -172 -408
holders of qualified
education bonds
(limited to $400
million per year in
loans; 2-year
sunset..
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of ................ ......... -2,966 -7,983 -9,178 -9,672 -9,595 -10,893 -11,379 -11,872 -12,379 -12,917 -39,394 -98,835
Education Tax
Incentives.
================================================================================================================================================
III. Savings and Investment
Tax Incentives
A. Individual Retirement
Arrangements:
1. IRA--Increase tyba 12/31/97... ......... -367 -345 86 -346 -860 -1,830 -3,292 -3,842 -4,424 -5,004 -1,832 -20,225
deductible IRA
income limits by
$10,000 for joint
filers in 1998
($5,000 for single
filers in 1998) and
by $1,000 per year
through 2002; in
2003 increase to
$40,000 for single
filers and $60,000
for joint filers and
by $5,000 per year
thereafter until
limits are $50,000-
$60,000 for single
filers and $80,000-
$100,000 for joint
filers (phase out
range increases to
$20,000 when lower
limit reaches
$100,000); penalty-
free withdrawals for
educational purposes
and first-time home
purchase only;
create IRA PLUS;
impose phase-out
range of $95,000-
$110,000 for single
filers and $150,000-
$160,000 for joint
filers; impose
$150,000-$160,000
income phase-out for
spousal IRAs;
provide that
aggregate
contributions to
deductible and
nondeductible
retirement IRAs may
not exceed $2,000.
B. Capital Gains
Provisions:
1. Capital gains: (a) various......... 1,254 6,371 171 -2,954 -2,934 -1,785 -3,742 -3,981 -4,179 -4,424 -4,958 123 -21,161
20%/10% rate
structure; (b)
retain maximum 28%
for collectibles;
(c) section 1250
recapture at maximum
of 25%; (d)
symmetric AMT
treatment; (e)
exclusion for gain
on personal
residence (including
remainder
interests); (f)
capital gains rate
structure of 18%/8%
for assets held more
than 5 years after
2000, with mark-to-
market in 2001;
assets qualify for
8% in 2001 if held
for 5 years
regardless of when
asset was acquired;
(g) permit rollover
of qualified small
business stock if
rolled over into
another qualified
small business stock
within 60 days; and
(h) retain 28%/15%
rate structure for
capital assets held
more than 12 months
but less than 18
months.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Savings ................ 1,254 6,004 -174 -2,868 -3,280 -2,645 -5,572 -7,273 -8,021 -8,848 -9,962 -1,709 -41,386
and Investment Tax
Incentives.
IV. Alternative Minimum Tax
Provisions
1. Exemption from tyba 12/31/97... ......... -97 -171 -131 -100 -77 -59 -45 -34 -26 -20 -577 -762
alternative minimum tax
for small corporations.
2. Conform AMT ppisa 12/31/98.. ......... ......... -580 -1,653 -2,230 -2,358 -2,561 -2,622 -2,350 -2,044 -1,920 -6,821 -18,317
depreciation lives to
the regular tax.
3. Reverse IRS position di tyba 12/31/87 -8 -157 -158 -167 -164 -157 -148 22 22 21 21 -811 -872
on AMT treatment of
certain installment
sales by farmers.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Alternative ................ -8 -254 -909 -1,951 -2,494 -2,592 -2,768 -2,645 -2,362 -2,049 -1,919 -8,209 -19,951
Minimum Tax Provisions.
================================================================================================================================================
V. Estate, Gift and
Generation-Skipping Tax
Provisions
A. Estate and Gift Tax
Provisions:
1. Increase unified dda 12/31/97.... ......... ......... -843 -1,259 -1,816 -2,013 -2,596 -2,997 -5,656 -7,279 -8,638 -5,931 -33,097
estate and gift tax
credit to $625,000
in 1998; $650,000 in
1999; $675,000 in
2000 and 2001;
$700,000 in 2002 and
2003, $850,000 in
2004, $950,000 in
2005; $1 million in
2006 and thereafter;
and index other
provisions beginning
in 1999; cap family
owned business
exclusion with
unified credit at
$1.3 million
annually (exclude
$675,000 in 1998,
$650,000 in 1999,
$625,000 in 2000,
$625,000 in 2001,
$600,000 in 2002 and
2003, $450,000 in
2004, $350,000 in
2005; $300,000 in
2006 and thereafter).
2. Reduce section dda 12/31/97.... ......... ......... -9 -17 -25 -33 -41 -47 -53 -58 -65 -84 -349
6601(j) interest
rate to 2% for first
$1 million of
taxable closely-held
business interests,
remainder subject to
tax at 45% of
present-law interest
rates, and all
interest under
section 6166 made
nondeductible.
3. Provide up to dda 12/31/97.... ......... ......... -7 -15 -25 -35 -48 -51 -56 -60 -64 -82 -361
$500,000 estate tax
exclusion (phasein
by $100,000 annually
beginning in 1998)
for treatment of
land subject to a
qualified
conservation
easement coordinated
with exclusion of
family farms
(expanded treatment
of land with severed
mineral rights) and
business relief used.
4. Extension of roa 12/31/76.... ......... -25 -2 -2 -2 -2 -2 -2 -2 -2 -2 -33 -43
treatment of certain
rents under section
2032A to lineal
descendants.
5. Clarification of dda DOE......... ......... ......... -15 -15 -15 -15 -15 -15 -14 -12 -11 -60 -127
judicial review of
eligibility for
extension of time
for payment of
estate tax.
6. Gifts may not be gma DOE......... ......... ......... -16 -18 -21 -26 -32 -38 -45 -53 -61 -81 -310
revalued for estate
tax purposes after
expiration of
statute of
limitations.
7. Repeal certain tyba 12/31/97... ......... ......... -11 -11 -11 -11 -11 -11 -11 -11 -11 -44 -99
throwback rules
applicable to
domestic trusts;
exclude pre-1984
multiple trusts from
repeal.
8. Estate tax relief DOE............. ......... -8 -15 ......... ......... ......... ......... ......... ......... ......... ......... -23 -23
for money going to
ESOPs in existence
on 8/1/96 and
decedents dying
before 1/1/99.
B. Generation-Skipping
Tax Provision:
1. Expand exception gsta 12/31/97... ......... ......... -4 -4 -4 -4 -4 -5 -5 -5 -6 -16 -41
from generation-
skipping transfer
tax for transfers to
individuals with
deceased parents.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Estate, ................ ......... -33 -922 -1341 -1919 -2139 -2749 -3166 -5842 -7480 -8858 -6354 -34450
Gift and
Generation-
Skipping Tax
Provisions.
================================================================================================================================================
VI. Expiring Tax Provisions
1. Research tax credit 6/1/97.......... -161 -820 -639 -294 -204 -123 -33 ......... ......... ......... ......... -2,241 -2,274
through 6/30/98..
2. Contributions of 6/1/97.......... ......... -99 -9 -4 ......... ......... ......... ......... ......... ......... ......... -112 -112
appreciated stock to
private foundations
through 6/30/98.
3. Extend a modified work wpoifhma 9/30/97 ......... -140 -131 -73 -28 -11 -2 ......... ......... ......... ......... -383 -385
opportunity tax credit
through 6/30/98 \5\;
include SSI recipients.
4. Orphan drug tax credit 6/1/97.......... ......... -29 -28 -30 -32 -34 -35 -37 -39 -40 -42 -152 -346
(permanent).
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Expiring ................ -161 -1,088 -807 -401 -264 -168 -70 -37 -39 -40 -42 -2,888 -3,117
Tax Provisions.
================================================================================================================================================
VII. District of Columbia
Tax Incentives
1. Designate existing 1/1/98.......... ......... -71 -110 -113 -118 -127 -45 3 2 (\6\) -2 -539 -582
D.C. enterprise
community and census
tracts with greater than
20% poverty (with
revised residency
requirement) as the D.C.
Enterprise Zone,
eligible for modified
present-law empowerment
zone incentives (20%
wage credit, increased
179 expensing, and
expanded tax-exempt
financing); sunset 12/31/
02.
2. Provide 0% capital 1/1/98.......... ......... -1 -5 -12 -21 -33 -48 -85 -90 -99 -107 -73 -502
gains rate on enterprise
zone business property
in D.C. census tracts
with greater than 10%
poverty held for at
least 5 years; sunset 12/
31/02.
3. $5,000 tax credit for po/a DOE........ ......... -10 -21 -27 -16 (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) -74 -74
first-time homebuyer in
D.C., with phaseout of
$110,000-$130,000 for
joint filers ($70,000-
$90,000 for single
filers), and sunset 12/
31/00.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of District of ................ ......... -82 -136 -152 -155 -160 -93 -82 -88 -99 -109 -686 -1,158
Columbia Tax
Incentives.
================================================================================================================================================
VIII. Welfare-to-Work Tax
Credit
Administration's welfare- wpoifhma 12/31/ ......... -13 -31 -29 -15 -10 -4 -2 -1 ......... ......... -99 -106
to-work tax credit, as 97.
modified: (a) wage
credit is 35% on first
$10,000 of wages in the
first year of
employment, and 50% on
$10,000 of wages in the
second year of
employment; (b)
effective for hires made
through 4/30/99.
================================================================================================================================================
IX. Miscellaneous
Provisions
A. Excise Tax Provisions:
1. Repeal excise tax 1/1/98.......... ......... -4 -5 -5 -1 -1 -1 -1 -1 -1 -1 -16 -22
on recreational
motorboat diesel
fuel.
2. Modify excise tax DOE............. (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) 1 1
on imported halons.
3. Transfer the 4.3 10/1/97.........
cents/gallon
transportation motor
fuels tax on highway
motor fuels to the
Highway Trust Fund.
(12)No Revenue Effect
4. Modify excise tax DOE............. ......... -6,359 6,359 ......... ......... ......... ......... ......... ......... ......... ......... .......... ..........
deposit rules for
gasoline and special
motor fuels, diesel
fuel and kerosene,
aviation fuels, and
air cargo taxes to
suspend deposits due
8/1/98 to 9/30/98
until 10/5/98.
5. Equalize the DOE............. -2 -15 -16 -16 -17 -18 -19 -20 -21 -22 -23 -82 -186
excise tax rates
among alternative
motor fuels except
CNG.
6. Treat certain DOE.............
gasoline retailers
as wholesale
distributors under
gasoline tax refund
rules.
(12)Negligible Revenue Effect
7. Reduce excise tax 10/1/97......... ......... -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -3 -7
rate on draft cider
to the small
producer beer rate.
8. Require study on ................
simplified
collection of
distilled spirits
taxes.
(12) No Revenue Effect
9. Codify Bureau of DOE.............
Alcohol, Tobacco,
and Firearms
regulations on wine
labeling; with
modification.
(12)No Revenue Effect
10. Uniform excise 10/1/97......... ......... -16 -15 -15 -15 -14 -14 -14 -14 -14 -14 -74 -146
tax on vaccines; add
3 new vaccines
($0.75 per dose).
B. Disaster Relief
Provisions:
1. Disaster losses-- aoty............
postponement of IRS
deadlines and loss
valuation; permit
extension of statute
of limitations.
(12)Negligible Revenue Effect
2. Modify tax sea 12/31/96.... ......... -12 -2 -2 -2 -1 -1 -1 -1 -1 -1 -18 -23
treatment of
livestock sold on
account of certain
weather-related
conditions.
3. Loosen mortgage (\8\)........... ......... -3 -7 -8 -8 -7 -6 -6 -5 -4 -4 -33 -58
revenue bond
requirements in
Presidentially
declared disaster
areas for 2 years;
permit 2-year period
to place mortgages.
4. Abatement of 1/1/97.......... -5 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... -5 -5
interest on
underpayments by
taxpayers in
Presidentially
declared disaster
areas (1997 disaster
areas only).
C. Provisions Relating
to Employment Taxes:
1. Worker spa 12/31/97....
classification of
securities brokers
for income and
employment tax
purposes.
(12) Negligible Revenue
Effect
2. Impose moratorium DOE.............
on issuance of
Treasury regulation
relating to self-
employment tax
(SECA) through 6/30/
98.
(12) No Revenue Effect
3. SECA for insurance pa 12/31/97.....
agents.
(12) Negligible Revenue
Effect
D. Provisions Relating to
Small Businesses:
1. Delay penalties DOE.............
for failure to make
payments through
EFTPS until after 6/
30/98.
(12) No Revenue Effect
2. Definition of tyba 12/31/98... ......... ......... -119 -244 -253 -263 -274 -285 -295 -306 -318 -880 -2,358
principal place of
business for home
office deduction.
3. Increase deduction tyba 12/31/96... ......... ......... ......... -39 -120 -224 -605 -882 -601 -404 -604 -383 -3,479
for health insurance
expenses of self-
employed
individuals: 50% in
2000 and 2001, 60%
in 2002, 80% in 2003
through 2005; 90% in
2006, and 100% in
2007 and thereafter.
E. Other Provisions:
1. Shrinkage ................ ......... -7 -21 -23 -25 -27 -29 -31 -33 -35 -37 -103 -268
allowance for
inventory account.
2. Include liability cfa DOE......... ......... -1 -2 -5 -8 -12 -17 -23 -29 -32 -36 -27 -164
to pay compensation
under workmen's
compensation acts
within rules
relating to certain
personal liability
assignments.
3. Clarify tax-exempt tyba 12/31/97... ......... (\6\) (\6\) -1 -1 -1 -1 -1 -1 -1 -1 -2 -6
status of certain
State workmen's
compensation funds.
4. Allow tyba 12/31/97...
grandfathered
publicly traded
partnerships to
elect to pay a
publicly traded
partnership tax;
with technical
modifications.
(12) Revenue Neutral
5. Exclusion from psora 12/31/97..
UBTI for certain
corporate
sponsorship
payments, with
technical
clarification.
(12)Negligible Revenue Effect
6. Allow timeshare tyba 12/31/96... ......... -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -7 -17
associations to
elect to be taxed as
homeowner
associations at 32%
rate and modify
definition of
property for
timeshares.
7. Deferral of gain sea 12/31/97.... ......... -2 -68 -5 -5 -4 -4 -4 -4 -4 -4 -84 -104
on sales of stock in
farm product
refining firms to
farm coops which
supply the firm with
raw farm products
for refining.
8. No information DOE............. .........
reporting on sales
of principal
residences less than
$250,000 or $500,000
(married filing
joint return).
(11)Negligible Revenue Effect
9. Increase the tyba 12/31/97... ......... -8 -17 -27 -37 -49 -62 -76 -91 -108 -125 -138 -600
business meals
deduction to 80% in
5% increments every
other year for
persons subject to
Federal hours of
service limitation,
with clarification
of section 119 meals.
10. Provide an above- 1/1/87.......... ......... -10 -4 -4 -4 -5 -5 -6 -6 -7 -7 -27 -58
the-line deduction
for certain State
and local official's
expenses.
11. Raise the tyba 12/31/97... ......... -8 -56 -58 -61 -64 -68 -71 -75 -78 -82 -247 -621
charitable mileage
rate from 12 cents/
mile to 14 cents/
mile; no indexing.
12. Expense (\9\)........... ......... -57 -132 -165 -63 (\7\) 2 9 17 19 18 -417 -352
``Brownfields''
redevelopment costs
in empowerment
zones, enterprise
communities and EPA
demonstration sites;
add census tracts
with greater than
20% poverty, 3-year
sunset.
13. Administration's DOE............. ......... -82 -121 -121 -99 -79 -56 -44 -41 -38 -25 -502 -706
proposal to add 20
urban empowerment
zones with modified
incentives
(including
interaction with
Conference
Brownfields
proposal).
14. Designate 2 1/1/00.......... ......... ......... ......... -38 -86 -92 -98 -78 -53 -26 -13 -215 -483
supplemental
empowerment zones as
regular empowerment
zones, with present-
law incentives
(phaseout of wage
credit beginning in
2004).
15. Exemption for DOE............. (\6\) -1 -1 (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) -2 -2
incremental cost of
clean-fuel vehicle
from luxury tax and
limits on
depreciation.
16. Exclude from (\10\).......... ......... (\6\) -1 -1 -1 -1 -1 -1 -1 -2 -2 -4 -12
gross income certain
survivor benefits
attributable to a
public safety
officer who is
killed in the line
of duty.
17. Suspend 100% net tyba DOE........ ......... -21 -35 -14 ......... ......... ......... ......... ......... ......... ......... -70 -70
income limitation
with respect to
percentage depletion
on oil and gas
property for
marginal producers
for 2 years.
18. Allow refunding bia DOE......... ......... -2 -4 -5 -5 -5 -3 -1 -3 -4 -4 -21 -37
of certain tax-
exempt Virgin
Islands bonds.
19. Purchasing of tyba 12/31/96...
receivables by tax-
exempt hospital
cooperative service
organizations.
(12)Negligible Revenue Effect
20. Modification of DOE.............
empowerment zone and
enterprise community
criteria in the
event of future
designations of
additional zones and
communities.
(12) No Revenue Effect
21. 3-year income tyba DOE ab 1/1/ -1 -10 -53 -54 -50 ......... ......... ......... ......... ......... ......... -168 -168
averaging for 01.
farmers.
22. Prior year ................ ......... -7,400 4,000 ......... ......... 4,400 -1,000 ......... ......... ......... ......... 1,000 ..........
estimated tax safe
harbor (100% in
1998, 105% in 1999
through 2001, and
112% in 2002).
23. Montana
simplified tax and
wage reporting
system (5-year
demonstration).
(12) No Revenue Effect
24. National DOE............. ......... -1,162 -1,162 ......... ......... ......... ......... ......... ......... ......... ......... -2,323 -2,323
Passenger Rail
(Amtrak) NOL
provision.
------------------------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL OF ................ -8 -15,182 8,516 -852 -863 3,530 -2,265 -1,539 -1,261 -1,071 -1,286 -4,850 -12,274
MISCELLANEOUS
PROVISIONS.
================================================================================================================================================
X. Revenue-Increase
Provisions
A. Financial Products:
1. Require csa 6/8/97...... ......... 367 121 68 73 79 85 94 111 118 127 708 1,243
recognition of gain
on certain
appreciated
positions in
personal property,
with technical
modifications.
2. Gains or losses 30da DOE........ ......... 15 27 25 25 25 25 25 25 25 25 117 242
from certain
terminations with
respect to property;
with technical
modification and
effective date with
modifications.
3. Determination of tyba DOE........ ......... 76 275 358 319 283 100 105 109 114 118 1,311 1,857
original issue
discount where
pooled debt
obligations subject
to acceleration.
4. Denial of interest iia 6/8/97...... ......... 5 16 29 43 55 62 63 64 65 67 148 469
deduction on certain
debt instruments.
B. Corporate
Organizations and
Reorganizations:
1. Tax treatment of da 9/13/95...... ......... 44 -93 -54 -10 45 77 81 89 95 101 -68 375
certain
extraordinary
dividends.
2. Require gain da 4/16/97...... ......... 301 243 216 187 158 130 101 73 46 10 1,105 1,465
recognition on
certain
distributions of
controlled
corporation stock
(with modifications
for intragroup
distributions); with
binding contract
modification.
3. Tax treatment of da/a 6/8/97..... ......... 10 10 5 5 5 5 5 5 5 5 35 60
redemptions
involving related
corporations.
4. Modify holding droaa 30da DOE.. ......... 11 13 15 16 16 16 17 17 17 18 71 156
period for dividends-
received deduction
with 2-year
transition period.
C. Other Corporate
Provisions:
1. Registration and tsoaiTg......... ......... 15 37 38 39 41 42 43 44 46 47 170 392
other provisions
relating to
confidential
corporate tax
shelters.
2. Certain preferred ta 6/8/97....... ......... 35 37 39 41 43 10 10 11 11 12 194 248
stock treated as
``boot,'' with
clarification.
D. Administrative
Provisions:
1. Reporting of pma 12/31/97.... ......... ......... 3 3 3 3 3 4 4 4 4 12 31
certain payments
made to attorneys.
2. Decrease of rd 90da DOE..... ......... ......... 7 8 9 10 11 11 12 12 13 34 93
threshold for
reporting payments
to corporations
performing services
for Federal agencies.
3. Extend disclosure dma 9/30/98..... ......... ......... 22 27 31 36 36 ......... ......... ......... ......... 116 152
of tax return
information for
administration of
certain Veterans'
programs \12\.
4. Modify levy lia DOE......... ......... 332 327 256 213 157 117 102 86 82 78 1,285 1,750
exemption and
provide continuous
levy on certain
payments.
5. Consistency rfa DOE......... ......... 3 3 3 3 3 3 4 4 4 4 15 34
requirement for
returns of
beneficiaries of
estates and trusts.
E. Excise Tax Provisions:
1. Extend and modify
Airport Trust Fund
excise taxes:.
a. Extend 10/1/97......... ......... 4,633 4,859 5,031 5,433 5,870 6,275 6,684 7,117 7,580 8,059 25,826 61,542
domestic air
passenger ticket
tax: reduce tax
rate from 10% to
9% of ticket
price and impose
an additional
tax of $1.00 per
flight segment
for 10/1/97
through 9/30/98;
8% and $2.00/
segment for 10/1/
98 through 9/30/
99; and 7.5%
after 9/30/99
with additional
tax of $2.25/
segment for 10/1/
99 through 12/31/
99, $2.50/
segment in 2000,
$2.75/segment in
2001, and $3.00/
segment in 2002,
and in years
thereafter index
the $3.00/
segment tax to
changes in the
CPI (first
indexing
adjustment on 1/
1/03).
b. Modify airline DOE............. -1,017 -199 1,216 ......... ......... ......... ......... ......... ......... ......... ......... .......... ..........
ticket tax
deposit rule to
suspend deposits
due 8/15/97 to 9/
30/97 until 10/
10/97, and
suspend deposits
due 8/15/98 to 9/
30/98 until 10/5/
98.
c. Reduce air 10/1/97......... ......... -26 -27 -26 -27 -27 -28 -30 -31 -32 -33 -133 -289
passenger ticket
tax to 7.5% of
ticket price
(and omit
segment tax) for
flight segments
to/from certain
rural airports
\13\.
d. Extend 10/1/97......... ......... 788 879 948 1,026 1,114 1,209 1,307 1,411 1,526 1,653 4,754 11,859
international
departure tax:
increase tax
from $6.00 to
$12/passenger,
tax arrivals at
the same rate,
and index the
$12 tax to
changes in the
CPI (first
indexing
adjustment on 1/
1/99), but
retain present-
law $6.00/
passenger
departure tax
for domestic
flights to/from
Alaska and
Hawaii, and
index the $6.00
departure tax to
changes in the
CPI (first
indexing
adjustment on 1/
1/99).
e. Impose 7.5% 10/1/97......... ......... 65 73 77 82 87 92 98 104 110 116 384 904
tax rate on cash
payments to
airlines for air
travel under
credit card and
similar programs.
f. Extend current 10/1/97......... ......... 304 347 377 409 443 481 522 567 615 667 1,880 4,732
air cargo excise
tax.
g. Extend current 10/1/97......... ......... 84 87 89 91 93 95 97 99 102 104 446 943
taxes on
noncommercial
aviation
gasoline and
noncommercial
jet fuel.
h. Dedicate 4.3 10/1/97......... .........
cents/gallon of
tax on aviation
fuel to the
Airport and
Airway Trust
Fund.
(11)No Revenue Effect
2. Tax kerosene in 7/1/98.......... ......... 44 43 49 46 44 43 44 47 49 52 226 461
the same manner as
diesel fuel; modify
to address home
heating in Alaska.
3. Reinstate LUST 10/1/97......... ......... 129 129 128 129 131 134 136 67 ......... ......... 645 983
excise tax and
extend through 3/31/
05.
4. Apply 3% telephone DOE............. ......... 19 28 38 49 60 71 83 101 113 124 193 684
excise tax to
certain prepaid
phone cards, with
technical
modification.
5. Replace truck Sa 12/31/97..... ......... 66 94 96 97 99 101 102 105 108 110 452 979
excise tax deduction
for tire value with
tax credit for
excise tax paid on
tires.
F. Provisions Relating to
Tax-Exempt
Organizations:
1. Modify control tyba 12/31/98 & ......... (\7\) (\7\) (\7\) 3 5 5 4 4 4 4 8 29
test and include tyba 2ya DOE.
attribution rules to
determine UBIT
consequences of
certain payments
from subsidiaries of
tax-exempt
organizations.
2. Repeal 1986 Act tyba 12/31/97... ......... (\7\) 82 116 124 128 133 140 149 160 174 450 1,208
grandfather rules
for pension business
of TIAA-CREF and
Mutual of America.
G. Foreign Provisions:
1. Inclusion of tyba DOE........ ......... 9 20 21 21 21 21 22 22 22 23 92 202
income from notional
principal contracts
and stock lending
transactions under
subpart F.
2. Further restrict Ta dofca........ ......... 4 8 11 13 15 17 19 21 23 25 51 156
like-kind exchanges
involving foreign
personal property.
3. Impose holding dpoaa 30da DOE.. ......... 23 48 50 53 56 58 61 64 68 71 230 552
period requirement
for claiming foreign
tax credits with
respect to dividends.
4. Limitation on DOE............. ......... 1 1 1 1 1 1 1 1 1 1 5 10
treaty benefits for
payments to hybrid
entities.
5. Interest on ftpoa tyba DOE.. ......... 8 10 2 1 1 1 1 1 1 1 22 27
underpayment reduced
by foreign tax
credit carryback.
6. Determination of ftpoa tyba DOE.. ......... 1 2 1 1 1 1 1 1 1 1 6 11
period of
limitations relating
to foreign tax
credits.
7. Repeal special tyba DOE........ ......... 2 5 5 5 5 5 5 5 5 5 22 47
rule which permits
certain companies to
eliminate their AMT
liability.
H. Pension and Employee
Benefit Provisions:
1. Provide employers tyba 12/31/97... ......... 3 8 11 12 12 13 14 14 15 16 46 118
the option to offer
tax-free employee
parking or taxable
cash compensation
(\14\).
2. Repeal of 15% tyba & dda 12/31/ ......... -18 -19 -7 18 18 16 16 14 13 11 -8 62
excess distribution 96.
and excess
accumulation taxes.
3. Increase in ptoa DOE........ ......... 2 4 4 4 4 4 4 4 4 4 14 34
prohibited
transactions excise
tax.
4. Basis recovery aba 12/31/97.... ......... 1 3 6 9 11 15 18 21 24 27 30 133
method.
I. Other Revenue-Increase
Provisions:
1. Termination of (\16\).......... ......... 29 33 35 36 37 39 40 41 43 44 170 377
suspense accounts
for family farm
corporations
required to use
accrual method of
accounting (\15\).
2. 2-year carryback NOLgi tyba DOE.. ......... 42 303 361 256 179 136 112 100 93 90 1,141 1,672
and 20-year
carryforward for net
operating losses
with an exception
related to
Presidentially
declared disaster
areas.
3. Modification of cia 6/8/97...... ......... 20 53 93 140 193 247 299 349 399 447 500 2,240
treatment of company-
owned life
insurance--pro rata
disallowance of
interest on debt to
fund life insurance.
4. Modify the basis pda DOE......... ......... 26 52 55 57 59 61 64 66 69 72 249 581
allocation rules for
distributee
partners, with
technical
modifications.
5. Eliminate the sepda DOE & ......... 30 66 69 73 77 80 84 89 93 98 316 760
substantial efbcieo 6/8/97.
appreciation
requirement for
inventory of a
partnership, with
technical
modification and
binding contract
exception.
6. Earned income tyba 12/31/96... ......... (\7\) 18 25 24 21 21 21 21 21 21 88 193
credit compliance
provisions: deny
eligibility for
prior acts of
recklessness;
recertification
required when EIC
denied in past; and
due diligence
requirement for paid
preparers.
7. For the purpose of tyba 12/31/97... ......... (\7\) 72 75 79 85 89 92 94 99 102 312 788
the Earned Income
Credit (EIC)
phaseout, include in
AGI nontaxable
distributions of
IRA, pensions, and
annuities, and tax-
exempt interest; and
addback 75% of
business losses
(\17\).
8. Provide that DOE.............
workfare payments do
not qualify as
earned income for
the purposes of the
earned income credit.
(12) Negligible Revenue
Effect
9. New EIC compliance
proposals (\18\):
a. Federal case 10/1/99......... ......... ......... ......... ......... 10 20 30 40 60 85 105 30 350
register data.
b. SSA parent 180da DOE....... ......... ......... 10 10 10 10 10 10 10 10 10 40 90
SSNs.
c. Additional DOE.............
appropriation
for EIC
enforcement.
(12) No Revenue Effect
10. Restrict income tyba DOE........ ......... 29 41 62 78 38 27 25 17 17 18 248 352
forecast method and
allow 3-year MACRS
for rent-to-own
property; with
clarification for
home computers and
cellular phones.
11. Extend FUTA lpo/a 1/1/99.... ......... ......... 1,063 1,763 1,797 1,733 661 -73 -71 -74 -73 6,356 6,726
surtax and increase
the statutory limit
on the FUA Trust
Fund from .25% of
covered wages to
.50% (\12\).
12. Limitation on Ta 6/18/97...... ......... 6 6 6 6 6 6 6 6 6 6 30 60
charitable remainder
trust annual
payouts; require
charitable
remainders to have a
minimum value of 10%
of trust.
13. Limit carryback cai tyba 12/31/ ......... 182 300 81 -60 -32 -9 5 15 21 25 471 527
period for general 97.
business credits to
1 year; extend
carryforward period
to 20 years.
14. Extend the 5-year pcpa dofca...... ......... ......... ......... ......... ......... 2 10 11 11 12 12 2 58
time limit for
taxing pre-
contribution gain to
7 years and
grandfather binding
contracts in effect
on 6/8/97.
15. Expansion of icoa dofca...... ......... 1 4 6 8 11 13 15 17 19 21 30 115
requirement that
involuntarily
converted property
be replaced with
property acquired
from an unrelated
person.
16. Repeal tyb1ya DOE...... ......... ......... 44 97 106 106 64 21 22 23 24 353 507
installment sales
grandfather rules of
1986 Act.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Revenue- ................ ......... 7,522 11,013 10,802 11,217 11,696 10,970 10,786 11,409 12,092 12,866 51,230 109,350
Increase
Provisions.
================================================================================================================================================
XI. Foreign Tax Provisions
A. General Provisions:
1. Simplify foreign tyba 12/31/97... ......... (\19\) -1 -1 -1 -1 -1 -1 -1 -1 -1 -4 -9
tax credit
limitation for
individuals.
2. Simplify ................ ......... (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\)
translation of
foreign taxes.
3. Election to use tyba 12/31/97... ......... (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) -1 -2
simplified foreign
tax credit
limitation for
alternative minimum
tax purposes.
4. Simplify treatment tyba 12/31/97... ......... (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) -1 -2
of personal
transactions in
foreign currency.
5. Simplify foreign tyba 12/31/02... ......... ......... ......... ......... ......... ......... -57 -241 -215 -227 -242 .......... -982
tax credit
limitation for
dividends from 10/50
companies to provide
look-through
starting in 2003.
B. General Provisions various......... ......... -2 -5 -7 -9 -10 -10 -11 -12 -13 -14 -33 -93
Affecting Treatment of
Controlled Foreign
Corporations.
C. Modification of tyba 12/31/97... ......... -24 -23 -24 -26 -27 -28 -29 -31 -33 -35 -124 -280
Passive Foreign
Investment Company
Provisions to Eliminate
Overlap With Subpart F
and to Allow Mark-to-
Market Election, and to
Modify Asset Measurement
Rule.
D. Simplify Formation and various......... ......... (\6\) (\6\) -1 -1 -1 -1 -1 -1 -1 -2 -3 -9
Operation of
International Joint
Ventures, with Technical
Modifications.
E. Modification of 1/1/98.......... ......... (\19\) -1 -2 -2 -2 -2 -2 -3 -3 -3 -7 -20
Reporting Threshold for
Stock Ownership of a
Foreign Corporation.
F. Other Foreign
Simplification
Provisions:
1. Transition rule aiii SBJPA...... ......... -1 -3 -5 -5 -5 -5 -5 -5 -5 -5 -19 -44
for certain trusts.
2. Simplify tyba 12/31/97... ......... (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\)
application of the
stock and securities
trading safe harbor.
3. Clarification of DOE............. ......... (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\)
determination of
foreign taxes deemed
paid.
4. Clarification of DOE............. ......... (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\)
foreign tax credit
limitation for
financial services
income.
G. Other Foreign
Provisions:
1. Foreign sales gra 12/31/97.... ......... -27 -42 -146 -173 -180 -191 -202 -227 -252 -277 -568 -1,717
corporation benefits
for computer
software.
2. Increase dollar 1/1/98.......... ......... -15 -30 -50 -67 -82 -97 -103 -111 -119 -127 -244 -801
limitation on
section 911
exclusion and index
after 2007.
3. Exception from tyba 12/31/97... ......... -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 -9 -19
U.S. property
definition under
subpart F for
certain securities
positions.
4. Exemption from tybi 1998....... ......... -23 -68 -3 ......... ......... ......... ......... ......... ......... ......... -94 -94
subpart F for active
financing income.
5. Treat service tyba 12/31/97... ......... -2 -4 -3 -3 -3 -3 -3 -3 -3 -3 -15 -30
income of
nonresident alien
individuals earned
on foreign ships as
foreign source
income and disregard
the U.S. presence of
such individuals;
with amendment to
rule disregarding
U.S. presence.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Foreign ................ ......... -95 -179 -244 -289 -313 -397 -600 -611 -659 -711 -1,122 -4,102
Tax Provisions.
================================================================================================================================================
XII Simplification
Provisions Relating to
Individuals and Businesses
A. Provisions Relating to
Individuals:
1. Deduction 1/1/98.......... ......... -2 -38 -35 -35 -35 -35 -35 -38 -37 -36 -146 -327
attributable to
unearned income of
dependent filers:
greater of (a)
present law; or (b)
earned income plus
$250; delink
dependent AMT from
parent's AMT
position.
2. Increase de tyba 12/31/97... ......... -134 -17 -18 -19 -20 -21 -22 -24 -25 -26 -208 -326
minimis threshold
for estimated tax to
$1,000.
3. Treatment of tyba 12/31/97... ......... (\6\) -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -11
certain reimbursed
expenses of rural
mail carriers.
4. Treatment of eii tyea DOE.... ......... (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) -1 -2
travel expenses of
certain Federal
employees engaged in
criminal
investigations.
5. Permit payment of DOE.............
taxes by any
commercially
acceptable means;
and prohibit payment
of fees by Treasury.
(12) Negligible Revenue
Effect
B. Provisions Relating to
Businesses Generally:
1. Modify look-back cci tyea DOE.... ......... -1 -2 -3 -4 -4 -4 -4 -5 -5 -5 -14 -37
method for long-term
contracts.
2. Minimum tax tyba 12/31/97... ......... -1 -2 -3 -3 -3 -3 -3 -3 -3 -3 -12 -27
treatment of certain
property and
casualty insurance
companies.
3. Provide for leia DOE........ .........
exclusion for
construction
allowances provided
to lessees, with
technical
modification.
(11) Negligible Revenue
Effect
C. Partnership
Simplification
Provisions:
1. Simplified tyba 12/31/97... ......... 6 8 8 8 8 9 9 9 9 9 38 83
reporting to
partners.
2. Simplified audit tyba 12/31/97... ......... (\7\) (\7\) (\7\) 1 1 1 1 1 1 1 2 8
procedure for large
partnerships.
3. Due date for tyba 12/31/97... .........
furnishing
information to
partners of large
partnerships.
(11)No Revenue Effect
4. Returns required tyba 12/31/97... .........
on magnetic media
for partnerships
with 100 partners or
more.
(11) Negligible Revenue
Effect
5. Other partnership tyba 12/31/97... ......... -2 (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) -3 -5
audit rules.
6. Closing tyba 12/31/97... ......... (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) -1 -1
partnership taxable
year with respect to
deceased partner.
D. Provisions Relating to
Real Estate Investment
Trusts:
1. Alternative tyba DOE........ .........
penalty for failure
to request
information from
shareholders.
(11) Negligible Revenue
Effect
2. De minimis rule tyba DOE........ .........
for tenant services
income.
(11)Negligible Revenue Effect
3. Attribution rules tyba DOE........ .........
applicable to tenant
services.
(11) Negligible Revenue
Effect
4. Credit for tax tyba DOE........ .........
paid by REIT on
retained capital
gains.
(11) Negligible Revenue
Effect
5. Repeal 30% gross tyba DOE........ ......... -4 -5 -5 -6 -7 -7 -8 -9 -10 -11 -26 -72
income requirement.
6. Modification of tyba DOE........ .........
earnings and profits
rules for
determining whether
REIT has earnings
and profits from non-
REIT year.
(11) Negligible Revenue
Effect
7. Treatment of tyba DOE........ .........
foreclosure property.
(11) Negligible Revenue
Effect
8. Payments under tyba DOE........ .........
hedging instruments.
(11) Negligible Revenue
Effect
9. Excess noncash tyba DOE........ .........
income.
(11) Negligible Revenue
Effect
10. Prohibited tyba DOE........ .........
transaction safe
harbor.
(11) Negligible Revenue
Effect
11. Shared tyba DOE........ .........
appreciation
mortgages.
(11) Negligible Revenue
Effect
12. Wholly owned tyba DOE........ .........
subsidiaries.
(11) Negligible Revenue
Effect
E. Provision Relating to
Regulated Investment
Companies:
1. Repeal 30% gross tyba DOE........ ......... -17 -23 -27 -33 -38 -45 -53 -61 -71 -82 -138 -450
income limitation
for regulated
investment companies.
F. Taxpayer Protections:
1. Provide tyba DOE........ .........
``reasonable cause''
exception for filing
claims for refunds.
(11) Negligible Revenue
Effect
2. Clarification of tyea DOE........ .........
period for filing
claims for refunds.
(11) Negligible Revenue
Effect
3. Repeal authority pca DOE......... .........
to disclose whether
a prospective juror
has been audited.
(11) No Revenue Effect
4. Clarify statute of tyba DOE........ .........
limitations for pass-
through entities.
(11) No Revenue Effect
5. Clarify procedure aca DOE......... .........
for administrative
cost awards.
(11) No Revenue Effect
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of .............. -155 -80 -84 -92 -99 -106 -116 -131 -142 -154 -514 -1,167
Simplification
Provisions
Relating to
Individuals and
Businesses.
================================================================================================================================================
XIII. Estate, Gift and
Trust Simplification
Provisions
1. Gifts to charities gma DOE.........
of over $10,000
exempt from gift tax
filing requirements.
(12) Negligible Revenue
Effect
2. Clarification of dda DOE.........
waiver of certain
rights of recovery
of estate tax from
QTIP trust.
(12) Negligible Revenue
Effect
3. Transitional aiii OBRA'90.... .........
rules under section
2056A.
(11) Negligible Revenue
Effect
4. Estate and gift dda DOE......... .........
tax treatment of
short-term OID
instruments.
(11) Negligible Revenue
Effect
5. Certain revocable dda DOE......... ......... -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -15 -30
trusts treated as
part of estate.
6. Distributions tyba DOE........ .........
during first 65 days
of taxable year of
estate.
(11) Negligible Revenue
Effect
7. Separate share dda DOE......... .........
rules available to
estates.
(11) Negligible Revenue
Effect
8. Executor of tyba DOE........ .........
estate and
beneficiaries
treated as related
persons for
disallowance of
losses.
(11) Negligible Revenue
Effect
9. Treatment of tyea DOE........ ......... 2 2 2 2 2 2 2 2 2 2 10 20
funeral trusts.
10. Adjustments for dda DOE......... .........
certain gifts within
3 years of
decedent's death.
(11) No Revenue Effect
11. Clarification of dda DOE......... .........
treatment of
survivor annuities
under qualified
terminable interest
rules.
(11) Negligible Revenue
Effect
12. Treatment under dda DOE......... .........
qualified domestic
trust rules of forms
of ownership which
are not trusts.
(11) Negligible Revenue
Effect
13. Opportunity to DOE............. .........
correct certain
failures under
section 2032A.
(11) Negligible Revenue
Effect
14. Authority to dda DOE......... .........
waive requirement of
United States
trustee for
qualified domestic
trusts.
(11) No Revenue Effect
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Estate, ................ ......... -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -10
Gift and Trust
Simplification
Provisions.
================================================================================================================================================
XIV. Excise Tax and Other
Simplification Provisions
A. Excise Tax
Simplification:
1. Increase de DOE............. .........
minimis limit for
aftermarket
alterations for
heavy truck and
luxury car excises.
(11) Negligible Revenue
Effect
2. Credit or refund fcq DOE+180 days .........
for imported bottled
distilled spirits
returned to
distilled spirits
plant.
(11) Negligible Revenue
Effect
3. Authority to fcq DOE+180 days .........
cancel or credit
export bonds without
submission of
records.
(11) No Revenue Effect
4. Repeal of fcq DOE+180 days .........
required maintenance
of records on
premises of
distilled spirits
plant.
(11) No Revenue Effect
5. Fermented fcq DOE+180 days .........
material from any
brewery may be
received at a
distilled spirits
plant.
(11) Negligible Revenue
Effect
6. Repeal of DOE............. .........
requirement for
wholesale dealers in
liquors to post sign.
(11) No Revenue Effect
7. Refund of tax to fcq DOE+180 days .........
wine returned to
bond not limited to
unmerchantable wine.
(11) Negligible Revenue
Effect
8. Use of additional fcq DOE+180 days .........
ameliorating
material in certain
wines.
(11) No Revenue Effect
9. Domestically fcq DOE+180 days .........
produced beer may be
withdrawn free of
tax for use of
foreign embassies,
legations, etc.
(11) Negligible Revenue
Effect
10. Beer may be fcq DOE+180 days .........
withdrawn free of
tax for destruction.
(11) Negligible Revenue
Effect
11. Authority to fcq DOE+180 days .........
allow drawback on
exported beer
without submission
of records.
(11) No Revenue Effect
12. Imported beer or fcq DOE+180 days .........
wine transferred in
bulk to brewery or
winery without
payment of tax.
(11) Negligible Revenue
Effect
13. Authority for IRS DOE............. .........
to grant exemption
from excise tax
registration
requirements.
(11) No Revenue Effect
14. Exemption from 1/1/98.......... ......... -5 -8 -8 -8 -9 -9 -10 -10 -11 -11 -38 -89
truck excise tax for
certain wrecked
truck fixups and
truck modifications.
15. Repeal 1/1/98.......... .........
registration
requirement for tax-
free sales of trucks
for resale.
(11) Negligible Revenue
Effect
16. Repeal of excise DOE............. .........
tax ``deadwood''
provision.
(11)No Revenue Effect
17. Move taxation of 1/1/98.......... .........
arrows from tax on
assembled arrows to
tax on component
parts of 12.4%.
(11)Negligible Revenue Effect
18. Clarify tax 10/1/97......... .........
treatment of
skydiving flights as
noncommercial
aviation; with
technical
modifications.
(11) Negligible Revenue
Effect
19. Eliminate double 10/1/97......... .........
taxation for certain
purchases of
aviation fuel from
fixed-based
operators; with
technical
modifications.
(11) Negligible Revenue
Effect
B. Tax Exempt Bond
Provisions:
1. Repeal $100,000 bia DOE......... ......... (\6\) -2 -3 -5 -6 -8 -9 -10 -11 -12 -17 -65
limitation on
unspent proceeds
from tax-exempt bond
issues under year
exception from
rebate.
2. Exclusion from bia DOE......... ......... (\6\) -1 -2 -3 -3 -4 -5 -6 -6 -7 -9 -37
arbitrage rebate for
earnings on bona
fide debt service
fund under
construction bond
rules.
3. Repeal of debt bia DOE......... .........
service based
limitation on
investment in
certain nonpurpose
investments.
(11) Negligible Revenue
Effect
4. Repeal of expired DOE............. .........
student loan bond
arbitrage rebate
provisions.
(11)No Revenue Effect
C. Tax Court Procedures:
1. Clarify DOE............. ......... -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -15 -30
jurisdiction of Tax
Court with respect
to overpayment
determinations.
2. Clarify Tax Court DOE............. .........
jurisdiction over
interest
determinations.
(11) No Revenue Effect
3. Clarify net worth DOE............. ......... -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 -9 -19
requirements for
awards of
administrative or
litigation costs; $4
million for joint
returns.
4. Clarify Tax Court DOE............. .........
jurisdiction for
independent
contractors with
technical
modification.
(11) Negligible Revenue
Effect
D. Other Provisions:
1. Extend due date tyba DOE........ ......... -2 (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) -2 -3
for first quarter
estimated tax by
private foundations.
2. Clarification of 1/1/98.......... ......... -2 -3 -1 -1 -1 -1 -1 -1 -1 -1 -8 -13
authority to
withhold Puerto Rico
income taxes from
salaries of Federal
employees..
3. Certain notices 1/1/98.......... ......... -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -10
disregarded under
provision increasing
interest rate on
large corporate
underpayments.
------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Excise ................ ......... -14 -20 -20 -23 -25 -28 -31 -33 -35 -37 -103 -266
Tax and Other
Simplification
Provisions.
==================================================================================================================================================================
XV. Pension Simplification
Provisions
A. Miscellaneous
Provisions Relating to
Pensions and Other
Provisions:
1. Water districts 1/1/98.......... ......... (\19\) -1 -1 -1 -2 -2 -2 -2 -2 -3 -6 -15
made eligible for
401(k) plans even if
State or local
entity.
2. Extend moratorium DOE............. .........
on nondiscrimination
rules for public
pension plans
(permanent), with
technical
modification.
(11) Negligible Revenue
Effect
3. Treatment of DOE............. ......... ......... -10 -1 ......... ......... ......... ......... ......... ......... ......... -11 -11
certain disability
benefits received by
former police
officers or
firefighters.
4. ESOP provision-- tyba 12/31/97... .........
Modify prohibited
transaction rules
relating to employee
stock ownership
plans of S
corporation; with
modifications.
(11) Negligible Revenue
Effect
5. Repeal UBIT on tyba 12/31/97... ......... -8 -23 -34 -41 -44 -46 -48 -50 -52 -54 -149 -400
income from an S
corporation to an
ESOP; with technical
modification.
6. Pension provision-- pyba 12/31/98... ......... ......... -4 -12 -14 -18 -19 -23 -23 -25 -25 -48 -164
increase in full
funding limit with
20-year
amortization; with
technical
modification.
7. Deduction for tyba 12/31/97... .........
contributions made
by ministers to
retirement plans.
(11) Negligible Revenue
Effect
8. Exclusion of tyba 12/31/97... .........
ministers from
discrimination
testing of
nondenominational
retirement plans.
(11)Negligible Revenue Effect
9. Diversification of DOE............. .........
401(k) investments;
with 1-year delay of
effective date.
(11)Negligible Revenue Effect
10. Exempt police and yba 12/31/96.... .........
firefighters from
section 415 dollar
limitation; with
clarification.
(11)Negligible Revenue Effect
11. Modify section tyba 12/31/97... ......... -9 -25 -25 -26 -26 -26 -27 -27 -27 -28 -111 -246
415 limits for State
and local plans;
with modifications.
12. ESOP provision-- tyba 12/31/97... .........
permit cash
distributions in
lieu of stock in the
S corporation.
(11)Negligible Revenue Effect
13. Increase the dma DOE......... (\7\) 2 6 7 7 7 8 8 9 9 10 29 73
amount from $3,500
to $5,000 on
involuntary cash out
from pension plans
with no indexing of
dollar amount.
14. Treatment for tyba 12/31/97... .........
partnership items of
individual
retirement accounts.
(11)No Revenue Effect
15. Church plan DOE............. .........
exception to
prohibition on
discrimination
against individuals
based on health
status.
(11)Negligible Revenue Effect
16. Excise tax pybo/a 1/1/98... .........
penalties for
failure of group
health plan to
provide certain
maternity and mental
health benefits.
(11)Negligible Revenue Effect
17. Date for adoption DOE............. .........
of plan amendments.
(11)No Revenue Effect
B. Pension Simplification
Provisions:
1. Matching tyba 12/31/97... ......... (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\20\) (\21\)
contributions for
self-employed
individuals not
treated as elective
deferrals.
2. Contributions to tyba 12/31/97... .........
IRAs through payroll
deductions.
(11)No Revenue Effect
3. Plans not tyba 12/31/97... .........
disqualified merely
by accepting
rollover
contributions; with
modification.
(11)Negligible Revenue Effect
4. Modification of DOE............. .........
prohibition on
assignment or
alienation.
(11)Negligible Revenue Effect
5. Eliminate tyba DOE........ .........
paperwork burdens on
plans.
(11)No Revenue Effect
6. Modifications to tyba 12/31/98... ......... ......... (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\19\) (\20\) (\21\)
section 403(b)
exclusion allowance
to conform to
section 415
modifications.
7. New technologies DOE............. .........
in retirement plans.
(11)No Revenue Effect
8. Modification of tyba 12/31/97... ......... -2 -3 -3 -3 -3 -3 -3 -3 -3 -3 -14 -29
10% tax on
nondeductible
contributions.
9. Modify funding cda 12/31/97.... .........
rules for certain
plans.
(11)Negligible Revenue Effect
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Pension ................ ......... -27 -51 -68 -78 -86 -88 -95 -96 -100 -103 -310 -792
Simplification
Provisions.
================================================================================================================================================
XVI. Technical Corrections
Provisions
1. Oklahoma technical on dwcorfpt 3/18/97 ......... -10 -2 1 2 2 1 1 1 1 1 -8 -2
Indian wage credits and
development incentives
for property with 10-
year lives or less, with
modification.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Technical ................ -10 -2 1 2 2 1 1 1 1 1 -8 -2
Corrections Provisions.
================================================================================================================================================
XVII. TRADE PROVISION--GSP 6/1/97.......... ......... -378 ......... ......... ......... ......... ......... ......... ......... ......... ......... -378 -378
extension through 6/30/98
[\12\]......................
..........
------------------------------------------------------------------------------------------------------------------------------------------------
Total Revenue Effect of ................ 60 -9,483 -9,887 -27,937 -29,329 -23,865 -34,966 -36,611 -38,652 -39,809 -41,551 -100,444 -292,045
H.R. 2014.
================================================================================================================================================
XVIII. REVENUE PROVISIONS
IN H.R. 2015
1. Increase small 10/1/97......... ......... ......... ......... 1,175 1,720 2,272 2,280 2,290 2,300 2,310 2,320 5,167 16,667
cigarettes tax by $0.10
per pack in 2000 and
2001, and $0.15 per pack
in 2002 and thereafter
with proportionate
increase in other
tobacco products excise
taxes.
2. Miscellaneous FUTA various......... ......... 3 (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) 1 ..........
provisions [\12\].
3. Medicare Plus MSAs.... tyba 12/31/97... .........
(11)Negligible Revenue Effect
------------------------------------------------------------------------------------------------------------------------------------------------
Total Revenue Effect of ................ ......... 3 [6] 1,175 1,720 2,272 2,280 2,290 2,300 2,310 2,320 5,168 16,667
H.R. 2015.
================================================================================================================================================
Grand Total: ................ 60 -9,480 -9,887 -26,762 -27,609 -21,593 -32,686 -34,321 -36,352 -37,499 -39,231 -95,276 -275,378
Reconciliation Revenue
Provisions.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimate considers interaction with HOPE tax credit proposal.
\2\ The refundable portion of the child credit is equal to $4,281 million for fiscal years 1998-2002 and $10,022 million for fiscal years 1998-2007.
\3\ Estimate includes interaction with estate and gift taxes.
\4\ Considers interaction with IRA PLUS proposal.
\5\ Estimate includes interaction with welfare-to-work tax credit.
\6\ Loss of less than $500,000.
\7\ Gain of less than $500,000.
\8\ Effective for bonds issued after 12/31/96 and bonds issued before 1/1/99.
\9\ Effective for expenses in taxable years ending after date of enactment and before 1/1/01.
\10\ Effective for payments received in taxable years beginning after 12/31/96 with respect to individuals dying after such date.
\11\ Assumes prior or concurrent passage of legislation to allow Virgin Island financing on parity basis.
\12\ Estimate provided by the Congressional Budget Office.
\13\ Rural airports would be defined as (1) airports receiving ``essential air service'' assistance on date of enactment and having fewer than 100,000 enplanements in the previous calendar
year, and (2) other airports having fewer than 100,000 passenger enplanements in the previous calendar year, excluding those within 75 miles of airports having more than 100,000 passenger
enplanements in the previous year.
\14\ Estimate does not include increase in receipts to Social Security trust fund ($21 million for fiscal years 1997-2002; $51 million for fiscal years 1997-2007).
\15\ The provision would eliminate the present-law requirement that a portion of the suspense account be restored to income whenever the gross receipts of the corporation decline.
\16\ Provision would be effective for taxable years ending after 6/8/97 for new suspense accounts, and taxable years beginning after that date for existing accounts. Balances in new accounts
would be included in income over a 10-year period, and balances in existing accounts over a 20-year period. For existing accounts, the amounts included in income in any year would not exceed
50% of the taxable income of the taxpayer before the inclusion.
\17\ Estimate includes outlay reductions of $254 million for 1997-2002 and $650 million for 1997-2007.
\18\ Estimate does not include effect on outlays. Outlays will be provided by the Congressional Budget Office.
\19\ Loss of less than $1 million.
\20\ Loss of less than $5 million.
\21\ Loss of less than $10 million.
Legend for ``Effective'' column: ab=and before; aba=annuities beginning after; aca=actions commenced after; aiii OBRA'90=as if included in the Omnibus Budget Reconciliation Act of 1990; aiii
SBJPA=as if included in the Small Business Job Protection Act of 1996; aoty=all open taxable years; bia=bonds issued after; cai=credits arising in; cci=contracts completed in;
cda=contributions due after; cfa=claims filed after; cia=contracts issued after; csa=constructive sales after; da=distributions after; Da=discharges after; da/a=distributions and
acquisitions after; dda=decedents dying after; di=dispositions in; dma=disclosures made after; DOE=date of enactment; dofca=date of first committee action; dpoaa=dividends paid or accrued
after; droaa=dividends received or accrued after; dwcorfpt=depreciation and wages claimed on returns filed prior to; efbcieo=exception for binding contracts in effect on; eia=expenses
incurred after; eii=expenses incurred in; fcq DOE + 180 days=first day of the calendar quarter that begins at least 180 days after date of enactment; ftpoa=foreign taxes paid or accrued in;
gma=gifts made after; gra=gross receipts after; gsta=generation skipping transfers after; icoa=involuntary conversions occurring after; lia=instruments issued after; leia=leases entered into
after; lia=levies issued after; Ipo/a=labor performed on or after; NOLgi=net operating losses generated in; oia=obligations issued after; pca=proceedings commenced after; pcpa=property
contributed to partnership after; pda=partnership distributions after; pma=payments made after; po/a=purchases on or after; poida=payments of interest due after; ppisa=property placed in
service after; psora=payments solicited or received after; ptoa=prohibited transactions occurring after; pyba=plans years beginning after; phybo/a=plans years beginning on or after;
rd=returns due; rfa=returns filed after; roa=rentals occurring after (for returns open on date of first committee action); Sa=sales after; sea=sales or exchanges after; sepda=sales and
exchanges, and certain partnership distributions after; spa=services performed after; ta=transactions after; Ta=transfers after; tyba=taxable years beginning after; tybo/a=taxable years
beginning on or after; tyb1ya=taxable years beginning 1 year after; tybi=taxable years beginning in; tyea=tax years ending after; tsoaiTg=tax shelters offered after issuance of Treasury
guidance; wpoifhma=wages paid or incurred for hires made after; yba=years beginning after; 30da=30 days after; 90da=90 days after; 180da=180 days after; 2ya=2 years after.
Note.--Details may not add to totals due to rounding. Enactment date is assumed to be August 15, 1997.
Source: Joint Committee on Taxation.
For consideration of the House bill, and the Senate
amendment, and modifications committed to conference:
John R. Kasich,
Bill Archer,
Phil Crane,
William M. Thomas,
Dick Armey,
Tom DeLay,
Charles B. Rangel,
As additional conferees from the Committee on
Transportation and Infrastructure, for
consideration of secs. 702 and 704 of the
Senate amendment, and modifications committed
to conference:
Bud Shuster,
Susan Molinari,
James L. Oberstar,
As additional conferees from the Committee on
Education and the Workforce, for consideration
of secs. 713-14, 717, 879, 1302, 1304-5, and
1311 of the Senate amendment, and modifications
committed to conference:
Bill Goodling,
Harris W. Fawell,
Donald M. Payne,
Managers on the Part of the House.
From the Committee on Finance:
Bill Roth,
Trent Lott,
Daniel P. Moynihan,
From the Committee on the Budget:
Pete Domenici,
Don Nickles,
Frank R. Lautenberg,
Managers on the Part of the Senate.