[House Report 105-739]
[From the U.S. Government Publishing Office]
105th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 105-739
_______________________________________________________________________
TAXPAYER RELIEF ACT OF 1998
_______
September 23, 1998.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______________________________________________________________________
Mr. Archer, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 4579]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 4579) to provide tax relief for individuals,
families, and farming and other small businesses, to provide
tax incentives for education, to extend certain expiring
provisions, and for other purposes, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
CONTENTS
Page
I. Summary and Background..........................................37
A. Purpose and Summary................................... 37
B. Background and Need for Legislation................... 42
C. Legislative History................................... 42
II. Explanation of the Bill.........................................43
Title I. Individual and Family Tax Relief Provisions..... 43
A. Marriage Penalty Tax Relief (sec. 101)............ 43
B. Partial Exclusion for Interest and Dividends (sec.
102)............................................. 45
C. Treatment of Personal Credits Under the Individual
Minimum Tax (sec. 103)........................... 46
D. Increase Deduction for Health Insurance Expenses
of Self-Employed Individuals (sec. 104).......... 47
E. Exclusion of Gain on the Sale of a Principal
Residence by a Member of the Uniformed Service or
the Foreign Service of the United States (sec.
105)............................................. 48
F. Acceleration of Increased Exemption From Estate
and Gift Tax (sec. 106).......................... 49
G. Education Provisions.............................. 50
1. Permit private higher education institutions to
establish qualified prepaid tuition programs
(sec. 111)..................................... 50
2. Modification of arbitrage rebate rules
application to public school construction bonds
(sec. 112)..................................... 51
H. Social Security Provisions........................ 53
1. Increases in the Social Security earnings limit
for individuals who have attained retirement
age (sec. 121)................................. 53
2. Recomputations of benefits after normal
retirement age (sec. 122)...................... 54
Title II. Small Business and Farmer Tax Relief Provisions 55
A. Accelerate Increase in Expensing for Small
Businesses (sec. 201)............................ 55
B. Farm Provisions................................... 57
1. Permanent extension of income averaging for
farmers (sec. 211)............................. 57
2. Extend the net operating loss carryback period
for farmers (sec. 212)......................... 57
3. Production flexibility contract payments (sec.
213)........................................... 59
C. Increase in Volume Cap on Private Activity Bonds
(sec. 221)....................................... 59
Title III. Extension of Expiring Provisions.............. 61
A. Extension of Research and Experimentation Credit
and Increase in the Rates for the Alternative
Incremental Research Credit (sec. 301)........... 61
B. Extension of Work Opportunity Tax Credit (sec.
302)............................................. 64
C. Extension of the Welfare-to-Work Tax Credit (sec.
303)............................................. 65
D. Extend the Deduction Provided for Contributions of
Appreciated Stock to Private Foundations; Public
Inspection of Private Foundation Annual Returns.. 66
1. Extend the deduction for contributions of
appreciated stock to private foundations (sec.
304(a))........................................ 66
2. Public inspection of private foundation annual
returns (sec. 304(b)).......................... 67
E. Exceptions under Subpart F for Certain Active
Financing Income (sec. 305)...................... 69
F. Extension of the Generalized System of Preferences
(sec. 311)....................................... 91
Title IV. Revenue Offset Provision....................... 91
A. Treatment of Certain Deductible Liquidating
Distributions of Regulated Investment Companies
and Real Estate Investment Trusts (sec. 401)..... 91
Title V. Tax Technical Corrections....................... 93
A. Technical Corrections to the 1998 Act............. 93
1. Burden of proof (sec. 502(b))................... 93
2. Relief for innocent spouses (sec. 502(c))....... 93
3. Interest netting (sec. 502 (d))................. 93
4. Effective date for elimination of 18-month
holding period for capital gains (sec. 502 (h)) 94
B. Technical Corrections to the 1997 Act............. 95
1. Treatment of interest on qualified education
loans (sec. 503(a))............................ 95
2. Capital gain distributions of charitable
remainder trusts (sec. 503(b))................. 96
3. Gifts may not be revalued for estate tax
purposes after expiration of statute of
limitations (sec. 503(c))...................... 96
4. Coordinate Vaccine Injury Compensation Trust
Fund expenditure purposes with list of taxable
vaccines (sec. 503(d))......................... 98
5. Abatement of interest by reason of
Presidentially declared disasters (sec. 503(e)) 98
6. Treatment of certain corporate distributions
(sec. 503(f)).................................. 99
7. Treatment of net operating losses arising from
certain eligible losses (sec. 503(g)).......... 100
8. Determination of unborrowed cash value under
COLI pro rata interest disallowance rules (sec.
503(h))........................................ 101
9. Payment of taxes by commercially acceptable
means (sec. 503 (i))........................... 101
C. Technical Corrections to the 1984 Act............. 102
1. Casualty loss deduction (sec. 504).............. 102
D. Disclosure of Tax Return Information to Department
of Agriculture (sec. 505(a))..................... 103
E. Technical Corrections to the Transportation Equity
Act for the 21st Century (sec. 505(b))........... 103
Title VI. Renewal Community Provisions (secs. 601-606)... 104
III. Votes of the Committee.........................................114
IV. Budget Effects of the Bill.....................................115
A. Committee Estimates of Budgetary Effects.............. 115
B. Budget Authority and Tax Expenditures................. 118
C. Cost Estimate Prepared by the Congressional Budget
Office............................................... 118
V. Other Matters to be Discussed Under the Rules of the House.....126
A. Committee Oversight Findings and Recommendations...... 126
B. Summary of Findings and Recommendations of the
Committee on Government Reform and Oversight......... 126
C. Constitutional Authority Statement.................... 126
D. Information Relating to Unfunded Mandates............. 126
E. Applicability of House Rule XXI5(c)................... 127
VI. Changes in Existing Law Made by the Bill, as Reported..........127
VII. Dissenting Views...............................................211
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE, ETC.
(a) Short Title.--This Act may be cited as the ``Taxpayer Relief Act
of 1998''.
(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) Table of Contents.--
Sec. 1. Short title, etc.
TITLE I--PROVISIONS PRIMARILY AFFECTING INDIVIDUALS AND FAMILIES
Subtitle A--General Provisions
Sec. 101. Elimination of marriage penalty in standard deduction.
Sec. 102. Exemption of certain interest and dividend income from tax.
Sec. 103. Nonrefundable personal credits allowed against alternative
minimum tax.
Sec. 104. 100 percent deduction for health insurance costs of self-
employed individuals.
Sec. 105. Special rule for members of uniformed services and Foreign
Service in determining exclusion of gain from sale of principal
residence.
Sec. 106. $1,000,000 exemption from estate and gift taxes.
Subtitle B--Provisions Relating to Education
Sec. 111. Eligible educational institutions permitted to maintain
qualified tuition programs.
Sec. 112. Modification of arbitrage rebate rules applicable to public
school construction bonds.
Subtitle C--Provisions Relating to Social Security
Sec. 121. Increases in the social security earnings limit for
individuals who have attained retirement age.
Sec. 122. Recomputation of benefits after normal retirement age.
TITLE II--PROVISIONS PRIMARILY AFFECTING FARMING AND OTHER BUSINESSES
Subtitle A--Increase in Expense Treatment for Small Businesses
Sec. 201. Increase in expense treatment for small businesses.
Subtitle B--Provisions Relating to Farmers
Sec. 211. Income averaging for farmers made permanent.
Sec. 212. 5-year net operating loss carryback for farming losses.
Sec. 213. Production flexibility contract payments.
Subtitle C--Increase in Volume Cap on Private Activity Bonds
Sec. 221. Increase in volume cap on private activity bonds.
TITLE III--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS
Subtitle A--Tax Provisions
Sec. 301. Research credit.
Sec. 302. Work opportunity credit.
Sec. 303. Welfare-to-work credit.
Sec. 304. Contributions of stock to private foundations; expanded
public inspection of private foundations' annual returns.
Sec. 305. Subpart F exemption for active financing income.
Subtitle B--Generalized System of Preferences
Sec. 311. Extension of Generalized System of Preferences.
TITLE IV--REVENUE OFFSET
Sec. 401. Treatment of certain deductible liquidating distributions of
regulated investment companies and real estate investment trusts.
TITLE V--TECHNICAL CORRECTIONS
Sec. 501. Definitions; coordination with other titles.
Sec. 502. Amendments related to Internal Revenue Service Restructuring
and Reform Act of 1998.
Sec. 503. Amendments related to Taxpayer Relief Act of 1997.
Sec. 504. Amendments related to Tax Reform Act of 1984.
Sec. 505. Other amendments.
TITLE VI--AMERICAN COMMUNITY RENEWAL ACT OF 1998
Sec. 601. Short title.
Sec. 602. Designation of and tax incentives for renewal communities.
Sec. 603. Extension of expensing of environmental remediation costs to
renewal communities.
Sec. 604. Extension of work opportunity tax credit for renewal
communities
Sec. 605. Conforming and clerical amendments.
Sec. 606. Evaluation and reporting requirements.
TITLE I--PROVISIONS PRIMARILY AFFECTING INDIVIDUALS AND FAMILIES
Subtitle A--General Provisions
SEC. 101. ELIMINATION OF MARRIAGE PENALTY IN STANDARD DEDUCTION.
(a) In General.--Paragraph (2) of section 63(c) (relating to standard
deduction) is amended--
(1) by striking ``$5,000'' in subparagraph (A) and inserting
``twice the dollar amount in effect under subparagraph (C) for
the taxable year'',
(2) by adding ``or'' at the end of subparagraph (B),
(3) by striking ``in the case of'' and all that follows in
subparagraph (C) and inserting ``in any other case.'', and
(4) by striking subparagraph (D).
(b) Additional Standard Deduction for Aged and Blind To Be the Same
for Married and Unmarried Individuals.--
(1) Paragraphs (1) and (2) of section 63(f) are each amended
by striking ``$600'' and inserting ``$750''.
(2) Subsection (f) of section 63 is amended by striking
paragraph (3) and by redesignating paragraph (4) as paragraph
(3).
(c) Technical Amendments.--
(1) Subparagraph (B) of section 1(f)(6) is amended by
striking ``(other than with'' and all that follows through
``shall be applied'' and inserting ``(other than with respect
to sections 63(c)(4) and 151(d)(4)(A)) shall be applied''.
(2) Paragraph (4) of section 63(c) is amended by adding at
the end the following flush sentence:
``The preceding sentence shall not apply to the amount referred
to in paragraph (2)(A).''
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1998.
SEC. 102. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND INCOME FROM TAX.
(a) In General.--Part III of subchapter B of chapter 1 (relating to
amounts specifically excluded from gross income) is amended by
inserting after section 115 the following new section:
``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY
INDIVIDUALS.
``(a) Exclusion From Gross Income.--Gross income does not include
dividends and interest received during the taxable year by an
individual.
``(b) Limitations.--
``(1) Maximum amount.--The aggregate amount excluded under
subsection (a) for any taxable year shall not exceed $200 ($400
in the case of a joint return).
``(2) Certain dividends excluded.--Subsection (a) shall not
apply to any dividend from a corporation which, for the taxable
year of the corporation in which the distribution is made, or
for the next preceding taxable year of the corporation, is a
corporation exempt from tax under section 501 (relating to
certain charitable, etc., organization) or section 521
(relating to farmers' cooperative associations).
``(c) Special Rules.--For purposes of this section--
``(1) Exclusion not to apply to capital gain dividends from
regulated investment companies and real estate investment
trusts.--
``For treatment of capital gain dividends, see
sections 854(a) and 857(c).
``(2) Certain nonresident aliens ineligible for exclusion.--
In the case of a nonresident alien individual, subsection (a)
shall apply only--
``(A) in determining the tax imposed for the taxable
year pursuant to section 871(b)(1) and only in respect
of dividends and interest which are effectively
connected with the conduct of a trade or business
within the United States, or
``(B) in determining the tax imposed for the taxable
year pursuant to section 877(b).
``(3) Dividends from employee stock ownership plans.--
Subsection (a) shall not apply to any dividend described in
section 404(k).''
(b) Conforming Amendments.--
(1)(A) Subparagraph (A) of section 135(c)(4) is amended by
inserting ``116,'' before ``137''.
(B) Subsection (d) of section 135 is amended by redesignating
paragraph (4) as paragraph (5) and by inserting after paragraph
(3) the following new paragraph:
``(4) Coordination with section 116.--This section shall be
applied before section 116.''
(2) Paragraph (2) of section 265(a) is amended by inserting
before the period ``, or to purchase or carry obligations or
shares, or to make deposits, to the extent the interest thereon
is excludable from gross income under section 116''.
(3) Subsection (c) of section 584 is amended by adding at the
end thereof the following new flush sentence:
``The proportionate share of each participant in the amount of
dividends or interest received by the common trust fund and to which
section 116 applies shall be considered for purposes of such section as
having been received by such participant.''
(4) Subsection (a) of section 643 is amended by redesignating
paragraph (7) as paragraph (8) and by inserting after paragraph
(6) the following new paragraph:
``(7) Dividends or interest.--There shall be included the
amount of any dividends or interest excluded from gross income
pursuant to section 116.''
(5) Section 854(a) is amended by inserting ``section 116
(relating to partial exclusion of dividends and interest
received by individuals) and'' after ``For purposes of''.
(6) Section 857(c) is amended to read as follows:
``(c) Restrictions Applicable to Dividends Received From Real Estate
Investment Trusts.--
``(1) Treatment for section 116.--For purposes of section 116
(relating to partial exclusion of dividends and interest
received by individuals), a capital gain dividend (as defined
in subsection (b)(3)(C)) received from a real estate investment
trust which meets the requirements of this part shall not be
considered as a dividend.
``(2) Treatment for section 243.--For purposes of section 243
(relating to deductions for dividends received by
corporations), a dividend received from a real estate
investment trust which meets the requirements of this part
shall not be considered as a dividend.''
(7) The table of sections for part III of subchapter B of
chapter 1 is amended by inserting after the item relating to
section 115 the following new item:
``Sec. 116. Partial exclusion of
dividends and interest received
by individuals.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1998.
SEC. 103. NONREFUNDABLE PERSONAL CREDITS ALLOWED AGAINST ALTERNATIVE
MINIMUM TAX.
(a) In General.--Subsection (a) of section 26 is amended to read as
follows:
``(a) Limitation Based on Amount of Tax.--The aggregate amount of
credits allowed by this subpart for the taxable year shall not exceed
the sum of--
``(1) the taxpayer's regular tax liability for the taxable
year, and
``(2) the tax imposed for the taxable year by section 55(a).
For purposes of applying the preceding sentence, paragraph (2) shall be
treated as being zero for any taxable year beginning during 1998.''.
(b) Conforming Amendments.--
(1) Subsection (d) of section 24 is amended by striking
paragraph (2) and by redesignating paragraph (3) as paragraph
(2).
(2) Section 32 is amended by striking subsection (h).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 104. 100 PERCENT DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
EMPLOYED INDIVIDUALS.
(a) In General.--Paragraph (1) of section 162(l) (relating to special
rules for health insurance costs of self-employed individuals) is
amended to read as follows:
``(1) Allowance of deduction.--In the case of an individual
who is an employee within the meaning of section 401(c)(1),
there shall be allowed as a deduction under this section an
amount equal to 100 percent of the amount paid during the
taxable year for insurance which constitutes medical care for
the taxpayer, his spouse, and dependents.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1998.
SEC. 105. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND FOREIGN
SERVICE IN DETERMINING EXCLUSION OF GAIN FROM SALE
OF PRINCIPAL RESIDENCE.
(a) In General.--Subsection (d) of section 121 (relating to exclusion
of gain from sale of principal residence) is amended by adding at the
end the following new paragraph:
``(9) Members of uniformed services and foreign service.--
``(A) In general.--The running of the 5-year period
described in subsection (a) shall be suspended with
respect to an individual during any time that such
individual or such individual's spouse is serving on
qualified official extended duty as a member of the
uniformed services or of the Foreign Service.
``(B) Qualified official extended duty.--For purposes
of this paragraph--
``(i) In general.--The term `qualified
official extended duty' means any period of
extended duty as a member of the uniformed
services or a member of the Foreign Service
during which the member serves at a duty
station which is at least 50 miles from such
property or is under Government orders to
reside in Government quarters.
``(ii) Uniformed services.--The term
`uniformed services' has the meaning given such
term by section 101(a)(5) of title 10, United
States Code, as in effect on the date of the
enactment of the Taxpayer Relief Act of 1998.
``(iii) Foreign service of the united
states.--The term `member of the Foreign
Service' has the meaning given the term `member
of the Service' by paragraph (1), (2), (3),
(4), or (5) of section 103 of the Foreign
Service Act of 1980, as in effect on the date
of the enactment of the Taxpayer Relief Act of
1998.
``(iv) Extended duty.--The term `extended
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.''.
(b) Effective Date.--The amendment made by this section shall apply
to sales and exchanges after the date of the enactment of this Act.
SEC. 106. $1,000,000 EXEMPTION FROM ESTATE AND GIFT TAXES.
(a) In General.--Subsection (c) of section 2010 (relating to
applicable credit amount) is amended to read as follows:
``(c) Applicable Credit Amount.--
``(1) In general.--For purposes of this section, the
applicable credit amount is $345,800.
``(2) Applicable exclusion amount.--For purposes of the
provisions of this title which refer to this subsection, the
applicable exclusion amount is $1,000,000.''
(b) Effective Date.--The amendment made by this section shall apply
to estates of decedents dying, and gifts made, after December 31, 1998.
Subtitle B--Provisions Relating to Education
SEC. 111. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO MAINTAIN
QUALIFIED TUITION PROGRAMS.
(a) In General.--Paragraph (1) of section 529(b) (defining qualified
State tuition program) is amended by inserting ``or by 1 or more
eligible educational institutions'' after ``maintained by a State or
agency or instrumentality thereof''.
(b) Technical Amendments.--
(1) The texts of sections 72(e)(9), 135(c)(2)(C),
135(d)(1)(D), 529, 530, and 4973(e)(1)(B) are each amended by
striking ``qualified State tuition program'' each place it
appears and inserting ``qualified tuition program''.
(2) The paragraph heading for paragraph (9) of section 72(e)
and the subparagraph heading for subparagraph (B) of section
530(b)(2) are each amended by striking ``state''.
(3) The subparagraph heading for subparagraph (C) of section
135(c)(2) is amended by striking ``qualified state tuition
program'' and inserting ``qualified tuition programs''.
(4) Sections 529(c)(3)(D)(i) and 6693(a)(2)(C) are each
amended by striking ``qualified State tuition programs'' and
inserting ``qualified tuition programs''.
(5)(A) The section heading of section 529 is amended to read
as follows:
``SEC. 529. QUALIFIED TUITION PROGRAMS.''.
(B) The item relating to section 529 in the table of sections
for part VIII of subchapter F of chapter 1 is amended by
striking ``State''.
(c) Effective Date.--The amendments made by this section shall take
effect on January 1, 1999.
SEC. 112. MODIFICATION OF ARBITRAGE REBATE RULES APPLICABLE TO PUBLIC
SCHOOL CONSTRUCTION BONDS.
(a) In General.--Subparagraph (C) of section 148(f)(4) is amended by
adding at the end the following new clause:
``(xviii) 4-year spending requirement for
public school construction issue.--
``(I) In general.--In the case of a
public school construction issue, the
spending requirements of clause (ii)
shall be treated as met if at least 10
percent of the available construction
proceeds of the construction issue are
spent for the governmental purposes of
the issue within the 1-year period
beginning on the date the bonds are
issued, 30 percent of such proceeds are
spent for such purposes within the 2-
year period beginning on such date, 50
percent of such proceeds are spent for
such purposes within the 3-year period
beginning on such date, and 100 percent
of such proceeds are spent for such
purposes within the 4-year period
beginning on such date.
``(II) Public school construction
issue.--For purposes of this clause,
the term `public school construction
issue' means any construction issue if
no bond which is part of such issue is
a private activity bond and all of the
available construction proceeds of such
issue are to be used for the
construction (as defined in clause
(iv)) of public school facilities to
provide education or training below the
postsecondary level or for the
acquisition of land that is
functionally related and subordinate to
such facilities.
``(III) Other rules to apply.--Rules
similar to the rules of the preceding
provisions of this subparagraph which
apply to clause (ii) also apply to this
clause.''
(b) Effective Date.--The amendment made by this section shall apply
to obligations issued after December 31, 1998.
Subtitle C--Provisions Relating to Social Security
SEC. 121. INCREASES IN THE SOCIAL SECURITY EARNINGS LIMIT FOR
INDIVIDUALS WHO HAVE ATTAINED RETIREMENT AGE.
(a) In General.--Section 203(f)(8)(D) of the Social Security Act (42
U.S.C. 403(f)(8)(D)) is amended by striking clauses (iv) through (vii)
and inserting the following new clauses:
``(iv) for each month of any taxable year ending
after 1998 and before 2000, $1,416.66\2/3\,
``(v) for each month of any taxable year ending after
1999 and before 2001, $1,541.66\2/3\,
``(vi) for each month of any taxable year ending
after 2000 and before 2002, $2,166.66\2/3\,
``(vii) for each month of any taxable year ending
after 2001 and before 2003, $2,500.00,
``(viii) for each month of any taxable year ending
after 2002 and before 2004, $2,608.33\1/3\,
``(ix) for each month of any taxable year ending
after 2003 and before 2005, $2,833.33\1/3\,
``(x) for each month of any taxable year ending after
2004 and before 2006, $2,950.00,
``(xi) for each month of any taxable year ending
after 2005 and before 2007, $3,066.66\2/3\,
``(xii) for each month of any taxable year ending
after 2006 and before 2008, $3,195.83\1/3\, and
``(xiii) for each month of any taxable year ending
after 2007 and before 2009, $3,312.50.''.
(b) Conforming Amendments.--
(1) Section 203(f)(8)(B)(ii) of such Act (42 U.S.C.
403(f)(8)(B)(ii)) is amended--
(A) by striking ``after 2001 and before 2003'' and
inserting ``after 2007 and before 2009''; and
(B) in subclause (II), by striking ``2000'' and
inserting ``2006''.
(2) The second sentence of section 223(d)(4)(A) of such Act
(42 U.S.C. 423(d)(4)(A)) is amended by inserting ``and section
121 of the Taxpayer Relief Act of 1998'' after ``1996''.
(c) Effective Date.--The amendments made by this section shall apply
with respect to taxable years ending after 1998.
SEC. 122. RECOMPUTATION OF BENEFITS AFTER NORMAL RETIREMENT AGE.
(a) In General.--Section 215(f)(2)(D)(i) of the Social Security Act
(42 U.S.C. 415(f)(2)(D)(i)) is amended to read as follows:
``(i) in the case of an individual who did not die in the
year with respect to which the recomputation is made, for
monthly benefits beginning with benefits for January of--
``(I) the second year following the year with respect
to which the recomputation is made, in any such case in
which the individual is entitled to old-age insurance
benefits, the individual has attained retirement age
(as defined in section 216(l)) as of the end of the
year preceding the year with respect to which the
recomputation is made, and the year with respect to
which the recomputation is made would not be
substituted in recomputation under this subsection for
a benefit computation year in which no wages or self-
employment income have been credited previously to such
individual, or
``(II) the first year following the year with respect
to which the recomputation is made, in any other such
case; or''.
(b) Conforming Amendments.--
(1) Section 215(f)(7) of such Act (42 U.S.C. 415(f)(7)) is
amended by inserting ``, and as amended by section 122(b)(2) of
the Taxpayer Relief Act of 1998,'' after ``This subsection as
in effect in December 1978''.
(2) Subparagraph (A) of section 215(f)(2) of the Social
Security Act as in effect in December 1978 and applied in
certain cases under the provisions of such Act as in effect
after December 1978 is amended--
(A) by striking ``in the case of an individual who
did not die'' and all that follows and inserting ``in
the case of an individual who did not die in the year
with respect to which the recomputation is made, for
monthly benefits beginning with benefits for January
of--''; and
(B) by adding at the end the following:
``(i) the second year following the year with respect
to which the recomputation is made, in any such case in
which the individual is entitled to old-age insurance
benefits, the individual has attained age 65 as of the
end of the year preceding the year with respect to
which the recomputation is made, and the year with
respect to which the recomputation is made would not be
substituted in recomputation under this subsection for
a benefit computation year in which no wages or self-
employment income have been credited previously to such
individual, or
``(ii) the first year following the year with respect
to which the recomputation is made, in any other such
case; or''.
(c) Effective Date.--The amendments made by this section shall apply
with respect to recomputations of primary insurance amounts based on
wages paid and self employment income derived after 1997 and with
respect to benefits payable after December 31, 1998.
TITLE II--PROVISIONS PRIMARILY AFFECTING FARMING AND OTHER BUSINESSES
Subtitle A--Increase in Expense Treatment for Small Businesses
SEC. 201. INCREASE IN EXPENSE TREATMENT FOR SMALL BUSINESSES.
(a) General Rule.--Paragraph (1) of section 179(b) (relating to
dollar limitation) is amended to read as follows:
``(1) Dollar limitation.--The aggregate cost which may be
taken into account under subsection (a) for any taxable year
shall not exceed $25,000.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1998.
Subtitle B--Provisions Relating to Farmers
SEC. 211. INCOME AVERAGING FOR FARMERS MADE PERMANENT.
Subsection (c) of section 933 of the Taxpayer Relief Act of 1997 is
amended by striking ``, and before January 1, 2001''.
SEC. 212. 5-YEAR NET OPERATING LOSS CARRYBACK FOR FARMING LOSSES.
(a) In General.--Paragraph (1) of section 172(b) (relating to net
operating loss deduction) is amended by adding at the end the following
new subparagraph:
``(G) Farming losses.--In the case of a taxpayer
which has a farming loss (as defined in subsection (i))
for a taxable year, such farming loss shall be a net
operating loss carryback to each of the 5 taxable years
preceding the taxable year of such loss.''
(b) Farming loss.--Section 172 is amended by redesignating subsection
(i) as subsection (j) and by inserting after subsection (h) the
following new subsection:
``(i) Rules Relating to Farming Losses.--For purposes of this
section--
``(1) In general.--The term `farming loss' means the lesser
of--
``(A) the amount which would be the net operating
loss for the taxable year if only income and deductions
attributable to farming businesses (as defined in
section 263A(e)(4)) are taken into account, or
``(B) the amount of the net operating loss for such
taxable year.
``(2) Coordination with subsection (b)(2).--For purposes of
applying subsection (b)(2), a farming loss for any taxable year
shall be treated in a manner similar to the manner in which a
specified liability loss is treated.
``(3) Election.--Any taxpayer entitled to a 5-year carryback
under subsection (b)(1)(G) from any loss year may elect to have
the carryback period with respect to such loss year determined
without regard to subsection (b)(1)(G). Such election shall be
made in such manner as may be prescribed by the Secretary and
shall be made by the due date (including extensions of time)
for filing the taxpayer's return for the taxable year of the
net operating loss. Such election, once made for any taxable
year, shall be irrevocable for such taxable year.''
(c) Coordination With Farm Disaster Losses.--Clause (ii) of section
172(b)(1)(F) is amended by adding at the end the following flush
sentence:
``Such term shall not include any farming loss
(as defined in subsection (i)).''
(d) Effective Date.--The amendments made by this section shall apply
to net operating losses for taxable years beginning after December 31,
1997.
SEC. 213. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.
The option under section 112(d)(3) of the Federal Agriculture
Improvement and Reform Act of 1996 (7 U.S.C. 7212(d)(3)) shall be
disregarded in determining the taxable year for which the payment for
fiscal year 1999 under a production flexibility contract under subtitle
B of title I of such Act is properly includible in gross income for
purposes of the Internal Revenue Code of 1986.
Subtitle C--Increase in Volume Cap on Private Activity Bonds
SEC. 221. INCREASE IN VOLUME CAP ON PRIVATE ACTIVITY BONDS.
(a) In General.--Subsection (d) of section 146 (relating to volume
cap) is amended by striking paragraph (2), by redesignating paragraphs
(3) and (4) as paragraphs (2) and (3), respectively, and by striking
paragraph (1) and inserting the following new paragraph:
``(1) In general.--The State ceiling applicable to any State
for any calendar year shall be the greater of--
``(A) an amount equal to $75 multiplied by the State
population, or
``(B) $225,000,000.
Subparagraph (B) shall not apply to any possession of the
United States.''
(b) Conforming Amendment.--Sections 25(f)(3) and 42(h)(3)(E)(iii) are
each amended by striking ``section 146(d)(3)(C)'' and inserting
``section 146(d)(2)(C)''.
(c) Effective Date.--The amendments made by this section shall apply
to calendar years after 1998.
TITLE III--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS
Subtitle A--Tax Provisions
SEC. 301. RESEARCH CREDIT.
(a) Temporary Extension.--
(1) In general.--Paragraph (1) of section 41(h) (relating to
termination) is amended--
(A) by striking ``June 30, 1998'' and inserting
``February 29, 2000'',
(B) by striking ``24-month'' and inserting ``44-
month'', and
(C) by striking ``24 months'' and inserting ``44
months''.
(2) Technical amendment.--Subparagraph (D) of section
45C(b)(1) is amended by striking ``June 30, 1998'' and
inserting ``February 29, 2000''.
(3) Effective date.--The amendments made by this subsection
shall apply to amounts paid or incurred after June 30, 1998.
(b) Increase in Percentages Under Alternative Incremental Credit.--
(1) In general.--Subparagraph (A) of section 41(c)(4) is
amended--
(A) by striking ``1.65 percent'' and inserting ``2.65
percent'',
(B) by striking ``2.2 percent'' and inserting ``3.2
percent'', and
(C) by striking ``2.75 percent'' and inserting ``3.75
percent''.
(2) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after June 30, 1998.
SEC. 302. WORK OPPORTUNITY CREDIT.
(a) Temporary Extension.--Subparagraph (B) of section 51(c)(4)
(relating to termination) is amended by striking ``June 30, 1998'' and
inserting ``February 29, 2000''.
(b) Effective Date.--The amendment made by this section shall apply
to individuals who begin work for the employer after June 30, 1998.
SEC. 303. WELFARE-TO-WORK CREDIT.
Subsection (f) of section 51A (relating to termination) is amended by
striking ``April 30, 1999'' and inserting ``February 29, 2000''.
SEC. 304. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS; EXPANDED
PUBLIC INSPECTION OF PRIVATE FOUNDATIONS' ANNUAL
RETURNS.
(a) Special Rule for Contributions of Stock Made Permanent.--
(1) In general.--Paragraph (5) of section 170(e) is amended
by striking subparagraph (D) (relating to termination).
(2) Effective date.--The amendment made by paragraph (1)
shall apply to contributions made after June 30, 1998.
(b) Expanded Public Inspection of Private Foundations' Annual
Returns, Etc.--
(1) In general.--Section 6104 (relating to publicity of
information required from certain exempt organizations and
certain trusts) is amended by striking subsections (d) and (e)
and inserting after subsection (c) the following new
subsection:
``(d) Public Inspection of Certain Annual Returns and Applications
for Exemption.--
``(1) In general.--In the case of an organization described
in subsection (c) or (d) of section 501 and exempt from
taxation under section 501(a)--
``(A) a copy of--
``(i) the annual return filed under section
6033 (relating to returns by exempt
organizations) by such organization, and
``(ii) if the organization filed an
application for recognition of exemption under
section 501, the exempt status application
materials of such organization,
shall be made available by such organization for
inspection during regular business hours by any
individual at the principal office of such organization
and, if such organization regularly maintains 1 or more
regional or district offices having 3 or more
employees, at each such regional or district office,
and
``(B) upon request of an individual made at such
principal office or such a regional or district office,
a copy of such annual return and exempt status
application materials shall be provided to such
individual without charge other than a reasonable fee
for any reproduction and mailing costs.
The request described in subparagraph (B) must be made in
person or in writing. If such request is made in person, such
copy shall be provided immediately and, if made in writing,
shall be provided within 30 days.
``(2) 3-year limitation on inspection of returns.--Paragraph
(1) shall apply to an annual return filed under section 6033
only during the 3-year period beginning on the last day
prescribed for filing such return (determined with regard to
any extension of time for filing).
``(3) Exceptions from disclosure requirement.--
``(A) Nondisclosure of contributors, etc.--Paragraph
(1) shall not require the disclosure of the name or
address of any contributor to the organization. In the
case of an organization described in section 501(d),
subparagraph (A) shall not require the disclosure of
the copies referred to in section 6031(b) with respect
to such organization.
``(B) Nondisclosure of certain other information.--
Paragraph (1) shall not require the disclosure of any
information if the Secretary withheld such information
from public inspection under subsection (a)(1)(D).
``(4) Limitation on providing copies.--Paragraph (1)(B) shall
not apply to any request if, in accordance with regulations
promulgated by the Secretary, the organization has made the
requested documents widely available, or the Secretary
determines, upon application by an organization, that such
request is part of a harassment campaign and that compliance
with such request is not in the public interest.
``(5) Exempt status application materials.--For purposes of
paragraph (1), the term `exempt status applicable materials'
means the application for recognition of exemption under
section 501 and any papers submitted in support of such
application and any letter or other document issued by the
Internal Revenue Service with respect to such application.''
(2) Conforming amendments.--
(A) Subsection (c) of section 6033 is amended by
adding ``and'' at the end of paragraph (1), by striking
paragraph (2), and by redesignating paragraph (3) as
paragraph (2).
(B) Subparagraph (C) of section 6652(c)(1) is amended
by striking ``subsection (d) or (e)(1) of section 6104
(relating to public inspection of annual returns)'' and
inserting ``section 6104(d) with respect to any annual
return''.
(C) Subparagraph (D) of section 6652(c)(1) is amended
by striking ``section 6104(e)(2) (relating to public
inspection of applications for exemption)'' and
inserting ``section 6104(d) with respect to any exempt
status application materials (as defined in such
section)''.
(D) Section 6685 is amended by striking ``or (e)''.
(E) Section 7207 is amended by striking ``or (e)''.
(3) Effective date.--
(A) In general.--Except as provided in subparagraph
(B), the amendments made by this subsection shall apply
to requests made after the later of December 31, 1998,
or the 60th day after the Secretary of the Treasury
first issues the regulations referred to such section
6104(d)(4) of the Internal Revenue Code of 1986, as
amended by this section.
(B) Publication of annual returns.--Section 6104(d)
of such Code, as in effect before the amendments made
by this subsection, shall not apply to any return the
due date for which is after the date such amendments
take effect under subparagraph (A).
SEC. 305. SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.
(a) Income Derived From Banking, Financing or Similar Businesses.--
Section 954(h) (relating to income derived in the active conduct of
banking, financing, or similar businesses) is amended to read as
follows:
``(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 qualified
banking or financing income of an eligible controlled foreign
corporation.
``(2) Eligible controlled foreign corporation.--For purposes
of this subsection--
``(A) In general.--The term `eligible controlled
foreign corporation' means a controlled foreign
corporation which--
``(i) is predominantly engaged in the active
conduct of a banking, financing, or similar
business, and
``(ii) conducts substantial activity with
respect to such business.
``(B) Predominantly engaged.--A controlled foreign
corporation shall be treated as predominantly engaged
in the active conduct of a banking, financing, or
similar business if--
``(i) more than 70 percent of the gross
income of the controlled foreign corporation is
derived directly from the active and regular
conduct of a lending or finance business from
transactions with customers which are not
related persons,
``(ii) it is engaged in the active conduct of
a banking business and is an institution
licensed to do business as a bank in the United
States (or is any other corporation not so
licensed which is specified by the Secretary in
regulations), or
``(iii) it is engaged in the active conduct
of a securities business and is registered as a
securities broker or dealer under section 15(a)
of the Securities Exchange Act of 1934 or is
registered as a Government securities broker or
dealer under section 15C(a) of such Act (or is
any other corporation not so registered which
is specified by the Secretary in regulations).
``(3) Qualified banking or financing income.--For purposes of
this subsection--
``(A) In general.--The term `qualified banking or
financing income' means income of an eligible
controlled foreign corporation which--
``(i) is derived in the active conduct of a
banking, financing, or similar business by--
``(I) such eligible controlled
foreign corporation, or
``(II) a qualified business unit of
such eligible controlled foreign
corporation,
``(ii) is derived from 1 or more
transactions--
``(I) with customers located in a
country other than the United States,
and
``(II) substantially all of the
activities in connection with which are
conducted directly by the corporation
or unit in its home country, and
``(iii) is treated as earned by such
corporation or unit in its home country for
purposes of such country's tax laws.
``(B) Limitation on nonbanking and nonsecurities
businesses.--No income of an eligible controlled
foreign corporation not described in clause (ii) or
(iii) of paragraph (2)(B) (or of a qualified business
unit of such corporation) shall be treated as qualified
banking or financing income unless more than 30 percent
of such corporation's or unit's gross income is derived
directly from the active and regular conduct of a
lending or finance business from transactions with
customers which are not related persons and which are
located within such corporation's or unit's home
country.
``(C) Substantial activity requirement for cross
border income.--The term `qualified banking or
financing income' shall not include income derived from
1 or more transactions with customers located in a
country other than the home country of the eligible
controlled foreign corporation or a qualified business
unit of such corporation unless such corporation or
unit conducts substantial activity with respect to a
banking, financing, or similar business in its home
country.
``(D) Determinations made separately.--For purposes
of this paragraph, the qualified banking or financing
income of an eligible controlled foreign corporation
and each qualified business unit of such corporation
shall be determined separately for such corporation and
each such unit by taking into account--
``(i) in the case of the eligible controlled
foreign corporation, only items of income,
deduction, gain, or loss and activities of such
corporation not properly allocable or
attributable to any qualified business unit of
such corporation, and
``(ii) in the case of a qualified business
unit, only items of income, deduction, gain, or
loss and activities properly allocable or
attributable to such unit.
``(4) Lending or finance business.--For purposes of this
subsection, the term `lending or finance business' means the
business of--
``(A) making loans,
``(B) purchasing or discounting accounts receivable,
notes, or installment obligations,
``(C) engaging in leasing (including entering into
leases and purchasing, servicing, and disposing of
leases and leased assets),
``(D) issuing letters of credit or providing
guarantees,
``(E) providing charge and credit card services, or
``(F) rendering services or making facilities
available in connection with activities described in
subparagraphs (A) through (E) carried on by--
``(i) the corporation (or qualified business
unit) rendering services or making facilities
available, or
``(ii) another corporation (or qualified
business unit of a corporation) which is a
member of the same affiliated group (as defined
in section 1504, but determined without regard
to section 1504(b)(3)).
``(5) Other definitions.--For purposes of this subsection--
``(A) Customer.--The term `customer' means, with
respect to any controlled foreign corporation or
qualified business unit, any person which has a
customer relationship with such corporation or unit and
which is acting in its capacity as such.
``(B) Home country.--Except as provided in
regulations--
``(i) Controlled foreign corporation.--The
term `home country' means, with respect to any
controlled foreign corporation, the country
under the laws of which the corporation was
created or organized.
``(ii) Qualified business unit.--The term
`home country' means, with respect to any
qualified business unit, the country in which
such unit maintains its principal office.
``(C) Located.--The determination of where a customer
is located shall be made under rules prescribed by the
Secretary.
``(D) Qualified business unit.--The term `qualified
business unit' has the meaning given such term by
section 989(a).
``(E) Related person.--The term `related person' has
the meaning given such term by subsection (d)(3).
``(6) Coordination with exception for dealers.--Paragraph (1)
shall not apply to income described in subsection (c)(2)(C)(ii)
of a dealer in securities (within the meaning of section 475)
which is an eligible controlled foreign corporation described
in paragraph (2)(B)(iii).
``(7) Anti-abuse rules.--For purposes of applying this
subsection and subsection (c)(2)(C)(ii)--
``(A) 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 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,
``(B) there shall be disregarded any item of income,
gain, loss, or deduction of an entity which is not
engaged in regular and continuous transactions with
customers which are not related persons,
``(C) there shall be disregarded any item of income,
gain, loss, or deduction with respect to any
transaction or series of transactions utilizing, or
doing business with--
``(i) one or more entities in order to
satisfy any home country requirement under this
subsection, or
``(ii) a special purpose entity or
arrangement, including a securitization,
financing, or similar entity or arrangement,
if one of the principal purposes of such transaction or
series of transactions is qualifying income or gain for
the exclusion under this subsection, and
``(D) a related person, an officer, a director, or an
employee with respect to any controlled foreign
corporation (or qualified business unit) which would
otherwise be treated as a customer of such corporation
or unit with respect to any transaction shall not be so
treated if a principal purpose of such transaction is
to satisfy any requirement of this subsection.
``(8) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection, subsection (c)(1)(B)(i),
subsection (c)(2)(C)(ii), and the last sentence of subsection
(e)(2).
``(9) Application.--This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection (e)(2) shall
apply only to the first taxable year of a foreign corporation
beginning after December 31, 1998, and before January 1, 2000,
and to taxable years of United States shareholders with or
within which such taxable year of such foreign corporation
ends.''
(b) Income Derived From Insurance Business.--
(1) Income attributable to issuance or reinsurance.--
(A) In general.--Section 953(a) (defining insurance
income) is amended to read as follows:
``(a) Insurance Income.--
``(1) In general.--For purposes of section 952(a)(1), the
term `insurance income' means any income which--
``(A) is attributable to the issuing (or reinsuring)
of an insurance or annuity contract, and
``(B) would (subject to the modifications provided by
subsection (b)) be taxed under subchapter L of this
chapter if such income were the income of a domestic
insurance company.
``(2) Exception.--Such term shall not include any exempt
insurance income (as defined in subsection (e)).''
(B) Exempt insurance income.--Section 953 (relating
to insurance income) is amended by adding at the end
the following new subsection:
``(e) Exempt Insurance Income.--For purposes of this section--
``(1) Exempt insurance income defined.--
``(A) In general.--The term `exempt insurance income'
means income derived by a qualifying insurance company
which--
``(i) is attributable to the issuing (or
reinsuring) of an exempt contract by such
company or a qualifying insurance company
branch of such company, and
``(ii) is treated as earned by such company
or branch in its home country for purposes of
such country's tax laws.
``(B) Exception for certain arrangements.--Such term
shall not include income attributable to the issuing
(or reinsuring) of an exempt contract as the result of
any arrangement whereby another corporation receives a
substantially equal amount of premiums or other
consideration in respect of issuing (or reinsuring) a
contract which is not an exempt contract.
``(C) Determinations made separately.--For purposes
of this subsection and section 954(i), the exempt
insurance income and exempt contracts of a qualifying
insurance company or any qualifying insurance company
branch of such company shall be determined separately
for such company and each such branch by taking into
account--
``(i) in the case of the qualifying insurance
company, only items of income, deduction, gain,
or loss, and activities of such company not
properly allocable or attributable to any
qualifying insurance company branch of such
company, and
``(ii) in the case of a qualifying insurance
company branch, only items of income,
deduction, gain, or loss and activities
properly allocable or attributable to such
unit.
``(2) Exempt contract.--
``(A) In general.--The term `exempt contract' means
an insurance or annuity contract issued or reinsured by
a qualifying insurance company or qualifying insurance
company branch in connection with property in,
liability arising out of activity in, or the lives or
health of residents of, a country other than the United
States.
``(B) Minimum home country income required.--
``(i) In general.--No contract of a
qualifying insurance company or of a qualifying
insurance company branch shall be treated as an
exempt contract unless such company or branch
derives more than 30 percent of its net written
premiums from exempt contracts (determined
without regard to this subparagraph)--
``(I) which cover applicable home
country risks, and
``(II) with respect to which no
policyholder, insured, annuitant, or
beneficiary is a related person (as
defined in section 954(d)(3)).
``(ii) Applicable home country risks.--The
term `applicable home country risks' means
risks in connection with property in, liability
arising out of activity in, or the lives or
health of residents of, the home country of the
qualifying insurance company or qualifying
insurance company branch, as the case may be,
issuing or reinsuring the contract covering the
risks.
``(C) Substantial activity requirements for cross
border risks.--A contract issued by a qualifying
insurance company or qualifying insurance company
branch which covers risks other than applicable home
country risks (as defined in subparagraph (B)(ii))
shall not be treated as an exempt contract unless such
company or branch, as the case may be--
``(i) conducts substantial activity with
respect to an insurance business in its home
country, and
``(ii) performs in its home country
substantially all of the activities necessary
to give rise to the income generated by such
contract.
``(3) Qualifying insurance company.--The term `qualifying
insurance company' means any controlled foreign corporation
which--
``(A) is subject to regulation as an insurance (or
reinsurance) company by its home country, and is
licensed, authorized, or regulated by the applicable
insurance regulatory body for its home country to sell
insurance, reinsurance, or annuity contracts to persons
other than related persons (within the meaning of
section 954(d)(3)) in such home country,
``(B) derives more than 50 percent of its aggregate
net written premiums from the issuance or reinsurance
by such controlled foreign corporation and each of its
qualifying insurance company branches of contracts--
``(i) covering applicable home country risks
(as defined in paragraph (2)) of such
corporation or branch, as the case may be, and
``(ii) with respect to which no policyholder,
insured, annuitant, or beneficiary is a related
person (as defined in section 954(d)(3)),
except that in the case of a branch, such premiums
shall only be taken into account to the extent such
premiums are treated as earned by such branch in its
home country for purposes of such country's tax laws,
and
``(C) is engaged in the insurance business and would
be subject to tax under subchapter L if it were a
domestic corporation.
``(4) Qualifying insurance company branch.--The term
`qualifying insurance company branch' means a qualified
business unit (within the meaning of section 989(a)) of a
controlled foreign corporation if--
``(A) such unit is licensed, authorized, or regulated
by the applicable insurance regulatory body for its
home country to sell insurance, reinsurance, or annuity
contracts to persons other than related persons (within
the meaning of section 954(d)(3)) in such home country,
and
``(B) such controlled foreign corporation is a
qualifying insurance company, determined under
paragraph (3) as if such unit were a qualifying
insurance company branch.
``(5) Life insurance or annuity contract.--For purposes of
this section and section 954, the determination of whether a
contract issued by a controlled foreign corporation or a
qualified business unit (within the meaning of section 989(a))
is a life insurance contract or an annuity contract shall be
made without regard to sections 72(s), 101(f), 817(h), and 7702
if--
``(A) such contract is regulated as a life insurance
or annuity contract by the corporation's or unit's home
country, and
``(B) no policyholder, insured, annuitant, or
beneficiary with respect to the contract is a United
States person.
``(6) Home country.--For purposes of this subsection, except
as provided in regulations--
``(A) Controlled foreign corporation.--The term `home
country' means, with respect to a controlled foreign
corporation, the country in which such corporation is
created or organized.
``(B) Qualified business unit.--The term `home
country' means, with respect to a qualified business
unit (as defined in section 989(a)), the country in
which the principal office of such unit is located and
in which such unit is licensed, authorized, or
regulated by the applicable insurance regulatory body
to sell insurance, reinsurance, or annuity contracts to
persons other than related persons (as defined in
section 954(d)(3)) in such country.
``(7) Anti-abuse rules.--For purposes of applying this
subsection and section 954(i)--
``(A) the rules of section 954(h)(7) (other than
subparagraph (B) thereof) shall apply,
``(B) there shall be disregarded any item of income,
gain, loss, or deduction of, or derived from, an entity
which is not engaged in regular and continuous
transactions with persons which are not related
persons,
``(C) there shall be disregarded any change in the
method of computing reserves a principal purpose of
which is the acceleration or deferral of any item in
order to claim the benefits of this subsection or
section 954(i),
``(D) a contract of insurance or reinsurance shall
not be treated as an exempt contract (and premiums from
such contract shall not be taken into account for
purposes of paragraph (2)(B) or (3)) if--
``(i) any policyholder, insured, annuitant,
or beneficiary is a resident of the United
States and such contract was marketed to such
resident and was written to cover a risk
outside the United States, or
``(ii) the contract covers risks located
within and without the United States and the
qualifying insurance company or qualifying
insurance company branch does not maintain such
contemporaneous records, and file such reports,
with respect to such contract as the Secretary
may require,
``(E) the Secretary may prescribe rules for the
allocation of contracts (and income from contracts)
among 2 or more qualifying insurance company branches
of a qualifying insurance company in order to clearly
reflect the income of such branches, and
``(F) premiums from a contract shall not be taken
into account for purposes of paragraph (2)(B) or (3) if
such contract reinsures a contract issued or reinsured
by a related person (as defined in section 954(d)(3)).
For purposes of subparagraph (D), the determination of where
risks are located shall be made under the principles of section
953.
``(8) Coordination with subsection (c).--In determining
insurance income for purposes of subsection (c), exempt
insurance income shall not include income derived from exempt
contracts which cover risks other than applicable home country
risks.
``(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection and section 954(i).
``(10) Application.--This subsection and section 954(i) shall
apply only to the first taxable year of a foreign corporation
beginning after December 31, 1998, and before January 1, 2000,
and to taxable years of United States shareholders with or
within which such taxable year of such foreign corporation
ends.
``(11) Cross reference.--
``For income exempt from foreign personal holding
company income, see section 954(i).''
(2) Exemption from foreign personal holding company income.--
Section 954 (defining foreign base company income) is amended
by adding at the end the following new subsection:
``(i) Special Rule for Income Derived in the Active Conduct of
Insurance Business.--
``(1) In general.--For purposes of subsection (c)(1), foreign
personal holding company income shall not include qualified
insurance income of a qualifying insurance company.
``(2) Qualified insurance income.--The term `qualified
insurance income' means income of a qualifying insurance
company which is--
``(A) 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 or a qualifying insurance company
branch of its reserves allocable to exempt contracts or
of 80 percent of its unearned premiums from exempt
contracts (as both are determined in the manner
prescribed under paragraph (4)), or
``(B) 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 or a qualifying insurance company branch of an
amount of its assets allocable to exempt contracts
equal to--
``(i) in the case of 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 life insurance or
annuity contracts, 10 percent of the reserves
described in subparagraph (A) for such
contracts.
``(3) Principles for determining insurance income.--Except as
provided by the Secretary, for purposes of subparagraphs (A)
and (B) of paragraph (2)--
``(A) in the case of any contract which is a separate
account-type contract (including any variable contract
not meeting the requirements of section 817), income
credited under such contract shall be allocable only to
such contract, and
``(B) income not allocable under subparagraph (A)
shall be allocated ratably among contracts not
described in subparagraph (A).
``(4) Methods for determining unearned premiums and
reserves.--For purposes of paragraph (2)(A)--
``(A) Property and casualty contracts.--The unearned
premiums and reserves of a qualifying insurance company
or a qualifying insurance company branch with respect
to property, casualty, or health insurance contracts
shall be determined using the same methods and interest
rates which would be used if such company or branch
were subject to tax under subchapter L, except that--
``(i) the interest rate determined for the
functional currency of the company or branch,
and which, except as provided by the Secretary,
is calculated in the same manner as the Federal
mid-term rate under section 1274(d), shall be
substituted for the applicable Federal interest
rate, and
``(ii) such company or branch shall use the
appropriate foreign loss payment pattern.
``(B) Life insurance and annuity contracts.--The
amount of the reserve of a qualifying insurance company
or qualifying insurance company branch for any life
insurance or annuity contract shall be equal to the
greater of--
``(i) the net surrender value of such
contract (as defined in section 807(e)(1)(A)),
or
``(ii) the reserve determined under paragraph
(5).
``(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 statement reserves
(less any catastrophe, deficiency, equalization, or
similar reserves).
``(5) Amount of reserve.--The amount of the reserve
determined under this paragraph with respect to any contract
shall be determined in the same manner as it would be
determined if the qualifying insurance company or qualifying
insurance company branch were subject to tax under subchapter
L, except that in applying such subchapter--
``(A) the interest rate determined for the functional
currency of the company or branch, and which, except as
provided by the Secretary, is calculated in the same
manner as the Federal mid-term rate under section
1274(d), shall be substituted for the applicable
Federal interest rate,
``(B) the highest assumed interest rate permitted to
be used in determining foreign statement reserves shall
be substituted for the prevailing State assumed
interest rate, and
``(C) tables for mortality and morbidity which
reasonably reflect the current mortality and morbidity
risks in the company's or branch's home country shall
be substituted for the mortality and morbidity tables
otherwise used for such subchapter.
The Secretary may provide that the interest rate and mortality
and morbidity tables of a qualifying insurance company may be
used for 1 or more of its qualifying insurance company branches
when appropriate.
``(6) Definitions.--For purposes of this subsection, any term
used in this subsection which is also used in section 953(e)
shall have the meaning given such term by section 953.''
(3) Reserves.--Section 953(b) is amended by redesignating
paragraph (3) as paragraph (4) and by inserting after paragraph
(2) the following new paragraph:
``(3) Reserves for any insurance or annuity contract shall be
determined in the same manner as under section 954(i).''
(c) Special Rules for Dealers.--Section 954(c)(2)(C) is amended to
read as follows:
``(C) Exception for dealers.--Except as provided by
regulations, in the case of a regular dealer in
property which is property described in 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 company income--
``(i) any item of income, gain, deduction, or
loss (other than any item described in
subparagraph (A), (E), or (G) of paragraph (1))
from any transaction (including hedging
transactions) entered into in the ordinary
course of such dealer's trade or business as
such a dealer, and
``(ii) if such dealer is a dealer in
securities (within the meaning of section 475),
any interest or dividend or equivalent amount
described in subparagraph (E) or (G) of
paragraph (1) from any transaction (including
any hedging transaction or transaction
described in section 956(c)(2)(J)) entered into
in the ordinary course of such dealer's trade
or business as such a dealer in securities, but
only if the income from the transaction is
attributable to activities of the dealer in the
country under the laws of which the dealer is
created or organized (or in the case of a
qualified business unit described in section
989(a), is attributable to activities of the
unit in the country in which the unit both
maintains its principal office and conducts
substantial business activity).''
(d) Exemption From Foreign Base Company Services Income.--Paragraph
(2) of section 954(e) is amended by inserting ``or'' at the end of
subparagraph (A), by striking ``, or'' at the end of subparagraph (B)
and inserting a period, by striking subparagraph (C), and by adding at
the end the following new flush sentence:
``Paragraph (1) shall also not apply to income which is exempt
insurance income (as defined in section 953(e)) or which is not
treated as foreign personal holding income by reason of
subsection (c)(2)(C)(ii), (h), or (i).''
(e) Exemption for Gain.--Section 954(c)(1)(B)(i) (relating to net
gains from certain property transactions) is amended by inserting
``other than property which gives rise to income not treated as foreign
personal holding company income by reason of subsection (h) or (i) for
the taxable year'' before the comma at the end.
Subtitle B--Generalized System of Preferences
SEC. 311. EXTENSION OF GENERALIZED SYSTEM OF PREFERENCES.
(a) Extension of Duty-Free Treatment Under System.--Section 505 of
the Trade Act of 1974 (29 U.S.C. 2465) is amended by striking ``June
30, 1998'' and inserting ``February 29, 2000''.
(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), any entry--
(A) of an article to which duty-free treatment under
title V of the Trade Act of 1974 would have applied if
such title had been in effect during the period
beginning on July 1, 1998, and ending on the day before
the date of the enactment of this Act, and
(B) that was made after June 30, 1998, 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 IV--REVENUE OFFSET
SEC. 401. TREATMENT OF CERTAIN DEDUCTIBLE LIQUIDATING DISTRIBUTIONS OF
REGULATED INVESTMENT COMPANIES AND REAL ESTATE
INVESTMENT TRUSTS.
(a) In General.--Section 332 (relating to complete liquidations of
subsidiaries) is amended by adding at the end the following new
subsection:
``(c) Deductible Liquidating Distributions of Regulated Investment
Companies and Real Estate Investment Trusts.--If a corporation receives
a distribution from a regulated investment company or a real estate
investment trust which is considered under subsection (b) as being in
complete liquidation of such company or trust, then, notwithstanding
any other provision of this chapter, such corporation shall recognize
and treat as a dividend from such company or trust an amount equal to
the deduction for dividends paid allowable to such company or trust by
reason of such distribution.''.
(b) Conforming Amendments.--
(1) The material preceding paragraph (1) of section 332(b) is
amended by striking ``subsection (a)'' and inserting ``this
section''.
(2) Paragraph (1) of section 334(b) is amended by striking
``section 332(a)'' and inserting ``section 332''.
(c) Effective Date.--The amendments made by this section shall apply
to distributions after May 21, 1998.
TITLE V--TECHNICAL CORRECTIONS
SEC. 501. DEFINITIONS; COORDINATION WITH OTHER TITLES.
(a) Definitions.--For purposes of this title--
(1) 1986 code.--The term ``1986 Code'' means the Internal
Revenue Code of 1986.
(2) 1998 act.--The term ``1998 Act'' means the Internal
Revenue Service Restructuring and Reform Act of 1998 (Public
Law 105-206).
(3) 1997 act.--The term ``1997 Act'' means the Taxpayer
Relief Act of 1997 (Public Law 105-34).
(b) 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. 502. AMENDMENTS RELATED TO INTERNAL REVENUE SERVICE RESTRUCTURING
AND REFORM ACT OF 1998.
(a) Amendment Related to Section 1101 of 1998 Act.--Paragraph (5) of
section 6103(h) of the 1986 Code, as added by section 1101(b) of the
1998 Act, is redesignated as paragraph (6).
(b) Amendment Related to Section 3001 of 1998 Act.--Paragraph (2) of
section 7491(a) of the 1986 Code is amended by adding at the end the
following flush sentence:
``Subparagraph (C) shall not apply to any qualified revocable
trust (as defined in section 645(b)(1)) with respect to
liability for tax for any taxable year ending after the date of
the decedent's death and before the applicable date (as defined
in section 645(b)(2)).''.
(c) Amendments Related to Section 3201 of 1998 Act.--
(1) Section 7421(a) of the 1986 Code is amended by striking
``6015(d)'' and inserting ``6015(e)''.
(2) Subparagraph (A) of section 6015(e)(3) is amended by
striking ``of this section'' and inserting ``of subsection (b)
or (f)''.
(d) Amendment Related to Section 3301 of 1998 Act.--Paragraph (2) of
section 3301(c) of the 1998 Act is amended by striking ``The
amendments'' and inserting ``Subject to any applicable statute of
limitation not having expired with regard to either a tax underpayment
or a tax overpayment, the amendments''.
(e) Amendment Related to Section 3401 of 1998 Act.--Section 3401(c)
of the 1998 Act is amended--
(1) in paragraph (1), by striking ``7443(b)'' and inserting
``7443A(b)''; and
(2) in paragraph (2), by striking ``7443(c)'' and inserting
``7443A(c)''.
(f) Amendment Related to Section 3433 of 1998 Act.--Section 7421(a)
of the 1986 Code is amended by inserting ``6331(i),'' after
``6246(b),''.
(g) Amendment Related to Section 3708 of 1998 Act.--Subparagraph (A)
of section 6103(p)(3) of the 1986 Code is amended by inserting
``(f)(5),'' after ``(c), (e),''.
(h) Amendment Related to Section 5001 of 1998 Act.--
(1) Subparagraph (B) of section 1(h)(13) of the 1986 Code is
amended by striking ``paragraph (7)(A)'' and inserting
``paragraph (7)(A)(i)''.
(2)(A) Subparagraphs (A)(i)(II), (A)(ii)(II), and (B)(ii) of
section 1(h)(13) of the 1986 Code shall not apply to any
distribution after December 31, 1997, by a regulated investment
company or a real estate investment trust with respect to--
(i) gains and losses recognized directly by such
company or trust, and
(ii) amounts properly taken into account by such
company or trust by reason of holding (directly or
indirectly) an interest in another such company or
trust to the extent that such subparagraphs did not
apply to such other company or trust with respect to
such amounts.
(B) Subparagraph (A) shall not apply to any distribution
which is treated under section 852(b)(7) or 857(b)(8) of the
1986 Code as received on December 31, 1997.
(C) For purposes of subparagraph (A), any amount which is
includible in gross income of its shareholders under section
852(b)(3)(D) or 857(b)(3)(D) of the 1986 Code after December
31, 1997, shall be treated as distributed after such date.
(D)(i) For purposes of subparagraph (A), in the case of a
qualified partnership with respect to which a regulated
investment company meets the holding requirement of clause
(iii)--
(I) the subparagraphs referred to in subparagraph (A)
shall not apply to gains and losses recognized directly
by such partnership for purposes of determining such
company's distributive share of such gains and losses,
and
(II) such company's distributive share of such gains
and losses (as so determined) shall be treated as
recognized directly by such company.
The preceding sentence shall apply only if the qualified
partnership provides the company with written documentation of
such distributive share as so determined.
(ii) For purposes of clause (i), the term ``qualified
partnership'' means, with respect to a regulated investment
company, any partnership if--
(I) the partnership is an investment company
registered under the Investment Company Act of 1940,
(II) the regulated investment company is permitted to
invest in such partnership by reason of section
12(d)(1)(E) of such Act or an exemptive order of the
Securities and Exchange Commission under such section,
and
(III) the regulated investment company and the
partnership have the same taxable year.
(iii) A regulated investment company meets the holding
requirement of this clause with respect to a qualified
partnership if (as of January 1, 1998)--
(I) the value of the interests of the regulated
investment company in such partnership is 35 percent or
more of the value of such company's total assets, or
(II) the value of the interests of the regulated
investment company in such partnership and all other
qualified partnerships is 90 percent or more of the
value of such company's total assets.
(i) Effective Date.--The amendments made by this section shall take
effect as if included in the provisions of the 1998 Act to which they
relate.
SEC. 503. AMENDMENTS RELATED TO TAXPAYER RELIEF ACT OF 1997.
(a) Amendment Related to Section 202 of 1997 Act.--Paragraph (2) of
section 163(h) of the 1986 Code is amended by striking ``and'' at the
end of subparagraph (D), by striking the period at the end of
subparagraph (E) and inserting ``, and'', and by adding at the end the
following new subparagraph:
``(F) any interest allowable as a deduction under
section 221 (relating to interest on educational
loans).''
(b) Provision Related to Section 311 of 1997 Act.--In the case of any
capital gain distribution made after 1997 by a trust to which section
664 of the 1986 Code applies with respect to amounts properly taken
into account by such trust during 1997, paragraphs (5)(A)(i)(I),
(5)(A)(ii)(I), and (13)(A) of section 1(h) of the 1986 Code (as in
effect for taxable years ending on December 31, 1997) shall not apply.
(c) Amendment Related to Section 506 of 1997 Act.--
(1) Section 2001(f)(2) of the 1986 Code is amended by adding
at the end the following:
``For purposes of subparagraph (A), the value of an item shall
be treated as shown on a return if the item is disclosed in the
return, or in a statement attached to the return, in a manner
adequate to apprise the Secretary of the nature of such
item.''.
(2) Paragraph (9) of section 6501(c) of the 1986 Code is
amended by striking the last sentence.
(d) Amendments Related to Section 904 of 1997 Act.--
(1) Paragraph (1) of section 9510(c) of the 1986 Code is
amended to read as follows:
``(1) In general.--Amounts in the Vaccine Injury Compensation
Trust Fund shall be available, as provided in appropriation
Acts, only for--
``(A) the payment of compensation under subtitle 2 of
title XXI of the Public Health Service Act (as in
effect on August 5, 1997) for vaccine-related injury or
death with respect to any vaccine--
``(i) which is administered after September
30, 1988, and
``(ii) which is a taxable vaccine (as defined
in section 4132(a)(1)) at the time compensation
is paid under such subtitle 2, or
``(B) the payment of all expenses of administration
(but not in excess of $9,500,000 for any fiscal year)
incurred by the Federal Government in administering
such subtitle.''.
(2) Section 9510(b) of the 1986 Code is amended by adding at
the end the following new paragraph:
``(3) Limitation on transfers to vaccine injury compensation
trust fund.--No amount may be appropriated to the Vaccine
Injury Compensation Trust Fund on and after the date of any
expenditure from the Trust Fund which is not permitted by this
section. The determination of whether an expenditure is so
permitted shall be made without regard to--
``(A) any provision of law which is not contained or
referenced in this title or in a revenue Act, and
``(B) whether such provision of law is a subsequently
enacted provision or directly or indirectly seeks to
waive the application of this paragraph.''.
(e) Amendments Related to Section 915 of 1997 Act.--
(1) Section 915 of the Taxpayer Relief Act of 1997 is
amended--
(A) in subsection (b), by inserting ``or 1998'' after
``1997'', and
(B) by amending subsection (d) to read as follows:
``(d) Effective Date.--This section shall apply to taxable years
ending with or within calendar year 1997.''.
(2) Paragraph (2) of section 6404(h) of the 1986 Code is
amended by inserting ``Robert T. Stafford'' before
``Disaster''.
(f) Amendments Related to Section 1012 of 1997 Act.--
(1) Paragraph (2) of section 351(c) of the 1986 Code, as
amended by section 6010(c) of the 1998 Act, is amended by
inserting ``, or the fact that the corporation whose stock was
distributed issues additional stock,'' after ``dispose of part
or all of the distributed stock''.
(2) Clause (ii) of section 368(a)(2)(H) of the 1986 Code, as
amended by section 6010(c) of the 1998 Act, is amended by
inserting ``, or the fact that the corporation whose stock was
distributed issues additional stock,'' after ``dispose of part
or all of the distributed stock''.
(g) Amendment Related to Section 1082 of 1997 Act.--Subparagraph (F)
of section 172(b)(1) of the 1986 Code is amended by adding at the end
the following new clause:
``(iv) Coordination with paragraph (2).--For
purposes of applying paragraph (2), an eligible
loss for any taxable year shall be treated in a
manner similar to the manner in which a
specified liability loss is treated.''
(h) Amendment Related to Section 1084 of 1997 Act.--Paragraph (3) of
section 264(f) of the 1986 Code is amended by adding at the end the
following flush sentence:
``If the amount described in subparagraph (A) with respect to
any policy or contract does not reasonably approximate its
actual value, the amount taken into account under subparagraph
(A) shall be the greater of the amount of the insurance company
liability or the insurance company reserve with respect to such
policy or contract (as determined for purposes of the annual
statement approved by the National Association of Insurance
Commissioners) or shall be such other amount as is determined
by the Secretary.''
(i) Amendment Related to Section 1205 of 1997 Act.--Paragraph (2) of
section 6311(d) of the 1986 Code is amended by striking ``under such
contracts'' in the last sentence and inserting ``under any such
contract for the use of credit or debit cards for the payment of taxes
imposed by subtitle A''.
(j) Effective Date.--The amendments made by this section shall take
effect as if included in the provisions of the Taxpayer Relief Act of
1997 to which they relate.
SEC. 504. AMENDMENTS RELATED TO TAX REFORM ACT OF 1984.
(a) In General.--Subparagraph (C) of section 172(d)(4) of the 1986
Code is amended to read as follows:
``(C) any deduction for casualty or theft losses
allowable under paragraph (2) or (3) of section 165(c)
shall be treated as attributable to the trade or
business; and''.
(b) Conforming Amendments.--
(1) Paragraph (3) of section 67(b) of the 1986 Code is
amended by striking ``for losses described in subsection (c)(3)
or (d) of section 165'' and inserting ``for casualty or theft
losses described in paragraph (2) or (3) of section 165(c) or
for losses described in section 165(d)''.
(2) Paragraph (3) of section 68(c) of the 1986 Code is
amended by striking ``for losses described in subsection (c)(3)
or (d) of section 165'' and inserting ``for casualty or theft
losses described in paragraph (2) or (3) of section 165(c) or
for losses described in section 165(d)''.
(3) Paragraph (1) of section 873(b) is amended to read as
follows:
``(1) Losses.--The deduction allowed by section 165 for
casualty or theft losses described in paragraph (2) or (3) of
section 165(c), but only if the loss is of property located
within the United States.''
(c) Effective Dates.--
(1) The amendments made by subsections (a) and (b)(3) shall
apply to taxable years beginning after December 31, 1983.
(2) The amendment made by subsection (b)(1) shall apply to
taxable years beginning after December 31, 1986.
(3) The amendment made by subsection (b)(2) shall apply to
taxable years beginning after December 31, 1990.
SEC. 505. OTHER AMENDMENTS.
(a) Amendments Related to Section 6103 of 1986 Code.--
(1) Subsection (j) of section 6103 of the 1986 Code is
amended by adding at the end the following new paragraph:
``(5) Department of agriculture.--Upon request in writing by
the Secretary of Agriculture, the Secretary shall furnish such
returns, or return information reflected thereon, as the
Secretary may prescribe by regulation to officers and employees
of the Department of Agriculture whose official duties require
access to such returns or information for the purpose of, but
only to the extent necessary in, structuring, preparing, and
conducting the census of agriculture pursuant to the Census of
Agriculture Act of 1997 (Public Law 105-113).''.
(2) Paragraph (4) of section 6103(p) of the 1986 Code is
amended by striking ``(j)(1) or (2)'' in the material preceding
subparagraph (A) and in subparagraph (F) and inserting
``(j)(1), (2), or (5)''.
(3) The amendments made by this subsection shall apply to
requests made on or after the date of the enactment of this
Act.
(b) Amendment Related to Section 9004 of Transportation Equity Act
for the 21st Century.--
(1) Paragraph (2) of section 9503(f) of the 1986 Code is
amended to read as follows:
``(2) notwithstanding section 9602(b), obligations held by
such Fund after September 30, 1998, shall be obligations of the
United States which are not interest-bearing.''
(2) The amendment made by paragraph (1) shall take effect on
October 1, 1998.
(c) Clerical Amendments.--
(1) Clause (i) of section 51(d)(6)(B) of the 1986 Code is
amended by striking ``rehabilitation plan'' and inserting
``plan for employment''. The reference to plan for employment
in such clause shall be treated as including a reference to the
rehabilitation plans referred to in such clause as in effect
before the amendment made by the preceding sentence.
(2) Subparagraphs (C) and (D) of section 6693(a)(2) of the
1986 Code are each amended by striking ``Section'' and
inserting ``section''.
TITLE VI--AMERICAN COMMUNITY RENEWAL ACT OF 1998
SEC. 601. SHORT TITLE.
This title may be cited as the ``American Community Renewal Act of
1998''.
SEC. 602. DESIGNATION OF AND TAX INCENTIVES FOR RENEWAL COMMUNITIES.
(a) In General.--Chapter 1 is amended by adding at the end the
following new subchapter:
``Subchapter X--Renewal Communities
``Part I. Designation.
``Part II. Renewal community capital
gain; renewal community
business.
``Part III. Family development accounts.
``Part IV. Additional incentives.
``PART I--DESIGNATION
``Sec. 1400E. Designation of renewal
communities.
``SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.
``(a) Designation.--
``(1) Definitions.--For purposes of this title, the term
`renewal community' means any area--
``(A) which is nominated by one or more local
governments and the State or States in which it is
located for designation as a renewal community
(hereinafter in this section referred to as a
`nominated area'), and
``(B) which the Secretary of Housing and Urban
Development designates as a renewal community, after
consultation with--
``(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury; the Director
of the Office of Management and Budget; and the
Administrator of the Small Business
Administration, and
``(ii) in the case of an area on an Indian
reservation, the Secretary of the Interior.
``(2) Number of designations.--
``(A) In general.--The Secretary of Housing and Urban
Development may designate not more than 20 nominated
areas as renewal communities.
``(B) Minimum designation in rural areas.--Of the
areas designated under paragraph (1), at least 4 must
be areas--
``(i) which are within a local government
jurisdiction or jurisdictions with a population
of less than 50,000,
``(ii) which are outside of a metropolitan
statistical area (within the meaning of section
143(k)(2)(B)), or
``(iii) which are determined by the Secretary
of Housing and Urban Development, after
consultation with the Secretary of Commerce, to
be rural areas.
``(3) Areas designated based on degree of poverty, etc.--
``(A) In general.--Except as otherwise provided in
this section, the nominated areas designated as renewal
communities under this subsection shall be those
nominated areas with the highest average ranking with
respect to the criteria described in subparagraphs (B),
(C), and (D) of subsection (c)(3). For purposes of the
preceding sentence, an area shall be ranked within each
such criterion on the basis of the amount by which the
area exceeds such criterion, with the area which
exceeds such criterion by the greatest amount given the
highest ranking.
``(B) Exception where inadequate course of action,
etc.--An area shall not be designated under
subparagraph (A) if the Secretary of Housing and Urban
Development determines that the course of action
described in subsection (d)(2) with respect to such
area is inadequate.
``(C) Priority for empowerment zones and enterprise
communities with respect to first half of
designations.--With respect to the first 10
designations made under this section--
``(i) 10 shall be chosen from nominated areas
which are empowerment zones or enterprise
communities (and are otherwise eligible for
designation under this section), and
``(ii) of such 10, 2 shall be areas described
in paragraph (2)(B).
``(4) Limitation on designations.--
``(A) Publication of regulations.--The Secretary of
Housing and Urban Development shall prescribe by
regulation no later than 4 months after the date of the
enactment of this section, after consultation with the
officials described in paragraph (1)(B)--
``(i) the procedures for nominating an area
under paragraph (1)(A),
``(ii) the parameters relating to the size
and population characteristics of a renewal
community, and
``(iii) the manner in which nominated areas
will be evaluated based on the criteria
specified in subsection (d).
``(B) Time limitations.--The Secretary of Housing and
Urban Development may designate nominated areas as
renewal communities only during the 24-month period
beginning on the first day of the first month following
the month in which the regulations described in
subparagraph (A) are prescribed.
``(C) Procedural rules.--The Secretary of Housing and
Urban Development shall not make any designation of a
nominated area as a renewal community under paragraph
(2) unless--
``(i) the local governments and the States in
which the nominated area is located have the
authority--
``(I) to nominate such area for
designation as a renewal community,
``(II) to make the State and local
commitments described in subsection
(d), and
``(III) to provide assurances
satisfactory to the Secretary of
Housing and Urban Development that such
commitments will be fulfilled,
``(ii) a nomination regarding such area is
submitted in such a manner and in such form,
and contains such information, as the Secretary
of Housing and Urban Development shall by
regulation prescribe, and
``(iii) the Secretary of Housing and Urban
Development determines that any information
furnished is reasonably accurate.
``(5) Nomination process for indian reservations.--For
purposes of this subchapter, in the case of a nominated area on
an Indian reservation, the reservation governing body (as
determined by the Secretary of the Interior) shall be treated
as being both the State and local governments with respect to
such area.
``(b) Period for Which Designation Is in Effect.--
``(1) In general.--Any designation of an area as a renewal
community shall remain in effect during the period beginning on
the date of the designation and ending on the earliest of--
``(A) December 31, 2006,
``(B) the termination date designated by the State
and local governments in their nomination, or
``(C) the date the Secretary of Housing and Urban
Development revokes such designation.
``(2) Revocation of designation.--The Secretary of Housing
and Urban Development may revoke the designation under this
section of an area if such Secretary determines that the local
government or the State in which the area is located--
``(A) has modified the boundaries of the area, or
``(B) is not complying substantially with, or fails
to make progress in achieving, the State or local
commitments, respectively, described in subsection (d).
``(c) Area and Eligibility Requirements.--
``(1) In general.--The Secretary of Housing and Urban
Development may designate a nominated area as a renewal
community under subsection (a) only if the area meets the
requirements of paragraphs (2) and (3) of this subsection.
``(2) Area requirements.--A nominated area meets the
requirements of this paragraph if--
``(A) the area is within the jurisdiction of one or
more local governments,
``(B) the boundary of the area is continuous, and
``(C) the area--
``(i) has a population, of at least--
``(I) 4,000 if any portion of such
area (other than a rural area described
in subsection (a)(2)(B)(i)) is located
within a metropolitan statistical area
(within the meaning of section
143(k)(2)(B)) which has a population of
50,000 or greater, or
``(II) 1,000 in any other case, or
``(ii) is entirely within an Indian
reservation (as determined by the Secretary of
the Interior).
``(3) Eligibility requirements.--A nominated area meets the
requirements of this paragraph if the State and the local
governments in which it is located certify (and the Secretary
of Housing and Urban Development, after such review of
supporting data as he deems appropriate, accepts such
certification) that--
``(A) the area is one of pervasive poverty,
unemployment, and general distress,
``(B) the unemployment rate in the area, as
determined by the most recent available data, was at
least 1\1/2\ times the national unemployment rate for
the period to which such data relate,
``(C) the poverty rate for each population census
tract within the nominated area is at least 20 percent,
and
``(D) in the case of an urban area, at least 70
percent of the households living in the area have
incomes below 80 percent of the median income of
households within the jurisdiction of the local
government (determined in the same manner as under
section 119(b)(2) of the Housing and Community
Development Act of 1974).
``(4) Consideration of high incidence of crime.--The
Secretary of Housing and Urban Development shall take into
account, in selecting nominated areas for designation as
renewal communities under this section, the extent to which
such areas have a high incidence of crime.
``(5) Consideration of communities identified in gao study.--
The Secretary of Housing and Urban Development shall take into
account, in selecting nominated areas for designation as
renewal communities under this section, if the area has census
tracts identified in the May 12, 1998, report of the Government
Accounting Office regarding the identification of economically
distressed areas.
``(d) Required State and Local Commitments.--
``(1) In general.--The Secretary of Housing and Urban
Development may designate any nominated area as a renewal
community under subsection (a) only if--
``(A) the local government and the State in which the
area is located agree in writing that, during any
period during which the area is a renewal community,
such governments will follow a specified course of
action which meets the requirements of paragraph (2)
and is designed to reduce the various burdens borne by
employers or employees in such area, and
``(B) the economic growth promotion requirements of
paragraph (3) are met.
``(2) Course of action.--
``(A) In general.--A course of action meets the
requirements of this paragraph if such course of action
is a written document, signed by a State (or local
government) and neighborhood organizations, which
evidences a partnership between such State or
government and community-based organizations and which
commits each signatory to specific and measurable
goals, actions, and timetables. Such course of action
shall include at least five of the following:
``(i) A reduction of tax rates or fees
applying within the renewal community.
``(ii) An increase in the level of efficiency
of local services within the renewal community.
``(iii) Crime reduction strategies, such as
crime prevention (including the provision of
such services by nongovernmental entities).
``(iv) Actions to reduce, remove, simplify,
or streamline governmental requirements
applying within the renewal community.
``(v) Involvement in the program by private
entities, organizations, neighborhood
organizations, and community groups,
particularly those in the renewal community,
including a commitment from such private
entities to provide jobs and job training for,
and technical, financial, or other assistance
to, employers, employees, and residents from
the renewal community.
``(vi) State or local income tax benefits for
fees paid for services performed by a
nongovernmental entity which were formerly
performed by a governmental entity.
``(vii) The gift (or sale at below fair
market value) of surplus real property (such as
land, homes, and commercial or industrial
structures) in the renewal community to
neighborhood organizations, community
development corporations, or private companies.
``(B) Recognition of past efforts.--For purposes of
this section, in evaluating the course of action agreed
to by any State or local government, the Secretary of
Housing and Urban Development shall take into account
the past efforts of such State or local government in
reducing the various burdens borne by employers and
employees in the area involved.
``(3) Economic growth promotion requirements.--The economic
growth promotion requirements of this paragraph are met with
respect to a nominated area if the local government and the
State in which such area is located certify in writing that
such government and State, respectively, have repealed or
otherwise will not enforce within the area, if such area is
designated as a renewal community--
``(A) licensing requirements for occupations that do
not ordinarily require a professional degree,
``(B) zoning restrictions on home-based businesses
which do not create a public nuisance,
``(C) permit requirements for street vendors who do
not create a public nuisance,
``(D) zoning or other restrictions that impede the
formation of schools or child care centers, and
``(E) franchises or other restrictions on competition
for businesses providing public services, including but
not limited to taxicabs, jitneys, cable television, or
trash hauling,
except to the extent that such regulation of businesses and
occupations is necessary for and well-tailored to the
protection of health and safety.
``(e) Coordination With Treatment of Empowerment Zones and Enterprise
Communities.--For purposes of this title, if there are in effect with
respect to the same area both--
``(1) a designation as a renewal community, and
``(2) a designation as an empowerment zone or enterprise
community,
both of such designations shall be given full effect with respect to
such area.
``(f) Definitions and Special Rules.--For purposes of this
subchapter--
``(1) Governments.--If more than one government seeks to
nominate an area as a renewal community, any reference to, or
requirement of, this section shall apply to all such
governments.
``(2) State.--The term `State' includes Puerto Rico, the
Virgin Islands of the United States, Guam, American Samoa, the
Northern Mariana Islands, and any other possession of the
United States.
``(3) Local government.--The term `local government' means--
``(A) any county, city, town, township, parish,
village, or other general purpose political subdivision
of a State,
``(B) any combination of political subdivisions
described in subparagraph (A) recognized by the
Secretary of Housing and Urban Development, and
``(C) the District of Columbia.
``(4) Application of rules relating to census tracts and
census data.--The rules of sections 1392(b)(4) and 1393(a)(9)
shall apply.
``PART II--RENEWAL COMMUNITY CAPITAL GAIN; RENEWAL COMMUNITY BUSINESS
``Sec. 1400F. Renewal community capital
gain.
``Sec. 1400G. Renewal community business
defined.
``SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.
``(a) General Rule.--Gross income does not include any qualified
capital gain recognized on the sale or exchange of a qualified
community asset held for more than 5 years.
``(b) Qualified Community Asset.--For purposes of this section--
``(1) In general.--The term `qualified community asset'
means--
``(A) any qualified community stock,
``(B) any qualified community partnership interest,
and
``(C) any qualified community business property.
``(2) Qualified community stock.--
``(A) In general.--Except as provided in subparagraph
(B), the term `qualified community stock' means any
stock in a domestic corporation if--
``(i) such stock is acquired by the taxpayer
after December 31, 1999, and before January 1,
2007, at its original issue (directly or
through an underwriter) from the corporation
solely in exchange for cash,
``(ii) as of the time such stock was issued,
such corporation was a renewal community
business (or, in the case of a new corporation,
such corporation was being organized for
purposes of being a renewal community
business), and
``(iii) during substantially all of the
taxpayer's holding period for such stock, such
corporation qualified as a renewal community
business.
``(B) Redemptions.--A rule similar to the rule of
section 1202(c)(3) shall apply for purposes of this
paragraph.
``(3) Qualified community partnership interest.--The term
`qualified community partnership interest' means any interest
in a partnership if--
``(A) such interest is acquired by the taxpayer after
December 31, 1999, and before January 1, 2007,
``(B) as of the time such interest was acquired, such
partnership was a renewal community business (or, in
the case of a new partnership, such partnership was
being organized for purposes of being a renewal
community business), and
``(C) during substantially all of the taxpayer's
holding period for such interest, such partnership
qualified as a renewal community business.
A rule similar to the rule of paragraph (2)(B) shall apply for
purposes of this paragraph.
``(4) Qualified community business property.--
``(A) In general.--The term `qualified community
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, 1999, and before
January 1, 2007,
``(ii) the original use of such property in
the renewal community 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 renewal community business of the
taxpayer.
``(B) Special rule for substantial improvements.--The
requirements of clauses (i) and (ii) of subparagraph
(A) shall be treated as satisfied with respect to--
``(i) property which is substantially
improved (within the meaning of section
1400B(b)(4)(B)(ii)) by the taxpayer before
January 1, 2007, and
``(ii) any land on which such property is
located.
``(c) Certain Rules To Apply.--Rules similar to the rules of
paragraphs (5), (6), and (7) of subsection (b), and subsections (e),
(f), and (g), of section 1400B shall apply for purposes of this
section.
``SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.
``For purposes of this part, the term `renewal community business'
means any entity or proprietorship which would be a qualified business
entity or qualified proprietorship under section 1397B if--
``(1) references to renewal communities were substituted for
references to empowerment zones in such section; and
``(2) `80 percent' were substituted for `50 percent' in
subsections (b)(2) and (c)(1) of such section.
``PART III--FAMILY DEVELOPMENT ACCOUNTS
``Sec. 1400H. Family development accounts
for renewal community EITC
recipients.
``Sec. 1400I. Demonstration program to
provide matching contributions
to family development accounts
in certain renewal communities.
``Sec. 1400J. Designation of earned
income tax credit payments for
deposit to family development
account.
``SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RENEWAL COMMUNITY EITC
RECIPIENTS.
``(a) Allowance of Deduction.--
``(1) In general.--There shall be allowed as a deduction--
``(A) in the case of a qualified individual, the
amount paid in cash for the taxable year by such
individual to any family development account for such
individual's benefit, and
``(B) in the case of any person other than a
qualified individual, the amount paid in cash for the
taxable year by such person to any family development
account for the benefit of a qualified individual but
only if the amount so paid is designated for purposes
of this section by such individual.
No deduction shall be allowed under this paragraph for any
amount deposited in a family development account under section
1400I (relating to demonstration program to provide matching
amounts in renewal communities).
``(2) Limitation.--
``(A) In general.--The amount allowable as a
deduction to any individual for any taxable year by
reason of paragraph (1)(A) shall not exceed the lesser
of--
``(i) $2,000, or
``(ii) an amount equal to the compensation
includible in the individual's gross income for
such taxable year.
``(B) Persons donating to family development accounts
of others.--The amount which may be designated under
paragraph (1)(B) by any qualified individual for any
taxable year of such individual shall not exceed
$1,000.
``(3) Special rules for certain married individuals.--Rules
similar to rules of section 219(c) shall apply to the
limitation in paragraph (2)(A).
``(4) Coordination with ira's.--No deduction shall be allowed
under this section to any person by reason of a payment to an
account for the benefit of a qualified individual if any amount
is paid into an individual retirement account (including a Roth
IRA) for the benefit of such individual.
``(5) Rollovers.--No deduction shall be allowed under this
section with respect to any rollover contribution.
``(b) Tax Treatment of Distributions.--
``(1) Inclusion of amounts in gross income.--Except as
otherwise provided in this subsection, any amount paid or
distributed out of a family development account shall be
included in gross income by the payee or distributee, as the
case may be.
``(2) Exclusion of qualified family development
distributions.--Paragraph (1) shall not apply to any qualified
family development distribution.
``(c) Qualified Family Development Distribution.--For purposes of
this section--
``(1) In general.--The term `qualified family development
distribution' means any amount paid or distributed out of a
family development account which would otherwise be includible
in gross income, to the extent that such payment or
distribution is used exclusively to pay qualified family
development expenses for the holder of the account or the
spouse or dependent (as defined in section 152) of such holder.
``(2) Qualified family development expenses.--The term
`qualified family development expenses' means any of the
following:
``(A) Qualified higher education expenses.
``(B) Qualified first-time homebuyer costs.
``(C) Qualified business capitalization costs.
``(D) Qualified medical expenses.
``(E) Qualified rollovers.
``(3) Qualified higher education expenses.--
``(A) In general.--The term `qualified higher
education expenses' has the meaning given such term by
section 72(t)(7), determined by treating postsecondary
vocational educational schools as eligible educational
institutions.
``(B) Postsecondary vocational education school.--The
term `postsecondary vocational educational school'
means an area vocational education school (as defined
in subparagraph (C) or (D) of section 521(4) of the
Carl D. Perkins Vocational and Applied Technology
Education Act (20 U.S.C. 2471(4))) which is in any
State (as defined in section 521(33) of such Act), as
such sections are in effect on the date of the
enactment of this section.
``(C) 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).
``(4) Qualified first-time homebuyer costs.--The term
`qualified first-time homebuyer costs' means qualified
acquisition costs (as defined in section 72(t)(8) without
regard to subparagraph (B) thereof) with respect to a principal
residence (within the meaning of section 121) for a qualified
first-time homebuyer (as defined in such section).
``(5) Qualified business capitalization costs.--
``(A) In general.--The term `qualified business
capitalization costs' means qualified expenditures for
the capitalization of a qualified business pursuant to
a qualified plan.
``(B) Qualified expenditures.--The term `qualified
expenditures' means expenditures included in a
qualified plan, including capital, plant, equipment,
working capital, and inventory expenses.
``(C) Qualified business.--The term `qualified
business' means any business that does not contravene
any law.
``(D) Qualified plan.--The term `qualified plan'
means a business plan which meets such requirements as
the Secretary may specify.
``(6) Qualified medical expenses.--The term `qualified
medical expenses' means any amount paid during the taxable
year, not compensated for by insurance or otherwise, for
medical care (as defined in section 213(d)) of the taxpayer,
his spouse, or his dependent (as defined in section 152).
``(7) Qualified rollovers.--The term `qualified rollover'
means any amount paid from a family development account of a
taxpayer into another such account established for the benefit
of--
``(A) such taxpayer, or
``(B) any qualified individual who is--
``(i) the spouse of such taxpayer, or
``(ii) any dependent (as defined in section
152) of the taxpayer.
Rules similar to the rules of section 408(d)(3) shall apply for
purposes of this paragraph.
``(d) Tax Treatment of Accounts.--
``(1) In general.--Any family development account is exempt
from taxation under this subtitle unless such account has
ceased to be a family development account by reason of
paragraph (2). Notwithstanding the preceding sentence, any such
account is subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business income of
charitable, etc., organizations). Notwithstanding any other
provision of this title (including chapters 11 and 12), the
basis of any person in such an account is zero.
``(2) Loss of exemption in case of prohibited transactions.--
For purposes of this section, rules similar to the rules of
section 408(e) shall apply.
``(3) Other rules to apply.--Rules similar to the rules of
paragraphs (4), (5), and (6) of section 408(d) shall apply for
purposes of this section.
``(e) Family Development Account.--For purposes of this title, the
term `family development account' means a trust created or organized in
the United States for the exclusive benefit of a qualified individual
or his beneficiaries, but only if the written governing instrument
creating the trust meets the following requirements:
``(1) Except in the case of a qualified rollover (as defined
in subsection (c)(7))--
``(A) no contribution will be accepted unless it is
in cash, and
``(B) contributions will not be accepted for the
taxable year in excess of $3,000 (determined without
regard to any contribution made under section 1400I
(relating to demonstration program to provide matching
amounts in renewal communities)).
``(2) The requirements of paragraphs (2) through (6) of
section 408(a) are met.
``(f) Qualified Individual.--For purposes of this section, the term
`qualified individual' means, for any taxable year, an individual--
``(1) who is a bona fide resident of a renewal community
throughout the taxable year, and
``(2) to whom a credit was allowed under section 32 for the
preceding taxable year.
``(g) Other Definitions and Special Rules.--
``(1) Compensation.--The term `compensation' has the meaning
given such term by section 219(f)(1).
``(2) Married individuals.--The maximum deduction under
subsection (a) shall be computed separately for each
individual, and this section shall be applied without regard to
any community property laws.
``(3) Time when contributions deemed made.--For purposes of
this section, a taxpayer shall be deemed to have made a
contribution to a family development account on the last day of
the preceding taxable year if the contribution is made on
account of such taxable year and is made not later than the
time prescribed by law for filing the return for such taxable
year (not including extensions thereof).
``(4) Employer payments; custodial accounts.--Rules similar
to the rules of sections 219(f)(5) and 408(h) shall apply for
purposes of this section.
``(5) Reports.--The trustee of a family development account
shall make such reports regarding such account to the Secretary
and to the individual for whom the account is maintained with
respect to contributions (and the years to which they relate),
distributions, and such other matters as the Secretary may
require under regulations. The reports required by this
paragraph--
``(A) shall be filed at such time and in such manner
as the Secretary prescribes in such regulations, and
``(B) shall be furnished to individuals--
``(i) not later than January 31 of the
calendar year following the calendar year to
which such reports relate, and
``(ii) in such manner as the Secretary
prescribes in such regulations.
``(6) Investment in collectibles treated as distributions.--
Rules similar to the rules of section 408(m) shall apply for
purposes of this section.
``(h) Penalty for Distributions Not Used for Qualified Family
Development Expenses.--
``(1) In general.--If any amount is distributed from a family
development account and is not used exclusively to pay
qualified family development expenses for the holder of the
account or the spouse or dependent (as defined in section 152)
of such holder, the tax imposed by this chapter for the taxable
year of such distribution shall be increased by the sum of--
``(A) 100 percent of the portion of such amount which
is includible in gross income and is attributable to
amounts contributed under section 1400I (relating to
demonstration program to provide matching amounts in
renewal communities), and
``(B) 10 percent of the portion of such amount which
is includible in gross income and is not described in
subparagraph (A).
For purposes of this subsection, distributions which are
includable in gross income shall be treated as attributable to
amounts contributed under section 1400I to the extent thereof.
For purposes of the preceding sentence, all family development
accounts of an individual shall be treated as one account.
``(2) Exception for certain distributions.--Paragraph (1)
shall not apply to distributions which are--
``(A) made on or after the date on which the account
holder attains age 59\1/2\,
``(B) made to a beneficiary (or the estate of the
account holder) on or after the death of the account
holder, or
``(C) attributable to the account holder's being
disabled within the meaning of section 72(m)(7).
``(i) Termination.--No deduction shall be allowed under this section
for any amount paid to a family development account for any taxable
year beginning after December 31, 2006.
``SEC. 1400I. DEMONSTRATION PROGRAM TO PROVIDE MATCHING CONTRIBUTIONS
TO FAMILY DEVELOPMENT ACCOUNTS IN CERTAIN RENEWAL
COMMUNITIES.
``(a) Designation.--
``(1) Definitions.--For purposes of this section, the term
`FDA matching demonstration area' means any renewal community--
``(A) which is nominated under this section by each
of the local governments and States which nominated
such community for designation as a renewal community
under section 1400E(a)(1)(A), and
``(B) which the Secretary of Housing and Urban
Development designates as an FDA matching demonstration
area after consultation with--
``(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury, the Director
of the Office of Management and Budget, and the
Administrator of the Small Business
Administration, and
``(ii) in the case of a community on an
Indian reservation, the Secretary of the
Interior.
``(2) Number of designations.--
``(A) In general.--The Secretary of Housing and Urban
Development may designate not more than 5 communities
as FDA matching demonstration areas.
``(B) Minimum designation in rural areas.--Of the
areas designated under subparagraph (A), at least 2
must be areas described in section 1400E(a)(2)(B).
``(3) Limitations on designations.--
``(A) Publication of regulations.--The Secretary of
Housing and Urban Development shall prescribe by
regulation no later than 4 months after the date of the
enactment of this section, after consultation with the
officials described in paragraph (1)(B)--
``(i) the procedures for nominating a renewal
community under paragraph (1)(A) (including
procedures for coordinating such nomination
with the nomination of an area for designation
as a renewal community under section 1400E),
and
``(ii) the manner in which nominated renewal
communities will be evaluated for purposes of
this section.
``(B) Time limitations.--The Secretary of Housing and
Urban Development may designate renewal communities as
FDA matching demonstration areas only during the 24-
month period beginning on the first day of the first
month following the month in which the regulations
described in subparagraph (A) are prescribed.
``(4) Designation based on degree of poverty, etc.--The rules
of section 1400E(a)(3) shall apply for purposes of designations
of FDA matching demonstration areas under this section.
``(b) Period for Which Designation is in Effect.--Any designation of
a renewal community as an FDA matching demonstration area shall remain
in effect during the period beginning on the date of such designation
and ending on the date on which such area ceases to be a renewal
community.
``(c) Matching Contributions to Family Development Accounts.--
``(1) In general.--Not less than once each taxable year, the
Secretary shall deposit (to the extent provided in
appropriation Acts) into a family development account of each
qualified individual (as defined in section 1400H(f))--
``(A) who is a resident throughout the taxable year
of an FDA matching demonstration area, and
``(B) who requests (in such form and manner as the
Secretary prescribes) such deposit for the taxable
year,
an amount equal to the sum of the amounts deposited into all of
the family development accounts of such individual during such
taxable year (determined without regard to any amount
contributed under this section).
``(2) Limitations.--
``(A) Annual limit.--The Secretary shall not deposit
more than $1000 under paragraph (1) with respect to any
individual for any taxable year.
``(B) Aggregate limit.--The Secretary shall not
deposit more than $2000 under paragraph (1) with
respect to any individual for all taxable years.
``(3) Exclusion from income.--Except as provided in section
1400H, gross income shall not include any amount deposited into
a family development account under paragraph (1).
``(d) Notice of Program.--The Secretary shall provide appropriate
notice to residents of FDA matching demonstration areas of the
availability of the benefits under this section.
``(e) Termination.--No amount may be deposited under this section for
any taxable year beginning after December 31, 2006.
``SEC. 1400J. DESIGNATION OF EARNED INCOME TAX CREDIT PAYMENTS FOR
DEPOSIT TO FAMILY DEVELOPMENT ACCOUNT.
``(a) In General.--With respect to the return of any qualified
individual (as defined in section 1400H(f)) for the taxable year of the
tax imposed by this chapter, such individual may designate that a
specified portion (not less than $1) of any overpayment of tax for such
taxable year which is attributable to the earned income tax credit
shall be deposited by the Secretary into a family development account
of such individual. The Secretary shall so deposit such portion
designated under this subsection.
``(b) Manner and Time of Designation.--A designation under subsection
(a) may be made with respect to any taxable year--
``(1) at the time of filing the return of the tax imposed by
this chapter for such taxable year, or
``(2) at any other time (after the time of filing the return
of the tax imposed by this chapter for such taxable year)
specified in regulations prescribed by the Secretary.
Such designation shall be made in such manner as the Secretary
prescribes by regulations.
``(c) Portion Attributable to Earned Income Tax Credit.--For purposes
of subsection (a), an overpayment for any taxable year shall be treated
as attributable to the earned income tax credit to the extent that such
overpayment does not exceed the credit allowed to the taxpayer under
section 32 for such taxable year.
``(d) Overpayments Treated as Refunded.--For purposes of this title,
any portion of an overpayment of tax designated under subsection (a)
shall be treated as being refunded to the taxpayer as of the last date
prescribed for filing the return of tax imposed by this chapter
(determined without regard to extensions) or, if later, the date the
return is filed.
``(e) Termination.--This section shall not apply to any taxable year
beginning after December 31, 2006.
``PART IV--ADDITIONAL INCENTIVES
``Sec. 1400K. Commercial revitalization
credit.
``Sec. 1400L. Increase in expensing under
section 179.
``SEC. 1400K. COMMERCIAL REVITALIZATION CREDIT.
``(a) General Rule.--For purposes of section 46, except as provided
in subsection (e), the commercial revitalization credit for any taxable
year is an amount equal to the applicable percentage of the qualified
revitalization expenditures with respect to any qualified
revitalization building.
``(b) Applicable Percentage.--For purposes of this section--
``(1) In general.--The term `applicable percentage' means--
``(A) 20 percent for the taxable year in which a
qualified revitalization building is placed in service,
or
``(B) at the election of the taxpayer, 5 percent for
each taxable year in the credit period.
The election under subparagraph (B), once made, shall be
irrevocable.
``(2) Credit period.--
``(A) In general.--The term `credit period' means,
with respect to any building, the period of 10 taxable
years beginning with the taxable year in which the
building is placed in service.
``(B) Applicable rules.--Rules similar to the rules
under paragraphs (2) and (4) of section 42(f) shall
apply.
``(c) Qualified Revitalization Buildings and Expenditures.--For
purposes of this section--
``(1) Qualified revitalization building.--The term `qualified
revitalization building' means any building (and its structural
components) if--
``(A) such building is located in a renewal community
and is placed in service after December 31, 1999,
``(B) a commercial revitalization credit amount is
allocated to the building under subsection (e), and
``(C) depreciation (or amortization in lieu of
depreciation) is allowable with respect to the
building.
``(2) Qualified revitalization expenditure.--
``(A) In general.--The term `qualified revitalization
expenditure' means any amount properly chargeable to
capital account--
``(i) for property for which depreciation is
allowable under section 168 and which is--
``(I) nonresidential real property,
or
``(II) an addition or improvement to
property described in subclause (I),
and
``(ii) in connection with the construction of
any qualified revitalization building which was
not previously placed in service or in
connection with the substantial rehabilitation
(within the meaning of section 47(c)(1)(C)) of
a building which was placed in service before
the beginning of such rehabilitation.
``(B) Dollar limitation.--The aggregate amount which
may be treated as qualified revitalization expenditures
with respect to any qualified revitalization building
for any taxable year shall not exceed the excess of--
``(i) $10,000,000, reduced by
``(ii) any such expenditures with respect to
the building taken into account by the taxpayer
or any predecessor in determining the amount of
the credit under this section for all preceding
taxable years.
``(C) Certain expenditures not included.--The term
`qualified revitalization expenditure' does not
include--
``(i) Straight line depreciation must be
used.--Any expenditure (other than with respect
to land acquisitions) with respect to which the
taxpayer does not use the straight line method
over a recovery period determined under
subsection (c) or (g) of section 168. The
preceding sentence shall not apply to any
expenditure to the extent the alternative
depreciation system of section 168(g) applies
to such expenditure by reason of subparagraph
(B) or (C) of section 168(g)(1).
``(ii) Acquisition costs.--The costs of
acquiring any building or interest therein and
any land in connection with such building to
the extent that such costs exceed 30 percent of
the qualified revitalization expenditures
determined without regard to this clause.
``(iii) Other credits.--Any expenditure which
the taxpayer may take into account in computing
any other credit allowable under this title
unless the taxpayer elects to take the
expenditure into account only for purposes of
this section.
``(d) When Expenditures Taken Into Account.--
``(1) In general.--Qualified revitalization expenditures with
respect to any qualified revitalization building shall be taken
into account for the taxable year in which the qualified
revitalization building is placed in service. For purposes of
the preceding sentence, a substantial rehabilitation of a
building shall be treated as a separate building.
``(2) Progress expenditure payments.--Rules similar to the
rules of subsections (b)(2) and (d) of section 47 shall apply
for purposes of this section.
``(e) Limitation on Aggregate Credits Allowable With Respect to
Buildings Located in a State.--
``(1) In general.--The amount of the credit determined under
this section for any taxable year with respect to any building
shall not exceed the commercial revitalization credit amount
(in the case of an amount determined under subsection
(b)(1)(B), the present value of such amount as determined under
the rules of section 42(b)(2)(C)) allocated to such building
under this subsection by the commercial revitalization credit
agency. Such allocation shall be made at the same time and in
the same manner as under paragraphs (1) and (7) of section
42(h).
``(2) Commercial revitalization credit amount for agencies.--
``(A) In general.--The aggregate commercial
revitalization credit amount which a commercial
revitalization credit agency may allocate for any
calendar year is the amount of the State commercial
revitalization credit ceiling determined under this
paragraph for such calendar year for such agency.
``(B) State commercial revitalization credit
ceiling.--The State commercial revitalization credit
ceiling applicable to any State--
``(i) for each calendar year after 1999 and
before 2007 is $2,000,000 for each renewal
community in the State, and
``(ii) zero for each calendar year
thereafter.
``(C) Commercial revitalization credit agency.--For
purposes of this section, the term `commercial
revitalization credit agency' means any agency
authorized by a State to carry out this section.
``(f) Responsibilities of Commercial Revitalization Credit
Agencies.--
``(1) Plans for allocation.--Notwithstanding any other
provision of this section, the commercial revitalization credit
amount with respect to any building shall be zero unless--
``(A) such amount was allocated pursuant to a
qualified allocation plan of the commercial
revitalization credit agency which is approved (in
accordance with rules similar to the rules of section
147(f)(2) (other than subparagraph (B)(ii) thereof)) by
the governmental unit of which such agency is a part,
and
``(B) such agency notifies the chief executive
officer (or its equivalent) of the local jurisdiction
within which the building is located of such allocation
and provides such individual a reasonable opportunity
to comment on the allocation.
``(2) Qualified allocation plan.--For purposes of this
subsection, the term `qualified allocation plan' means any
plan--
``(A) which sets forth selection criteria to be used
to determine priorities of the commercial
revitalization credit agency which are appropriate to
local conditions,
``(B) which considers--
``(i) the degree to which a project
contributes to the implementation of a
strategic plan that is devised for a renewal
community through a citizen participation
process,
``(ii) the amount of any increase in
permanent, full-time employment by reason of
any project, and
``(iii) the active involvement of residents
and nonprofit groups within the renewal
community, and
``(C) which provides a procedure that the agency (or
its agent) will follow in monitoring compliance with
this section.
``(g) Termination.--This section shall not apply to any building
placed in service after December 31, 2006.
``SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.
``(a) General Rule.--In the case of a renewal community business (as
defined in section 1400G), for purposes of section 179--
``(1) the limitation under section 179(b)(1) shall be
increased by the lesser of--
``(A) $35,000, or
``(B) the cost of section 179 property which is
qualified renewal property placed in service during the
taxable year, and
``(2) the amount taken into account under section 179(b)(2)
with respect to any section 179 property which is qualified
renewal property shall be 50 percent of the cost thereof.
``(b) Recapture.--Rules similar to the rules under section 179(d)(10)
shall apply with respect to any qualified renewal property which ceases
to be used in a renewal community by a renewal community business.
``(c) Qualified Renewal Property.--For purposes of this section--
``(1) In general.--The term `qualified renewal property'
means any property to which section 168 applies (or would apply
but for section 179) if--
``(A) such property was acquired by the taxpayer by
purchase (as defined in section 179(d)(2)) after
December 31, 1999, and before January 1, 2007, and
``(B) such property would be qualified zone property
(as defined in section 1397C) if references to renewal
communities were substituted for references to
empowerment zones in section 1397C.
``(2) Certain rules to apply.--The rules of subsections
(a)(2) and (b) of section 1397C shall apply for purposes of
this section.''
SEC. 603. EXTENSION OF EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS TO
RENEWAL COMMUNITIES.
(a) Extension.--Paragraph (2) of section 198(c) (defining targeted
area) is amended by redesignating subparagraph (C) as subparagraph (D)
and by inserting after subparagraph (B) the following new subparagraph:
``(C) Renewal communities included.--Except as
provided in subparagraph (B), such term shall include a
renewal community (as defined in section 1400E).''
(b) Extension of Termination Date for Renewal Communities.--
Subsection (h) of section 198 is amended by inserting before the period
``(December 31, 2006, in the case of a renewal community, as defined in
section 1400E).''
SEC. 604. EXTENSION OF WORK OPPORTUNITY TAX CREDIT FOR RENEWAL
COMMUNITIES.
(a) Extension.--Subsection (c) of section 51 (relating to
termination) is amended by adding at the end the following new
paragraph:
``(5) Extension of credit for renewal communities.--
``(A) In general.--In the case of an individual who
begins work for the employer after the date contained
in paragraph (4)(B), for purposes of section 38--
``(i) in lieu of applying subsection (a), the
amount of the work opportunity credit
determined under this section for the taxable
year shall be equal to--
``(I) 15 percent of the qualified
first-year wages for such year, and
``(II) 30 percent of the qualified
second-year wages for such year,
``(ii) subsection (b)(3) shall be applied by
substituting `$10,000' for `$6,000',
``(iii) paragraph (4)(B) shall be applied by
substituting for the date contained therein the
last day for which the designation under
section 1400E of the renewal community referred
to in subparagraph (B)(i) is in effect, and
``(iv) rules similar to the rules of section
51A(b)(5)(C) shall apply.
``(B) Qualified first- and second-year wages.--For
purposes of subparagraph (A)--
``(i) In general.--The term `qualified wages'
means, with respect to each 1-year period
referred to in clause (ii) or (iii), as the
case may be, the wages paid or incurred by the
employer during the taxable year to any
individual but only if--
``(I) the employer is engaged in a
trade or business in a renewal
community throughout such 1-year
period,
``(II) the principal place of abode
of such individual is in such renewal
community throughout such 1-year
period, and
``(III) substantially all of the
services which such individual performs
for the employer during such 1-year
period are performed in such renewal
community.
``(ii) 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.
``(iii) 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 clause (ii).''
(b) Congruent Treatment of Renewal Communities and Enterprise Zones
for Purposes of Youth Residence Requirements.--
(1) High-risk youth.--Subparagraphs (A)(ii) and (B) of
section 51(d)(5) are each amended by striking ``empowerment
zone or enterprise community'' and inserting ``empowerment
zone, enterprise community, or renewal community''.
(2) Qualified summer youth employee.--Clause (iv) of section
51(d)(7)(A) is amended by striking ``empowerment zone or
enterprise community'' and inserting ``empowerment zone,
enterprise community, or renewal community''.
(3) Headings.--Paragraphs (5)(B) and (7)(C) of section 51(d)
are each amended by inserting ``or community'' in the heading
after ``zone''.
SEC. 605. CONFORMING AND CLERICAL AMENDMENTS.
(a) Deduction for Contributions to Family Development Accounts
Allowable Whether or Not Taxpayer Itemizes.--Subsection (a) of section
62 (relating to adjusted gross income defined) is amended by inserting
after paragraph (17) the following new paragraph:
``(18) Family development accounts.--The deduction allowed by
section 1400H(a)(1)(A).''
(b) Tax on Excess Contributions.--
(1) Tax imposed.--Subsection (a) of section 4973 is amended
by striking ``or'' at the end of paragraph (3), adding ``or''
at the end of paragraph (4), and inserting after paragraph (4)
the following new paragraph:
``(5) a family development account (within the meaning of
section 1400H(e)),''.
(2) Excess contributions.--Section 4973 is amended by adding
at the end the following new subsection:
``(g) Family Development Accounts.--For purposes of this section, in
the case of a family development account, the term `excess
contributions' means the sum of--
``(1) the excess (if any) of--
``(A) the amount contributed for the taxable year to
the account (other than a qualifiedrollover, as defined
in section 1400H(c)(7), or a contribution under section 1400I), over
``(B) the amount allowable as a deduction under
section 1400H for such contributions, and
``(2) the amount determined under this subsection for the
preceding taxable year reduced by the sum of--
``(A) the distributions out of the account for the
taxable year which were included in the gross income of
the payee under section 1400H(b)(1),
``(B) the distributions out of the account for the
taxable year to which rules similar to the rules of
section 408(d)(5) apply by reason of section
1400H(d)(3), and
``(C) the excess (if any) of the maximum amount
allowable as a deduction under section 1400H for the
taxable year over the amount contributed to the account
for the taxable year (other than a contribution under
section 1400I).
For purposes of this subsection, any contribution which is distributed
from the family development account in a distribution to which rules
similar to the rules of section 408(d)(4) apply by reason of section
1400H(d)(3) shall be treated as an amount not contributed.''
(c) Tax on Prohibited Transactions.--Section 4975 is amended--
(1) by adding at the end of subsection (c) the following new
paragraph:
``(6) Special rule for family development accounts.--An
individual for whose benefit a family development 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, with respect to such
transaction, the account ceases to be a family development
account by reason of the application of section 1400H(d)(2) to
such account.'', and
(2) in subsection (e)(1), by striking ``or'' at the end of
subparagraph (E), by redesignating subparagraph (F) as
subparagraph (G), and by inserting after subparagraph (E) the
following new subparagraph:
``(F) a family development account described in
section 1400H(e), or''.
(d) Information Relating to Certain Trusts and Annuity Plans.--
Subsection (c) of section 6047 is amended--
(1) by inserting ``or section 1400H'' after ``section 219'',
and
(2) by inserting ``, of any family development account
described in section 1400H(e),'', after ``section 408(a)''.
(e) Inspection of Applications for Tax Exemption.--Clause (i) of
section 6104(a)(1)(B) is amended by inserting ``a family development
account described in section 1400H(e),'' after ``section 408(a),''.
(f) Failure To Provide Reports on Family Development Accounts.--
Paragraph (2) of section 6693(a) is amended by striking ``and'' at the
end of subparagraph (C), by striking the period and inserting ``, and''
at the end of subparagraph (D), and by adding at the end the following
new subparagraph:
``(E) section 1400H(g)(6) (relating to family
development accounts).''
(g) Conforming Amendments Regarding Commercial Revitalization
Credit.--
(1) Section 46 (relating to investment credit) 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 adding at the end the following new paragraph:
``(4) the commercial revitalization credit provided under
section 1400K.''
(2) Section 39(d) is amended by adding at the end the
following new paragraph:
``(9) No carryback of section 1400k credit before date of
enactment.--No portion of the unused business credit for any
taxable year which is attributable to any commercial
revitalization credit determined under section 1400K may be
carried back to a taxable year ending before the date of the
enactment of section 1400K.''
(3) Subparagraph (B) of section 48(a)(2) is amended by
inserting ``or commercial revitalization'' after
``rehabilitation'' each place it appears in the text and
heading.
(4) Subparagraph (C) of section 49(a)(1) is amended by
striking ``and'' at the end of clause (ii), by striking the
period at the end of clause (iii) and inserting ``, and'', and
by adding at the end the following new clause:
``(iv) the portion of the basis of any
qualified revitalization building attributable
to qualified revitalization expenditures.''
(5) Paragraph (2) of section 50(a) is amended by inserting
``or 1400K(d)(2)'' after ``section 47(d)'' each place it
appears.
(6) Subparagraph (A) of section 50(a)(2) is amended by
inserting ``or qualified revitalization building
(respectively)'' after ``qualified rehabilitated building''.
(7) Subparagraph (B) of section 50(a)(2) is amended by adding
at the end the following new sentence: ``A similar rule shall
apply for purposes of section 1400K.''
(8) Paragraph (2) of section 50(b) 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
adding at the end the following new subparagraph:
``(E) a qualified revitalization building (as defined
in section 1400K) to the extent of the portion of the
basis which is attributable to qualified revitalization
expenditures (as defined in section 1400K).''
(9) The last sentence of section 50(b)(3) is amended to read
as follows: ``If any qualified rehabilitated building or
qualified revitalization building is used by the tax-exempt
organization pursuant to a lease, this paragraph shall not
apply for purposes of determining the amount of the
rehabilitation credit or the commercial revitalization
credit.''
(10) Subparagraph (C) of section 50(b)(4) is amended--
(A) by inserting ``or commercial revitalization''
after ``rehabilitated'' in the text and heading, and
(B) by inserting ``or commercial revitalization''
after ``rehabilitation''.
(11) Subparagraph (C) of section 469(i)(3) is amended--
(A) by inserting ``or section 1400K'' after ``section
42''; and
(B) by striking ``credit'' in the heading and
inserting ``and commercial revitalization credits''.
(h) Clerical Amendments.--The table of subchapters for chapter 1 is
amended by adding at the end the following new item:
``Subchapter X. Renewal Communities.''
SEC. 606. EVALUATION AND REPORTING REQUIREMENTS.
Not later than the close of the fourth calendar year after the year
in which the Secretary of Housing and Urban Development first
designates an area as a renewal community under section 1400E of the
Internal Revenue Code of 1986, and at the close of each fourth calendar
year thereafter, such Secretary shall prepare and submit to the
Congress a report on the effects of such designations in stimulating
the creation of new jobs, particularly for disadvantaged workers and
long-term unemployed individuals, and promoting the revitalization of
economically distressed areas.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
Purpose
The bill, H.R. 4579 (``Taxpayer Relief Act of 1998'') is
intended to provide needed tax relief for the nation's
families, farmers and small businesses, provide education and
community renewal tax incentives, extend certain expired and
expiring tax and trade provisions, increase the earnings limit
for Social Security recipients, modify the treatment of certain
deductible liquidating distributions of regulated investment
companies (``RICs'') and real estate investment trusts
(``REITs'') to close an existing tax loophole, and provide
necessary technical corrections to recent tax legislation.
Summary of the Bill
Family tax relief provisions
Marriage penalty tax relief.--The bill increases the basic
standard deduction for a married couple filing a joint return
to twice the basic standard deduction for a single return in
each taxable year beginning after December 31, 1998. Also, the
basic standard deduction for a married taxpayer filing
separately will be increased so that it will equal the basic
standard deduction for singles. Further, the bill increases the
additional standard deduction for married individuals who are
elderly or blind to the same amount allowed for singles and
heads of households. These amounts will be indexed for
inflation.
Partial exclusion for interest and dividends.--The bill
provides an exclusion from income for individuals for up to
$200 ($400 for married couples filing jointly) of combined
interest and dividends received in a taxable year. The
provision is effective for taxable years beginning after
December 31, 1998.
Treatment of personal credits under the individual minimum
tax.--The bill will allow nonrefundable personal tax credits to
offset both the individual's regular income tax liability and
the minimum tax liability. The bill also repeals the rule that
reduces the additional child credit and the earned income
credit by the amount of the minimum tax liability. The
provision is effective for taxable years beginning after
December 31, 1997.
Exclusion of gain on the sale of a principal residence by a
member of the uniformed services or the Foreign Service of the
United States.--The bill suspends the test period for ownership
and use during certain absences due to service in the uniformed
services or the Foreign Service of the United States.
Specifically, the 5-year period ending on the date of the sale
or exchange of a principal residence will not include any
periods during which the taxpayer or the taxpayer's spouse was
on qualified official extended duty as a member of the
uniformed services or the Foreign Service of the United States
and serving at a place of duty at least 50 miles away from the
taxpayer's principal residence or under orders compelling
residence in Government furnished quarters. Extended duty is
defined as 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. The provision is effective for sales or
exchanges of principal residences after the date of enactment.
Education and infrastructure provisions
Permit private higher education institutions to establish
qualified prepaid tuition programs.--The definition of a
``qualified tuition program'' is expanded to include programs
established and maintained by one or more private educational
institutions. The provision is effective for taxable years
beginning after December 31, 1998.
Expand exception from arbitrage rebate for tax-exempt bonds
issued to finance public school construction.--The bill
liberalizes the permitted expenditure period of the present-law
construction bond exception in the case of bonds issued to
finance the construction of public schools. Amounts spent for
the acquisition and improvement of land that is functionally
related and subordinate to a school, the construction of which
is financed with proceeds of the bond issue, will be treated as
spent for construction. Under the provision, no rebate will be
required on the construction proceeds of these public school
construction bonds if the proceeds (less presently allowed
retainage) were spent within four years after the bonds are
issued, and the following intermediate spending targets are
satisfied: (1) 10 percent or more of the construction proceeds
is spent within one year after the bonds are issued; (2) 30
percent or more of the construction proceeds is spent within
two years after the bonds are issued; and (3) 50 percent or
more of the construction proceeds is spent within three years
after the bonds are issued. The provision applies to bonds
issued after December 31, 1998.
Increase State volume limits on private activity tax-exempt
bonds.--The bill increases the annual State private activity
bond volume limits to $75 (from $50) per resident of each
State, or to $225 million (from $150 million) if greater. The
provision is effective beginning in calendar year 1999.
Estate tax, small business and farmer tax relief provisions
Acceleration of increased exemption from estate and gift
tax.--The bill accelerates the scheduled increases in the
applicable exemption amount so that the exemption equivalent
will be $1,000,000 for decedents dying and gifts made after
December 31, 1998.
Increase deduction for health insurance expenses of self-
employed individuals.--The bill increases the deduction for
health insurance of self-employed individuals to 100 percent
for taxable years beginning in 1999 and thereafter.
Accelerate increase in expensing for small business.--The
bill increases the maximum dollar amount that may be deducted
under Code section 179 to $25,000 for taxable years beginning
in 1999 and thereafter, without the present-law phase-in rule.
Permanent extension of income averaging for farmers.--The
bill makes permanent income averaging for farmers.
Extend the net operating loss (NOL) carryback period for
farmers.--The bill allows NOLs attributable to a farming
business to be carried back five years, whether or not incurred
in a Presidentially declared disaster area. The carryforward
period will remain at 20 years. A taxpayer may elect to not
apply the five-year carryback period. The NOL rule attributable
to a farming business will be coordinated with the other NOL
rules. The provision is effective for NOLs taxable years
beginning after December 31, 1997.
Production flexibility contract payments.--Under the bill,
the option added by the Emergency Farm Financial Relief Act of
1998 to accelerate certain production flexibility payments is
disregarded in determining the taxable year in which such
payments must be included in income. The provision is effective
for Federal Agriculture Improvement and Reform Act of 1996
payments for fiscal year 1999.
Designation of 20 ``renewal communities.''--The bill
authorizes the designation of 20 ``renewal communities'' within
which special tax incentives will be available. The tax
benefits available in ``renewal communities'' generally will be
effective for the seven-year period beginning January 1, 2000,
and ending December 31, 2006.
Extension of expiring provisions
Extension of research tax credit.--The research tax credit
is extended for the period July 1, 1998, through February 29,
2000. In addition, the credit rate applicable under the
alternative incremental credit will be increased by one
percentage point per step, that is from 1.65 percent to 2.65
percent when a taxpayer's current-year research expenses exceed
a base amount of 1 percent but do not exceed a base amount of
1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's
current-year research expenses exceed a base amount of 1.5
percent but do not exceed a base amount of 2 percent; and from
2.75 percent to 3.75 percent when a taxpayer's current-year
research expenses exceed a base amount of 2 percent.
Taxpayers will be permitted to elect the alternative
incremental research credit regime under Code 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. Extension of the research credit is effective
for qualified research expenditures paid or incurred during the
period July 1, 1998, through February 29, 2000. The increase in
the credit rate under the alternative incremental credit is
effective for taxable years beginning after June 30, 1998.
Extension of work opportunity tax credit.--The bill extends
the work opportunity tax credit through February 29, 2000. The
provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after July 1, 1998, and before March 1, 2000.
Extension of the welfare-to-work tax credit.--The bill
extends through February 29, 2000, the welfare-to-work tax
credit for wages paid or incurred to a qualified individual.
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after May 1, 1999, and before March 1, 2000.
Extend the deduction provided for contributions of
appreciated stock to private foundations.--The bill extends
permanently the special rule contained in Code section
170(e)(5). The provision is effective for contributions of
qualified appreciated stock to private foundations made on or
after July 1, 1998.
Public inspection of private foundation annual returns.--
Under the bill, private foundations will be subject to the
public inspection requirements that currently apply to all
other tax-exempt organizations that file annual information
returns. Private foundations will no longer be subject to the
publication requirements of Code section 6104(d). The public
inspection requirements apply to requests made no earlier than
60 days after the Treasury Department publishes regulations
defining when documents are widely available or where a request
is a part of a harassment campaign, but in any event not before
December 31, 1998.
Exceptions under subpart F for certain active financing
income.--The bill modifies the present-law temporary exceptions
from subpart F for income that is derived in the active conduct
of a banking, financing, insurance, or similar business. These
exceptions (as modified) are applicable only for taxable years
beginning in 1999.
With respect to income derived in the active conduct of a
banking, financing, or similar business, the provision differs
from the present-law temporary exceptions in the following
significant respects. First, the provision requires a
Controlled Foreign Corporation (``CFC'') to conduct substantial
activity with respect to its business in order to qualify for
the exceptions. Second, the provision adds certain nexus
requirements which would require that income which is derived
by a CFC or a Qualified Business Unit (``QBU'') from
transactions with customers would be eligible for the
exceptions if, among other things, substantially all of the
activities in connection with such transactions are conducted
directly by the CFC or QBU in its home country, and such income
is treated as earned by the CFC or QBU in its home country for
purposes of such country's tax laws. Third, the provision
modifies the tests for determining whether a CFC is
predominantly engaged in the active conduct of a banking,
financing, or similar business, including modifications for
income derived from a lending or finance business. Fourth, the
provision extends the exceptions to income derived from certain
cross-border transactions, provided that certain requirements
are met. Fifth, the determination of where a customer is
treated as located will be made under rules prescribed by the
Secretary of the Treasury. Finally, the look-through rule that
was included in the present-law provision for purposes of
determining the income eligible for the exceptions will be
eliminated.
In the case of insurance, the provision differs from
present law in the following significant respects. In addition
to the exception for certain income of a qualifying insurance
company with respect to risks located within the CFC's country
of creation or organization that is provided under present law,
the provision will provide additional exceptions. First, the
provision provides temporary exceptions from insurance income
and from foreign personal holding company income for certain
income of a qualifying branch of a qualifying insurance company
with respect to risks located within the home country of the
branch, provided certain requirements are met under each of the
exceptions. Further, the provision adds additional temporary
exceptions from insurance income and from foreign personal
holding company income for certain income of certain CFCs or
branches with respect to risks located in any country other
than the United States, provided that requirements for these
exceptions are met. The provision applies only to taxable years
of foreign corporations beginning in 1999, and to taxable years
of U.S. shareholders with or within which such taxable years of
foreign corporations end.
Extension of the generalized system of preferences
(``GSP'').--The bill reauthorizes the GSP trade program through
February 29, 2000. Refunds will be authorized, upon request of
the importer, for duties paid between July 1, 1998, and the
date of enactment of the bill. The provision is effective for
duties paid on or after July 1, 1998, and before March 1, 2000.
Revenue offset provision
Treatment of certain deductible liquidating distributions
of regulated investment companies (``RICs'') and real estate
investment trusts (``REITs'').--Under the bill, any amount
which a liquidating RIC or REIT may take as a deduction for
dividends paid with respect to an otherwise tax-free
liquidating distribution to an 80-percent corporate owner will
be includible in the income of the recipient corporation. The
includible amount will be treated as a dividend received from
the RIC or REIT. The liquidating corporation will be able to
designate the amount treated as a dividend, as a capital gain
dividend or, in the case of a RIC, a dividend eligible for the
70-percent dividends received deduction, to the extent provided
by the RIC or REIT provisions of the Code.
The bill does not otherwise change the tax treatment of the
distribution to the parent corporation or to the RIC or REIT.
Thus, for example, the liquidating corporation would not
recognize gain (if any) on the liquidating distribution and the
recipient corporation will hold the assets at a carryover
basis. The bill is effective for distributions on or after May
22, 1998, regardless of when the plan of liquidation was
adopted. No inference is intended regarding the treatment of
such transactions under present law.
Tax technical corrections provisions
The bill makes necessary technical corrections to recent
tax legislation, including the Internal Revenue Service
Restructuring and Reform Act of 1998 (``1998 Act''), the
Taxpayer Relief Act of 1997 (``1997 Act''), and other tax
legislation.
Social Security provisions
Increases in the Social Security earnings limit for
individuals who have attained retirement age.--The bill
increases the Social Security earnings limit for those between
full retirement age (currently age 65) and age 70 in calendar
years 1999-2008, as follows:
Year Earnings limit
1999.......................................................... $17,000
2000.......................................................... 18,500
2001.......................................................... 26,000
2002.......................................................... 30,000
2003.......................................................... 31,300
2004.......................................................... 34,000
2005.......................................................... 35,400
2006.......................................................... 36,800
2007.......................................................... 38,350
2008.......................................................... 39,750
Senior citizens between full retirement age (currently age
65) and 70 who earn over the given earnings limit for the year
would continue to lose $1 in benefits for every $3 earned over
the limit. After 2008, the annual exempt amounts will be
indexed to growth in average wages. The provision is effective
for the taxable years ending after 1998.
Recomputations of benefits after normal retirement age.--
Under the bill, recomputation of benefits resulting from
earnings in the year after a worker reaches normal retirement
age (currently age 65) and later will be reflected in the
recipient's benefit check, effective with the January of the
second year after the year of the earnings, one year later than
under current law. An exception is provided for recipients who
have one or more ``zero'' years of earnings in their wage
averaging computation. Earnings continue to be credited as
under present law for purposes of establishing entitlement. The
provision is effective for earnings beginning in 1998.
B. Background and Need for Legislation
As the Congress has moved to balance the Federal budget,
the Congressional Budget Office (``CBO'') has recently
estimated that the economy is projected to produce a $1.6
trillion budget surplus for fiscal years 1998-2008. The
Committee has determined that a modest portion (about 10
percent) should be returned to the taxpayers to reduce their
Federal tax burden, which is currently (CBO's fiscal year 1998
estimate) at a record peacetime 20.5 percent of Gross Domestic
Product. The goal of the Committee is to provide needed tax
relief while preserving 90 percent of the projected Federal
budget surplus until Social Security is reformed.
The bill will provide a net revenue reduction of $80,074
million in fiscal years 1999-2003. (See Part IV.A. of this
report for detailed estimates of the budget effects of the
bill.) In a separately reported bill (H.R. 4578), the Committee
approved the creation of a new Treasury Account, the ``Protect
Social Security Account,'' into which will be deposited 90
percent of the estimated unified budget surplus. Such payments
are to reserve 90 percent of any budget surplus until a long-
term solution for the Social Security system is enacted. The
tax reduction bill (H.R. 4579) will only involve about 10
percent of the projected budget surplus and will allow
families, farmers and small businesses to retain a portion of
the overall Federal budget surplus rather than sending such
projected surplus revenues to the Federal Government. This will
prevent the bill's tax reduction amounts from being spent by
the Federal Government.
C. Legislative History
The bill, H.R. 4579, was introduced by Chairman Archer on
September 16, 1998. The Committee marked up the bill on
September 17, 1998, and approved the bill with the Chairman's
amendment in the nature of a substitute by a roll call vote of
23 yeas and 15 nays.
II. EXPLANATION OF THE BILL
TITLE I. INDIVIDUAL AND FAMILY TAX RELIEF PROVISIONS
A. Marriage Penalty Tax Relief (sec. 101 of the bill and sec. 63 of the
Code)
Present Law
Marriage penalty
A married couple generally is treated as one tax unit that
must pay tax on the unit's total taxable income. Although
married couples may elect to file separate returns, the rate
schedules and provisions are structured so that filing separate
returns usually results in a higher tax than filing joint
returns. Other rate schedules apply to single persons and to
single heads of household.
A ``marriage penalty'' exists when the sum of the tax
liabilities of two unmarried individuals filing their own tax
returns (either single or head of household returns) is less
than their tax liability under a joint return (if the two
individuals were to marry). A ``marriage bonus'' exists when
the sum of the tax liabilities of the individuals is greater
than their combined tax liability under a joint return.
While the size of any marriage penalty or bonus under
present law depends upon the individuals' incomes, number of
dependents, and itemized deductions, as a general rule married
couples whose incomes are split more evenly than 70-30 suffer a
marriage penalty. Married couples whose incomes are largely
attributable to one spouse generally receive a marriage bonus.
Under present law, the size of the standard deduction and
the tax bracket breakpoints follow certain customary ratios
across filing statuses. The standard deduction and tax bracket
breakpoints for single filers are roughly 60 percent of those
for joint filers. 1 With these ratios, unmarried
individuals have standard deductions whose sum exceeds the
standard deduction they would receive as a married couple
filing a joint return. Thus, their taxable income as joint
filers may exceed the sum of their taxable incomes as unmarried
individuals.
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\1\ This is not true for the 39.6-percent rate. The beginning
point of this rate bracket is the same for all taxpayers regardless of
filing status.
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Basic standard deduction
Taxpayers who do not itemize deductions may choose the
basic standard deduction (and additional standard deductions,
if applicable), which is subtracted (along with the deduction
for personal exemptions) from adjusted gross income (``AGI'')
in arriving at taxable income. The size of the basic standard
deduction varies according to filing status and is indexed for
inflation. For 1999, the size of the basic standard deduction
is projected to be as follows: 2
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\2\ Joint Committee on Taxation staff projections.
Basic standard
Filing status deduction
Married, joint return......................................... $7,200
Head of household return...................................... 6,250
Single return................................................. 4,300
Married, separate return...................................... 3,600
For 1999, the basic standard deduction for joint returns is
projected to be 1.675 times the basic standard deduction for
single returns.
Additional standard deductions
An additional standard deduction is allowed for a taxpayer
who is either elderly (age 65 or over) or blind. Two additional
standard deductions are allowed for a taxpayer who is elderly
(age 65 or over) and blind. In the case of a joint return,
these rules apply to both the husband and the wife. For
example, if both taxpayers filing a joint return are both
elderly and blind then they are entitled to four additional
standard deductions. For 1999, the amount of each additional
standard deduction is projected to be $800 for married
individuals and $1,050 for singles and heads of households.
3 These amounts are indexed for inflation.
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\3\ Joint Committee on Taxation staff projections.
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Reasons for Change
The Committee is concerned about the inequity of the
marriage penalty created by the present-law income tax. One
primary concern of the Committee is that the marriage penalty
may act as a potential disincentive to work for certain married
couples. Also, the Committee believes that relief from the
marriage penalty is needed because the marriage penalty may
undermine respect for the family and may discourage family
formation. Any attempt to address the marriage penalty involves
the balancing of several competing principles, including equal
tax treatment of married couples with equal incomes and the
determination of equitable relative tax burdens of single
individuals and married couples with equal incomes. The
Committee believes that an increase in the standard deduction
for married couples filing a joint return is a responsible
first step towards removing the marriage penalty. It provides
tax relief in 1999 to approximately 48 million married
individuals, including more than 10 million senior citizens.
Further, approximately six million individuals who currently
itemize their deductions would realize the simplification
benefits of using the basic standard deduction. Finally, the
modification to the additional standard deduction amounts
eliminates the disparate tax treatment under present law for
the aged and blind based solely upon filing status.
Explanation of Provision
The bill increases the basic standard deduction for a
married couple filing a joint return to twice the basic
standard deduction for a single return in each taxable year
beginning after December 31, 1998. For example, the basic
standard deduction for a married couple filing a joint return
is increased from a projected $7,200 to $8,600 in 1999. The
basic standard deduction for a married taxpayer filing
separately is increased so that it equals the basic standard
deduction for singles and equals one-half of the basic standard
deduction for a married couple filing jointly for each taxable
year beginning after December 31, 1998 (e.g., $4,300 in 1999).
The basic standard deduction for a head of household is
unchanged.
Also, the bill increases the additional standard deduction
for a married individual who is elderly or blind from $800 to
$1,050 (the same amount allowed for singles and heads of
households). This amount is indexed for inflation. The other
rules relating to the additional standard deduction are not
changed.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1998.
B. Partial Exclusion for Interest and Dividends (sec. 102 of the bill
and new sec. 116 of the Code)
Present Law
The Code states that, except as otherwise provided, ``gross
income means all income from whatever source derived'' (sec.
61). Because there is no exclusion for interest and dividends,
interest and dividends received by individuals are includible
in income and subject to tax.
Reasons for Change
The Committee believes that an exclusion from income for
interest and dividends will provide an incentive for savings
and will simplify the tax returns of a number of individuals.
Approximately 68 million tax returns for 1999 will reflect tax
savings as a result of this provision; out of that number,
approximately 32 million tax returns will reflect a total
exclusion from tax for all interest and dividends received.
4
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\4\ Joint Committee on Taxation staff projections.
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Explanation of Provision
The bill provides an exclusion from income for individuals
for up to $200 ($400 for married couples filing jointly) of
combined interest and dividends (other than capital gain
dividends from RICs and REITs, dividends from tax-exempt
corporations, and dividends received from an employee stock
ownership plan) received in a taxable year. 5
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\5\ From 1954 until 1986, the Code (sec. 116) contained an
exclusion from income (in varying amounts) for dividends. For 1981
only, that provision was also extended to interest; this provision is
generally parallel to that provision. The exclusion for dividends was
repealed by the Tax Reform Act of 1986.
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The Committee encourages the IRS to implement this
provision so as to simplify the process of completing tax forms
to the greatest extent practicable. For example, the Committee
encourages the IRS to consider raising the administratively-
established dollar thresholds for completing Schedule B or for
being able to use the Form 1040EZ.
In determining eligibility for the earned income credit
(``EIC'), any interest or dividends excluded from gross income
under this provision is excluded for purposes of the EIC
disqualified income test.
The fact that dividends may be excluded from income
pursuant to this provision does not affect the computation of
the foreign tax credit.
The exclusion under this provision is in addition to, and
is to be applied after, the exclusion for educational savings
bond interest (sec. 135). In applying those provisions of the
Code (such as secs. 86, 219, 221, and 469) that determine
modified adjusted gross income without regard to section 135,
it is intended that the exclusion under this provision be
computed without regard to the savings bond interest exclusion.
Thus, for example, if an individual has $100 of interest from a
qualified U.S. savings bond, and $150 of other interest, in
determining modified adjusted gross income for purposes of
section 219(g)(3), the individual will treat $200 as excluded
from income under section 116, notwithstanding that the amount
of the actual exclusion under section 116 (after applying
section 135) is less than $200.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1998.
C. Treatment of Personal Credits Under the Individual Minimum Tax (sec.
103 of the bill and sec. 26 of the Code)
present law
Present law imposes a minimum tax (``AMT'') on an
individual to the extent the individual's tentative minimum tax
exceeds his or her regular income tax liability. The tentative
minimum tax is computed at rates of (1) 26 percent on the first
$175,000 ($87,500 in the case of a married individual filing a
separate return) of alternative minimum taxable income
(``AMTI'') in excess of a phased-out exemption amount and (2)
28 percent on the remaining AMTI. The maximum tax rates on net
capital gain are the same as under the regular tax. AMTI is the
individual's taxable income adjusted to take account of
specified preferences and adjustments. The exemption amounts
are: (1) $45,000 in the case of married individuals filing a
joint return and surviving spouses; (2) $33,750 in the case of
other unmarried individuals; and (3) $22,500 in the case of
married individuals filing a separate return, estates and
trusts. The exemption amounts are phased out by an amount equal
to 25 percent of the amount by which the individual's AMTI
exceeds (1) $150,000 in the case of married individuals filing
a joint return and surviving spouses, (2) $112,500 in the case
of other unmarried individuals, and (3) $75,000 in the case of
married individuals filing separate returns or an estate or a
trust. These amounts are not indexed for inflation.
Present law provides for certain nonrefundable personal tax
credits (i.e., the dependent care credit, the credit for the
elderly and disabled, the adoption credit, the child tax
credit, the credit for interest on certain home mortgages, the
HOPE Scholarship and Lifetime Learning credits, and the D.C.
homebuyer's credit). Generally, these credits are reduced or
eliminated for individuals with adjusted gross incomes above
certain specified amounts, and may not exceed the amount by
which the individual's regular income tax liability exceeds the
individual's tentative minimum tax (determined without regard
to the AMT foreign tax credit). For families with three or more
qualifying children, an additional child credit is provided
which may offset the liability for social security taxes to the
extent that tax liability exceeds the amount of the earned
income credit. The additional child credit is reduced by the
amount of the individual's minimum tax liability. A similar
rule applies to the earned income credit.
reasons for change
The individual minimum tax was enacted by Congress to
ensure that no taxpayer with substantial economic income can
avoid significant tax liability by using exclusions,
deductions, and credits.6 The Committee believes
that allowing middle-income families to use the nonrefundable
personal tax credits to offset the minimum tax will not
undermine the policy of the minimum tax, and will promote the
important social policies underlying each of the credits.
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\6\ See H. Rept 99-426, p. 305-6 and S. Rept. 99-313, p. 518.
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Allowing these credits to offset the minimum tax will
result in significant simplification. Substantially fewer
taxpayers will need to complete the minimum tax form (Form
6251), and worksheets accompanying the credits will be greatly
simplified.
explanation of provision
The provision allows the nonrefundable personal tax credits
to offset both an individual's regular income tax liability and
the AMT.
The provision also repeals the rule that reduces the
additional child credit and the earned income credit by the
amount of an individual's AMT.
effective date
The provision is effective for taxable years beginning
after December 31, 1997.
For taxable years beginning in 1998, the nonrefundable
personal credits may offset an individual's regular tax in
full, but not an individual's AMT.
D. Increase Deduction for Health Insurance Expenses of Self-Employed
Individuals (sec. 104 of the bill and sec. 162(l) of the Code)
present law
Under present law, self-employed individuals are entitled
to deduct a portion of the amount paid for health insurance,
including (within certain limits) long-term care insurance, for
the self-employed individual and the individual's spouse and
dependents. 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.7 The deduction is available in
the case of self insurance as well as commercial insurance. The
self-insured plan must in fact be insurance (e.g., there must
be appropriate risk shifting) and not merely a reimbursement
arrangement.
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\7\ This rule is applied separately to long-term care insurance and
other health insurance.
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The portion of health insurance expenses of self-employed
individuals that is deductible is 45 percent for taxable years
beginning in 1998 and 1999, 50 percent for taxable years
beginning in 2000 and 2001, 60 percent for taxable years
beginning in 2002, 80 percent for taxable years beginning in
2003, 2004, and 2005, 90 percent for taxable years beginning in
2006, and 100 percent for taxable years beginning in 2007 and
thereafter.
Under present law, employees can exclude from income 100
percent of employer-provided health insurance.
reasons for change
The Committee believes it appropriate to increase the
deduction for health insurance expenses of self-employed
individuals in order to reduce the disparity of treatment
between such expenses and employer-provided health insurance
and to help make health insurance more affordable for self-
employed individuals.
explanation of provision
The provision increases the deduction for health insurance
of self-employed individuals to 100 percent for taxable years
beginning in 1999 and thereafter.
effective date
The provision is effective for taxable years beginning
after December 31, 1998.
E. Exclusion of Gain on the Sale of a Principal Residence by a Member
of the Uniformed Service or the Foreign Service of the United States
(sec. 105 of the bill and sec. 121 of the Code)
present law
Under present law, an individual taxpayer may 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. To
be eligible for the exclusion, the taxpayer must have owned and
used the residence 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, to the extent provided under
regulations, unforeseen circumstances is able to exclude an
amount equal to the fraction of the $250,000 ($500,000 if
married filing a joint return) which is equal to the fraction
of the two years that the ownership and use requirements are
met. There are no special rules relating to members of the
uniformed services or the Foreign Service of the United States.
reasons for change
The Committee believes that members of the uniformed
services and the Foreign Service of the United States who would
otherwise qualify for the exclusion of the gain on the sale of
a principal residence will not be deprived the exclusion
because of service to their country.
explanation of provision
Under the bill, the 5-year test period for ownership and
use is suspended during certain absences due to service in the
uniformed services or the Foreign Service of the United States.
The uniform services include: (1) the armed forces (the Army,
Navy, Air Force, Marine Corp, and Coast Guard); (2) the
commissioned corps of the National Oceanic and Atmospheric
Administration; and (3) the commissioned corps of the Public
Health Service. Specifically, the five-year period ending on
the date of the sale or exchange of a principal residence does
not include any periods during which the taxpayer or the
taxpayer's spouse is on qualified official extended duty as a
member of the uniformed services or the Foreign Service of the
United States. Qualified official extended duty is any period
of extended duty by a member of the uniformed services or the
Foreign Service of the United States while serving at a place
of duty at least 50 miles away from the taxpayer's principal
residence or under orders compelling residence in Government
furnished quarters. Extended duty is defined as 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.
effective date
The provision is effective for sales or exchanges of
principal residences after the date of enactment.
F. Acceleration of Increased Exemption From Estate and Gift Tax (sec.
106 of the bill and sec. 2010 of the Code)
present law
Increase in exemption from estate and gift tax.--Exemptions
from the Federal estate and gift tax are provided by allowing
reduction of the estate or gift tax by a credit, called the
unified credit. The 1997 Act increased the present-law unified
credit beginning in 1998, from an effective exemption (called
the ``applicable exemption amount'') of $600,000 in 1997 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
applicable exemption amount is not indexed for inflation.
Deduction for interests in certain family-owned business.--
In addition, the 1997 Act provided a limited deduction for
Federal estate tax purposes for certain family-owned business
interests. The deduction for family-owned business interests
may be taken only to the extent that the deduction for family-
owned business interests, plus the applicable exemption amount,
does not exceed $1.3 million.
reasons for change
The Committee believes that increasing the amount of the
estate and gift tax unified credit encourages saving, promotes
capital formation and entrepreneurial activity, and helps
preserve existing family-owned farms and businesses. The
Committee believes that acceleration of the scheduled increases
in the unified credit will accelerate these benefits and
provide more uniform levels of taxation among decedents
whenever they die.
explanation of provision
The bill accelerates the scheduled increase in the
applicable exemption amount to $1,000,000 for decedents dying
and gifts made after 1998. The bill retains the $1.3 million
limitation on the combined applicable exclusion amount and the
deduction for family-held business interests and, thus, the
maximum deduction for family-held business interests under the
bill is $300,000.
effective date
The provision is effective for decedents dying, and gifts
made, after December 31, 1998.
G. Education Provisions
1. Permit private higher education institutions to establish qualified
prepaid tuition programs (sec. 111 of the bill and sec. 529 of
the Code)
present law
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), as well as certain 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.8
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\8\ 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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reasons for change
To preserve a level playing field, the Committee believes
that private institutions of higher education should be allowed
to establish and maintain qualified tuition programs on the
same basis that States may do so under present law.
explanation of provision
Under the bill, the definition of a ``qualified tuition
program'' is expanded to include any program established and
maintained by one or more eligible educational institutions
(which may be private institutions that are not State-owned)
that satisfies the requirements under present-law section 529
(other than the State-ownership rule).
Effective Date
The provision is effective for taxable years beginning
after December 31, 1998.
2. Modification of arbitrage rebate rules applicable to public school
construction bonds (sec. 112 of the bill and sec. 148 of the
Code)
Present Law
Interest on bonds issued by States and local governments is
excluded from income if the proceeds of the bonds are used to
finance activities conducted and paid for by the governmental
units (Code sec. 103). Interest on bonds issued by these
governmental units to finance activities carried out and paid
for by private persons (``private activity bonds'') is taxable
unless the activities are specified in the Internal Revenue
Code. Private activity bonds on which interest may be tax-
exempt include bonds for privately operated transportation
facilities (airports, docks and wharves, mass transit, and high
speed rail facilities), privately owned and/or provided
municipal services (water, sewer, solid waste disposal, and
certain electric and heating facilities), economic development
(small manufacturing facilities and redevelopment in
economically depressed areas), and certain social programs
(low-income rental housing, qualified mortgage bonds, student
loan bonds, and exempt activities of charitable organizations
described in Code sec. 501(c)(3)).
Subject to limited exceptions, issuers of tax-exempt bonds
are not permitted to earn and retain profits on investment of
bond proceeds in a manner unrelated to the governmental purpose
of the borrowing (the ``arbitrage restrictions''). Profits are
defined as earnings in excess of the interest paid on the
bonds. The arbitrage restrictions require profits on these
nonpurpose investments to be rebated to the Federal Government
at five-year intervals, with the final payment being due
following redemption of the bonds.
Present law includes several exceptions to the requirement
that arbitrage profits be rebated to the Federal Government:
(1) If all proceeds of an issue of tax-exempt bonds are
spent for the governmental purpose of the borrowing within six
months after the bonds are issued, no rebate is required for
any profits that are earned (e.g., during the six-month period
or afterwards on funds such as certain bona fide debt service
funds). For governmental bonds, the 100-percent expenditure
requirement for the first six months is reduced to 95 percent,
if the remaining five percent of the proceeds is spent within
one year after the bonds are issued.
(2) In the case of tax and revenue anticipation notes,
which are short-term bonds issued to finance governmental cash
flow deficits, no rebate is required if the amount of the
borrowing does not exceed amounts determined by reference to
the issuing government's projected cash flow shortfall.
(3) In the case of governmental bonds and certain private
activity bonds issued to finance the construction of property
owned by a governmental unit or a section 501(c)(3)
organization, no rebate is required (except profits on amounts
invested in reserve funds) if proceeds are spent in a manner
satisfying a 24-month ``spend-down'' exception (the
``construction bond exception''). The construction bond
exception requires expenditure of minimum amounts during each
six-month period of the 24-month period (10 percent in the
first six months; 45 percent in the first 12 months; 75 percent
in the first 18 months; and 100 percent (less retainage not
exceeding five percent) by the end of the 24 month period).
This exception further allows issuers to elect to pay a fixed
penalty in lieu of calculating arbitrage profits and rebating
them to the Federal Government if any of the expenditure
targets are not met.
(4) In the case of governmental bonds issued by small
governments, no rebate is required. ``Small'' governments are
defined as governmental units with general taxing powers that,
along with any subordinate units, issue no more than $5 million
in governmental bonds during a calendar year. In calculating
the $5 million issuance limit, up to $5 million of bonds to
finance public school construction may be excluded, effectively
increasing the issuance limit to $10 million in the case of
small governments engaging in public school construction.
Reasons for Change
The Committee is aware that a great need exists for
construction and renovation of public schools if American
educational excellence is to be maintained. The Committee
determined that a more liberal spend-down exception for public
school construction bonds is appropriate to allow issuers
greater flexibility in the timing of bond issuance for this
limited purpose to meet actual construction needs.
Explanation of Provision
The bill liberalizes the permitted expenditure period of
the present-law construction bond exception in the case of
bonds issued to finance the construction of public schools.
Amounts spent for the acquisition and improvement of land that
is functionally related and subordinate to a school the
construction of which is financed with proceeds of the bond
issue are treated as spent for construction. Under the bill, no
rebate is required on the construction proceeds of these public
school construction bonds if the proceeds (less presently
allowed retainage 9) are spent within four years
after the bonds are issued, and the following intermediate
spending targets are satisfied:
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\9\ Retainage amounts, limited to the present-law five percent
amount, are required to be spent within five years after the bonds are
issued.
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(1) 10 percent or more of the construction proceeds
is spent within one year after the bonds are issued;
(2) 30 percent or more of the construction proceeds
is spent within two years after the bonds are issued;
and
(3) 50 percent or more of the construction proceeds
is spent within three years after the bonds are issued.
As under the present construction bond exception, issuers
may elect to pay fixed penalties in lieu of calculating profits
and rebating them to the Federal Government if they fail to
satisfy the liberalized expenditure requirements. Further, as
under the present-law exception, profits earned on reasonably
required reserve or replacement funds or on proceeds used other
than for construction remain subject to the rebate requirement.
Effective Date
The provision applies to bonds issued after December 31,
1998.
H. Social Security Provisions
1. Increases in the Social Security earnings limit for individuals who
have attained retirement age (sec. 121 of the bill and sec. 203
of the Social Security Act)
Present law
Senior citizens age 70 and older receive full Social
Security benefits regardless of the amount of earnings they
have from wages or self employment. Those between the full
retirement age (currently age 65) and age 70 receive full
benefits only if their earnings are lower than an earnings
limit amount determined by law. In 1998, the limit for those
age 65 to 69 is $14,500. The limit is gradually raised to
$30,000 by the year 2002 as shown in the table below. After
2002, the annual exempt amounts are indexed to growth in
average wages.
Present law
Year earnings limit
1998.......................................................... $14,500
1999.......................................................... 15,500
2000.......................................................... 17,000
2001.......................................................... 25,000
2002.......................................................... 30,000
2003.......................................................... 31,231
2004.......................................................... 32,463
2005.......................................................... 33,806
2006.......................................................... 35,149
2007.......................................................... 36,604
2008.......................................................... 37,948
Senior citizens between the age of full retirement
(currently age 65) and 70 who earn more than the earnings limit
lose $1 in benefits for every $3 in wages or self-employment
income they earn over the limit.
Reason for Change
Given the combined effects of Federal, State and local
income taxes, Social Security payroll taxes, income taxes on
benefits, and the earnings limit, senior citizens who earn even
moderate amounts over the limit can be subjected to extremely
high marginal tax rates. These rates are a severe disincentive
to work and penalize retirees who often need to work out of
economic need. Raising the earnings limit also would ease the
administrative burdens of the Social Security Administration,
which spends between $100 and $150 million a year to monitor
and update the earnings limit. SSA estimates that on average 66
percent of all overpayments, and 16 percent of all
underpayments, were attributable to the earnings limit.
Explanation of Provision
The bill increases the Social Security earnings limit for
those between full retirement age (currently age 65) and age 70
in calendar years 1999-2008, as follows:
Earnings limit
Year under the bill
1998.......................................................... $14,500
1999.......................................................... 17,000
2000.......................................................... 18,500
2001.......................................................... 26,000
2002.......................................................... 30,000
2003.......................................................... 31,300
2004.......................................................... 34,000
2005.......................................................... 35,400
2006.......................................................... 36,800
2007.......................................................... 38,350
2008.......................................................... 39,750
Senior citizens between full retirement age (currently age
65) and 70 who earn over the given earnings limit for the year
would continue to lose $1 in benefits for every $3 earned over
the limit. After 2008, the annual exempt amounts are indexed to
growth in average wages.
Effective Date
The provision is effective for the taxable years ending
after 1998.
2. Recomputations of benefits after normal retirement age (sec. 122 of
the bill and sec. 215 of the Social Security Act)
Present law
Social Security benefits are based on the average of an
individual's ``high'' years of earnings. For workers born in
1929 or later, 35 ``high'' years of earnings are averaged. For
those born before 1929, the number of ``high'' years averaged
is proportionately fewer (for example, for those born in 1919,
25 ``high'' years are averaged).
If a retiree continues to work after entitlement to
benefits, his or her monthly benefit may be increased if the
new yearly earnings are greater than one of the years used in
the initial determination of benefits. Currently,
recomputations of benefits are effective in the year
immediately following the year of the earnings. However,
because of the lag between when wages are earned and when they
are reported and recomputations are processed, most
recomputations are actually paid in a lump-sum payment near the
end of the year that they are effective. Subsequently, the
adjustment is reflected in the new regular monthly benefit
amount.
Reason for Change
Since earnings are not reported until well into the year
following the year in which they are earned, there is no
administrative lead time built into the process for SSA to
adjust payments on a timely basis. The adjustments almost
always have to be provided to beneficiaries through end-of-year
lump-sum payments (and are sometimes delayed until the next
year). As a result, the current recomputation process is labor
intensive for SSA, and because most recipients do not expect
these increases, many are confused by receipt of the lump-sum
checks. Many of those affected by the delay in recomputation
are among those likely to benefit from the proposed increases
in the earnings limitation.
Under the provision, SSA's ability to manage the
recomputation process will be greatly enhanced by having ample
lead time between the year of the earnings and the point at
which they are reflected in benefit levels. The benefit check
that the recipient relies on to meet regular monthly expenses
will not be affected by delaying the recomputation.
Beneficiaries who lack earnings in one or more of the
``high'' years, and who are therefore most likely to have the
lowest Social Security benefits, will receive retroactive
recomputations and past-due benefits as under present law.
Explanation of Provision
Recomputation of benefits resulting from earnings in the
year after a worker reaches normal retirement age (currently
age 65) and later will be reflected in the recipient's benefit
check, effective with the January of the second year after the
year of the earnings. An exception is provided for recipients
who have one or more ``zero'' years of earnings in their wage
averaging computation. Earnings will continue to be credited as
under present law for purposes of establishing entitlement.
Effective Date
The provision is effective for earnings beginning in 1998.
TITLE II. SMALL BUSINESS AND FARMER TAX RELIEF PROVISIONS
A. Accelerate Increase in Expensing for Small Businesses (sec. 201 of
the bill and sec. 179 of the Code)
Present Law
Present law provides that, in lieu of depreciation, a
taxpayer with a sufficiently small amount of annual investment
may elect to deduct up to $18,500 (for taxable years beginning
in 1998) of the cost of qualifying property placed in service
for the taxable year (sec. 179). In general, qualifying
property is defined as depreciable tangible personal property
that is purchased for use in the active conduct of a trade or
business. The $18,500 amount is reduced (but not below zero) by
the amount by which the cost of qualifying property placed in
service during the taxable year exceeds $200,000. In addition,
the amount eligible to be expensed for a taxable year may not
exceed the taxable income for a taxable year that is derived
from the active conduct of a trade or business (determined
without regard to this provision). Any amount that is not
allowed as a deduction because of the taxable income limitation
may be carried forward to succeeding taxable years (subject to
similar limitations).
The $18,500 amount is increased to $25,000 for taxable
years beginning in 2003 and thereafter. The increase is phased
in as follows: for taxable years beginning in 1999, the amount
is $19,000; for taxable years beginning in 2000, the amount is
$20,000; for taxable years beginning in 2001 or 2002, the
amount is $24,000; and for taxable years beginning in 2003 and
thereafter, the amount is $25,000.
Reasons for Change
The Committee believes that section 179 expensing provides
two important benefits for small businesses (including small
businesses that are farms). First, it lowers the cost of
capital for tangible property used in a trade or business.
Second, it eliminates depreciation recordkeeping requirements
with respect to expensed property. In the Small Business Job
Protection Act of 1996, the Congress increased the value of
these benefits over a phase-in period ending in 2003. The
Committee now believes that the value of the benefits should be
increased for taxable years beginning in 1999 and thereafter,
without a phase-in period, so that taxpayers may receive these
benefits earlier.
Explanation of Provision
The bill provides that the maximum dollar amount that may
be deducted under section 179 is increased to $25,000 for
taxable years beginning in 1999 and thereafter, without the
present-law phase-in rule.
The Treasury Department is requested to conduct a
comprehensive study of recovery periods and depreciation
methods under section 168 of the Code for purposes of the
deduction for depreciation and to provide recommendations as to
the determination of such periods and methods in a more
rational manner.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1998.
B. Farm Provisions
1. Permanent extension of income averaging for farmers (sec. 211 of the
bill and sec. 1301 of the Code)
Present Law
An individual engaged in a farming business may elect to
compute his or her current year tax liability by averaging,
over the prior three-year period, all or a portion of the
taxable income that is attributable to the farming business.
In general, an individual who makes the election (1)
designates all or a portion of his or her taxable income
attributable to any farming business from the current year as
``elected farm income;'' 10 (2) allocates one-third
of the elected farm income to each of the three prior taxable
years; and (3) determines the current year section 1 tax
liability by combining (a) his or her current year section 1
tax liability excluding the elected farm income allocated to
the three prior taxable years, plus (b) the increases in the
section 1 tax liability for each of the three prior taxable
years caused by including one-third of the elected farm income
in each such year. Any allocation of elected farm income
pursuant to the election applies for purposes of any election
in a subsequent taxable year.
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\10\ The amount of elected farm income of a taxpayer for a taxable
year may not exceed the taxable income attributable to any farming
business for the year.
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The provision does not apply for employment tax purposes,
or to an estate or a trust. The provision also does not apply
for purposes of the alternative minimum tax. The provision is
effective for taxable years beginning after December 31, 1997,
and before January 1, 2001.
Reasons for Change
Income from a farming business can fluctuate significantly
from year to year due to circumstances beyond the farmer's
control. Allowing farmers an election to average their income
over a period of years mitigates the adverse tax consequences
that could result from fluctuating income levels. The Committee
believes that the election by farmers to average their income
should be made permanent.
Explanation of Provision
The bill permanently extends the income averaging provision
for farmers.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
2. Extend the net operating loss carryback period for farmers (sec. 212
of the bill and sec. 172 of the Code)
Present Law
A net operating loss (``NOL'') is, generally, the amount by
which business deductions of a taxpayer exceed business gross
income. An NOL may be carried back two years and carried
forward 20 years to offset taxable income in such years. A
taxpayer may elect to forgo the carryback of an NOL. In the
case of an NOL (1) arising from casualty or theft losses of
individual taxpayers, or (2) attributable to Presidentially
declared disasters for taxpayers engaged in a farming business
or a small business, the NOL can be carried back three years. A
farming business includes the trade or business of farming, as
well as the trade or business of operating a nursery or sod
farm, or the raising or harvesting of certain
trees.11 Special rules apply to real estate
investment trusts (no carrybacks), specified liability losses
(10-year carryback), and excess interest losses (no
carrybacks).
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\11\ For this purpose, the term ``farming business'' is defined as
in sec. 263A(e)(4).
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A carry back of an NOL will result in the refund of Federal
income tax for the carryback year. A carryforward of an NOL
will reduce Federal income tax for the carryforward year.
Reasons for Change
The NOL carryback and carryforward rules allow taxpayers to
smooth out swings in business income (and Federal income taxes
thereon) that result from business cycle fluctuations and
unexpected financial losses. Farmers are particularly
vulnerable to such fluctuations and losses. The Committee
believes that farmers who suffer losses from their farming
business should have an extended period in which to use such
losses to offset taxable income in prior years.
Explanation of Provision
The bill provides a special five-year carryback period for
a farming loss, regardless of whether the loss was incurred in
a Presidentially declared disaster area. The carryforward
period remains at 20 years. A ``farming loss'' is defined as
the amount of any net operating loss attributable to the income
and deductions of a farming business (as defined in section
263A(e)(4)). A farming loss cannot exceed the taxpayer's NOL
for the taxable year. In calculating the amount of a taxpayer's
NOL carrybacks, the portion of the NOL that is attributable to
a farming loss is treated as a separate NOL and is taken into
account after the remaining portion of the NOL for the taxable
year.
A taxpayer can elect to forgo the five-year carryback
period for a farming loss. The election to forgo the five-year
carryback period is made in the manner prescribed by the
Secretary of the Treasury and must be made by the due date of
the return (including extensions)for the year of the loss. The
election is irrevocable. If a taxpayer elects to forgo the five-year
carryback period, then the farming losses are subject to the rules that
otherwise would have applied under section 172 absent the five-year
rule. The three-year carryback period continues to apply to an NOL
incurred in a Presidentially declared disaster area if such NOL is not
eligible for the five-year carryback period.
Effective Date
The provision is effective for NOLs arising in taxable
years beginning after December 31, 1997.
3. Production flexibility contract payments (sec. 213 of the bill)
Present law
A taxpayer is generally required to include an item in
income no later than the time of its actual or constructive
receipt, unless such amount is properly accounted for as of a
different period under the taxpayer's method of accounting. If
a taxpayer has an unrestricted right to demand the payment of
an amount, the taxpayer is in constructive receipt of that
amount whether or not the taxpayer makes the demand and
actually receives the payment.
The Federal Agriculture Improvement and Reform Act of 1996
provides for certain annual payments to be made to certain
farmers. These payments are made at specified times during the
fiscal year. The Emergency Farm Financial Relief Act of 1998
provides that all payments for fiscal year 1999 are to be paid
at such time or times during fiscal year 1999 as the recipient
may specify. Amounts that would otherwise be paid after
December 31, 1998 can be specified for payment in calendar year
1998. This potentially results in the constructive receipt (and
thus required inclusion in taxable income) of such amounts in
calendar year 1998, whether or not the amounts are actually
received or the right to their receipt is fixed.
Reasons for Change
The Committee believes that it is inappropriate to
accelerate the tax on Federal Agriculture Improvement and
Reform Act of 1996 payments where the taxpayer does not
accelerate the actual receipt of such payments.
Explanation of Provision
The option added by the Emergency Farm Financial Relief Act
of 1998 to accelerate certain payments under the Federal
Agriculture Improvement and Reform Act of 1996 that are due in
fiscal 1999 is disregarded in determining the taxable year in
which such payments must be included in income.
Effective Date
The provision is effective for Federal Agriculture
Improvement and Reform Act of 1996 payments for fiscal year
1999.
C. Increase in Volume Cap on Private Activity Bonds (sec. 221 of the
bill and sec. 146 of the Code)
Present Law
Interest on bonds issued by States and local governments is
excluded from income if the proceeds of the bonds are used to
finance activities conducted and paid for by the governmental
units (Code sec. 103). Interest on bonds issued by these
governmental units to finance activities carried out and paid
for by private persons (``private activity bonds'') is taxable
unless the activities are specified in the Internal Revenue
Code. Private activity bonds on which interest may be tax-
exempt include bonds for privately operated transportation
facilities (airports, docks and wharves, mass transit, and
high-speed rail facilities), privately owned and/or provided
municipal services (water, sewer, solid waste disposal, and
certain electric and heating facilities), economic development
(small manufacturing facilities and redevelopment in
economically depressed areas), and certain social programs
(low-income rental housing, qualified mortgage bonds, student
loan bonds, and exempt activities of charitable organizations
described in Code sec. 501(c)(3)).
The volume of tax-exempt private activity bonds that States
and local governments may issue for most of these purposes in
each calendar year is limited by State-wide volume limits. The
current annual volume limits are $50 per resident of the State
or $150 million if greater. The volume limits do not apply to
private activity bonds to finance airports, docks and wharves,
certain governmentally owned, but privately operated solid
waste disposal facilities, certain high-speed rail facilities,
and to certain types of private activity tax-exempt bonds that
are subject to other limits on their volume (qualified
veterans' mortgage bonds and certain ``new'' empowerment zone
and enterprise community bonds).
Reasons for Change
The Committee determined that an adjustment to the annual
State private activity bond volume limits to levels comparable
to the dollar limits that first applied after enactment of the
Tax Reform Act of 1986 is appropriate. Such an adjustment will
assist States in meeting infrastructure needs and encouraging
economic development and will facilitate continuation of
privatization efforts regarding municipal services such as
solid waste disposal, water, and sewer services without
reversing the general policy of limiting the use of this
Federal subsidy for conduit borrowing in transactions that
distort market choice and efficiency.
Explanation of Provision
The bill increases the present-law annual State private
activity bond volume limits by 50 percent, to $75 per resident
of each State (or $225 million if greater).
Effective Date
The provision is effective beginning in calendar year 1999.
TITLE III. EXTENSION OF EXPIRING PROVISIONS
A. Extension of Research and Experimentation Credit and Increase in the
Rates for the Alternative Incremental Research Credit (sec. 301 of the
bill and sec. 41 of the Code)
Present and Prior 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 does
not apply to amounts paid or incurred after June 30, 1998.
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.12
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\12\ A special rule 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-based 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-
based 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.
Alternative incremental research credit regime
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 for
any taxable year beginning after June 30, 1996, 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.
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'').13
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\13\ Under a special rule, 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 sec. 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 but must be
undertaken for the purpose of discovering information that
istechnological 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 involve a process of experimentation related to
functional aspects, performance, reliability, or quality of a business
component.
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
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)).
Reasons for Change
The Committee believes that increasing technological
knowledge ultimately will lead to new and better products
produced at lower costs. New and better products and lower
production costs are the genesis of economic growth. For this
reason, the Committee believes it is important to extend the
research and experimentation tax credit.
In addition, the Committee believes the alternative
incremental credit enacted in 1996 should be strengthened. The
alternative incremental research credit was enacted to respond
to the changing economic circumstances of many taxpayers which
invest heavily in research. However, the Committee believes
that under current law, the alternative incremental research
credit provides less of a research incentive than does the
regular research and experimentation tax credit. Therefore, the
Committee believes it is appropriate to increase the rate of
the alternative incremental research credit.
Explanation of Provision
The bill extends the research tax credit for 20 months--
i.e., generally, for the period July 1, 1998, through February
29, 2000.
In addition, the bill increases the credit rate applicable
under the alternative incremental research credit one
percentage point per step, that is from 1.65 percent to 2.65
percent when a taxpayer's current-year research expenses exceed
a base amount of 1 percent but do not exceed a base amount of
1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's
current-year research expenses exceed a base amount of 1.5
percent but do not exceed a base amount of 2 percent; and from
2.75 percent to 3.75 percent when a taxpayer's current-year
research expenses exceed a base amount of 2 percent.
In extending the credit, the Committee wishes to reaffirm
the scope of the term ``qualified research.'' Section 41
targets the credit to research which is undertaken for the
purpose of discovering information which is technological in
nature and the application of which is intended to be useful in
the development of a new or improved business component of the
taxpayer. However, eligibility for the credit does not require
that the research be successful--i.e., the research need not
achieve its desired result. Moreover, evolutionary research
activities intended to improve functionality, performance,
reliability, or quality are eligible for the credit, as are
research activities intended to achieve a result that has
already been achieved by other persons but is not yet within
the common knowledge e.g., freely available to the general
public) of the field (provided that the research otherwise
meets the requirements of section 41, including not being
excluded by subsection (d)(4)).
Activities constitute a process of experimentation, as
required for credit eligibility, if they involve evaluation of
more than one alternative to achieve a result where the means
of achieving the result are uncertain at the outset, even if
the taxpayer knows at the outset that it may be technically
possible to achieve the result. Thus, even though a researcher
may know of a particular method of achieving an outcome, the
use of the process of experimentation to effect a new or better
method of achieving that outcome may be eligible for the credit
(provided that the research otherwise meets the requirements of
section 41, including not being excluded by subsection (d)(4)).
Lastly, the Committee observes a lack of clarity in and
litigation regarding the definition of ``internal-use
software.'' The Committee believes that taxpayers should be
given clear guidance as to what software is not subject to the
limitations on expenditures related to ``internal-use
software'' for purposes of the research tax credit. As such,
the Committee encourages the Secretary of the Treasury to issue
regulations that clarify the distinction between internal-use
software, which is subject to a higher standard for eligibility
for the credit, and other software, which is not subject to the
higher standards of Code section 41(d)(4)(E).
Effective Date
The extension of the research credit is effective for
qualified research expenditures paid or incurred during the
period July 1, 1998, through February 29, 2000. The increase in
the credit rate under the alternative incremental research
credit is effective for taxable years beginning after June 30,
1998.
B. Extension of the Work Opportunity Tax Credit (sec. 302 of the bill
and sec. 51 of the Code)
Prior Law
In general
The work opportunity tax credit (``WOTC''), which expired
on June 30, 1998, was available on an elective basis for
employers hiring individuals from one or more of eight targeted
groups. The credit equals 40 percent (25 percent for employment
of 400 hours or less) of qualified wages. Qualified wages are
wages attributable to service rendered by a member of a
targeted group during the one-year period beginning with the
day the individual began work for the employer. For a
vocational rehabilitation referral, however, the period begins
on the day the individual began work for the employer on or
after the beginning of the individual's vocational
rehabilitation plan.
The maximum credit per employee is $2,400 (40 percent of
the first $6,000 of qualified first-year wages). With respect
to qualified summer youth employees, the maximum credit is
$1,200 (40 percent of the first $3,000 of qualified first-year
wages).
The employer's deduction for wages is reduced by the amount
of the credit.
Targeted groups eligible for the credit
The eight targeted groups are: (1) families eligible to
receive benefits under the Temporary Assistance for Needy
Families (TANF) Program; (2) high-risk youth; (3) qualified ex-
felons; (4) vocational rehabilitation referrals; (5) qualified
summer youth employees; (6) qualified veterans; (7) families
receiving food stamps; and (8) persons receiving certain
Supplemental Security Income (SSI) benefits.
Minimum employment period
No credit is allowed for wages paid to employees who work
less then 120 hours in the first year of employment.
Expiration date
The credit was effective for wages paid or incurred to a
qualified individual who began work for an employer before July
1, 1998.
Reasons for Change
The Committee believes the preliminary experience of the
WOTC is promising as an incentive for employers to hire
individuals who are under-skilled, undereducated, or who
generally may be less desirable to employers. A temporary
extension of this credit will allow the Congress and the
Treasury and Labor Departments to continue to monitor the
effectiveness of the credit.
Explanation of Provision
The bill extends the work opportunity tax credit for 20
months (through February 29, 2000).
Effective Date
The provision is effective for wages paid or incurred to
qualified individuals who begin work for the employer on or
after July 1, 1998, and before March 1, 2000.
C. Extension of the Welfare-To-Work Tax Credit (sec. 303 of the bill
and sec. 51A of the Code)
Present Law
Employers are allowed a tax credit for eligible wages paid
to qualified long-term family assistance recipients during the
first two years of employment. The credit is 35 percent of the
first $10,000 of eligible wages in the first year of employment
and 50 percent of the first $10,000 of eligible wages in the
second year of employment. The maximum credit is $8,500 per
qualified employee.
Qualified long-term family assistance recipients are: (1)
members of a family that have received family assistance for at
least 18 consecutive months ending on the hiring date; (2)
members of a family that have received family assistance for a
total of at least 18 months (whether or not consecutive) after
the date of enactment of this credit (August 5, 1997) 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 two 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.
The welfare-to-work credit 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.
Reasons for Change
The Committee believes that the credit should be
temporarily extended to provide the Congress and the Treasury
and Labor Departments a better opportunity to assess the
operation and effectiveness of the credit in meeting its goals.
When enacted in the Taxpayer Relief Act of 1997, the goals of
the welfare-to-work credit were: (1) to provide an incentive to
hire long-term welfare recipients; (2) to promote the
transition from welfare to work by increasing access to
employment; and (3) to encourage employers to provide these
individuals with training, health coverage, dependent care and
ultimately better job attachment.
Explanation of Provision
The bill extends the welfare-to-work credit for an
additional 10 months (through February 29, 2000.
Effective Date
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after May 1, 1999, and before March 1, 2000.
D. Extend the Deduction Provided for Contributions of Appreciated Stock
to Private Foundations; Public Inspection of Private Foundation Annual
Returns
1. Extend the deduction provided for contributions of appreciated stock
to private foundations (sec. 304(a) of the bill and sec.
170(e)(5) of the Code)
Present and Prior 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.14 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.
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\14\ 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)).
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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 July 1, 1998. 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.
Reasons for Change
The Committee believes that, to encourage donations to
charitable private foundations, it is appropriate to extend
permanently the rule that allows a fair market value deduction
for certain gifts of appreciated stock to private foundations.
Explanation of Provision
The provision extends permanently the special rule
contained in section 170(e)(5).
Effective Date
The provision is effective for contributions of qualified
appreciated stock to private foundations made on or after July
1, 1998.
2. Public inspection of private foundation annual returns (sec. 304(b)
of the bill and sec. 6104 of the Code)
Present Law
Tax-exempt organizations (other than churches and certain
small organizations) are required to file an annual information
return (Form 990) with the Internal Revenue Service (``IRS''),
setting forth the organization's items of gross income and
expenses attributable to such income, disbursements for tax-
exempt purposes, plus certain other information for the taxable
year.
Private foundations are required to make the current year's
annual information return (Form 990-PF) available for public
inspection at the foundation's principal office during regular
business hours (sec. 6104(d)). Such return must be made
available for inspection by any citizen on request made within
180 days after the date of publication of notice of its
availability. Notice must be published, not later than the day
the return is required to be filed, in a newspaper having
general circulation in the county in which the principal office
of the foundation is located. The notice must state that the
annual return is available for public inspection by any citizen
who requests it, and must state the address and telephone
number of the private foundation's principal office and the
name of its principal manager.
Tax-exempt organizations (other than private foundations)
that are required to file a Form 990, including public
charities, are required to allow public inspection at the
organization's principal office (and certain regional or
district offices) of their Forms 990 for the three most recent
taxable years (sec. 6104(e)).
The Taxpayer Bill of Rights 2 imposed additional public
inspection requirements on tax-exempt organizations. All tax-
exempt organizations, except private foundations, will be
required to comply with requests made in person or in writing
by individuals who seek a copy of the organization's Form 990
for any of the organization's three most recent taxable years.
Upon such a request, the organization is required to supply
copies without charge other than a reasonable fee for
reproduction and mailing costs. If the request for copies is
made in person, then the organization must immediately provide
such copies. If the request for copies is made in writing, then
copies must be provided within 30 days. In addition, all tax-
exempt organizations, including private foundations, will be
required to comply in the same manner with requests made in
person or in writing by individuals who seek a copy of the
organization's application for recognition of tax-exempt status
and certain related documents. However, an organization may be
relieved of its obligation to provide copies if, in accordance
with regulations to be promulgated by the Secretary of
Treasury, (1) the organization has made the requested documents
widely available or (2) the Secretary of the Treasury
determined, upon application by the organization, that the
organization was subject to a harassment campaign such that a
waiver of the obligation to provide copies would be in the
public interest. These additional publicinspection provisions
apply to requests made no earlier than 60 days after the date on which
the Treasury Department publishes regulations defining when requested
documents have been made widely available or when a request is part of
a harassment campaign, but in any event, not before December 31,
1998.15 While proposed regulations have been issued, final
regulations have not been published; therefore, the provision is not
yet in effect.16
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\15\ However, the legislative history of the provision indicates
that Congress expected that organizations will comply voluntarily with
the public inspection provisions prior to the issuance of such final
regulations.
\16\ Prop. Treas. Reg. sec. 301.6104(e)-1.
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Upon written request to the IRS, members of the general
public also are permitted to inspect annual information returns
of tax-exempt organizations and applications for recognition of
tax-exempt status (and related documents) at the National
Office of the IRS in Washington, D.C. A person making such a
written request is notified by the IRS when the material is
available for inspection at the National Office, where notes
may be taken of the material open for inspection, photographs
taken with the person's own equipment, or copies of such
material obtained from the IRS for a fee (Treas. Reg. secs.
301.6104(a)-6 and 301.6104(b)-1).
Reasons for Change
To enhance oversight and public accountability of non-
profit organizations, the Committee believes that the
disclosure provisions applicable to private foundations should
be consistent with those applicable to public charities and
other tax-exempt organizations. In addition, this change will
result in more efficient use of private foundation resources by
eliminating the present-law publication requirements.
Explanation of Provision
Under the provision, private foundations are subject to the
public inspection requirements that currently apply to public
charities and all other tax-exempt organizations that file
annual information returns. Accordingly, private foundations
will be required to comply with requests from individuals who
seek a copy of the foundation's annual information return for
any of the foundation's three most recent taxable years.
Private foundations are no longer subject to the publication
requirements of section 6104(d).
The Committee is aware that the length of annual
information returns filed by certain private foundations may
make duplication and mailing of the return expensive and
administratively burdensome. The Committee expects that the
Treasury Department will publish regulations to address this
issue (e.g., by permitting persons to request a copy of
particular portions of the return).
Effective Date
The additional public inspection provisions apply to
requests made after the later of: (1) the date which is 60 days
after the date on which the Treasury Department publishes
regulations defining when requested documents have been made
widely available or when a request is part of a harassment
campaign, or (2) December 31, 1998. The repeal of the present-
law publication requirement shall apply only to those returns
the due date for filing of which is on or after the date the
public inspection requirements become effective.
E. Exceptions Under Subpart F for Certain Active Financing Income (sec.
305 of the bill and secs. 953 and 954 of the Code)
Present Law
In general
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
not such income is distributed to the shareholders. The income
subject to current inclusion under the subpart F rules
includes, among other things, ``foreign personal holding
company income'' and insurance income. 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: (1) dividends, interest, royalties, rents and
annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and REMICs; (3) net gains from
commodities transactions; (4) net gains from foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; and (7) payments in
lieu of dividends.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other-country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income (Prop.
Treas. Reg. sec. 1.953-1(a)).
Temporary exceptions from foreign personal holding company
income and foreign base company services income apply for
subpart F purposes for certain income that is derived in the
active conduct of a banking, financing, insurance, or similar
business. These exceptions (described below) are applicable
only for taxable years beginning in 1998.
Income from the active conduct of a banking, financing, or similar
business
A 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 or similar business generally is determined
under the principles applicable in determining financial
services income for foreign tax credit limitationpurposes.
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. In this regard, 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) (as in effect prior to the
enactment of the Taxpayer Relief Act of 1997). See Prop. Treas. Reg.
secs. 1.1296-4 and 1.1296-6. The Secretary of the Treasury is directed
to prescribe regulations applying look-through treatment in
characterizing for this purpose dividends, interest, income equivalent
to interest, rents and royalties from related persons.
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, a corporation is 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 prior law section 1296(b) (as in
effect prior to the enactment of the Taxpayer Relief Act of
1997); qualified bank affiliates and qualified securities
affiliates are 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 (``QBU'') of a corporation from
transactions with unrelated persons located in the country in
which the QBU 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.
Income from the active conduct of an insurance business
A temporary exception from foreign personal holding company
income applies for certain investment income of a qualifying
insurance company with respect to risks located within the
CFC's country of creation or organization. These rules differ
from the rules of 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.
A temporary exception applies 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. 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 are defined as 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 apply. Any one
of the three rules can be elected with respect to a particular
line of business.
First, reserves for such contracts can 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 can be determined
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 can be determined to be
equal to the net surrender value of the contract (as defined in
section 807(e)(1)(A)).
In no event can 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.
A temporary exception from foreign personal holding company
income also applies 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 company is a company
(including any predecessor) that has not been engaged in the
active conduct of an insurance business for more than 5 years.
In general, 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 insurancebusiness. In the event of the
acquisition of a book of business from another company through an
assumption or indemnity reinsurance transaction, the 5-year 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.
Reinsurance transactions among related persons may not be used to
multiply the number of 5-year periods.
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 sec. 817), only the
income specifically allocable to such contracts are taken into
account. In the case of other contracts, income not
specifically allocable is allocated ratably among such
contracts.
A qualifying insurance company is defined as 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 temporary exceptions do not apply to investment income
(includable in the income of a U.S. shareholder of a CFC
pursuant to sec. 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.
Anti-abuse rule
An anti-abuse rule applies for purposes of these temporary
exceptions. For purposes of applying these exceptions, items
with respect to a transaction or series of transactions are
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.
Foreign base company services income
A temporary exception from foreign base company services
income applies 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 or is a
qualifying insurance company.
Reasons for Change
The subpart F rules historically have been aimed at
requiring current inclusion by the U.S. shareholders of income
of a CFC that is either passive or easily moveable. Under the
subpart F rules, certain U.S. shareholders of a CFC are subject
to U.S. tax on a current basis on certain income (including
certain insurance income and foreign personal holding company
income) earned by the CFC, whether or not such income is
distributed to the shareholders. Prior to the enactment of the
Tax Reform Act of 1986 (the ``1986 Act''), exceptions from
foreign personal holding company income were provided for
income derived in the active conduct of a banking, financing,
or similar business, or derived from certain investments made
by an insurance company. The Committee recognizes that the 1986
Act's repeal of these exceptions may be viewed as causing the
subpart F rules to apply to income that is neither passive nor
easily moveable, requiring inclusion of such income on a
current basis by U.S. shareholders. In the Taxpayer Relief Act
of 1997, a one-year temporary exception from foreign personal
holding company income was enacted 17 for income
from the active conduct of an insurance, banking, financing, or
similar business. The Committee believes it is appropriate to
extend for one year these exceptions from subpart F, with
certain modifications.
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\17\ The President canceled this provision in 1997 pursuant to the
Line Item Veto Act. On June 25, 1998, the U.S. Supreme Court held that
the cancellation procedures set forth in the Line Item Veto Act are
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 (June
25, 1998).
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The Committee believes that modifications to the present-
law provision are appropriate, including changes designed to
treat various types of businesses with active financing income
more similarly to each other than does the present-law
provision. The Committee also believes that it is appropriate
to modify the present-law provision to require that eligible
businesses conduct substantial activity with regard to their
respective financial service businesses, and that the income
eligible for the exceptions have a nexus with the business
activities giving rise to such income. In the case of
transactions conducted with persons located outside the home
country of the CFC or its foreign branch (so-called ``cross
border'' transactions), the Committee believes that it is
appropriate to impose higher standards for qualifying under the
provision due to the increased concerns with respect to the
mobility of income from such transactions.
Explanation of Provision
In general
The bill extends and modifies the present-law temporary
exceptions from subpart F for income that is derived in the
active conduct of a banking, financing, or similar business or
in the conduct of an insurance business. These exceptions (as
modified) are applicable only for taxable years beginning in
1999.
With respect to income derived in the active conduct of a
banking, financing, or similar business, the bill differs from
the present-law temporary exceptions in the following
significant respects. First, the bill requires a CFC to conduct
substantial activity with respect to its business in order to
qualify for the exceptions. Second, the bill adds certain nexus
requirements which require that income which is derived by a
CFC or QBU from transactions with customers iseligible for the
exceptions if, among other things, substantially all of the activities
in connection with such transactions are conducted directly by the CFC
or QBU in its home country, and such income is treated as earned by the
CFC or QBU in its home country for purposes of such country's tax laws.
Third, the bill modifies the tests for determining whether a CFC is
predominantly engaged in the active conduct of a banking, financing, or
similar business, including modifications for income derived from a
lending or finance business. Fourth, the bill extends the exceptions to
income derived from certain cross border transactions, provided that
certain requirements are met. Fifth, the determination of where a
customer is treated as located is made under rules prescribed by the
Secretary of the Treasury. Finally, the look-through rule that was
included in the present-law provision for purposes of determining the
income eligible for the exceptions is eliminated.
In the case of insurance, the bill differs from present law
in the following significant respects. In addition to the
exception for certain income of a qualifying insurance company
with respect to risks located within the CFC's country of
creation or organization that is provided under present law,
the bill provides additional exceptions. First, the bill
provides temporary exceptions from insurance income and from
foreign personal holding company income for certain income of a
qualifying branch of a qualifying insurance company with
respect to risks located within the home country of the branch,
provided certain requirements are met under each of the
exceptions. Further, the bill adds additional temporary
exceptions from insurance income and from foreign personal
holding company income for certain income of certain CFCs or
branches with respect to risks located in any country other
than the United States, provided that the requirements for
these exceptions are met.
Income from the active conduct of a banking, financing or similar
business
Substantial activity requirement
The bill modifies the exceptions from subpart F for income
derived in the active conduct of a banking, financing, or
similar business by, among other things, incorporating a
substantial activity requirement. Under the bill, the subpart F
exceptions apply to a CFC that is an eligible controlled
foreign corporation (an ``eligible CFC'). An eligible CFC is
defined as a CFC which is predominantly engaged in the active
conduct of a banking, financing, or similar business, but only
if it conducts substantial activity with respect to such
business.
Whether a CFC is considered to conduct substantial activity
with respect to a banking, financing, or similar business is
determined under all the facts and circumstances. It is
intended that as part of this facts and circumstances analysis
in determining whether the activities conducted by the CFC are
substantial, all relevant factors are taken into account,
including the overall size of the CFC, the amount of its
revenues and expenses, the number of its employees, the ratio
of its revenues per employee, the amount of property it owns,
and the nature, size, and relative significance of the
applicable activities conducted by the CFC. Under the bill, the
Secretary is granted the authority to prescribe regulations to
carry out the purposes of these exceptions. It is intended that
such authority includes the authority to prescribe rules
relating to whether a CFC (or, as relevant, a QBU) is
considered to conduct substantial activity.
It also is intended that as part of this facts and
circumstances analysis, a CFC is required to conduct
substantially all of the activities necessary for the
generation of income with respect to the business, which
generally include the following:
Initial solicitation of customers (including
vendors);
Advising customers on financial needs, including
funding and financial products;
Providing financial and technical advice to
customers;
Designing or tailoring financial products to
customers' needs;
Negotiating terms with customers;
Performing credit analysis on customers and
evaluating noncredit risks;
Providing related services to customers;
Making loans, entering into leases, extending credit
or entering into other transactions with customers that
generate income that would be considered derived in the
active conduct of a banking, financing, or similar
business;
Collecting from customers;
Performing remarketing activities (including sales)
following termination of transactions with customers;
Responding to customers failure to satisfy their
obligations under transactions, including enforcement
or renegotiation of terms, liquidation of collateral,
foreclosure, and/or institution of litigation; and
Holding collateral for transactions with customers.
It is intended that the performance of back-office functions
(including accounting for income or loss, recordkeeping, and
routine communicating with customers) not be taken into account
in determining whether the substantial activity requirement is
satisfied. It also is intended that the relevant activities of
the business may be modified by Treasury regulation to take
into account future changes in the operations of these
businesses.
In general, the substantial activity requirement is applied
based on the activities of the CFC as a whole, including the
activities of any QBUs of the CFC. In determining whether the
substantial activity requirement is satisfied, activities
performed in the country in which the CFC is incorporated (or
in the country in which the QBU has its principal office) by
employees of a related person of the CFC are taken into
account, but only to the extent that the related person is
compensated on an arm's-length basis for the services of such
employees and such compensationis includible in the related
person's income in such country for purposes of such country's income
tax laws. For this purpose, a related person has the meaning provided
in section 954(d)(3), substituting ``at least 80 percent'' for ``more
than 50 percent.'' It is intended that the activities of such a related
person would not again be taken into account in determining whether
another CFC or QBU (e.g., the related person) satisfies the substantial
activity requirement.
Predominantly engaged requirement
The bill also modifies the rules for determining whether a
CFC is predominantly engaged in the active conduct of a
banking, financing, or similar business. Alternative rules
apply for this purpose.
Banking or securities business.--The bill modifies the
present-law application of the banking or securities business
tests for determining whether a CFC is predominantly engaged in
the active conduct of a banking, financing or similar business.
Under the bill, a CFC 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
business and is an institution licensed to do business as a
bank in the United States (or is any other corporation not so
licensed which is specified in regulations). In addition, a CFC
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 securities business and is
registered as a securities broker or dealer under applicable
U.S. securities laws (or is any other corporation not so
registered which is specified in regulations). It generally is
intended that these requirements for the active conduct of a
banking or securities business are to be interpreted in the
manner provided in the regulations proposed under prior law
section 1296(b) (as in effect prior to the enactment of the
Taxpayer Relief Act of 1997). See Prop. Treas. Reg. secs.
1.1296-4 and 1.1296-6. Specifically, it is intended that these
requirements include the requirements for foreign banks under
Prop. Treas. Reg. sec. 1.1296-4 as currently drafted. However,
it is not intended that these requirements be considered to be
satisfied by a CFC merely because it is a qualified bank
affiliate or a qualified securities affiliate within the
meaning of the proposed regulations under former section
1296(b).
Lending or finance business.--The bill modifies the
present-law 70 percent test for determining whether a CFC is
predominantly engaged in the active conduct of a banking,
financing, or similar business. Under the bill, a CFC is
considered to be predominantly engaged in the active conduct of
such business if more than 70 percent of its gross income is
derived directly from the active and regular conduct of a
lending or finance business from transactions with customers
which are unrelated persons. For this purpose, it is intended
that transactions with customers located in the United States
not be taken into account in determining whether the 70-percent
test is satisfied.
For this purpose, a CFC is considered to be engaged in a
lending or finance business if it is engaged in the business
of:
(1) making loans;
(2) purchasing or discounting accounts receivable,
notes (including loans), or installment obligations;
(3) engaging in leasing (including entering into
leases and purchasing, servicing and disposing of
leases and leased assets);
(4) issuing letters of credit and providing
guarantees;
(5) providing charge and credit card services; or
(6) rendering services or making facilities available
in connection with the foregoing activities carried on
by the corporation rendering such services or
facilities, or by another corporation which is a member
of the same affiliated group.
For this purpose, whether two corporations are affiliated is
determined by reference to section 1504 with one modification:
the exclusion for foreign corporations is disregarded.
Whether any portion of a CFC's gross income is derived
directly from the active and regular conduct of a lending or
finance business is determined under all the facts and
circumstances. Under the bill, the Secretary is granted the
authority to prescribe regulations to carry out the purposes of
these exceptions. It is intended that such authority includes
the authority to prescribe rules relating to this
determination.
Qualified banking or financing income exempt from subpart F
In general.--If a CFC is treated as an eligible CFC (i.e.,
it satisfies the substantial activity and predominantly engaged
requirements), the subpart F exceptions apply to qualified
banking or financing income of such corporation. Qualified
banking or financing income is defined as income which is
derived in the active conduct of a banking, financing, or
similar business by an eligible CFC or a QBU of such CFC if:
(1) the income is derived from transactions with customers not
located in the United States, (2) substantially all of the
activities in connection with such transactions are conducted
directly by the corporation or unit in its home country, and
(3) the income is treated as earned by such corporation or unit
in its home country for purposes of such country's tax laws.
For this purpose, income is considered to be earned by a CFC or
a QBU in its home country if such income is sourced and
allocable to such CFC or QBU in its home country for purposes
of such country's tax laws. In addition, for this purpose,
activities are considered to be conducted by a CFC or QBU if
such activities are performed by employees of the CFC or QBU.
Except as provided by regulations, a CFC's home country is
defined as its country of creation or organization, and a QBU's
home country is defined as the country in which the unit
maintains its principal office. Moreover, income derived from
transactions with customers apply only to transactions with
customers acting in their capacity as such.
For this purpose, it is intended that income derived by an
eligible CFC or QBU of such CFC from the following types of
activities be considered to be income derived in the
activeconduct of a banking, financing, or similar business (provided
that the other requirements for these exceptions are satisfied):
(1) regularly making personal, mortgage, industrial,
or other loans in the ordinary course of the
corporation's trade or business;
(2) factoring evidences of indebtedness for
customers;
(3) purchasing, selling, discounting, or negotiating
for customers notes, drafts, checks, bills of exchange,
acceptances, or other evidences of indebtedness;
(4) issuing letters of credit and negotiating drafts
drawn thereunder for customers;
(5) performing trust services, including as a
fiduciary, agent, or custodian, for customers, provided
such trust activities are not performed in connection
with services provided by a dealer in stock, securities
or similar financial instruments;
(6) arranging foreign exchange transactions
(including any section 988 transaction within the
meaning of section 988(c)(1)) for, or engaging in
foreign exchange transactions with, customers;
(7) arranging interest rate or currency futures,
forwards, options or notional principal contracts for,
or entering into such transactions with, customers;
(8) underwriting issues of stock, debt instruments or
other securities under best efforts or firm commitment
agreements for customers;
(9) engaging in leasing (including entering into
leases and purchasing, servicing and disposing of
leases and leased assets);
(10) providing charge and credit card services for
customers or factoring receivables obtained in the
course of providing such services;
(11) providing traveler's check and money order
services for customers;
(12) providing correspondent bank services for
customers;
(13) providing paying agency and collection agency
services for customers;
(14) maintaining restricted reserves (including money
or securities) in a segregated account in order to
satisfy a capital or reserve requirement imposed by a
local banking or securities regulatory authority;
(15) engaging in hedging activities directly related
to another activity described herein;
(16) repackaging mortgages and other financial assets
into securities and servicing activities with respect
to such assets (including the accrual of interest
incidental to such activity);
(17) engaging in financing activities typically
provided in the ordinary course by an investment bank,
such as project financing provided in connection with
construction projects, structured finance (including
the extension of a loan and the sale of participations
or interests in the loan to other financial
institutions or investors), and leasing activities to
the extent incidental to such financing activities;
(18) providing financial or investment advisory
services, investment management services, fiduciary
services, or custodial services;
(19) purchasing or selling stock, debt instruments,
interest rate or currency futures or other securities
or derivative financial products (including notional
principal contracts) from or to customers and holding
stock, debt instruments and other securities as
inventory for sale to customers, unless the relevant
securities or derivative financial products are not
held in a dealer capacity;
(20) effecting transactions in securities for
customers as a securities broker; and
(21) any other activity that the Secretary of the
Treasury determines to be a financing activity
conducted by active corporations in the ordinary course
of their business.
Qualified banking or financing income of an eligible CFC or
QBU of such CFC is determined separately for the CFC and each
QBU, taking into account, in the case of an eligible CFC, only
items of income, gain, deduction, loss or other items, as well
as activities, of such CFC that are not properly allocable to
any QBUs. Similarly, in the case of a QBU, qualified banking or
financing income is determined by taking into account such
applicable items (e.g., income and activities) that are
properly allocable to such QBU. Under the bill, the Secretary
is granted the authority to prescribe regulations to carry out
the purposes of these exceptions. It is intended that such
authority includes the authority to prescribe rules for
properly allocating items and activities among branches or
units of a CFC, and between the CFC and its branches or units.
Income from local customer transactions.--If the
requirements above are satisfied, the exceptions apply to
income that is derived from transactions with customers located
in the CFC's home country. In addition, the exceptions apply to
income that is derived by a QBU of an eligible CFC from
transactions with customers located in the QBU's home country.
For example, assume that a CFC is incorporated in the
United Kingdom and has operations in France that constitute a
QBU. Also assume that the activities of the U.K. CFC's head
office together with the activities of the French QBU satisfy
the substantial activity requirement. Under the bill, income
derived by the U.K. CFC from transactions with customers in the
United Kingdom is eligible for the exceptions if substantially
all of the activities in connection with the transaction are
performed in the United Kingdom by employees of the U.K.CFC,
and the income is treated as earned by the U.K. CFC in the United
Kingdom for U.K. income tax purposes. In addition, income derived by
the French QBU from transactions with customers in France is eligible
for the exceptions if substantially all of the activities in connection
with the transactions are performed in France by employees of the
French QBU, and the income is treated as earned by the French QBU in
France for French income tax purposes.
Income from cross border transactions.--If the requirements
above are satisfied, the exceptions also apply to income from
certain cross border transactions, but only if a higher
standard with respect to the substantial activity requirement
is satisfied. Under the bill, income derived by a CFC from
transactions with customers not located in the CFC's home
country or the United States is eligible for the exceptions if
the CFC conducts substantial activity with respect to a
banking, financing, or similar business in its home country. In
addition, income derived by a QBU of an eligible CFC from
transactions with customers not located in the QBU's home
country or the United States is eligible for the exceptions,
but only if the QBU conducts substantial activity with respect
to such a business in its home country. For this purpose, the
substantial activity requirement is applied by looking only at
the activities of the applicable CFC or QBU on a stand-alone
basis. Thus, income derived by a QBU from transactions with
customers not located in its home country (or in the United
States) is eligible for the exceptions if the activities of the
QBU itself constitute substantial activities (provided that the
other requirements are satisfied).
Consider again the U.K. CFC and the French QBU. If the head
office of the U.K. CFC derives income from a transaction with a
customer in Germany, the income is eligible for the exceptions
if the activities of the CFC itself (without regard to those of
the French QBU) satisfy the substantial activity requirement.
Alternatively, if the French QBU derives income from a
transaction with a German customer, the income is eligible for
the exceptions if the activities of the French QBU itself
satisfy the substantial activity requirement.
Home country requirement for income earned with respect to
a lending or finance business.--In the case of a lending or
finance business, in addition to the requirements described
above, the bill includes an additional requirement to qualify
for the exceptions in the case of income earned by a CFC that
is an eligible CFC which satisfies the predominantly engaged
requirement for an active lending or finance business. For such
an eligible CFC, income derived by such CFC is eligible for the
exceptions only if such CFC derives more than 30 percent of its
gross income directly from the active and regular conduct of a
lending or finance business from transactions with customers
that are unrelated persons and that are located within the
CFC's home country (the ``home country'' requirement). In
addition, income derived by a QBU of such an eligible CFC is
eligible for the exceptions only if such QBU derives more than
30 percent of its gross income directly from the active and
regular conduct of a lending or finance business from
transactions with customers that are unrelated persons and that
are located within the QBU's home country. For this purpose, it
is intended that transactions with customers located in the
United States not be taken into account.
The home country requirement is applied on a stand-alone
basis to the particular CFC or QBU. Thus, the 30-percent gross
income test takes into account only the gross income of a
particular CFC (without regard to the income of its QBUs) from
transactions with its home-country unrelated customers.
Similarly, in the case of a QBU, there is taken into account
the gross income of the particular QBU (without regard to the
income of the CFC or other QBUs) from transactions with its
home country unrelated customers. Accordingly, if more than 70
percent of the CFC's gross income is derived directly from the
active and regular conduct of a lending or finance business
from transactions with unrelated customers, and one of the
CFC's QBUs satisfies the home country requirement but another
QBU does not satisfy such requirement, income derived by the
QBU that satisfies the home country requirement is eligible for
the exceptions from subpart F (provided that the other
requirements are satisfied), but income derived by the other
QBU is not eligible for the exceptions.
Coordination with dealer exception.--The bill provides that
the exceptions under section 954(h) for income derived in the
active conduct of a banking, financing, or similar business do
not apply to income described in the dealer exception under
section 954(c)(2)(C)(ii) (described below) for a dealer in
securities which is an eligible CFC that satisfies the
predominantly engaged requirement for a securities business.
Exception for securities dealers
The bill provides an additional exception from foreign
personal holding company income for certain income derived by a
securities dealer within the meaning of section 475 (the so-
called ``dealer exception''). The dealer exception applies to
interest or dividends (or equivalent amounts described in sec.
954(c)(1)(E) or (G)) from any transaction (including a hedging
transaction or a transaction consisting of a deposit of
collateral or margin described in sec. 956(c)(2)(J)) entered
into in the ordinary course of the dealer's trade or business
as such a securities dealer, but only if the income is
attributable to activities of the dealer in the country in
which the dealer is created or organized (or, in the case of a
QBU of the dealer, is attributable to activities of the QBU in
the country in which the QBU both maintains its principal
office and conducts substantial business activity). For this
purpose, income is considered to be attributable to activities
of the dealer in its country of incorporation (or to a QBU in
the country in which the QBU both maintains its principal
office and conducts substantial business activity), if such
income is attributable to activities performed in such country
by employees of the dealer (or QBU), and such income is treated
as earned in such country by the dealer (or QBU) for purposes
of such country's tax laws. For this purpose, income is
considered to be earned in the country in which the dealer is
created or organized (or, in the case of a QBU, in the country
in which the QBU both maintains its principal office and
conducts substantial business activity), if such income is
sourced and allocable to such dealer (or QBU) in such country
for purposes of such country's tax laws. It is intended that
the dealer exception not apply to income from transactions with
persons located in the United States with respect to U.S.
securities. In addition, it is intended that the dealer
exception will apply to interest paid by customers to the
dealer on margin loans in connection with sales of securities
(provided that the other requirements of the provision are
satisfied).
Insurance income
In general
The bill provides a temporary exception to insurance income
under section 953. For purposes of the exception to insurance
income, reserves for an exempt insurance or annuity contract
are determined in the same manner as under the temporary
exception, described below, for foreign personal holding
company income relating to certain insurance contracts (sec.
954(i), as added by the bill). For purposes of these
provisions, reserves are intended to include discounted unpaid
losses or losses incurred, as appropriate, for property and
casualty contracts.
Operation of the exception
The bill provides an exception from insurance income for
income derived by a qualifying insurance company that is
attributable to the issuing (or reinsuring) of an exempt
contract by the qualifying insurance company or a qualifying
insurance company branch of such a company, and that is treated
as earned by the company or branch in that company's, or
branch's, home country for purposes of that country's tax laws.
The exception from insurance income does not apply to income
attributable to the issuing (or reinsuring) of an exempt
contract as the result of any arrangement whereby another
corporation receives a substantially equal amount of premiums
or other consideration in respect of issuing (or reinsuring a
contract that is not an exempt contract). An exempt contract is
an insurance or annuity contract issued or reinsured by a
qualifying insurance company or qualified insurance company
branch in connection with property in, liability arising out of
activity in, or the lives or health of residents of, a country
other than the United States.
No contract is treated as an exempt contract unless the
qualifying insurance company or branch derives more than 30
percent of its net written premiums from exempt contracts
(determined without regard to this sentence) covering
applicable home country risks, and with respect to which no
policyholder, insured, annuitant, or beneficiary is a related
person (within the meaning of sec. 954(d)(3)). Applicable home
country risks are risks in connection with property in,
liability arising out of activity in, or the lives or health of
residents of, the home country of the qualifying insurance
company or branch, as the case may be. In all cases, the 30
percent test is applied on a unit-by-unit basis. Accordingly,
income derived by a qualifying insurance company branch of a
CFC qualifies only if such branch alone satisfies the 30
percent test (without regard to the net written premiums of any
other branch). Income derived by the CFC qualifies only if the
CFC alone satisfies the 30 percent test without regard to the
net written premiums of any other unit or branch of the CFC.
When determinations under the bill are made separately with
respect to a qualifying insurance company and its qualifying
insurance company branch or branches, then in the case of the
qualifying insurance company, only income, gain, or loss and
activities of the company not properly allocable or
attributable to any qualifying insurance company branch are
taken into account. In the case of a qualifying insurance
company branch, only income, gain, or loss and activities of
the branch that are properly allocable or attributable to it
are taken into account. Under the bill, the Secretary is
granted the authority to carry out the purposes of these
exceptions. It is intended that such authority includes the
authority to prescribe rules for properly allocating items and
activities among branches or units of a CFC, and among the CFC
and its branches or units.
The home country of a CFC is the country in which the CFC
is created or organized. The home country of a qualified
business unit that is a qualifying insurance company branch of
a qualifying insurance company means the country in which the
principal office of such unit is located and in which such unit
is licensed, authorized, or regulated by the applicable
insurance regulatory body to sell insurance, reinsurance or
annuity contracts to persons other than related persons (within
the meaning of sec. 954(d)(3)) in that country.
Qualifying insurance company
A qualifying insurance company is a CFC that meets the
following requirements, which are intended to distinguish firms
that have a real business nexus with a foreign country or
countries from firms that do not. The first requirement is that
the CFC be subject to regulation as an insurance (or
reinsurance) company by its home country, and that the CFC be
licensed, authorized, or regulated by the applicable insurance
regulatory body for its home country to sell insurance,
reinsurance, or annuity contracts to persons other than related
persons (within the meaning of section 954(d)(3)) in its home
country.
The second requirement is that the CFC derive more than 50
percent of its aggregate net written premiums from the
insurance or reinsurance by the CFC (on an aggregate basis,
including qualifying insurance company branches) covering
applicable home country risks (as described above) of the CFC
or branch, as the case may be. For purposes of this rule, if a
policyholder, insured, annuitant, or beneficiary is a related
person, then the contract is treated as not covering home
country risks. A related person has the meaning set forth in
section 954(d)(3). In the case of a qualifying insurance
company branch, premiums are taken into account under this
second requirement only to the extent the premiums are treated
as earned by the branch in its home country for purposes of
that country's tax laws.
The 50 percent test applies on an aggregate basis. For
example, assume that a German CFC has a branch in France and a
branch in Italy. Assume that $50 of net written premiums are
properly allocable to the Italian branch, $100 of net written
premiums are properly allocable to the French branch, and $100
of net written premiums are properly allocable to the CFC in
Germany. For the Italian branch, assume $20 of the $50, or 40
percent, is from home country risks. For the French branch,
assume that $80 of the $100, or 80 percent, is from home
country risks. For the CFC in Germany, assume that $60 of the
$100, or 60 percent, is from home country risks. Taking into
account the respective amounts and percentages, the CFC has 64
percent of its net written premiums from home country risks on
an aggregate basis.
The third requirement is that the CFC be engaged in the
insurance business and that it would be subject to tax under
subchapter L if it were a domestic corporation. A CFC is
considered to be engaged in the insurance business, within the
meaning of this bill, if it operates in a manner consistent
with the operation of other bona fide commercial insurance
companies that sell insurance products to unrelated parties in
its home country, and conducts managerial activities in that
country with respect to the major functions of the insurance
business. A factor, among others, that could be considered in
determining whether it conducts managerial activities in its
home country with respect to the major functions of the
insurance business may be whetherin its home country it
exercises key decision making in determining business strategy with
respect to the major functions of the insurance business. For purposes
of the requirement that the CFC be engaged in the insurance business,
activities performed in the home country of the CFC by employees of the
CFC and of a related person are taken into account, to the extent that
the related person is compensated on a arm's length basis for the
services of such employees and such compensation is includible in the
related person's income in such country for purposes of that country's
tax laws. For this purpose, a related person has the meaning provided
in section 954(d)(3), substituting ``at least 80 percent'' for ``more
than 50 percent.'' In determining whether a CFC is engaged in the
insurance business, for example, an entity that is not engaged in
regular and continuous transactions with persons that are not related
persons (as described in the generally applicable anti-abuse rules) is
not considered as engaged in the insurance business.
Qualifying insurance company branch
A qualifying insurance company branch is a qualified
business unit of a CFC that meets two requirements. A qualified
business unit means any separate and clearly identified unit of
a trade or business of a taxpayer which maintains separate
books and records (within the meaning of sec. 989(a)). The
first requirement is that the unit be licensed, authorized, or
regulated by the applicable insurance regulatory body for its
home country to sell insurance, reinsurance or annuity
contracts to persons other than related persons (within the
meaning of sec. 954(d)(3)) in that country. It is intended that
the applicable insurance regulatory body be the regulatory body
that has the authority to license, authorize, or regulate with
respect to the insurance business in the country where the
branch is located and a branch that is regulated by such a body
be considered to be regulated in the country where the branch
is located. The second requirement is that the CFC (of which
the branch is a unit) be a qualifying insurance company, taking
the unit into account for purposes of the applicable tests
(above) as if it were a qualifying insurance company branch.
Additional requirements in the case of cross border risks
The bill imposes additional requirements with respect to
any contract that covers cross border risks (that is, risks
other than applicable home country risks), due to the increased
concern about mobility of income in cross border business. A
contract issued by a qualifying insurance company or qualifying
insurance company branch that covers risks other than
applicable home country risks is not treated as an exempt
contract unless such company or branch, as the case may be, (1)
conducts substantial activity in its home country with respect
to the insurance business, and (2) performs in its home country
substantially all of the activities necessary to give rise to
the income generated by the contract.
Whether a CFC or unit thereof is considered to perform in
its home country substantial activities with respect to the
insurance business is determined under all the facts and
circumstances. It is intended that as part of this facts and
circumstances analysis in determining whether the activities
conducted by the CFC or unit are substantial, all relevant
factors are taken into account, including the overall size of
the CFC or unit, the amount of its revenues and expenses, the
number of its employees, the ratio of its revenues per
employee, the amount of property it owns, and the nature, size
and relative significance of the applicable activities
conducted by the CFC or unit. Under the bill, the Secretary is
granted the authority to carry out the purposes of these
exceptions. It is intended that such authority includes the
authority to prescribe regulations relating to whether a CFC or
unit is considered to conduct substantial activity.
It also is intended that as part of this facts and
circumstances analysis, a CFC or unit is required to conduct
substantially all of the activities necessary for the
generation of income with respect to the insurance business.
Such activities of an insurance business generally depend on
the line of business, and could include:
Designing or tailoring insurance products to meet
market or customer requirements;
Performing actuarial analysis with respect to
insurance products;
Determining investment options for separate account-
type products;
Performing underwriting functions with respect to
insurance products;
Performing analysis for purposes of risk assessment;
Performing analysis for purposes of setting premium
rates;
Performing analysis for purposes of calculating
reserves;
Performing claims management and adjustment
functions;
Developing marketing strategies, advertising and
other public image activities;
Making (or arranging for) sales to customers;
Maintaining reserves and surplus (other than excess
surplus);
Making (or arranging for) investments; and
Collecting from customers.
It further is intended that the performance of back-office
functions (including accounting for income or loss,
recordkeeping, and routine communicating with customers) not be
taken into account in determining whether the substantial
activity requirement is satisfied. It also is intended that the
relevant activities of the business may be modified by Treasury
regulation to take into account the actual operation of lines
of insurance business and future changes in the operation of
lines of insurance business.
It further is intended that activities performed in the
CFC's or unit's home country by employees of a related person
(within the meaning of sec. 954(d)(3), substituting ``at least
80 percent'' for ``more than 50 percent'') be taken into
account, to the extent that the related person is compensated
on an arm's length basis for the services of such employees and
such compensation is includible in the related person's income
in that country for purposes of such country's tax laws. It
also is intended that the activities of such a related person
are not again taken into account in determining whether another
CFC or unit (e.g., the related person) satisfies the
substantial activity requirement.
In addition, with respect to a contract issued by a
qualifying insurance company or qualifying insurance company
branch that covers risks other than applicable home country
risks, the qualifying insurance company or qualifying insurance
company branch is required to perform in its home country
substantially all of the activities necessary to give rise to
the income generated by the contract.
Foreign personal holding company income with respect to insurance
The bill provides a temporary exception from foreign
personal holding income for certain investment income derived
by a qualifying insurance company and by certain qualifying
insurance company branches.
The exception applies to income (received from a person
other than a related person) from investments made by a
qualifying insurance company or qualifying insurance company
branch of its reserves allocable to exempt contracts or 80
percent of its unearned premiums from exempt contracts. For
this purpose, an exempt contract has the meaning provided under
the bill.
In the case of exempt contracts that are 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
are used if the qualifying insurance company or qualifying
insurance company branch were subject to tax under subchapter L
of the Code, with certain modifications. For this purpose,
unearned premiums and losses incurred are determined in
accordance with section 832(b) 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). However, in
applying these rules, there is substituted for the applicable
Federal interest rate the interest rate determined for the
functional currency of the company or branch and which (except
as provided by the Treasury Secretary) is calculated in the
same manner as the Federal mid-term rate under section 1274(d).
In addition, there is substituted for the loss payment pattern
under section 846 the appropriate foreign loss payment pattern
determined by the Treasury Secretary for the line of business.
In the case of health insurance contracts, it is intended that
appropriate foreign mortality and morbidity tables be used for
this purpose.
In the case of an exempt contract that is a life insurance
or annuity contract, reserves for such contracts are determined
as follows. The reserves equal the greater of: (1) the net
surrender value of the contract (as defined in section
807(e)(1)(A)), including in the case of pension plan contracts;
or (2) the amount determined by applying the tax reserve method
that would apply if the qualifying insurance company were
subject to tax under Subchapter L of the Code, with the
following modifications. First, there is substituted for the
applicable Federal interest rate an interest rate determined
for the functional currency of the qualifying insurance
company's home country, calculated (except as provided by the
Treasury Secretary in order to address insufficient data and
similar problems) in the same manner as the mid-term applicable
Federal interest rate (``AFR'') (within the meaning of section
1274(d)). Second, there is substituted for the prevailing State
assumed rate the highest assumed interest rate permitted to be
used for purposes of determining statement reserves in the
foreign country for the contract. Third, in lieu of U.S.
mortality and morbidity tables, there are applied mortality and
morbidity tables that reasonably reflect the current mortality
and morbidity risks in the foreign country. Fourth, the
Treasury Secretary may provide that the interest rate and
mortality and morbidity tables of a qualifying insurance
company may be used for one or more of its branches when
appropriate.
In no event may the reserve for any contract at any time
exceed the foreign statement reserve for the contract, reduced
by any catastrophe, equalization, or deficiency reserve or any
similar reserve. In the case of a contract that is a property,
casualty, or health insurance contract, it is intended that
this limitation applies with respect to unpaid losses by line
of business (similar to sec. 846(a)(3)). These rules apply
whether the contract is regulated as a property, casualty,
health, life insurance, annuity, or any other type of contract.
The bill also provides an exception from foreign personal
holding company income for income from investment of assets
equal to (1) one-third of premiums earned during the taxable
year on exempt contracts regulated in the country in which sold
as property, casualty, or health insurance contracts, and (2)
10 percent of reserves (determined for purposes of the bill)
for contracts regulated in the country in which sold as life
insurance or annuity contracts. In no event does the exception
from foreign personal holding company income apply to
investment income with respect to excess surplus.
To prevent the shifting of relatively high-yielding assets
to generate investment income that qualifies under this
temporary exception, the bill provides that, except as provided
by the Treasury Secretary, income is allocated to contracts as
follows. In the case of a separate account-type contract
(including a variable contract not meeting the requirements of
section 817), the income credited under the contract is
allocable only to that contract. Income not so allocated
generally is allocated ratably among all contracts that are not
separate account-type contracts, subject to the anti-abuse
rules (described below).
Other definitions and anti-abuse rules relating to insurance
The bill provides that the present-law statutory definition
of a life insurance contract (under secs. 7702 or 101(f)), as
well as the distribution on death requirement of section 72(s)
and the diversification requirement of section 817(h), do not
apply for purposes of determining reserves for a life insurance
or annuity contract under sections 953 and 954 of the Code,
provided that neither the policyholders, the insureds or
annuitants, nor the beneficiaries with respect to the contract
are U.S. persons.
The bill provides a rule coordinating the exception to
insurance income with the present-law special rule for certain
captive insurance companies (sec. 953(c)). Under the
coordination rule, the scope of the present-law rule that
related party insurance income is treated as subpart F income
is retained. The exception under the bill from the definition
of insurance income does not include income derived from exempt
contracts that cover risks other than applicable home country
risks, for purposes of the rules of section 953(c).
The anti-abuse rules applicable under the subpart F
exceptions provided in section 954(h) (other than sec.
954(h)(7)(B)) (as added by the bill) apply to these exceptions
for insurance. In addition, the bill provides anti-abuse rules
applicable under the exceptions from subpart F income relating
to insurance.
The bill provides that there shall be disregarded any item
of income, gain, loss, or deduction of, or derived from, an
entity which is not engaged in regular and continuous
transactions with persons that are not related persons. This
rule is intended, for example, to address the use of fronting
companies or similar entities (that are not engaged in regular
and continuous transactions with persons that are not related
persons) to reinsure risks in a manner to cause a CFC or branch
to qualify as a qualifying insurance company or qualifying
insurance company branch by meeting percentage requirements
with respect to home country risks that it would not otherwise
meet.
The bill provides that there shall be disregarded 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 bill also provides that a contract is not treated as an
exempt contract (as described above), if any policyholder,
insured or annuitant, or beneficiary is a resident of the
United States, the contract was marketed to the U.S. resident,
and was written to cover a risk outside the United States.
The bill also provides that a contract is not treated as an
exempt contract, if the contract covers risks located both
within and outside the United States, and the qualifying
insurance company or branch does not maintain such records, and
file such reports, with respect to the contract as the Treasury
Secretary requires. It is intended that documentation that is
contemporaneous with the issuance of the contract be maintained
by the qualifying insurance company or branch.
The bill also provides that the Treasury Secretary may
prescribe rules for the allocation of contracts (and income
from contracts) among two or more qualifying insurance company
branches of a qualifying insurance company in order to clearly
reflect the income of such branches.
The bill also provides that premiums from a contract are
treated as not covering home country risks (and are treated as
covering risks other than home country risks) for purposes of
the tests for 30 percent and 50 percent, respectively, of net
written premiums if the contract reinsures a contract issued or
reinsured by a related person (within the meaning of sec.
954(d)(3)).
The bill also provides that the Treasury Secretary may
prescribe regulations as may be necessary or appropriate to
carry out the purposes of the exceptions from insurance income
and foreign personal holding company income provided under
sections 953(e) and 954(i) (as added by the bill).
Other anti-abuse rules
The bill generally includes the anti-abuse rules of the
present-law provision, with certain further refinements. Under
the bill, the anti-abuse rules provide that items with respect
to a transaction or series of transactions are disregarded if
one of the principal purposes of the transaction or
transactions is to qualify income or gain for these exceptions,
including any transaction or a series of transactions a
principal purpose of which is the acceleration or deferral of
any item in order to claim the benefits of these exceptions. In
addition, the anti-abuse rules provide that items of an entity
which is not engaged in regular and continuous transactions
with customers which are not related persons are disregarded.
Moreover, items with respect to a transaction or series of
transactions are disregarded if one of the principal purposes
of the transaction or transactions is to qualify income or gain
for these exceptions, including utilizing or doing business
with: (1) one or more entities in order to satisfy any home
country requirement, or (2) a special purpose entity or
arrangement, including a securitization or financing
arrangement or any similar entity or arrangement. Finally, the
anti-abuse rules provide that a related person, officer,
director, or employee with respect to any CFC (or QBU) which
otherwise would be treated as a customer of such corporation or
unit with respect to any transaction would not be treated as a
customer, if a principal purpose of such transaction is to
satisfy any requirement for these exceptions.
Sale of assets of an active financing business
The bill includes a modification to address the treatment
of sales of assets of an active financing business. In general,
foreign personal holding company income includes net gains from
the sale or exchange of property that gives rise to dividends,
interest, royalties, rents, or annuities. The bill provides an
exception from this rule for income that qualifies for the
exception from subpart F for income derived in the active
conduct of a banking, financing, or similar business. Under the
bill, foreign personal holding company income does not include
net gains from the sale or exchange of property that gives rise
to dividends, interest, royalties, rents, or annuities if such
property gives rise to income not treated as foreign personal
holding company income for the taxable year by reason of the
exceptions under section 954(h) or (i) (as added by the bill)
for income derived in the active conduct of a banking,
financing, or similar business or in the conduct of an
insurance business. It is intended that this exception applies
only to the extent that, prior to its disposition, the property
was held to generate or generated income which qualifies for
the exceptions under section 954(h) or (i) (and such property
was not so held for a principal purpose of taking advantage of
this exception).
Exceptions from foreign base company services income
The present-law provision includes a corresponding
exception from foreign base company services income for income
derived by a CFC from the performance of services that are
directly related to a transaction entered into by the CFC that
gives rise to income that is eligible for these exceptions from
subpart F. Under the bill, foreign base company services income
does not include income that is not treated as foreign personal
holding company income by reason of the exceptions under
section 954(h) or 954(i) or the securities dealer exception
under section 954(c)(2)(C)(ii), or treated as exempt insurance
income by reason of section 953(e) (as added by the bill).
Effective Date
The provision applies only to taxable years of foreign
corporations beginning in 1999, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
F. Extension of the Generalized System of Preferences (sec. 311 of the
bill and sec. 505 of the Trade Act of 1974)
Present and Prior Law
Title V of the Trade Act of 1974, as amended, grants
authority to the President to provide duty-free treatment on
imports of certain articles from beneficiary developing
countries subject to certain conditions and limitations. To
qualify for GSP privileges, each beneficiary country is subject
to various mandatory and discretionary eligiblity criteria.
Import sensitive products are ineligible for GSP. The GSP
program, which is designed to promote development through trade
rather than traditional aid programs, expired after June 30,
1998.
Reasons for Change
The Committee believes it is appropriate to extend the GSP
program.
Explanation of Provision
The bill reauthorizes the GSP program to terminate after
February 29, 2000. Refunds would be authorized, upon request of
the importer, for duties paid between July 1, 1998, and the
date of enactment of the bill.
Effective Date
The provision is effective for duties paid on or after July
1, 1998, and before March 1, 2000.
TITLE IV. REVENUE OFFSET PROVISION
A. Treatment of Certain Deductible Liquidating Distributions of
Regulated Investment Companies and Real Estate Investment Trusts (sec.
401 of the bill and secs. 332 and 334 of the Code)
Present Law
Regulated investment companies (``RICs'') and real estate
investment trusts (``REITs'') are allowed a deduction for
dividends paid to their shareholders. The deduction for
dividends paid includes amounts distributed in liquidation
which are properly chargeable to earnings and profits, as well
as, in the case of a complete liquidation occurring within 24
months after the adoption of a plan of complete liquidation,
any distribution made pursuant to such plan to the extent of
earnings and profits. Rules that govern the receipt of
dividends from RICs and REITs generally provide for including
the amount of the dividend in the income of the shareholder
receiving the dividend that was deducted by the RIC or REIT.
Generally, any shareholder realizing gain from a liquidating
distribution of a RIC or REIT includes the amount of gain in
the shareholder's income. However, in the case of a liquidating
distribution to a corporation owning 80-percent of the stock of
the distributing corporation, a separate rule generally
provides that the distribution is tax-free to the parent
corporation. The parent corporation succeeds to the tax
attributes, including the adjusted basis of assets, of the
distributing corporation. Under these rules, a liquidating RIC
or REIT might be allowed a deduction for amounts paid to its
parent corporation, without a corresponding inclusion in the
income of the parent corporation, resulting in income being
subject to no tax.
A RIC or REIT may designate a portion of a dividend as a
capital gain dividend to the extent the RIC or REIT itself has
a net capital gain, and a RIC may designate a portion of the
dividend paid to a corporate shareholder as eligible for the
70-percent dividends-received deduction to the extent the RIC
itself received dividends from other corporations. If certain
conditions are satisfied, a RIC also is permitted to pass
through to its shareholders the tax-exempt character of the
RIC's net income from tax-exempt obligations through the
payment of ``exempt interest dividends,'' though no deduction
is allowed for such dividends.
Reasons for Change
RICs and REITs are important investment vehicles,
particularly for small investors. The RIC and REIT rules are
designed to encourage investors to pool their resources and
achieve the type of investment opportunities, subject to a
single level of tax, that otherwise would be available only to
a larger investor. Nonetheless, the Committee understands that
some corporations have attempted to use the ``dividends paid
deduction'' for a RIC or REIT in combination with the separate
rule that allows a corporate parent to receive property from an
80 percent subsidiary without tax when the subsidiary is
liquidating, and have argued that the combination of these two
rules permits income deducted by the RIC or REIT and paid to
the parent corporation to be entirely tax free during the
period of liquidation of the RIC or REIT. The Committee
believes that income of a RIC or REIT which is not taxable to
the RIC or REIT because of the dividends paid deduction also
should not be excluded from the income of the RIC's or REIT's
shareholders as a liquidating distribution to a parent
shareholder. This legislation will not affect the intended
beneficiaries of the RIC and REIT rules.
Explanation of Provision
Any amount which a liquidating RIC or REIT may take as a
deduction for dividends paid with respect to an otherwise tax-
free liquidating distribution to an 80-percent corporate owner
is includible in the income of the recipient corporation. The
includible amount is treated as a dividend received from the
RIC or REIT. The liquidating corporation may designate the
amount treated as a dividend as a capital gain dividend or, in
the case of a RIC, a dividend eligible for the 70-percent
dividends received deduction or an exempt interest dividend, to
the extent provided by the RIC or REIT provisions of the Code.
The provision does not otherwise change the tax treatment
of the distribution to the parent corporation or to the RIC or
REIT. Thus, for example, the liquidating corporation will not
recognize gain (if any) on the liquidating distribution and the
recipient corporation will hold the assets at a carryover
basis, even where the amount received is treated as a
dividend..
Effective Date
The provision is effective for distributions on or after
May 22, 1998, regardless of when the plan of liquidation was
adopted.
No inference is intended regarding the treatment of such
transactions under present law.
TITLE V. TAX TECHNICAL CORRECTIONS
Except as otherwise provided, the technical corrections
contained in the bill generally are effective as if included in
the originally enacted related legislation.
A. Technical Corrections to the 1998 Act
1. Burden of proof (sec. 502(b) of the bill, sec. 3001 of the 1998 Act,
and sec. 7491 (a)(2)(C) of the Code)
Present Law
The Treasury Secretary has the burden of proof in any court
proceeding with respect to a factual issue if the taxpayer
introduces credible evidence with respect to any factual issue
relevant to ascertaining the taxpayer's tax liability, provided
specified conditions are satisfied (sec. 7491). One of these is
that corporations, trusts, and partnerships must meet certain
net worth limitations. These net worth limitations do not apply
to individuals or to estates.
Explanation of Provision
The provision removes the net worth limitation from certain
revocable trusts for the same period of time that the trust
would have been treated as part of the estate had the trust
made the election under section 645 to be treated as part of
the estate.
2. Relief for innocent spouses (sec. 502(c) of the bill, sec. 3201 of
the 1998 Act, and secs. 2024(a) and 6015(e) of the Code)
Present Law
A taxpayer who is no longer married to, is separated from,
or has been living apart for at least 12 months from the person
with whom he or she originally joined in filing a joint Federal
income tax return may elect to limit his or her liability for a
deficiency arising from such joint return to the amount of the
deficiency that is attributable to items that are allocable to
such electing spouse. The election is limited to deficiency
situations and only affects the amount of the deficiency for
which the electing spouse is liable. Thus, the election cannot
be used to generate a refund, to direct a refund to one spouse
or the other, or to allocate responsibility for payment where a
balance due is reported on, but not paid with, a joint return.
In addition to the election to limit the liability for
deficiencies, a taxpayer may be eligible for innocent spouse
relief. Innocent spouse relief allows certain taxpayers who
joined in the filing of a joint return to be relieved of
liability for an understatement of tax that is attributable to
items of the other spouse to the extent that the taxpayer did
not know or have reason to know of the understatement. The
Secretary is also authorized to provide equitable relief in
situations where, taking into account all of the facts and
circumstances, it is inequitable to hold an individual
responsible for all or a part of any unpaid tax or deficiency
arising from a joint return. Under certain circumstances, it is
possible that a refund could be obtained under this authority.
Explanation of Provision
The provision clarifies that the ability to obtain a credit
or refund of Federal income tax is limited to situations where
the taxpayer qualifies for innocent spouse relief or where the
Secretary exercises his authority to provide equitable relief.
3. Interest netting (sec. 502(d) of the bill and sec. 3301 (c)(2) of
the 1998 Act)
Present Law
For calendar quarters beginning after July 22, 1998, a net
interest rate of zero applies where interest is payable and
allowable on equivalent amounts of overpayment and underpayment
of any tax imposed by the Internal Revenue Code. In addition,
the net interest rate of zero applies to periods on or before
July 22, 1998, providing (1) the statute of limitations has not
expired with respect to either the underpayment or overpayment,
(2) the taxpayer identifies the periods of underpayment and
overpayment where interest is payable and allowable for which
the net interest rate of zero would apply, and (3) on or before
December 31, 1999, the taxpayer asks the Secretary to apply the
net zero rate.
Explanation of Provision
The provision restores language originally included in the
Senate amendment that clarifies that the applicability of the
zero net interest rate for periods on or before July 22, 1998
is subject to any applicable statute of limitations not having
expired with regard to either a tax underpayment or
overpayment.
4. Effective date for elimination of 18-month holding period for
capital gains (sec. 502(h) of the bill, sec. 5001 of the 1998
Act, and sec. 1(h) of the Code)
Present Law
The 1998 Act repealed the provision in the 1997 Act
providing a maximum 28-percent rate for the long-term capital
gain attributable to property held more than one year but not
more than 18 months. Instead, the 1998 Act treated this gain in
the same manner as gain from property held more than 18 months.
The provision in the 1998 Act is effective for amounts properly
taken into account after December 31, 1997. For gains taken
into account by a pass-thru entity, such as a partnership, S
corporation, trust, estate, RIC or REIT, the date that the
entity properly took the gain into account is the appropriate
date in applying this provision. Thus, for example, amounts
properly taken into account by a pass-thru entity in 1997 with
respect to property held more than one year but not more than
18 months which are included in income on an individual's 1998
return are taken into account in computing 28-percent rate
gain.
Explanation of Provision
Under the provision, in the case of a capital gain dividend
made by a RIC or REIT after 1997, no amount will be taken into
account in computing the net gain or loss in the 28-percent
rate gain category by reason of property being held more than
one year but not more than 18 months, other than amounts taken
into account by the RIC or REIT from other pass-thru entities
(other than in structures, such as a ``master-feeder
structure'', in which the RIC invests a substantial portion of
its assets in one or more partnerships holding portfolio
securities and having the same taxable year as the RIC). A
similar rule applies to amounts properly taken into account by
a RIC or REIT by reason of holding, directly or indirectly, an
interest in another RIC or REIT to which the rule in the
preceding sentence applies.
For example, if a RIC sold stock held more than one year
but not more than 18 months on November 15, 1997, for a gain,
and makes a capital gain dividend in 1998, the gain is not
taken into account in computing 28-percent rate gain for
purposes of determining the taxation of the 1998 dividend.
(Thus, all the netting and computations made by the RIC need to
be redone with respect to all post-1997 capital gain dividends,
whether or not dividends of 28-percent rate gain.) If, however,
the gain was taken into account by a RIC by reason of holding
an interest in a calendar year 1997 partnership which itself
sold the stock, the gain will not be recharacterized by reason
of this provision (unless the RIC's investment in the
partnership satisfies the exception for master-feeder
structures). If the gain was taken into account by a RIC by
reason on holding an interest in a REIT and the gain was
excluded from 28-percent rate gain by reason of the application
of this provision to the REIT, the gain will be excluded from
28-percent rate gain in determining the tax of the RIC
shareholders.
The provision also corrects a cross reference.
B. Technical Corrections to the 1997 Act
1. Treatment of interest on qualified education loans (sec. 503(a) of
the bill, sec. 202 of the 1997 Act, and secs. 221 and 163(h) of
the Code)
Present Law
Present law, as modified by the 1997 Act, provides that
certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for such
interest expense, up to a maximum dollar amount per year
($1,000 for taxable years beginning in 1998), subject to
certain requirements. Present law also provides that in the
case of a taxpayer other than a corporation, no deduction is
allowed for personal interest. For this purpose, personal
interest means any interest allowable as a deduction, other
than certain types of interest listed in the statute. This
provision does not specifically provide that otherwise
deductible qualified education loan interest is not treated as
personal interest.
Explanation of Provision
The provision clarifies that otherwise deductible qualified
education loan interest is not treated as nondeductible
personal interest.
2. Capital gain distributions of charitable remainder trusts (sec.
503(b) of the bill, sec. 311 of the 1997 Act and sec. 5001 of
the 1998 Act, and sec. 1(h) of the Code)
Present Law
Under present law, the income beneficiary of a charitable
remainder trust (``CRT'') includes the trust's capital gain in
income when the gains are distributed to the beneficiary (sec.
664(b)(2)). Internal Revenue Service Notice 98-20 provides
guidance with respect to the categorization of long-term
capital gain distributions from a CRT under the capital gain
rules enacted by the 1997 Act. Under the Notice, long-term
capital gains properly taken into account by the trust before
January 1, 1997, are treated as falling in the 20-percent group
of gain (i.e., gain not in the 28-percent rate gain or
unrecaptured sec. 1250 gain). Long-term capital gains properly
taken into account by the trust after December 31, 1996, and
before May 7, 1997, are included in 28-percent rate gain. Long-
term capital gains properly taken into account by the trust
after May 6, 1997, are treated as falling into the category
which would apply if the trust itself were subject to tax.
Explanation of Provision
The provision provides that, in the case of a capital gain
distribution by a CRT after December 31, 1997, with respect to
amounts properly taken into account by the trust during 1997,
amounts will not be included in the 28-percent rate gain
category solely by reason of being properly taken into account
by the trust before May 7, 1997, or by reason of the property
being held not more than 18 months. Thus, for example, the sale
of stock by a CRT on February 1, 1997, will not be taken into
account in determining 28-percent rate gain where the gain is
distributed after 1997.
Effective Date
The provision applies to taxable years beginning after
December 31, 1997.
3. Gifts may not be revalued for estate tax purposes after expiration
of statute of limitations (sec. 503(c) of the bill, sec. 506 of
the 1997 Act, and secs. 2001(f)(2) and 6501(c)(9) of the Code)
Present Law
Basic structure of Federal estate and gift taxes.--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 in that year and in 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, the unified credit, and certain other credits.
This structure raises two different, but related, issues:
(1) what is the period beyond which additional gift taxes
cannot be assessed or collected--generically referred to as the
``statute of limitations''--and (2) what is the period beyond
which the amount of prior transfers cannot be revalued for the
purpose of determining the amount of tax on subsequent
transfers.
Gift tax statute of limitations.--Section 6501(a) provides
the general rule that any tax (including gift and estate tax)
must be assessed within three years after the return is filed
by the taxpayer. Under section 6501(e)(2), the period for
assessments of gift or estate tax is increased to six years
where there is more than a 25 percent omission in the amount of
the total gifts or gross estate disclosed on the gift or estate
tax return.
Revaluation of gifts for gift tax purposes.--Under a 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 if the statute of
limitations for assessment of gift tax on the prior gifts has
expired.
In addition, section 6501(c)(9) provides that the value of
any item which is required to be disclosed on a gift tax return
may not be redetermined by the Commissioner after the
expiration of the statute of limitations. 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). Further, 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). The IRS is to develop an administrative appeals process
whereby a taxpayer can challenge a redetermination of value by
the IRS prior to issuance of a final notice. In the event the
taxpayer and the IRS cannot agree on the value of a gift, the
1997 Act provided the U.S. Tax Court with jurisdiction to issue
a declaratory judgment on the value of a gift (section 7477). 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
U.S. 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.
Revaluation of gifts for estate tax purposes.--Similarly, a
gift cannot be revalued for purposes of determining the
applicable estate tax bracket and available unified credit if
(1) the statute of limitations has expired and (2) the value of
the gift is shown or disclosed on gift tax return or is
disclosed in a statement attached to the gift tax return
(section 2001(f)).
Explanation of Provision
The bill clarifies the rules relating to revaluations of
prior transfers for computation of the estate tax to provide
that the value of a prior transfer cannot be redetermined if
the transfer was disclosed on a gift tax return, or in a
statement attached to the gift tax return, in a manner to
adequately apprise the Treasury Secretary of the nature the
transfer, even if there was no gift tax imposed on that
transfer.
In addition, the bill removes the revaluation rule in
section 6501(c)(9) since the substance of that rule also is
provided in sections 2001(f) and 2504(c). The Committee intends
that there be no change in the manner of finally determining
the value of a gift as a result of this amendment.
4. Coordinate Vaccine Injury Compensation Trust Fund expenditure
purposes with list of taxable vaccines (sec. 503(d) of the
bill, sec. 904 of the 1997 Act, and sec. 9510(c) of the Code)
Present Law
A manufacturer's excise tax is imposed on certain vaccines
routinely recommended for administration to children (sec.
4131). The tax is imposed at a rate of $0.75 per dose on any
listed vaccine component. Taxable vaccine components are
vaccines against diphtheria, tetanus, pertussis, measles,
mumps, rubella, polio, HIB (haemophilus influenza type B),
hepatitis B, and varicella (chicken pox). Tax was imposed on
vaccines against diphtheria, tetanus, pertussis, measles,
mumps, rubella, and polio by the Omnibus Budget Reconciliation
Act of 1987. Tax was imposed on vaccines against HIB, hepatitis
B, and varicella by the 1997 Act.
Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund
(``Vaccine 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. Present law provides that payments from the
Vaccine Trust Fund may be made only for vaccines eligible under
the program as of December22, 1987 (sec. 9510(c)(1)). Thus,
payments may not be made for injuries related to the HIB, hepatitis B
or varicella vaccines.
Explanation of Provision
The provision provides that payments are permitted from the
Vaccine Trust Fund for injuries related to the administration
of the HIB, hepatitis B, and varicella vaccines. The provision
also clarifies that expenditures from the Vaccine Trust Fund
may occur only as provided in the Code and makes conforming
amendments.
5. Abatement of interest by reason of Presidentially declared disasters
(sec. 503(e) of the bill, sec. 915 of the 1997 Act, and sec.
6404(h) of the Code)
Present Law
The Taxpayer Relief Act of 1997 (``1997 Act'') provided
that, if the Secretary of the Treasury extends the filing date
of an individual tax return for 1997 for individuals living in
an area that has been declared a disaster area by the President
during 1997, no interest shall be charged as a result of the
failure of an individual taxpayer to file an individual tax
return, or pay the taxes shown on such return, during the
extension.
The Internal Revenue Service Restructuring and Reform Act
of 1998 (``1998 Act'') contains a similar rule applicable to
all taxpayers for tax years beginning after 1997 for disasters
declared after 1997. The status of disasters declared in 1998
but that relate to the 1997 tax year is unclear.
Explanation of Provision
The provision amends the 1997 Act rule so that it is
available for disasters declared in 1997 or in 1998 with
respect to the 1997 tax year.
6. Treatment of certain corporate distributions (sec. 503(f) of the
bill, sec. 1012 of the 1997 Act, and secs. 351(c) and
368(a)(2)(H) of the Code)
Present Law
The 1997 Act (sec. 1012(a)) requires a distributing
corporation to recognize corporate level gain on the
distribution of stock of a controlled corporation under section
355 of the Code if, pursuant to a plan or series of related
transactions, one or more persons acquire a 50-percent or
greater interest (defined as 50 percent or more of the voting
power or value of the stock) of either the distributing or
controlled corporation (Code sec. 355(e)). Certain transactions
are excepted from the definition of acquisition for this
purpose. Under the technical corrections included in the
Internal Revenue Service Restructuring and Reform Act of 1998,
in the case of acquisitions under section 355(e)(3)(A)(iv), the
acquisition of stock in the distributing corporation or any
controlled corporation is disregarded to the extent that the
percentage of stock owned directly or indirectly in such
corporation by each person owning stock in such corporation
immediately before the acquisition does not
decrease.1
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\1\ This exception (as certain other exceptions) does not apply if
the stock held before the acquisition was acquired pursuant to a plan
(or series of related transactions) to acquire a 50-percent or greater
interest in the distributing or a controlled corporation.
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In the case of a 50-percent or more 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. No adjustment to the basis of the
stock or assets of either corporation is allowed by reason of
the recognition of the gain.2
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\2\ The 1997 Act does not limit the otherwise applicable Treasury
regulatory authority under section 336(e) of the Code. Nor does it
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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The 1997 Act (as amended by the technical corrections
contained in the Internal Revenue Service Restructuring and
Reform Act of 1998) also modified 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 reorganizations under
section 368(a)(1)(D), the fact that the shareholders of the
distributing corporation dispose of part or all of the
distributed stock shall not be taken into account.
The effective date (Act section 1012(d)(1)) states that the
relevant provisions of the 1997 Act apply to distributions
after April 16, 1997, pursuant to a plan (or series of related
transactions) which involves an acquisition occurring after
such date (unless certain transition provisions apply).
Explanation of Provision
The provision clarifies the ``control immediately after''
requirement of section 351(c) and section 368(a)(2)(H) in the
case of certain divisive transactions in which a corporation
contributes assets to a controlled corporation and then
distributes the stock of the controlled corporation in a
transaction that meets the requirements of section 355 (or so
much of section 356 as relates to section 355). In such cases,
not only the fact that the shareholders of the distributing
corporation dispose of part or all of the distributed stock,
but also the fact that the corporation whose stock was
distributed issues additional stock, shall not be taken into
account.
Effective Date
The provision generally is effective for distributions
after April 16, 1997, as if included in the 1997 Act.
7. Treatment of net operating losses arising from certain eligible
losses (sec. 503(g) of the bill, sec. 1082 of the 1997 Act, and
sec. 172(b)(1)(F) of the Code)
Present Law
The 1997 Act changed the general net operating loss
(``NOL'') carryback period of a taxpayer from three years to
two years. The three-year carryback period was retained in the
case of an NOL attributable to an eligible loss. An eligible
loss is defined as (1) a casualty or theft loss of an
individual taxpayer, or (2) an NOL attributable to a
Presidentially declared disaster area by a taxpayer engaged in
a farming business or a small business. Other special rules
apply to real estate investment trusts (REITs) (no carrybacks),
specified liability losses (10-year carryback), and excess
interest losses (no carrybacks).
Explanation of Provision
The provision coordinates the use of eligible losses with
the general rule for NOLs in the same manner as a loss arising
from a specified liability loss. Thus, an eligible loss for any
year is treated as a separate net operating loss and is taken
into account after the remaining portion of the net operating
loss for the taxable year.
8. Determination of unborrowed policy cash value under COLI pro rata
interest disallowance rules (sec. 503(h) of the bill, sec. 1084
of the 1997 Act, and sec. 264(f) of the Code)
Present Law
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 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. 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 unborrowed policy cash value of
a contract.
Explanation of Provision
The provision clarifies the meaning of ``unborrowed policy
cash value'' under section 264(f)(3), with respect to any life
insurance, annuity or endowment contract. The technical
correction clarifies that under section 264(f)(3), if the cash
surrender value (determined without regard to any surrender
charges) with respect to any policy or contract does not
reasonably approximate its actual value, then the amount taken
into account for this purpose is the greater of (1) the amount
of the insurance company's liability with respect to the policy
or contract, as determined for purposes of the annual statement
approved by the National Association or Insurance
Commissioners, (2) the amount of the insurance company's
reserve with respect to the policy or contract for purposes of
such annual statement; or such other amount as is determined by
the Treasury Secretary. No inference is intended that such
amounts may not be taken into account in determining the cash
surrender value of a policy or contract in such circumstances
for purposes of any other provision of the Code.
9. Payment of taxes by commercially acceptable means (sec. 503(i) of
the bill, sec. 1205 of the 1997 Act, and sec. 6311 (d)(2) of
the Code)
Present Law
The Code generally permits the payment of taxes by
commercially acceptable means (such as credit cards) (sec.
6311(d)). The Treasury Secretary may not pay any fee or provide
any other consideration in connection with this provision. This
fee prohibition may have an unintended impact on Treasury
contracts for the provision of services unrelated to the
payment of income taxes by commercially acceptable means.
Explanation of Provision
The provision clarifies that the prohibition on paying any
fees or providing any other consideration applies to the use of
credit or debit cards for the payment of income taxes.
C. Technical Corrections to the 1984 Act
1. Casualty loss deduction (sec. 504 of the bill, sec. 711(c) of the
1984 Act, and secs. 172(d)(4), 67(b)(3), 68(c)(3), and 873(b)
of the Code)
Present Law
The Tax Reform Act of 1984 (``1984 Act'') deleted casualty
and theft losses from property connected with a nonbusiness
transaction entered into for profit from the list of losses set
forth in section 165(c)(3). This amendment was made in order to
provide that these losses were deductible in full and not
subject to the $100 per casualty limitation or the 10-percent
adjusted gross income floor applicable to personal casualty
losses. However, the amendment inadvertently eliminated the
deduction for these losses from the computation of the net
operating loss. Also, the Tax Reform Act of 1986 provided that
casualty losses described in section 165(c)(3) are not
miscellaneous itemized deductions subject to the 2-percent
adjusted gross income floor, and the Revenue Reconciliation Act
of 1990 provided that these losses are not treated as itemized
deductions in computing the overall limitation on itemized
deductions. The losses of nonresident aliens are limited to
deductions described in section 165(c)(3). Because of the
change made by the 1984 Act, the reference to section 165(c)(3)
does not include casualty and theft losses from nonbusiness
transactions entered into for profit.
Explanation of Provision
The provision provides that all deductions for nonbusiness
casualty and theft losses are taken into account in computing
the net operating loss. Also, these deductions are not treated
as miscellaneous itemized deductions subject to the 2-percent
adjusted gross income floor, or as itemized deductions subject
to the overall limitation on itemized deductions, and are
allowed to nonresident aliens.
Effective Dates
The provision relating to the net operating loss and the
deduction for nonresident aliens applies to taxable years
beginning after December 31, 1983.
The provision relating to miscellaneous itemized deductions
applies to taxable years beginning after December 31, 1986.
The provision relating to the overall limitation on
itemized deductions applies to taxable years beginning after
December 31, 1990.
D. Disclosure of Tax Return Information to the Department of
Agriculture (sec. 505(a) of the bill and sec. 6103 (j) of the Code)
Present Law
Tax return information generally may not be disclosed,
except as specifically provided by statute. Disclosure is
permitted to the Bureau of the Census for specified purposes,
which included the responsibility of structuring, conducting,
and preparing the census of agriculture (sec. 6103(j)(1)). The
Census of Agriculture Act of 1997 (P.L. 105-113) transferred
this responsibility from the Bureau of the Census to the
Department of Agriculture.
Explanation of Provision
The provision permits the continuation of disclosure of tax
return information for the purpose of structuring, conducting,
and preparing the census of agriculture by authorizing the
Department of Agriculture to receive this information.
Effective Date
The provision is effective on the date of enactment of this
technical correction.
E. Technical Corrections to the Transportation Equity Act for the 21st
Century (sec. 505(b) of the bill, sec. 9004 of the Act, and sec.
9503(f) of the Code)
Present Law
The Transportation Equity Act for the 21st Century
(``Transportation Equity Act'') (P.L. 105-178) extended the
Highway Trust Fund and accompanying highway excise taxes. The
Transportation Equity Act also changed the budgetary treatment
of Highway Trust Fund expenditures, including repeal of a
provision that balances maintained in the Highway Trust Fund
pending expenditure earn interest from the General Fund of the
Treasury.
Explanation of Provision
The provision clarifies that the Secretary of the Treasury
is not required to invest Highway Trust Fund balances in
interest-bearing obligations (because any interest paid to the
Trust Fund by the General Fund would be immediately returned to
the General Fund).
TITLE VI. RENEWAL COMMUNITY PROVISIONS
(secs. 601-606 of the bill and secs. 39, 46, 48, 49, 50, 51, 62, 4973,
4975, 6047, 6104, 6693, and new secs. 1400E-M of the Code)
Present Law
In general
Zones and communities designated under OBRA 1993
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 and three
empowerment zones are located in rural areas.\3\ 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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\3\ 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, and
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); (3) special tax-exempt
financing for certain zone facilities (described in more detail
below); and (4) the so-called ``brownfields'' tax incentive,
which allows taxpayers to expense (rather than capitalize)
certain environmental remediation expenditures.\4\
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\4\ The environmental remediation expenditure must be incurred in
connection with the abatement or control of hazardous substances at a
qualified contaminated site, generally meaning 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. Targeted areas include:
(1) empowerment zones and enterprise communities as designated under
OBRA 1993 and the 1997 Act (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.
The ``brownfields'' provision (enacted in the 1997 Act) applies to
eligible expenditures incurred in taxable years ending after date of
enactment and before January 1, 2001.
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The 95 enterprise communities are eligible for the special
tax-exempt financing benefits and ``brownfields'' tax
incentive, but not the other tax incentives (i.e., the wage
credit and additional sec. 179 expensing) available in the
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 (other than the ``brownfields''
incentive) 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).
Additional zones designated under 1997 Act
Two additional urban zones with same tax incentives as
previously designated empowerment zones.--Pursuant to the Tax
Relief Act of 1997 (``1997 Act''), the Secretary of HUD
designated 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
the same tax incentives generally apply (i.e., the wage credit,
additional expensing, special tax-exempt financing, and
``brownfields'' incentive) as are available within the
empowerment zones authorized by OBRA 1993.\5\ The two
additional empowerment zones are subject to the same
eligibility criteria under present-law section 1392 that apply
to the original six urban empowerment zones.\6\
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\5\ The two additional empowerment zones are located in Cleveland
and Los Angeles. The wage credit available in the two new urban
empowerment zones is modified slightly to provide that the credit rate
will be 20 percent for calendar years 2000-2004, 15-percent for
calendar year 2005, 10 percent for calendar year 2006, and five percent
for calendar year 2007. No wage credit will be available in the two new
urban empowerment zones after 2007.
\6\ In order to permit designation of these two additional
empowerment zones, the 1997 Act increased the aggregate population cap
applicable to urban empowerment zones from 750,000 to a cap of one
million aggregate population for the eight urban empowerment zones.
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The two additional empowerment zones must be designated
within 180 days after enactment of the 1997 Act (i.e., the
designations must be made by February 1, 1998). However, a
special rule provides that the designations of these two
additional empowerment zones will not take effect until January
1, 2000 (and generally will remain in effect for 10 years).
20 additional urban and rural empowerment zones.--The 1997
Act also authorizes theSecretaries 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).7 With respect
to these additional empowerment zones, the present-law eligibility
criteria are expanded slightly in comparison to the eligibility
criteria provided for by OBRA 1993. First, the general square mileage
limitations (i.e., 20 square miles for urban areas and 1,000 square
miles 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 may be divided among up to three
noncontiguous parcels. In addition, the general requirement that at
least half of the nominated area consists of census tracts with poverty
rates of 35 percent or more does not apply to the 20 additional
empowerment zones. However, 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.8 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 was 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.9
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\7\ In contrast to OBRA 1993, areas located within Indian
reservations are eligible for designation as one of the additional 20
empowerment zones under the 1997 Act.
\8\ In lieu of the poverty criteria, outmigration may be taken into
account in designating one rural empowerment zone.
\9\ A special rule enacted as part of the 1997 Act modifies the
present-law empowerment zone and enterprise community designation
criteria so that any zones or communities designated in the future in
the States of Alaska or Hawaii will not be subject to the general size
limitations, nor will such zones or communities be subject to the
general poverty-rate criteria. 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).
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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 10 and
to utilize special tax-exempt financing benefits. The
``brownfields'' tax incentive (described above) also is
available within all designated empowerment zones. However,
businesses within the 20 additional empowerment zones are not
eligible to receive the present-law wage credit available
within the 11 other designated empowerment zones (i.e., the
wage credit is available only within the nine zones designated
under OBRA 1993 and the two urban zones designated under the
1997 Act that are eligible for the same tax incentives as are
available in the nine zones designated under OBRA 1993).
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\10\ However, the additional section 179 expensing is not available
within the additional 2,000 acres allowed to be included under the 1997
Act 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.11
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\11\ In addition, the 1997 Act also provides for special tax
incentives (some of which are modeled after the empowerment zone tax
incentives, but which also include a zero percent capital gains rate
for certain qualified assets) for the District of Columbia.
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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; 12 (2) at least 50 percent
13 of the total gross income is derived from the
active conduct of a ``qualified business'' within a zone or
community; (3) a substantial portion of the business' tangible
property is used within a zone or community; (4) a substantial
portion of the business' intangible property is used in the
active conduct of such business; (5) a substantial portion 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) less 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.
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\12\ A qualified proprietorship is not required to meet the
requirement that the sole trade or business of the proprietor is the
active conduct of a qualified business within the empowerment zone or
enterprise community.
\13\ The 1997 Act reduced this threshold from 80 percent (as
enacted in OBRA 1993) to 50 percent.
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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.14 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.15 The
rental of tangible personal property to others is not a
qualified business unless at least 50 percent 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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\14\ 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.
\15\ The 1997 Act provides that the lessor of property may rely on
a lessee's certification that such lessee is an enterprise zone
business.
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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. However, a special rule
(enacted in the 1997 Act) provides that certain ``new
empowerment zone facility bonds'' issued for qualified
enterprise zone businesses in the 20 additional empowerment
zones are not subject to the State private activity bond volume
caps or the special limits on issue size generally applicable
to qualified enterprise zone facility bonds.16
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\16\ The maximum amount of ``new empowerment zone facility 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.
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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
17) the principal user of which is an ``enterprise
zone business'' (also defined above 18), or (2)
functionally related and subordinate land located in the
empowerment zone or enterprise community.19 These
bonds may only be issued while an empowerment zone or
enterprise community designation is in effect.
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\17\ A special rule (enacted in the 1997 Act) 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 and need
not be 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 exceed 15 percent of the
taxpayer's basis at the beginning of the period, or $5,000 (whichever
is greater).
\18\ 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.
A special rule (enacted in the 1997 Act) 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 the
first three taxable years after the startup period.
\19\ A special rule (enacted in the 1997 Act) waives until the end
of a ``startup period'' the requirement that 95 percent or more of the
proceeds of a bond issue be used by a qualified enterprise zone
business. With respect to each property, the startup period would end
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 available only if, at the beginning of the startup period,
there is a reasonable expectation that the use by a qualified
enterprise zone business will be satisfied at the end of the startup
period and the business makes bona fide efforts to satisfy the
enterprise zone business definition.
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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.
Reasons for Change
The Committee believes that the tax incentives available in
empowerment zones and enterprise communities are inadequate to
address the problems of distressed rural and urban areas.
Revitalization of economically distressed areas through
expanded business and employment opportunities should help
alleviate both economic and social problems in such areas.
Explanation of Provision
The bill authorizes the designation of 20 ``renewal
communities'' within which special tax incentives will be
available. The following is a description of the designation
process and the tax incentives that are available within the
proposed renewal communities.
Designation process
Designation of 20 renewal communities.--Under the bill, the
Secretary of HUD is authorized to designate up to 20 ``renewal
communities'' from areas nominated by States and local
governments. At least 20 percent of the designated communities
must be in rural areas (defined as areas which (1) are within
local government jurisdictions with a population less than
50,000, (2) are outside of a metropolitan statistical area, or
(3) are determined by HUD to be a rural area). The Secretary of
HUD is required to publish (within four months after enactment)
regulations describing the selection process, and all
designations of renewal communities would have to be made
within 24 months after such regulations are published.
Designations generally remain in effect through December 31,
2006.
Old empowerment zones and enterprise communities may seek
additional designation as renewal communities.--The bill allows
the previously designated empowerment zones and enterprise
communities to be eligible for designation as renewal
communities. Priority would be given in the designation of the
first 50 percent of renewal communities to nominated areas
which are empowerment zones or enterprise communities under
present law and which otherwise meet the requirements of the
proposal for designation as a renewal community. If a
previously designated empowerment zone or enterprise community
is selected as one of the 20 renewal communities, then the
area's designation as a empowerment zone or enterprise
community would remain in effect and the same area would also
be designated as a renewal community. For such an area
obtaining dual-designation status, the special tax incentives
available for empowerment zones (or enterprise communities, as
the case may be) and for renewal communities are available. If
an area previously designated as an empowerment zone or
enterprise community does not seek designation (or is not
selected by the Secretary of HUD) as a renewal community, then
the present-law empowerment zone and enterprise community
provisions continue to apply to that area.
Eligibility criteria.--To be designated as a renewal
community, a nominated area must meet all of the following
criteria: (1) each census tract must have a poverty rate of at
least 20 percent; (2) at least 70 percent of the households
have incomes below 80 percent of the median income of
households within the local government jurisdiction; (3) the
unemployment rate is at least 1.5 times the national
unemployment rate; and (4) the area is one of pervasive
poverty, unemployment, and general distress.
Except with respect to the designation of the first 50
percent of renewal communities under which priority is given to
existing empowerment zones and enterprise communities (as
described above), those areas with the highest average ranking
of factors (1), (2), and (3) above would be designated as
renewal communities. The Secretary of HUD could also take into
account in selecting areas for designation the extent to which
such areas have a high incidence of crime, as well as whether
the area has census tracts identified in the May 12, 1998,
report of the General Accounting Office regarding the
identification of economically distressed areas.
There are no geographic size or maximum population
limitations placed on the designated renewal communities. The
bill merely requires that the boundary of a designated
community be ``continuous'' and that the designated community
have a population of at least 4,000 if the community is located
within a metropolitan statistical area (at least 1,000 in all
other cases, or the community must be entirely within an Indian
reservation).
Required State and local government course of action.--In
order for an area to be designated as a renewal community, the
bill requires State and local governments to submit a written
course of action which promises within the nominated area at
least five of the following:(1) a reduction of tax rates or
fees; (2) an increase in the level of efficiency of local services; (3)
crime reduction strategies; (4) actions to remove or streamline
governmental requirements; (5) involvement by private entities and
community groups, such as to provide jobs and job training and
financial assistance; (6) State or local income tax benefits for fees
paid for services performed by a nongovernmental entity which were
formerly performed by a government entity; and (7) the gift (or sale at
below fair market value) of surplus realty by the State or local
government to community organizations or private companies.
In addition, the bill requires that the nominating State
and local governments promise to promote economic growth in the
nominated area by repealing or not enforcing (1) licensing
requirements for occupations that do not ordinarily require a
professional degree, (2) zoning restrictions on home-based
businesses which do not create a public nuisance, (3) permit
requirements for street vendors who do not create a public
nuisance, (4) zoning or other restrictions that impede the
formation of schools or child care centers, and (5) franchises
or other restrictions on competition for businesses providing
public services, including but not limited to taxicabs,
jitneys, cable television, or trash hauling, unless such
regulations are ``well-tailored to the protection of health and
safety.''
Tax incentives for renewal communities
The following tax incentives generally are available during
the seven-year period beginning January 1, 2000, and ending
December 31, 2006.
100-percent capital gain exclusion.--The bill provides for
a 100 percent capital gains exclusion for qualified capital
gain from the sale of a qualified community asset acquired
after December 31, 1999, and before January 1, 2007, and held
for more than five years. A ``qualified community asset''
includes: (1) qualified community stock (meaning original-issue
stock acquired for cash in a ``renewal community business,''
defined below); (2) qualified community partnership interest
(meaning a partnership interest acquired for cash in a renewal
community business); and (3) qualified community business
property (meaning tangible real and personal property used in a
renewal community business, if acquired (or substantially
improved) by the taxpayer after December 31, 1999, and before
January 1, 2007). The exclusion is available only if during
substantially all of the taxpayer's holding period, the
corporation or partnership qualifies as a renewal community
business, or substantially all of the use of the property is in
a renewal community business. Property continues to be a
``qualified community asset'' if sold (or otherwise
transferred) to a subsequent purchaser, provided that the
property continues to represent an interest in (or is tangible
property used in) a renewal community business. In the case of
the termination of an area's status as a renewal community, the
amount of gain eligible for the exclusion cannot exceed the
amount that would have been excludable had the property been
sold on the date of the termination of status. Any gain
attributable to the period before January 1, 2000, and after
December 31, 2006, is not eligible for the 100-percent capital
gains exclusion.
A ``renewal community business'' for purposes of the
capital gain exclusion, as well as for purposes of the
increased expensing under section 179 (described below),
generally must satisfy the requirements of an ``enterprise zone
business'' under present law; however, at least 50 percent (as
opposed to 80 percent) of the total gross income of the
business must be derived from the active conduct of a
``qualified business'' within a renewal community.
Family development accounts.--Under the bill, individual
taxpayers are allowed to claim an above-the-line deduction for
certain amounts paid in cash to a family development account
(``FDA'') established for the benefit of a ``qualified
individual,'' meaning an individual who both resides in a
renewal community throughout the taxable year and who was
allowed to claim the earned income tax credit (``EITC'') during
the preceding taxable year. An FDA is subject to rules similar
to the rules for Individual Retirement Arrangements (``IRAs'').
No deduction is allowed for any amount paid to an FDA for a
taxable year beginning after December 31, 2006.
A qualified individual may claim a deduction for a taxable
year for amounts contributed to his or her FDA(s) of up to the
lesser of (1) $2,000 or (2) the amount of the individual's
compensation included in gross income for the year. Any other
person may deduct up to $1,000 per year for amounts contributed
to an FDA established on behalf of a qualified individual.
Under the bill, no more than $3,000 of contributions (excluding
certain demonstration program matching contributions described
below) can be made to the FDAs of a qualified individual in any
taxable year. Contributions to an FDA may be made on or before
April 15th of the following taxable year. The bill permits (but
does not require) individuals to direct that the IRS directly
deposit their EITC refunds into an FDA on behalf of such
individual.
The bill provides that up to 5 of the renewal communities
may be designated by the Secretary of HUD as ``FDA matching
demonstration areas,'' with respect to which HUD will, at the
request of a qualified individual, match amounts contributed to
FDAs, up to $1,000 per individual per taxable year (with a
$2,000 lifetime cap). At least 2 of the FDA matching
demonstration areas must be rural areas. The Secretary of HUD
may designate renewal communities as FDA matching demonstration
areas only during the 24-month period after such Secretary
prescribes regulations regarding such areas. The matching grant
amounts made under this demonstration program are excluded from
the gross income of the account holder, and no deduction is
allowed for matching grant amounts. The Secretary of the
Treasury is required to provide notice to residents of FDA
matching demonstration areas of the availability of matching
contributions.
The bill provides that an FDA is exempt from taxation
(other than the unrelated business income tax imposed by
present-law section 511). Distributions from an FDA that are
qualified family development distributions are not included in
gross income. A distribution from an FDA is a qualified family
development distribution if the distribution is used
exclusively to pay (1) qualified post-secondary educational
expenses, (2) certain first-time homebuyer expenses, (3)
certain qualified business capitalization costs, or (4)
qualified medical expenses. Such qualified expenses must be
incurred on behalf of the FDA account holder, or the spouse or
dependent of the account holder. Distributions from an FDA that
are not qualified family development distributions are included
in gross income and subject to either a 100-percent penalty tax
(in the case of a distribution attributable to a demonstration
matching contribution) or a 10-percent penalty tax (in the case
of a distribution that is not attributable to a demonstration
matchingcontribution). The 100-percent and 10-percent penalty
taxes do not apply to distributions that are made on or after the
account holder attains age 59\1/2\, dies, or becomes disabled. Any
distribution from an FDA that is not a qualified family development
distribution is deemed to have been made from demonstration matching
contributions (and, therefore, subject to a 100-percent penalty) until
all such demonstration matching contributions have been withdrawn. The
purpose of this rule is to encourage account holders to use the amounts
contributed to the FDA for qualified family development distributions
or to save such amounts for retirement.
The bill permits tax-free (and penalty-free) rollovers of
amounts in an FDA into another such account established for the
benefit of an individual who (1) both resides in a renewal
community throughout the taxable year and was allowed to claim
the earned income tax credit during the preceding taxable year,
and (2) either is the account holder or is a spouse or
dependent of the account holder.
Commercial revitalization credit.--The bill allows
taxpayers to claim a nonrefundable ``commercial revitalization
credit'' equal to: (1) a 20-percent credit rate for the year a
qualified building is placed in service or, if the taxpayer
elects, (2) a 5-percent credit rate for each year during a 10-
year period after the building is placed in service for costs
(up to $10 million per building) of constructing or
substantially rehabilitating one or more buildings used for
commercial purposes in a designated renewal community. A
qualified building must be located in a renewal community and
be placed in service after December 31, 1999, and before
January 1, 2007. Under the bill, each State is allowed to
allocate no more than $2 million of credits to each renewal
community located within the State for each calendar year.
Additional section 179 expensing.--A renewal community
business (defined above) is allowed an additional $35,000 of
section 179 expensing for qualified renewal property placed in
service after an area is designated a renewal community. Thus,
if a renewal community business is located in an area that is
designated as both an empowerment zone and a renewal community,
such business could be allowed an additional $55,000 of section
179 expensing (i.e., $20,000 of additional expensing because
the area is designated an empowerment zone plus $35,000 of
additional expensing because the area is designated a renewal
community). As under present law, the section 179 expensing
allowed to a taxpayer is phased out if the cost of section 179
property placed in service during the year by the taxpayer
exceeds $200,000.
Expensing of environmental remediation costs
(``brownfields'').--Under the bill, taxpayers can elect to
treat certain environmental remediation expenditures that would
otherwise be chargeable to capital account as deductible in the
year paid or incurred. The expenditure must be incurred in
connection with the abatement or control of environmental
contaminants, as required by Federal and State law, at a trade
or business site located within a designated renewal community.
This provision makes available to taxpayers located in renewal
communities the ``brownfields'' provision enacted as part of
the 1997 Act, which allows taxpayers to expense certain
environmental remediation expenditures on property located in
an empowerment zone, enterprise community, or certain other
designated areas. This provision applies to expenditures
incurred after December 31, 1999, and before January 1, 2007.
Extension of work opportunity tax credit.--The bill permits
employers to claim the Work Opportunity Tax Credit (``WOTC'')
with respect to individuals hired from one or more targeted
groups that live and perform substantially all of their work in
a renewal community. The WOTC is available to an employer if
(1) the employer is engaged in a trade or business in a renewal
community throughout the one-year period for which the credit
is being claimed, (2) the individual with respect to whom the
WOTC is claimed is a resident of the renewal community
throughout the one-year period, and (3) substantially all of
the services which the individual performs for the employer
during the one-year period are performed in the renewal
community. The availability of the WOTC in renewal communities
expires with respect to wages paid after December 31, 2006.
20 Under this provision, the WOTC with respect to a
qualifying individual is 15 percent of qualified first-year
wages and 30 percent of qualified second-year wages. No more
than $10,000 of wages may be taken into account in each year.
Thus, the maximum credit for a qualifying individual is $1,500
with respect to qualified first-year wages and $3,000 with
respect to qualified second-year wages. Qualified wages
generally consist of wages paid or incurred during the one-year
period for which the WOTC is being calculated.
---------------------------------------------------------------------------
\20\ The Work Opportunity Tax Credit expired July 1, 1998. Section
302 of the bill extends the Work Opportunity Tax Credit through
February 29, 2000.
---------------------------------------------------------------------------
Targeted groups eligible for the credit include: (1)
certain individuals certified by the designated local
employment agency as being a member of a family eligible to
receive benefits under the Temporary Assistance for Needy
Families program (``TANF''); (2) certain ex-felons having a
hiring date within one year of release from prison or date of
conviction; (3) individuals who are at least 18 but not 25
years of age and have a principal place of abode within an
empowerment zone, enterprise community, or renewal community;
(4) individuals who are at least 18 but not 25 years of age who
are certified 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; (5) 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; (6) individuals who are 16 or 17 years of age,
perform services during any 90-day period between May 1 and
September 15, and have a principal place of abode within an
empowerment zone, enterprise community, or renewal community;
(7) certain veterans who receive food stamps; and (8)
recipients of certain (``SSI'') Supplemental Security Income
benefits.
Treasury reports.--The bill provides that, not later than
the close of the fourth calendar year after the year the
Secretary of HUD first designates an area as a renewal
community and every four years thereafter, the Secretary of
Treasury must report to Congress on the effects of such
designation in stimulating the creation of new jobs,
particularly for disadvantaged workers and long-term unemployed
individuals, and promoting the revitalization of economically
distressed areas.
Effective Date
Under the bill, renewal communities must be designated
within 24 months after publication of certain regulations by
HUD. The tax benefits available in renewal communities
generally are effective for the 7-year period beginning January
1, 2000, and ending December 31, 2006.
III. VOTES OF THE COMMITTEE
In compliance with clause 2(l)(2)(B) of Rule XI of the
Rules of the House of Representatives, the following statements
are made concerning the votes of the Committee on Ways and
Means in its consideration of the bill, H.R. 4579.
Motion to report the bill
The bill, H.R. 4579, as amended, was ordered favorably
reported by a roll call vote of 23 yeas to 15 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer............................. X ........ Mr. Rangel..................... ........ X
Mr. Crane.............................. X ........ Mr. Stark...................... ........ X
Mr. Thomas............................. X ........ Mr. Matsui..................... ........ X
Mr. Shaw............................... X ........ Mrs. Kennelly.................. X ........
Mrs. Johnson........................... X ........ Mr. Coyne...................... ........ X
Mr. Bunning............................ X ........ Mr. Levin...................... ........ X
Mr. Houghton........................... X ........ Mr. Cardin..................... ........ X
Mr. Herger............................. X ........ Mr. McDermott.................. ........ X
Mr. McCrery............................ X ........ Mr. Kleczka.................... ........ X
Mr. Camp............................... X ........ Mr. Lewis...................... ........ X
Mr. Ramstad............................ X ........ Mr. Neal....................... ........ X
Mr. Nussle............................. X ........ Mr. McNulty.................... ........ X
Mr. Johnson............................ X ........ Mr. Jefferson.................. ........ X
Ms. Dunn............................... X ........ Mr. Tanner..................... ........ X
Mr. Collins............................ X ........ Mr. Becerra.................... ........ X
Mr. Portman............................ ........ ........ Mrs. Thurman................... ........ X
Mr. English............................ X ........
Mr. Ensign............................. X ........
Mr. Christensen........................ X ........
Mr. Watkins............................ X ........
Mr. Hayworth........................... X ........
Mr. Weller............................. X ........
Mr. Hulshof............................ X ........
----------------------------------------------------------------------------------------------------------------
Vote on amendment
A roll call vote was conducted on the following amendment
to the Chairman's amendment in the nature of a substitute.
An amendment by Mr. Rangel, that would make the bill's
provisions contingent upon attaining long-term solvency within
the Social Security system, but permitting the provisions of
the bill which extend expiring provisions (together with a
revenue offset) and increase the Social Security earnings
limitation (and the budget offsets) to take effect immediately,
was defeated by a roll call vote of 15 yeas to 23 nays. The
vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Representatives Yea Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer............................. ........ X Mr. Rangel..................... X ........
Mr. Crane.............................. ........ X Mr. Stark...................... X ........
Mr. Thomas............................. ........ X Mr. Matsui..................... X ........
Mr. Shaw............................... ........ X Mrs. Kennelly.................. ........ ........
Mrs. Johnson........................... ........ X Mr. Coyne...................... X ........
Mr. Bunning............................ ........ X Mr. Levin...................... X ........
Mr. Houghton........................... ........ X Mr. Cardin..................... X ........
Mr. Herger............................. ........ X Mr. McDermott.................. X ........
Mr. McCrery............................ ........ X Mr. Kleczka.................... X ........
Mr. Camp............................... ........ X Mr. Lewis...................... X ........
Mr. Ramstad............................ ........ X Mr. Neal....................... X ........
Mr. Nussle............................. ........ X Mr. McNulty.................... X ........
Mr. Johnson............................ ........ X Mr. Jefferson.................. X ........
Ms. Dunn............................... ........ X Mr. Tanner..................... X ........
Mr. Collins............................ ........ ........ Mr. Becerra.................... X ........
Mr. Portman............................ ........ X Mrs. Thurman................... X ........
Mr. English............................ ........ X
Mr. Ensign............................. ........ X
Mr. Christensen........................ ........ X
Mr. Watkins............................ ........ X
Mr. Hayworth........................... ........ X
Mr. Weller............................. ........ X
Mr. Hulshof............................ ........ X
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with clause 7(a) of Rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the estimated budget effects of H.R. 4579, as
reported by the Committee.
The bill, as reported, is estimated to have the following
budget effects:
ESTIMATED BUDGET EFFECTS OF H.R. 4579, THE ``TAXPAYER RELIEF ACT OF 1998'' AS APPROVED BY THE COMMITTEE ON WAYS AND MEANS
[By fiscal years in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 1999 2000 2001 2002 2003 1999-2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
I. Family Tax Relief Provisions:
A. Marriage Penalty Tax Relief-- tyba 12/31/98....................... -3,517 -5,935 -6,057 -6,255 -6,310 -28,074
adjust the standard deduction so
that it is twice that of the
standard deduction for a single
taxpayer; make uniform additional
standard deduction for the blind and
elderly.
B. $200/$400 Exclusion for Interest tyba 12/31/98....................... -693 -3,472 -3,521 -3,599 -3,669 -14,954
and Dividends.
C. Treatment of Nonrefundable tyba 12/31/97....................... -1,042 -1,103 -1,442 -1,911 -2,577 -8,075
Personal Credits (child credit,
adoption, credit, HOPE and Lifetime
Learning credits, etc.) Under the
Alternative Individual Minimum Tax.
D. Suspension of 5-Year Holding sa DOE.............................. -5 -12 -12 -13 -13 -54
Period Relating to Gain on Sale of
Principal Residence for Members of
the Uniformed Services and the
Foreign Service Serving Outside the
Area in Which the Property is
Located.
------------------------------------------------------------------------
Subtotal of Family Tax Relief .................................... -5,257 -10,522 -11,032 -11,778 -12,569 -51,157
Provisions.
========================================================================
II. Education and Infrastructure
Provisions:
A. Permit Private Higher Education ci tyba 12/31/98.................... -43 -117 -127 -137 -148 -572
Schools to Establish Qualified
Prepaid Tuition Programs.
B. Provide a 4-Year Exception from bia 12/31/98........................ -86 -238 -343 -379 -332 -1,379
Arbitrage Rebate for Tax-Exempt
Bonds Issued to Finance Public
School Construction.
C. Increase Private Activity Bond 1/1/99.............................. -16 -111 -225 -329 -425 -1,107
Volume Cap to the Greater of $75 Per
Capita or $225 Million.
D. Designate 20 Renewal Communities; DOE................................. -3 -156 -256 -282 -343 -1,039
Provide Various Incentives Starting
1/1/00, Including 100% Capital Gains
Exclusion on Certain Investments.
------------------------------------------------------------------------
Subtotal of Education and .................................... -148 -622 -951 -1,127 -1,248 -4,097
Infrastructure Provisions.
=============
III. Small Business and Farmer Tax Relief
Provisions:
A. Accelerate the $1 Million Estate dda 12/31/98........................ .......... -4,381 -4,278 -4,641 -4,626 -17,926
Tax Unified Credit Exemption.
B. Accelerate 100% Deduction for tybe 12/31/98....................... -415 -1,247 -1,249 -1,241 -959 -5,111
Health Insurance Premiums of Self-
Employed Individuals.
C. Accelerate $25,000 Small Business tyba 12/31/98....................... -600 -945 -140 -319 -307 -1,059
and Farmer Expensing.
D. Permanent Extension of Income tyba 12/31/00....................... .......... .......... -2 -21 -22 -45
Averaging for Farmers.
E. Extend the Net Operating Loss NOLgi tyba 12/31/97................. -20 -18 -16 -14 -13 -81
Carryback Period for Farmer Losses.
F. Farmers Production Flexibility DOE................................. -98 98 .......... .......... .......... ...........
Contract Payments Not Included in
Income Prior to Receipt.
------------------------------------------------------------------------
Subtotal of Small Business and .................................... -1,133 -6,493 -5,685 -5,598 -5,313 -24,222
Farmer Tax Relief Provisions.
========================================================================
IV. Extension of Expiring Provisions:
A. Extend the R&E Credit and Increase 7/1/98.............................. -1,543 -1,076 -677 -407 -249 -3,952
the Rates for the Alternative
Incremental Research Credit by 1-
Percentage Point (through 2/29/00).
B. Extend the Work Opportunity Tax wpoifibwa 6/30/98................... -245 -245 -156 -67 -25 -737
Credit (through 2/29/00).
C. Extend the Welfare to Work Tax wpoifibwa 4/30/99................... -14 -47 -37 -19 -8 -124
Credit (through 2/29/00).
D. Permanently Extend Contributions 7/1/98; tyea 12/31/98............... -23 -56 -71 -83 -91 -324
of Appreciated Stock to Private
Foundations; Public Inspection of
Private Foundation Annual Returns.
E. 1-Year Modified Extension of tybi 1999........................... -117 -378 .......... .......... .......... -495
Exemption from Subpart F for Active
Financing Income.
F. Extend the Generalized System of 7/1/98.............................. -393 -142 .......... .......... .......... -535
Preferences (through 2/29/00) \1\.
------------------------------------------------------------------------
Subtotal of Extension of Expiring .................................... -2,335 -1,944 -941 -576 -373 -6,167
Provisions.
========================================================================
V. Revenue Offset Provisions:
A. Change the Treatment of Certain dma 5/21/98......................... 2,425 1,109 723 640 672 5,569
Deductible Liquidating Distributions
of RICs and REITs.
------------------------------------------------------------------------
Subtotal of Revenue Offset .................................... 2,425 1,109 723 640 672 5,569
Provision.
VI. Tax Technical Corrections Provisions
Total of Revenue Provisions........ .................................... -6,448 -18,472 -17,886 -18,439 -18,831 -80,074
Social Security Outlay Provisions \2\
A. Accelerate Phase-in of $30,000 tyea 12/31/98....................... -175 -225 -150 -25 10 -565
Earnings Test Limit.
B. Delay Benefit Recomputations...... bma 12/31/98........................ 10 140 140 140 140 570
------------------------------------------------------------------------
Subtotal of Social Security Outlay .................................... -165 -85 -10 115 150 5
Provisions.
========================================================================
Net Total.......................... .................................... -6,613 -18,557 -17,896 -18,324 -18,681 -80,069
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimate provided by the Congressional Budget Office.
\2\ Preliminary and unofficial estimates provided by the Congressional Budget Office.
Legend for ``Effective'' column; ci=contributions in; bia=bonds issued after; bma=benefits months after; dda=decedents dying after; dma=distributions
made after; DOE=date of enactment; NOLgi=net operating losses generated in; sa=sales after; tyba=taxable years beginning after; tybi=taxable years
beginning in; tyea=taxable years ending after; wpoifibwa=wages paid or incurred for individuals beginning work after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with subdivision (B) of clause 2(l)(3) of
Rule XI of the Rules of the House of Representatives, the
Committee states that the Social Security provisions (secs. 121
and 122) involve increased (sec. 121) and decreased (sec. 122)
budget outlays. (See Part IV.A., above.)
Tax expenditures
In compliance with subdivision (B) of clause 2(l)(3) of
Rule XI of the Rules of the House of Representatives, the
Committee states that the individual income tax reduction
provisions (other than the increased standard deduction for
married taxpayers), the business income tax reduction
provisions (other than the provision relating to farmer
production flexibility contract payments), and the extensions
of expiring income tax provisions involve increased tax
expenditures. The partial exclusion for individual interest and
dividend income is a new tax expenditure to the Tax Code.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with subdivision (C) of the clause 2(l)(3) of
Rule XI of the Rules of the House of Representatives, requiring
a cost estimate prepared by the Congressional Budget Office
(``CBO''), the Committee advises that the CBO has submitted the
following statement on H.R. 4579, as reported.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 23, 1998.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4579, the Taxpayer
Relief Act of 1998.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Hester
Grippando (for revenues) and Kathy Ruffing.
Sincerely,
June E. O'Neil, Director.
Enclosure.
H.R. 4579--Taxpayer Relief Act of 1998
Summary: The Taxpayer Relief Act of 1998 is an omnibus tax
bill that would amend exiting tax laws and extend numerous tax
provisions that have expired recently or are about to expire.
H.R. 4579 would also increase the amount that Social Security
beneficiaries who are over the age of eligibility for full
retirement benefits (currently 65) and under age 70 could earn
without having their benefits reduced and would offset the
resulting costs by delaying recomputations of benefits for
recent earnings. The Congressional Budget Office (CBO) and the
Joint Committee on Taxation (JCT) estimate that H.R. 4579 would
decrease governmental receipts by $80 billion over the 1999-
2003 period. In addition, CBO estimates that this bill would
reduce spending for Social Security by $5 million over the same
period.
H.R. 4579 contains no intergovernmental mandates as defined
in the unfunded Mandates Reform Act (UMRA) and would impose no
costs on state, local, or tribal governments. The bill imposes
one new private-sector mandate through changes in the treatment
of certain deductible liquidating distributions of regulated
investment companies and real estate investment trusts. The
costs of the new mandate would exceed the threshold ($100
million in 1996, adjusted annually for inflation) specified in
UMRA in fiscal years 1999-2003.
Description of major provisions: Title I, Provisions
Primarily Affecting Individuals and Families, would:
Raise the standard deduction for married couples,
Provide for a partial exclusion of income from
interest and dividends,
Change treatment of personal credits under the
individual alternative minimum tax,
Accelerate the increase in the deduction for health
insurance expenses for self-employed individuals,
Establish a special rule relating to gain on sale of
principal residence for members of the uniformed forces
and the foreign service serving outside the area where
the property is located,
Accelerate the increase in the unified credit in the
estate and gift tax,
Permit schools of higher education to establish
qualified prepaid tuition programs,
Change the treatment of tax-exempt bonds issued to
finance public school construction,
Increase the Social Security earnings limit for
individuals who attained retirement age, and
Change the recomputation of benefits after normal
retirement age.
Title II, Provisions Primarily Affecting Farming and Other
Businesses, would:
Accelerate the increase in expensing for small
businesses,
Permanently extend income averaging for farmers,
Extend the net operating loss carryback period for
farmers,
Allow farmers not to include payments from production
flexibility contracts in income prior to receipt, and
Increase state volume limits on private activity tax-
exempt bonds.
Title III, Extension and Modification of Certain Expiring
Provisions, would:
Extend the research and experimentation tax credit
through February 29, 2000,
Extend the work opportunity tax credit through
February 29, 2000,
Extend the welfare-to-work tax credit through
February 29, 2000,
Permanently extend the deduction provided for
contributions of appreciated stock to private
foundations,
Modify and extend for one year the exemption from
Subpart F for active financing income, and
Extend the Generalized System of Preferences through
February 29, 2000,
Title IV, Revenue Offset Provision, would change the
treatment of certain deductible liquidating distributions of
regulated investment companies and real estate investment
trust.
Title V would make technical corrections to existing tax
laws.
Title VI, The American Community Renewal Act of 1998, would
designate 20 renewal communities and provide various tax
incentives.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 4579 is summarized in the following
table. The costs of this legislation fall within budget
function 650 (Social Security).
TABLE 1. SUMMARY OF ESTIMATED BUDGETARY EFFECTS OF H.R. 4579
[By fiscal year in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
REVENUES
Title I: Provisions Primarily Affecting
Individuals and Families..................... 0 -5,801 -16,505 -17,029 -18,176 -18,634
Title II: Provisions Primarily Affecting
Farming and Other Businesses................. 0 -734 -976 -383 -45 -153
Title III: Extension and Modification of
Certain Expiring Provisions.................. 0 -2,335 -1,944 -941 -576 -373
Title IV: Revenue Offset...................... 0 2,425 1,109 723 640 672
Title VI: American Community Renewal Act...... 0 -3 -156 -256 -282 -343
-----------------------------------------------------------------
Total................................... 0 -6,448 -18,472 -17,886 -18,439 -18,831
DIRECT SPENDING
Spending under current law:
Old-Age, Survivors, and Disability
Insurance \1\............................ 375,785 391,477 408,764 427,736 448,711 471,221
Proposed changes:
Old-Age, Survivors, and Disability
Insurance \1\............................ 0 165 85 10 -115 -150
Spending under H.R. 4579
Old-Age, Survivors, and Disability
Insurance \1\............................ 375,785 391,642 408,849 427,746 448,596 471,071
CHANGE IN SURPLUS
Proposed changes:
Off-budget................................ 0 -165 -85 -10 115 150
On-budget................................. 0 -6,448 -18,472 -17,886 -18,439 -18,831
-----------------------------------------------------------------
Total................................... 0 -6,613 -18,557 -17,896 -18,324 -18,681
----------------------------------------------------------------------------------------------------------------
\1\ Spending from the Old-Age and Survivors Insurance and Disability Insurance trust funds is off-budget under
current law.
Notes.--Components may not sum to totals due to rounding. The table does not include any spending that may occur
subject to appropriations as a result of federal deposits to the family development accounts, authorized in
title VI.
Source: Joint Committee on Taxation and Congressional Budget Office.
Basis of Estimate
Revenues
All the estimates for the revenue provisions, with the
exception of the Generalized System of Preferences (GSP) in
subtitle B of title III, were provided by the JCT.
The Taxpayer Relief Act of 1998 would renew GSP, which
expired on June 30, 1998, through February 29, 2000. Taxpayers
could apply for refunds for the period between July 1, 1998,
and October 1, 1998. GSP affords nonreciprocal tariff
preferences to approximately 140 developing countries to aid
their economic development and to diversify and expand their
production and exports. Generally, duty-free treatment of
imported goods from GSP-designated developing countries is
extended to products that are not competitive internationally.
The program contains safeguards to protect domestic industries
that are sensitive to import competition. CBO estimates that
renewing GSP would reduce governmental receipts by $393 million
in fiscal year 1999, $142 million in fiscal year 2000, and a
total of $535 million over the 1999-2000 period, net of payroll
and income tax offsets. This estimates is based on projections
of U.S. imports and recent data on collections from beneficiary
countries under the GSP program.
Provisions Relating to Social Security
Subtitle C of title I contains two provisions relating to
Social Security.
Earnings Limit.--Section 121 of H.R. 4579 would increase
the amount that certain Social Security beneficiaries could
earn without having their benefits reduced. Under current law,
for beneficiaries over retirement age (currently 65) and
younger than age 70, one dollar of benefits is withheld for
every three dollars of earnings above a threshold, which equals
$14,500 in 1998. A stricter test applies to retired workers
between the ages of 62 and 64; beneficiaries above the age of
70 are exempt. This year's limit of $14,500 was set two years
ago in the Contract with America Advancement Act (Public Law
104-121), and will increase to $30,000 by 2002 and in step with
average wages thereafter. This bill would raise the exempt
amount of earnings in each of the next ten years except 2002
(see Table 2).
TABLE 2. EARNINGS TEST FOR CERTAIN SOCIAL SECURITY BENEFICIARIES UNDER CURRENT LAW AND H.R. 4579
----------------------------------------------------------------------------------------------------------------
Exempt
amount Exempt
Calendar year under amount Difference Affected age group
current law under H.R.
\1\ 4579
----------------------------------------------------------------------------------------------------------------
1998................................. $14,500 $14,500 0 65 to 70
1999................................. 15,500 17,000 1,500 65 to 70
2000................................. 17,000 18,500 1,500 65 to 70
2001................................. 25,000 26,000 1,000 65 to 70
2002................................. 30,000 30,000 0 65 to 70
2003................................. 31,200 31,300 100 65 and 2 months to 70
2004................................. 32,520 34,000 1,480 65 and 4 months to 70
2005................................. 33,840 35,400 1,560 65 and 6 months to 70
2006................................. 35,160 36,800 1,640 65 and 8 months to 70
2007................................. 36,600 38,350 1,750 65 and 10 months to 70
2008................................. 37,920 39,750 1,830 66 to 70
----------------------------------------------------------------------------------------------------------------
\1\ Through 2002, these amounts are set in the Contract With America Advancement Act (Public Law 104-121). After
2002, they are indexed to overall wage increases. A lower limit applies to beneficiaries who have not reached
the age for full (unreduced) retirement benefits.
In calendar years 1999 and 2000, CBO estimates that the
proposed increase in the earnings limit would lead to extra
Social Security outlays of about $225 million each year.
Because the increase would not take effect until January 1999,
the cost in fiscal year 1999 would be only about $175 million.
In those years, based on information from the Social Security
Administration (SSA), CBO estimates that about 500,000
beneficiaries would receive benefit increase. The maximum gain
in those years for a beneficiary would be $500 (that is, the
proposed $1,500 increase times the one-third reduction in
benefits that the recipient would experience under current
law); of course, not all of those affected would receive the
maximum increase. The costs of the bill would fall after 2000
for several reasons. First, the retirement age is scheduled to
increase under current law, effective for people reaching age
62 in 2000 (age 65 in 2003), and fewer people will be in the
relevant age bracket. Second, the threshold for the earnings
test is already scheduled to climb steeply under current law,
and fewer people will exceed it. Finally, those older workers
who benefit form this proposal will thereby forfeit a part of
their delayed retirement credit for the rest of their
lifetimes. In 2003, for example, when the proposed change in
the earnings test itself is negligible, CBO estimates that
about $10 million would be saved, on balance, by virtue of the
delayed retirement credit (see Table 3).
Delay In Benefit Recomputations.--Benefits for retired
workers are essentially computed by averaging the highest 35
years of the worker's earnings and applying a benefit
formula.When a retiree continues to have earnings, SSA checks to see
whether substituting that year of earnings--in lieu of one of the other
35 years--would lead to a higher benefit. Those recomputations are
based on the annual earnings that employers report to the Internal
Revenue Service. About 85 percent of such earnings are posted within 6
months of the close of the calendar year, and about 98 percent within 9
months. Because of this lag, recomputations--which are now effective
for the January immediately after the year of earnings--typically lead
to a lump-sum payment of retroactive benefits when they are finally
processed.
Section 122 of H.R. 4579 provides that, in most cases, the
recomputation would raise benefits effective in January of the
second year following the earnings. That is, benefits for the
year after the earnings we received would not reflect those
earnings. H.R. 4579 would make an exception in cases where that
latest year of earnings would substitute for a year of zero
earnings in the beneficiary's previous high 35. The provision
would apply only to beneficiaries who have reached retirement
age and would be effective beginning with earnings in 1998.
Because SSA would not have processed most of those
recomputations until late in the fiscal year, savings in 1999
are estimated at just $10 million. Thereafter, the proposal is
estimated to affect nearly 1 million beneficiaries a year for
annual savings of $140 million.
TABLE 3. ESTIMATED BUDGETARY EFFECTS OF SPENDING PROVISIONS OF H.R. 4579
[By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 121. Increase earnings limit for Social Security
beneficiaries over the age of retirement..................... 175 225 150 25 -10 110 150 150 150 150
Section 122. Delay recomputation of benefits for certain
Social Security beneficiaries over the age of retirement..... -10 -140 -140 -140 -140 -140 -140 -140 -140 -140
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--These provisions would affect benefit outlays from the Old-Age and Survivors Insurance trust fund, which is off-budget.
Source: Congressional Budget Office.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act of 1985 establishes pay-as-you-go
procedures for legislation affecting direct spending or
receipts. Only changes affecting on-budget outlays and receipts
(that is, those in non-Social Security programs) affect the
pay-as-you-go scorecard. For purposes of enforcing pay-as-you-
go procedures, only the effects in the current year, budget
year, and the succeeding four years are counted (see Table 4).
TABLE 4. SUMMARY OF PAY-AS-YOU-GO EFFECTS OF H.R. 4579
[By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in outlays.......................... 0 0 0 0 0 0 0 0 0 0
Change in receipts......................... -6,448 -18,472 -17,886 -18,439 -18,831 -19,738 -18,620 -18,523 -19,119 -21,034
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office and Joint Committee on Taxation.
Social Security outlays and receipts do not appear on the
pay-as-you-go scorecard, but the House of Representatives
tracks them separately. That tally includes effects only for
the year in which the legislation takes effect and the four
subsequent years; for H.R. 4579, the relevant years are 1999
through 2003. The scorecard also includes balances carried over
from laws enacted in previous years, such as the Contract with
American Advancement Act, enacted in 1996 (see Table 5).
TABLE 5. CBO ESTIMATE OF CURRENT STATUS OF THE SOCIAL SECURITY SCORECARD IN THE HOUSE OF REPRESENTATIVES
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Scorecard at start of 1999:
OASDI taxes............................................... 80 ........ ........ ........ ........
OASDI benefits............................................ -114 75 ........ ........ ........
-------------------------------------------------
Net Effect.............................................. 194 -75 ........ ........ ........
Effect of Taxpayer Relief Act of 1998 (H.R. 4579):
OASDI taxes............................................... ........ ........ ........ ........ ........
OASDI benefits............................................ 165 85 10 -115 -150
-------------------------------------------------
Net Effect.............................................. -165 -85 -10 115 150
Scorecard assuming enactment of H.R. 4579:
OASDI taxes............................................... 80 ........ ........ ........ ........
OASDI benefits............................................ 51 160 10 -115 -150
-------------------------------------------------
Net effect.............................................. 29 -160 -10 115 150
----------------------------------------------------------------------------------------------------------------
Note. OASDI=Old-Age, Survivors, and Disability Insurance.
Sources: Congressional Budget Office and Joint Committee on Taxation.
Estimated impact on State, local, and tribal governments:
Section 4 of UMRA excludes from the application of that act any
legislative provisions that relate to the old-age, survivors,
and disability insurance program under title II of the Soial
Security Act. CBO has determined that all provisions of
subtitle C of title I fit within that exclusion. CBO and JCT
have determined that the remaining provisions of H.R. 4579
contain no intergovernmental mandates as defined in UMRA.
Estimated impact on the private Sector: JCT has determined
that title IV would impose a new private-sector mandate on
regulated investment companies and real estate in investment
trusts by changing the treatment of certain deductible
liquidating distributions. The direct costs of the new mandate
would exceed the statutory threshold ($100 million in 1996,
adjusted annually for inflation) established in UMRA in each of
fiscal years 1999 through 2003 (see Table 6). UMRA does not
apply to the provisions of subtitle C of title I. The other
provisions of H.R. 4579 contain no private-sector mandates.
TABLE 6. ESTIMATED COST OF PRIVATE-SECTOR MANDATES
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Cost to the private sector.......................... 0 2,425 1,109 723 640 672
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.
Estimate prepared by: Federal spending: Kathy Ruffing and
Deb Reis, Federal revenues: Hester Grippando; Impact on State,
local, and tribal governments: Pepper Santalucia; Impact on the
private sector: Lesley Frymier.
Estimate approved by: Frank Sammartino, Assistant Director
for Tax Analysis (Acting); Paul N. Van de Water, Assistant
Director for Budget Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to subdivision (A) of clause 2(l)(3) of Rule
XI of the Rules of the House of Representatives (relating to
oversight findings), the Committee advises that it was the
result of the Committee's oversight activities with respect to
providing tax relief for the marriage tax penalty, tax relief
for modest amounts of interest and dividend income, individual
minimum tax relief for taxpayers utilizing personal tax
credits, education and community renewal tax incentives, small
business and farmer tax relief, acceleration of the increased
estate tax unified credit exemption, extension of certain
expired and expiring tax and trade provisions, closing a tax
loophole with respect to the treatment of certain deductible
liquidating distributions of RICs and REITs, acceleration of
the phase-in of increased Social Security earnings limit and
delay of Social Security benefit recomputations, and necessary
tax technical corrections that the Committee concluded that it
is appropriate and timely to enact the provisions contained in
the bill as reported.
B. Summary of Findings and Recommendations of the Committee on
Government Reform and Oversight
With respect to subdivision (D) of clause 2(l)(3) of Rule
XI of the Rules of the House of Representatives, the Committee
advises that no specific oversight findings or recommendations
have been submitted to this Committee by the Committee on
Government Reform and Oversight with respect to the provisions
contained in the bill.
C. Constitutional Authority Statement
With respect to clause 2(l)(4) of Rule XI of the Rules of
the House of Representatives (relating to Constitutional
Authority), the Committee states that the Committee's action in
reporting this bill is derived from Article I of the
Constitution, Section 7 (``All bills for raising revenue shall
originate in the House of Representatives'') and Section 8
(``The Congress shall have the power to lay and collect taxes,
duties, imports and excises, to pay the debts * * * of the
United States''), and from the 16th Amendment to the
Constitution.
D. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the provision of the bill
relating to treatment of certain deductible liquidating
distributions of RICs and REITs (bill sec. 401) will impose a
Federal mandate on the private sector totaling $5,569 million
for fiscal years 1999-2003. This amount is no greater than the
aggregate estimated amounts the private sector will be required
to pay in order to comply with this private sector mandate
during this period. The bill will not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
E. Applicability of House Rule XXI 5(c)
Rule XXI 5(c) of the Rules of the House of Representatives
provides, in part, that ``No bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase shall be considered as passed or agreed to unless
determined by a vote of not less than three-fifths of the
Members.'' The Committee has carefully reviewed the provisions
of the bill, and states that the provisions of the bill do not
involve any Federal income tax rate increase within the meaning
of the rule.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3 of rule XIII of the Rules of the
House of Representatives, changes in existing law made by the
bill, as reported, are shown as follows (existing law proposed
to be omitted is enclosed in black brackets, new matter is
printed in italic, existing law in which no change is proposed
is shown in roman):
INTERNAL REVENUE CODE OF 1986
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
Subchapter A. Determination of tax liability.
* * * * * * *
Subchapter X. Renewal communities.
Subchapter A--Determination of Tax Liability
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 1. TAX IMPOSED.
(a) * * *
* * * * * * *
(f) Adjustments in Tax Tables so That Inflation Will Not
Result in Tax Increases.--
(1) * * *
* * * * * * *
(6) Rounding.--
(A) * * *
(B) Table for married individuals filing
separately.--In the case of a married
individual filing a separate return,
subparagraph (A) [(other than with respect to
subsection (c)(4) of section 63 (as it applies
to subsections (c)(5)(A) and (f) of such
section) and section 151(d)(4)(A)) shall be
applied] (other than with respect to sections
63(c)(4) and 151(d)(4)(A)) shall be applied by
substituting ``$25'' for ``$50'' each place it
appears.
* * * * * * *
(h) Maximum Capital Gains Rate.--
(1) * * *
* * * * * * *
(13) Special rules.--
(A) * * *
(B) Determination of unrecaptured section
1250 gain.--The amount determined under
paragraph [(7)(A)] (7)(A)(i) shall not include
gain--
(i) which is properly taken into
account for the portion of the taxable
year before May 7, 1997; or
(ii) from property held not more than
18 months which is properly taken into
account for the portion of the taxable
year after July 28, 1997, and before
January 1, 1998.
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart A--Nonrefundable Personal Credits
* * * * * * *
SEC. 24. CHILD TAX CREDIT.
(a) * * *
* * * * * * *
(d) Additional Credit for Families with 3 or More Children.--
(1) * * *
[(2) Reduction of credit to taxpayer subject to
alternative minimum tax.--The credit determined under
this subsection for the taxable year shall be reduced
by the excess (if any) of--
[(A) the amount of tax imposed by section 55
(relating to alternative minimum tax) with
respect to such taxpayer for such taxable year,
over
[(B) the amount of the reduction under
section 32(h) with respect to such taxpayer for
such taxable year.]
[(3)] (2) Social security taxes.--For purposes of
paragraph (1)--
(A) * * *
* * * * * * *
SEC. 25. INTEREST ON CERTAIN HOME MORTGAGES.
(a) * * *
* * * * * * *
(f) Reduction in Aggregate Amount of Qualified Mortgage Bonds
Which May be Issued Where Certain Requirements Not Met.--
(1) * * *
* * * * * * *
(3) Special rule for states having constitutional
home rule cities.--In the case of a State having one or
more constitutional home rule cities (within the
meaning of section [146(d)(3)(C)] 146(d)(2)(C)), the
reduction in the State ceiling by reason of paragraph
(1) shall be allocated to the constitutionalhome rule
city, or to the portion of the State not within such city, whichever
caused the reduction.
* * * * * * *
SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX
LIABILITY.
[(a) Limitation Based on Amount of Tax.--The aggregate amount
of credits allowed by this subpart for the taxable year shall
not exceed the excess (if any) of--
[(1) the taxpayer's regular tax liability for the
taxable year, over
[(2) the tentative minimum tax for the taxable year
(determined without regard to the alternative minimum
tax foreign tax credit).]
(a) Limitation Based on Amount of Tax.--The aggregate amount
of credits allowed by this subpart for the taxable year shall
not exceed the sum of--
(1) the taxpayer's regular tax liability for the
taxable year, and
(2) the tax imposed for the taxable year by section
55(a).
For purposes of applying the preceding sentence, paragraph (2)
shall be treated as being zero for any taxable year beginning
during 1998.
* * * * * * *
Subpart C--Refundable Credits
* * * * * * *
SEC. 32. EARNED INCOME.
(a) * * *
* * * * * * *
[(h) Reduction of Credit to Taxpayers Subject to Alternative
Minimum Tax.--The credit allowed under this section for the
taxable year shall be reduced by the amount of tax imposed by
section 55 (relating to alternative minimum tax) with respect
to such taxpayer for such taxable year.]
Subpart D--Business Related Credits
* * * * * * *
SEC. 39. CARRYBACK AND CARRYFORWARD OF UNUSED CREDITS.
(a) * * *
* * * * * * *
(d) Transitional Rules.--
(1) * * *
* * * * * * *
(9) No carryback of section 1400k credit before date
of enactment.--No portion of the unused business credit
for any taxable year which is attributable to any
commercial revitalization credit determined under
section 1400K may be carried back to a taxable year
ending before the date of the enactment of section
1400K.
* * * * * * *
SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.
(a) * * *
* * * * * * *
(c) Base Amount.--
(1) * * *
* * * * * * *
(4) Election of alternative incremental credit.--
(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to the sum
of--
(i) [1.65] 2.65 percent of so much of
the qualified research expenses for the
taxable year as exceeds 1 percent of
the average described in subsection
(c)(1)(B) but does not exceed 1.5
percent of such average,
(ii) [2.2] 3.2 percent of so much of
such expenses as exceeds 1.5 percent of
such average but does not exceed 2
percent of such average, and
(iii) [2.75] 3.75 percent of so much
of such expenses as exceeds 2 percent
of such average.
* * * * * * *
(h) Termination.--
(1) In general.--This section shall not apply to any
amount paid or incurred--
(A) after June 30, 1995, and before July 1,
1996, or
(B) after [June 30, 1998] February 29, 2000.
Notwithstanding the preceding sentence, in the case of
a taxpayer making an election under subsection (c)(4)
for its first taxable year beginning after June 30,
1996, and before July 1, 1997, this section shall apply
to amounts paid or incurred during the [24-month] 44-
month period beginning with the first month of such
year. The [24 months] 44 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.
* * * * * * *
SEC. 42. LOW-INCOME HOUSING CREDIT.
(a) * * *
* * * * * * *
(h) Limitation on Aggregate Credit Allowable With Respect to
Projects Located in a State.--
(1) * * *
* * * * * * *
(3) Housing credit dollar amount for agencies.--
(A) * * *
* * * * * * *
(E) Special rule for states with
constitutional home rule cities.--For purposes
of this subsection--
(i) * * *
* * * * * * *
(iii) Constitutional home rule
city.--For purposes of this paragraph,
the term ``constitutional home rule
city'' has the meaning given such term
by section [146(d)(3)(C)] 146(d)(2)(C).
* * * * * * *
SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES
OR CONDITIONS.
(a) * * *
(b) Qualified Clinical Testing Expenses For Purposes of This
Section.--
(1) Qualified clinical testing expenses.--
(A) * * *
* * * * * * *
(D) Special rule.--For purposes of this
paragraph, section 41 shall be deemed to remain
in effect for periods after June 30, 1995, and
before July 1, 1996, and periods after [June
30, 1998] February 29, 2000.
* * * * * * *
Subpart E--Rules for Computing Investment Credit
* * * * * * *
SEC. 46. AMOUNT OF CREDIT.
For purposes of section 38, the amount of the investment
credit determined under this section for any taxable year shall
be the sum of--
(1) the rehabilitation credit,
(2) the energy credit, [and]
(3) the reforestation credit[.], and
(4) the commercial revitalization credit provided
under section 1400K.
* * * * * * *
SEC. 48. ENERGY CREDIT; REFORESTATION CREDIT.
(a) Energy Credit.--
(1) * * *
(2) Energy percentage.--
(A) * * *
(B) Coordination with rehabilitation or
commercial revitalization.--The energy
percentage shall not apply to that portion of
the basis of any property which is attributable
to qualified rehabilitation or commercial
revitalization expenditures.
* * * * * * *
SEC. 49. AT-RISK RULES.
(a) General Rule.--
(1) Certain nonrecourse financing excluded from
credit base.--
(A) * * *
* * * * * * *
(C) Credit base defined.--For purposes of
this paragraph, the term ``credit base''
means--
(i) the portion of the basis of any
qualified rehabilitated building
attributable to qualified
rehabilitation expenditures,
(ii) the basis of any energy
property, [and]
(iii) the amortizable basis of any
qualified timber property[.], and
(iv) the portion of the basis of any
qualified revitalization building
attributable to qualified
revitalization expenditures.
* * * * * * *
SEC. 50. OTHER SPECIAL RULES.
(a) Recapture in Case of Dispositions, Etc.--Under
regulations prescribed by the Secretary--
(1) * * *
(2) Property ceases to qualify for progress
expenditures.--
(A) In general.--If during any taxable year
any building to which section 47(d) or
1400K(d)(2) applied ceases (by reason of sale
or other disposition, cancellation or
abandonment of contract, or otherwise) to be,
with respect to the taxpayer, property which,
when placed in service, will be a qualified
rehabilitated building or qualified
revitalization building (respectively), then
the tax under this chapter for such taxable
year shall be increased by an amount equal to
the aggregate decrease in the credits allowed
under section 38 for all prior taxable years
which would have resulted solely from reducing
to zero the credit determined under this
subpart with respect to such building.
(B) Certain excess credit recaptured.--Any
amount which would have been applied as a
reduction under paragraph (2) of section 47(b)
but for the fact that a reduction under such
paragraph cannot reduce the amount taken into
account under section 47(b)(1) below zero shall
be treated as an amount required to be
recaptured under subparagraph (A) for the
taxable year during which the building is
placed in service. A similar rule shall apply
for purposes of section 1400K.
(C) Certain sales and leasebacks.--Under
regulations prescribed by the Secretary, a sale
by, and leaseback to, a taxpayer who, when the
property is placed in service, will be a lessee
to whom the rules referred to in subsection
(d)(5) apply shall not be treated as a
cessation described in subparagraph (A) to the
extent that the amount which will be passed
through to the lessee under suchrules with
respect to such property is not less than the qualified rehabilitation
expenditures properly taken into account by the lessee under section
47(d) or 1400K(d)(2) with respect to such property.
(D) Coordination with paragraph (1).--If,
after property is placed in service, there is a
disposition or other cessation described in
paragraph (1), then paragraph (1) shall be
applied as if any credit which was allowable by
reason of section 47(d) or 1400K(d)(2) and
which has not been required to be recaptured
before such disposition, cessation, or change
in use were allowable for the taxable year the
property was placed in service.
(E) Special rules.--Rules similar to the
rules of this paragraph shall apply in cases
where qualified progress expenditures were
taken into account under the rules referred to
in section 48(a)(5).
* * * * * * *
(b) Certain Property Not Eligible.--No credit shall be
determined under this subpart with respect to--
(1) * * *
(2) Property used for lodging.--No credit shall be
determined under this subpart with respect to any
property which is used predominantly to furnish lodging
or in connection with the furnishing of lodging. The
preceding sentence shall not apply to--
(A) * * *
* * * * * * *
(C) a certified historic structure to the
extent of that portion of the basis which is
attributable to qualified rehabilitation
expenditures; [and]
(D) any energy property[.]; and
(E) a qualified revitalization building (as
defined in section 1400K) to the extent of the
portion of the basis which is attributable to
qualified revitalization expenditures (as
defined in section 1400K).
(3) Property used by certain tax-exempt
organizations.--No credit shall be determined under
this subpart with respect to any property used by an
organization (other than a cooperative described in
section 521 which is exempt from the tax imposed by
this chapter unless such property is used predominantly
in an unrelated trade or business the income of which
is subject to tax under section 511. If the property is
debt-financed property (as defined in section 514(b),
the amount taken into account for purposes of
determining the amount of the credit under this subpart
with respect to such property shall be that percentage
of the amount (which but for this paragraph would be so
taken into account) which is the same percentage as is
used under section 514(a), for the year the property is
placed in service, in computing the amount of gross
income to be taken into account during such taxable
year with respect to such property. [If any qualified
rehabilitated building is used by the tax-exempt
organization pursuant to a lease, this paragraph shall
not apply for purposes of determining the amount of the
rehabilitation credit.] If any qualified rehabilitated
building or qualified revitalization building is used
by the tax-exempt organization pursuant to a lease,
this paragraph shall not apply for purposes of
determining the amount of the rehabilitation credit or
the commercial revitalization credit.
(4) Property used by governmental units or foreign
persons or entities.--
(A) * * *
* * * * * * *
(C) Exception for qualified rehabilitated or
commercial revitalization buildings leased to
governments, etc.--If any qualified
rehabilitated or commercial revitalization
building is leased to a governmental unit (or a
foreign person or entity) this paragraph shall
not apply for purposes of determining the
rehabilitation or commercial revitalization
credit with respect to such building.
* * * * * * *
Subpart F--Rules for Computing Work Opportunity Credit
* * * * * * *
SEC. 51. AMOUNT OF CREDIT.
(a) * * *
* * * * * * *
(c) Wages Defined.--For purposes of this subpart--
(1) * * *
* * * * * * *
(4) Termination.--The term ``wages'' shall not
include any amount paid or incurred to an individual
who begins work for the employer--
(A) after December 31, 1994, and before
October 1, 1996, or
(B) after [June 30, 1998] February 29, 2000.
(5) Extension of credit for renewal communities.--
(A) In general.--In the case of an individual
who begins work for the employer after the date
contained in paragraph (4)(B), for purposes of
section 38--
(i) in lieu of applying subsection
(a), the amount of the work opportunity
credit determined under this section
for the taxable year shall be equal
to--
(I) 15 percent of the
qualified first-year wages for
such year, and
(II) 30 percent of the
qualified second-year wages for
such year,
(ii) subsection (b)(3) shall be
applied by substituting ``$10,000'' for
``$6,000'',
(iii) paragraph (4)(B) shall be
applied by substituting for the date
contained therein the last day for
which the designation under section
1400E of the renewal community referred
to in subparagraph (B)(i) is in effect,
and
(iv) rules similar to the rules of
section 51A(b)(5)(C) shall apply.
(B) Qualified first and second-year wages.--
For purposes of subparagraph (A)--
(i) In general.--The term ``qualified
wages'' means, with respect to each 1-
year period referred to in clause (ii)
or (iii), as the case may be, the wages
paid or incurred by the employer during
the taxable year to any individual but
only if--
(I) the employer is engaged
in a trade or business in a
renewal community throughout
such 1-year period,
(II) the individual is a
resident of such renewal
community throughout such 1-
year period, and
(III) substantially all of
the services which such
individual performs for the
employer during such 1-year
period are performed in such
renewal community.
(ii) 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.
(iii) 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 clause (ii).
(d) Members of Targeted Groups.--For purposes of this
subpart--
(1) * * *
* * * * * * *
(5) High-risk youth.--
(A) In general.--The term ``high-risk youth''
means any individual who is certified by the
``designated local agency''--
(i) as having attained age 18 but not
age 25 on the hiring date, and
(ii) as having his principal place of
abode within an [empowerment zone or
enterprise community] empowerment zone,
enterprise community, or renewal
community.
(B) Youth must continue to reside in zone or
community.--In the case of a high-risk youth,
the term ``qualified wages'' shall not include
wages paid or incurred for services performed
while such youth's principal place of abode is
outside an [empowerment zone or enterprise
community] empowerment zone, enterprise
community, or renewal community.
(6) Vocational rehabilitation referral.--The term
``vocational rehabilitation referral'' means any
individual who is certified by the designated local
agency as--
(A) * * *
(B) having been referred to the employer upon
completion of (or while receiving)
rehabilitative services pursuant to--
(i) an individualized written
[rehabilitation plan] plan for
employment under a State plan for
vocational rehabilitation services
approved under the Rehabilitation Act
of 1973, or
(ii) a program of vocational
rehabilitation carried out under
chapter 31 of title 38, United States
Code.
(7) Qualified summer youth employee.--
(A) In general.--The term ``qualified summer
youth employee'' means any individual--
(i) * * *
* * * * * * *
(iv) who is certified by the
designated local agency as having his
principal place of abode within an
[empowerment zone or enterprise
community] empowerment zone, enterprise
community, or renewal community.
* * * * * * *
(C) Youth must continue to reside in zone or
community.--Paragraph (5)(B) shall apply for
purposes of subparagraph (A)(iv).
* * * * * * *
SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM FAMILY
ASSISTANCE RECIPIENTS.
(a) * * *
* * * * * * *
(f) Termination.--This section shall not apply to individuals
who begin work for the employer after [April 30, 1999] February
29, 2000.
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General Rule.--For purposes of this subtitle, the term
``adjusted gross income'' means, in the case of an individual,
gross income minus the following deductions:
(1) * * *
* * * * * * *
(18) Family development accounts.--The deduction
allowed by section 1400H(a)(1)(A).
* * * * * * *
SEC. 63. TAXABLE INCOME DEFINED.
(a) * * *
* * * * * * *
(c) Standard Deduction.--For purposes of this subtitle--
(1) * * *
(2) Basic standard deduction.--For purposes of
paragraph (1), the basic standard deduction is--
(A) [$5,000] twice the dollar amount in
effect under subparagraph (C) for the taxable
year in the case of--
(i) a joint return, or
(ii) a surviving spouse (as defined
in section 2(a)),
(B) $4,400 in the case of a head of household
(as defined in section 2(b)), or
(C) $3,000 [in the case of an individual who
is not married and who is not a surviving
spouse or head of household, or] in any other
case.
[(D) $2,500 in the case of a married
individual filing a separate return.]
* * * * * * *
(4) Adjustments for inflation.--In the case of any
taxable year beginning in a calendar year after 1988,
each dollar amount contained in paragraph (2) or (5) or
subsection (f) shall be increased by an amount equal
to--
(A) such dollar amount, multiplied by
(B) 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).
The preceding sentence shall not apply to the amount
referred to in paragraph (2)(A).
* * * * * * *
(f) Aged or Blind Additional Amounts.--
(1) Additional amounts for the aged.--The taxpayer
shall be entitled to an additional amount of [$600]
$750--
(A) for himself if he has attained age 65
before the close of his taxable year, and
(B) for the spouse of the taxpayer if the
spouse has attained age 65 before the close of
the taxable year and an additional exemption is
allowable to the taxpayer for such spouse under
section 151(b).
(2) Additional amount for blind.--The taxpayer shall
be entitled to an additional amount of [$600] $750--
(A) for himself if he is blind at the close
of the taxable year, and
(B) for the spouse of the taxpayer if the
spouse is blind as of the close of the taxable
year and an additional exemption is allowable
to the taxpayer for such spouse under section
151(b).
For purposes of subparagraph (B), if the spouse dies
during the taxable year the determination of whether
such spouse is blind shall be made as of the time of
such death.
[(3) Higher amount for certain unmarried
individuals.--In the case of an individual who is not
married and is not a surviving spouse, paragraphs (1)
and (2) shall be applied by substituting ``$750'' for
``$600''.]
[(4)] (3) Blindness defined.--For purposes of this
subsection, an individual is blind only if his central
visual acuity does not exceed 20/200 in the better eye
with correcting lenses, or if his visual acuity is
greater than 20/200 but is accompanied by a limitation
in the fields of vision such that the widest diameter
of the visual field subtends an angle no greater than
20 degrees.
* * * * * * *
SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS.
(a) * * *
(b) Miscellaneous Itemized Deductions.--For purposes of this
section, the term ``miscellaneous itemized deductions'' means
the itemized deductions other than--
(1) * * *
* * * * * * *
(3) the deduction under section 165(a) [for losses
described in subsection (c)(3) or (d) of section 165]
for casualty or theft losses described in paragraph (2)
or (3) of section 165(c) or for losses described in
section 165(d),
* * * * * * *
SEC. 68. OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
(a) * * *
* * * * * * *
(c) Exception for Certain Itemized Deductions.--For purposes
of this section, the term ``itemized deductions'' does not
include--
(1) * * *
* * * * * * *
(3) the deduction under section 165(a) [for losses
described in subsection (c)(3) or (d) of section 165]
for casualty or theft losses described in paragraph (2)
or (3) of section 165(c) or for losses described in
section 165(d).
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
(a) * * *
* * * * * * *
(e) Amounts Not Received as Annuities.--
(1) * * *
* * * * * * *
(9) Extension of paragraph (2)(B) to qualified
[state] tuition programs and educational individual
retirement accounts.--Notwithstanding any other
provision of this subsection, paragraph (2)(B) shall
apply to amounts received under a [qualified State
tuition program] qualified tuition program (as defined
in section 529(b)) or under an education individual
retirement account (as defined in section 530(b)). The
rule of paragraph (8)(B) shall apply for purposes of
this paragraph.
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
Sec. 101. Certain death benefits.
* * * * * * *
Sec. 116. Partial exclusion of dividends and interest received
by individuals.
* * * * * * *
SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY
INDIVIDUALS.
(a) Exclusion From Gross Income.--Gross income does not
include dividends and interest received during the taxable year
by an individual.
(b) Limitations.--
(1) Maximum amount.--The aggregate amount excluded
under subsection (a) for any taxable year shall not
exceed $200 ($400 in the case of a joint return).
(2) Certain dividends excluded.--Subsection (a) shall
not apply to any dividend from a corporation which, for
the taxable year of the corporation in which the
distribution is made, or for the next preceding taxable
year of the corporation, is a corporation exempt from
tax under section 501 (relating to certain charitable,
etc., organization) or section 521 (relating to
farmers' cooperative associations).
(c) Special Rules.--For purposes of this section--
(1) Exclusion not to apply to capital gain dividends
from regulated investment companies and real estate
investment trusts.--
For treatment of capital gain dividends, see sections 854(a)
and 857(c).
(2) Certain nonresident aliens ineligible for
exclusion.--In the case of a nonresident alien
individual, subsection (a) shall apply only--
(A) in determining the tax imposed for the
taxable year pursuant to section 871(b)(1) and
only in respect of dividends and interest which
are effectively connected with the conduct of a
trade or business within the United States, or
(B) in determining the tax imposed for the
taxable year pursuant to section 877(b).
(3) Dividends from employee stock ownership plans.--
Subsection (a) shall not apply to any dividend
described in section 404(k).
* * * * * * *
SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
(a) * * *
* * * * * * *
(d) Special Rules.--
(1) * * *
* * * * * * *
(9) Members of uniformed services and foreign
service.--
(A) In general.--The running of the 5-year
period described in subsection (a) shall be
suspended with respect to an individual during
any time that such individual or such
individual's spouse is serving on qualified
official extended duty as a member of the
uniformed services or of the Foreign Service.
(B) Qualified official extended duty.--For
purposes of this paragraph--
(i) In general.--The term ``qualified
official extended duty'' means any
period of extended duty as a member of
the uniformed services or a member of
the Foreign Service during which the
member serves at a duty station which
is at least 50 miles from such property
or is under Government orders to reside
in Government quarters.
(ii) Uniformed services.--The term
``uniformed services'' has the meaning
given such term by section 101(a)(5) of
title 10, United States Code, as in
effect on the date of the enactment of
this paragraph.
(iii) Foreign service of the united
states.--The term ``member of the
Foreign Service'' has the meaning given
the term ``member of the Service'' by
paragraph (1), (2), (3), (4), or (5) of
section 103 of the Foreign Service Act
of 1980, as in effect on the date of
the enactment of this paragraph.
(iv) Extended duty.--The term
``extended 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.
* * * * * * *
SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER
EDUCATION TUITION AND FEES.
(a) * * *
* * * * * * *
(c) Definitions.--For purposes of this section--
(1) * * *
(2) Qualified higher education expenses.--
(A) * * *
(B) Exception for education involving sports,
etc.--Such term shall not include expenses with
respect to any course or other education
involving sports, games, or hobbies other than
as part of a degree program.
(C) Contributions to [qualified state tuition
program] qualified tuition programs and
education individual retirement accounts.--Such
term shall include any contribution to a
[qualified State tuition program] qualified
tuition program (as defined in section 529 on
behalf of a designated beneficiary (as defined
in such section), or to an education individual
retirement account (as defined in section 530
on behalf of an account beneficiary, 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
72 by reason of any portion of such
contribution which is not includible in gross
income by reason of this subparagraph.
* * * * * * *
(4) Modified adjusted gross income.--The term
``modified adjusted gross income'' means the adjusted
gross income of the taxpayer for the taxable year
determined--
(A) without regard to this section and
sections 116, 137, 911, 931, and 933, and
(B) after the application of sections 86,
469, and 219.
(d) Special Rules.--
(1) Adjustment for certain scholarships and veterans
benefits.--The amount of 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 sum of the amounts received with respect to
such individual for the taxable year as--
(A) * * *
* * * * * * *
(D) a payment, waiver, or reimbursement of
qualified higher education expenses under a
[qualified State tuition program] qualified
tuition program (within the meaning of section
529(b).
* * * * * * *
(4) Coordination with section 116.--This section
shall be applied before section 116.
[(4)] (5) Regulations.--The Secretary may prescribe
such regulations as may be necessary or appropriate to
carry out this section, including regulations requiring
record keeping and information reporting.
* * * * * * *
PART IV--TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS
* * * * * * *
Subpart A--Private Activity Bonds
* * * * * * *
SEC. 146. VOLUME CAP.
(a) * * *
* * * * * * *
(d) State Ceiling.--For purposes of this section--
[(1) In general.--The State ceiling applicable to any
State for any calendar year shall be the greater of--
[(A) an amount equal to $75 multiplied by the
State population, or
[(B) $250,000,000.
Subparagraph (B) shall not apply to any possession of
the United States.
[(2) Adjustment after 1987.--In the case of calendar
years after 1987, paragraph (1) shall be applied by
substituting--
[(A) ``$50'' for ``$75'', and
[(B) ``$150,000,000'' for ``$250,000,000''.]
(1) In general.--The State ceiling applicable to any
State for any calendar year shall be the greater of--
(A) an amount equal to $75 multiplied by the
State population, or
(B) $225,000,000.
Subparagraph (B) shall not apply to any possession of
the United States.
[(3)] (2) Special rule for states with constitutional
home rule cities.--For purposes of this section--
(A) * * *
* * * * * * *
[(4)] (3) Special rule for possessions with
populations of less than the population of the least
populous state.--
(A) * * *
* * * * * * *
Subpart B--Requirements Applicable to All State and Local Bonds
* * * * * * *
SEC. 148. ARBITRAGE.
(a) * * *
* * * * * * *
(f) Required Rebate to the United States.--
(1) * * *
* * * * * * *
(4) Special rules for applying paragraph (2).--
(A) * * *
* * * * * * *
(C) Exception from rebate for certain
proceeds to be used to finance construction
expenditures.--
(i) * * *
* * * * * * *
(xviii) 4-year spending requirement
for public school construction issue.--
(I) In general.--In the case
of a public school construction
issue, the spending
requirements of clause (ii)
shall be treated as met if at
least 10 percent of the
available construction proceeds
of the construction issue are
spent for the governmental
purposes of the issue within
the 1-year period beginning on
the date the bonds are issued,
30 percent of such proceeds are
spent for such purposes within
the 2-year period beginning on
such date, 50 percent of such
proceeds are spent for such
purposes within the 3-year
period beginning on such date,
and 100 percent of such
proceeds are spent for such
purposes within the 4-year
period beginning on such date.
(II) Public school
construction issue.--For
purposes of this clause, the
term ``public school
construction issue'' means any
construction issue if no bond
which is part of such issue is
a private activity bond and all
of the available construction
proceeds of such issue are to
be used for the construction
(as defined in clause (iv)) of
public school facilities to
provide education or training
below the postsecondary level
or for the acquisition of land
that is functionally related
and subordinate to such
facilities.
(III) Other rules to apply.--
Rules similar to the rules of
the preceding provisions of
this subparagraph which apply
to clause (ii) also apply to
this clause.
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) * * *
* * * * * * *
(l) Special Rules for Health Insurance Costs of Self-Employed
Individuals.--
[(1) Allowance of deduction.--
[(A) In general.--In the case of an
individual who is an employee within the
meaning of section 401(c)(1), there shall be
allowed as a deduction under this section an
amount equal to the applicable percentage of
the amount paid during the taxable year for
insurance which constitutes medical care for
the taxpayer, his spouse, and dependents.
[(B) Applicable percentage.--For purposes of
subparagraph (A), the applicable percentage
shall be determined under the following table:
[For taxable years beginning The applicable
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.]
(1) Allowance of deduction.--In the case of an
individual who is an employee within the meaning of
section 401(c)(1), there shall be allowed as a
deduction under this section an amount equal to 100
percent of the amount paid during the taxable year for
insurance which constitutes medical care for the
taxpayer, his spouse, and dependents.
* * * * * * *
SEC. 163. INTEREST.
(a) * * *
* * * * * * *
(h) Disallowance of Deduction for Personal Interest.--
(1) * * *
(2) Personal interest.--For purposes of this
subsection, the term ``personal interest'' means any
interest allowable as a deduction under this chapter
other than--
(A) * * *
* * * * * * *
(D) any qualified residence interest (within
the meaning of paragraph (3)), [and]
(E) 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 6163[.], and
(F) any interest allowable as a deduction
under section 221 (relating to interest on
educational loans).
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) * * *
* * * * * * *
(e) Certain Contributions of Ordinary Income and Capital Gain
Property.--
(1) * * *
* * * * * * *
(5) Special rule for contributions of stock for which
market quotations are readily available.--
(A) * * *
* * * * * * *
[(D) Termination.--This paragraph shall not
apply to contributions made--
[(i) after December 31, 1994, and
before July 1, 1996, or
[(ii) after June 30, 1998.]
* * * * * * *
SEC. 172. NET OPERATING LOSS DEDUCTION.
(a) * * *
(b) Net Operating Carrybacks and Carryovers.--
(1) Years to which loss may be carried.--
(A) * * *
* * * * * * *
(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) * * *
* * * * * * *
Such term shall not include any farming
loss (as defined in subsection (i)).
* * * * * * *
(iv) Coordination with paragraph
(2).--For purposes of applying
paragraph (2), an eligible loss for any
taxable year shall be treated in a
manner similar to the manner in which a
specified liability loss is treated.
(G) Farming losses.--In the case of a
taxpayer which has a farming loss (as defined
in subsection (i)) for a taxable year, such
farming loss shall be a net operating loss
carryback to each of the 5 taxable years
preceding the taxable year of such loss.
* * * * * * *
(d) Modifications.--The modifications referred to in this
section are as follows:
(1) * * *
* * * * * * *
(4) Nonbusiness deductions of taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation, the deductions allowable by this chapter
which are not attributable to a taxpayer's trade or
business shall be allowed only to the extent of the
amount of the gross income not derived from such trade
or business. For purposes of the preceding sentence--
(A) * * *
* * * * * * *
[(C) any deduction allowable under section
165(c)(3) (relating to casualty losses) shall
not be taken into account; and]
(C) any deduction for casualty or theft
losses allowable under paragraph (2) or (3) of
section 165(c) shall be treated as attributable
to the trade or business; and
* * * * * * *
(i) Rules Relating to Farming Losses.--For purposes of this
section--
(1) In general.--The term ``farming loss'' means the
lesser of--
(A) the amount which would be the net
operating loss for the taxable year if only
income and deductions attributable to farming
businesses (as defined in section 263A(e)(4))
are taken into account, or
(B) the amount of the net operating loss for
such taxable year.
(2) Coordination with subsection (b)(2).--For
purposes of applying subsection (b)(2), a farming loss
for any taxable year shall be treated in a manner
similar to the manner in which a specified liability
loss is treated.
(3) Election.--Any taxpayer entitled to a 5-year
carryback under subsection (b)(1)(G) from any loss year
may elect to have the carryback period with respect to
such loss year determined without regard to subsection
(b)(1)(G). Such election shall be made in such manner
as may be prescribed by the Secretary and shall be made
by the due date (including extensions of time) for
filing the taxpayer's return for the taxable year of
the net operating loss. Such election, once made for
any taxable year, shall be irrevocable for such taxable
year.
[(i)] (j) Cross References.--
(1) For treatment of net operating loss carryovers in certain
corporate acquisitions, see section 381.
(2) For special limitation on net operating loss carryovers in
case of a corporate change of ownership, see section 382.
* * * * * * *
SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) * * *
(b) Limitations.--
[(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed the following applicable
amount:
[If the taxable year The applicable
begins in: amount is:
1997.................................................... 18,000
1998.................................................... 18,500
1999.................................................... 19,000
2000.................................................... 20,000
2001 or 2002............................................ 24,000
2003 or thereafter...................................... 25,000]
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $25,000.
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 264. CERTAIN AMOUNTS PAID IN CONNECTION WITH INSURANCE CONTRACTS.
(a) * * *
* * * * * * *
(f) Pro Rata Allocation of Interest Expense to Policy Cash
Values.--
(1) * * *
* * * * * * *
(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.
If the amount described in subparagraph (A) with
respect to any policy or contract does not reasonably
approximate its actual value, the amount taken into
account under subparagraph (A) shall be the greater of
the amount of the insurance company liability or the
insurance company reserve with respect to such policy
or contract (as determined for purposes of the annual
statement approved by the National Association of
Insurance Commissioners) or shall be such other amount
as is determined by the Secretary.
* * * * * * *
SEC. 265. EXPENSES AND INTEREST RELATING TO TAX-EXEMPT INCOME.
(a) General Rule.--No deduction shall be allowed for--
(1) * * *
(2) Interest.--Interest on indebtedness incurred or
continued to purchase or carry obligations the interest
on which is wholly exempt from the taxes imposed by
this subtitle, or to purchase or carry obligations or
shares, or to make deposits, to the extent the interest
thereon is excludable from gross income under section
116.
* * * * * * *
Subchapter C--Corporate Distributions and Adjustments
* * * * * * *
PART II--CORPORATE LIQUIDATIONS
* * * * * * *
Subpart A--Effects on Recipients
* * * * * * *
SEC. 332. COMPLETE LIQUIDATIONS OF SUBSIDIARIES.
(a) * * *
(b) Liquidations to Which Section Applies.--For purposes of
[subsection (a)] this section, a distribution shall be
considered to be in complete liquidation only if--
(1) the corporation receiving such property was, on
the date of the adoption of the plan of liquidation,
and has continued to be at all times until the receipt
of the property, the owner of stock (in such other
corporation) meeting the requirements of section
1504(a)(2); and either
* * * * * * *
(c) Deductible Liquidating Distributions of Regulated
Investment Companies and Real Estate Investment Trusts.--If a
corporation receives a distribution from a regulated investment
company or a real estate investment trust which is considered
under subsection (b) as being in complete liquidation of such
company or trust, then, notwithstanding any other provision of
this chapter, such corporation shall recognize and treat as a
dividend from such company or trust an amount equal to the
deduction for dividends paid allowable to such company or trust
by reason of such distribution.
* * * * * * *
SEC. 334. BASIS OF PROPERTY RECEIVED IN LIQUIDATIONS.
(a) * * *
(b) Liquidation of Subsidiary.--
(1) In general.--If property is received by a
corporate distributee in a distribution in a complete
liquidation to which [section 332(a)] section 332
applies (or in a transfer described in section
337(b)(1)), the basis of such property in the hands of
such distributee shall be the same as it would be in
the hands of the transferor; except that, in any case
in which gain or loss is recognized by the liquidating
corporation with respect to such property, the basis of
such property in the hands of such distributee shall be
the fair market value of the property at the time of
the distribution.
* * * * * * *
PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS
* * * * * * *
Subpart A--Corporate Organizations
* * * * * * *
SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.
(a) * * *
* * * * * * *
(c) Special Rules Where Distribution to Shareholders.--
(1) * * *
(2) Special rule for section 355.--If the
requirements of section 355 (or so much of section 356
as relates to section 355) are met with respect to a
distribution described in paragraph (1), then, solely
for purposes of determining the tax treatment of the
transfers of property to the controlled corporation by
the distributing corporation, the fact that the
shareholders of the distributing corporation dispose of
part or all of the distributed stock, or the fact that
the corporation whose stock was distributed issues
additional stock, shall not be taken into account in
determining control for purposes of this section.
* * * * * * *
Subpart D--Special Rule; Definitions
* * * * * * *
SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.
(a) Reorganization.--
(1) * * *
(2) Special rules relating to paragraph (1).--
(A) * * *
* * * * * * *
(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 (or so much of section
356 as relates to section 355) are met,
the fact that the shareholders of the
distributing corporation dispose of
part or all of the distributed stock,
or the fact that the corporation whose
stock was distributed issues additional
stock, shall not be taken into account.
* * * * * * *
Subchapter E--Accounting Periods and Methods of Accounting
* * * * * * *
PART II--METHODS OF ACCOUNTING
* * * * * * *
Subpart C--Taxable Year for Which Deductions Taken
* * * * * * *
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
(a) * * *
* * * * * * *
(i) $25,000 Offset for Rental Real Estate Activities.--
(1) * * *
* * * * * * *
(3) Phase-out of exemption.--
(A) * * *
* * * * * * *
(C) Exception for low-income housing [credit]
and commercial revitalization credits.--
Subparagraph (A) shall not apply to any portion
of the passive activity credit for any taxable
year which is attributable to any credit
determined under section 42 or section 1400K.
* * * * * * *
Subchapter F--Exempt Organizations
* * * * * * *
PART VIII--HIGHER EDUCATION SAVINGS ENTITIES
Sec. 529. Qualified [State] tuition programs.
* * * * * * *
[SEC. 529. QUALIFIED STATE TUITION PROGRAMS.]
SEC. 529. QUALIFIED TUITION PROGRAMS.
(a) General Rule.--A [qualified State tuition program]
qualified tuition program shall be exempt from taxation under
this subtitle. Notwithstanding the preceding sentence, such
program shall be subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business income of
charitable organizations).
(b) Qualified State Tuition Program.--For purposes of this
section--
(1) In general.--The term ``[qualified State tuition
program] qualified tuition program'' means a program
established and maintained by a State or agency or
instrumentality thereof or by 1 or more eligible
educational institutions--
(A) * * *
* * * * * * *
(2) Cash contributions.--A program shall not be
treated as a [qualified State tuition program]
qualified tuition program unless it provides that
purchases or contributions may only be made in cash.
(3) Refunds.--A program shall not be treated as a
[qualified State tuition program] qualified tuition
program unless it imposes a more than de minimis
penalty on any refund of earnings from the account
which are not--
(A) used for qualified higher education
expenses of the designated beneficiary,
(B) made on account of the death or
disability of the designated beneficiary, or
(C) made on account of a scholarship (or
allowance or payment described in section
135(d)(1)(B) or (C)) received by the designated
beneficiary to the extent the amount of the
refund does not exceed the amount of the
scholarship, allowance, or payment.
(4) Separate accounting.--A program shall not be
treated as a [qualified State tuition program]
qualified tuition program unless it provides separate
accounting for each designated beneficiary.
(5) No investment direction.--A program shall not be
treated as a [qualified State tuition program]
qualified tuition program unless it provides that any
contributor to, or designated beneficiary under, such
program may not directly or indirectly direct the
investment of any contributions to the program (or any
earnings thereon).
(6) No pledging of interest as security.--A program
shall not be treated as a [qualified State tuition
program] qualified tuition program if it allows any
interest in the program or any portion thereof to be
used as security for a loan.
(7) Prohibition on excess contributions.--A program
shall not be treated as a [qualified State tuition
program] qualified tuition program unless it provides
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.
(c) Tax Treatment of Designated Beneficiaries and
Contributors.--
(1) In general.--Except as otherwise provided in this
subsection, no amount shall be includible in gross
income of--
(A) a designated beneficiary under a
[qualified State tuition program] qualified
tuition program, or
(B) a contributor to such program on behalf
of a designated beneficiary,
with respect to any distribution or earnings under such
program.
(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.
(3) Distributions.--
(A) In general.--Any distribution under a
[qualified State tuition program] qualified
tuition program shall be includible in the
gross income of the distributee in the manner
as provided under section 72 to the extent not
excluded from gross income under any other
provision of this chapter.
(B) In-kind distributions.--Any benefit
furnished to a designated beneficiary under a
[qualified State tuition program] qualified
tuition program shall be treated as a
distribution to the beneficiary.
(C) Change in beneficiaries.--
(i) Rollovers.--Subparagraph (A)
shall not apply to that portion of any
distribution which, within 60 days of
such distribution, is transferred to
the credit of another designated
beneficiary under a [qualified State
tuition program] qualified tuition
program who is a member of the family
of the designated beneficiary with
respect to which the distribution was
made.
(ii) Change in designated
beneficiaries.--Any change in the
designated beneficiary of an interest
in a [qualified State tuition program]
qualified tuition program shall not be
treated as a distribution for purposes
of subparagraph (A) if the new
beneficiary is a member of the family
of the old beneficiary.
(D) Operating rules.--For purposes of
applying section 72--
(i) to the extent provided by the
Secretary, all [qualified State tuition
programs] qualified tuition programs of
which an individual is a designated
beneficiary shall be treated as one
program,
(ii) all distributions during a
taxable year shall be treated as one
distribution, and
(iii) the value of the contract,
income on the contract, and investment
in the contract shall be computed as of
the close of the calendar year in which
the taxable year begins.
* * * * * * *
(d) Reports.--Each officer or employee having control of the
[qualified State tuition program] qualified 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.
(e) Other Definitions and Special Rules.--For purposes of
this section--
(1) Designated beneficiary.--The term ``designated
beneficiary'' means--
(A) the individual designated at the
commencement of participation in the [qualified
State tuition program] qualified tuition
program as the beneficiary of amounts paid (or
to be paid) to the program,
(B) in the case of a change in beneficiaries
described in subsection (c)(3)(C), the
individual who is the new beneficiary, and
(C) in the case of an interest in a qualified
[State tuition program] qualified tuition
program purchased by a State or local
government (or agency or instrumentality
thereof) or an organization described in
section 501(c)(3) and exempt from taxation
under section 501(a) as part of a scholarship
program operated by such government or
organization, the individual receiving such
interest as a scholarship.
* * * * * * *
(3) Qualified higher education expenses.--
(A) * * *
(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]
qualified 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.
(4) Application of section 514.--An interest in a
[qualified State tuition program] qualified tuition
program shall not be treated as debt for purposes of
section 514.
(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.
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) * * *
(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] qualified
tuition program (as defined in section 529(b)
for the benefit of the beneficiary of the
account.
* * * * * * *
Subchapter H--Banking Institutions
* * * * * * *
PART I--RULES OF GENERAL APPLICATION TO BANKING INSTITUTIONS
* * * * * * *
SEC. 584. COMMON TRUST FUNDS.
(a) * * *
* * * * * * *
(c) Income of Participants in Fund.--Each participant in the
common trust fund in computing its taxable income shall
include, whether or not distributed and whether or not
distributable--
(1) * * *
* * * * * * *
The proportionate share of each participant in the amount of
dividends or interest received by the common trust fund and to
which section 116 applies shall be considered for purposes of
such section as having been received by such participant.
* * * * * * *
Subchapter J--Estates, Trusts, Beneficiaries, and Decedents
* * * * * * *
PART I--ESTATES, TRUSTS, AND BENEFICIARIES
* * * * * * *
Subpart A--General Rules for Taxation of Estates and Trusts
* * * * * * *
SEC. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D.
(a) Distributable Net Income.--For purposes of this part, the
term ``distributable net income'' means, with respect to any
taxable year, the taxable income of the estate or trust
computed with the following modifications--
(1) * * *
* * * * * * *
(7) Dividends or interest.--There shall be included
the amount of any dividends or interest excluded from
gross income pursuant to section 116.
[(7)] (8) Abusive transactions.--The Secretary shall
prescribe such regulations as may be necessary or
appropriate to carry out the purposes of this part,
including regulations to prevent avoidance of such
purposes.
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
* * * * * * *
PART II--REAL ESTATE INVESTMENT TRUSTS
* * * * * * *
SEC. 854. LIMITATIONS APPLICABLE TO DIVIDENDS RECEIVED FROM REGULATED
INVESTMENT COMPANY.
(a) Capital Gain Dividend.--For purposes of section 116
(relating to partial exclusion of dividends and interest
received by individuals) and section 243 (relating to
deductions for dividends received by corporations), a capital
gain dividend (as defined in section 852(b)(3)) received from a
regulated investment company shall not be considered as a
dividend.
* * * * * * *
SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND THEIR
BENEFICIARIES.
(a) * * *
* * * * * * *
[(c) Restrictions Applicable to Dividends Received From Real
Estate Investment Trusts.--For purposes of section 243
(relating to deductions for dividends received by
corporations), a dividend received from a real estate
investment trust which meets the requirements of this part
shall not be considered as a dividend.]
(c) Restrictions Applicable to Dividends Received From Real
Estate Investment Trusts.--
(1) Treatment for section 116.--For purposes of
section 116 (relating to partial exclusion of dividends
and interest received by individuals), a capital gain
dividend (as defined in subsection (b)(3)(C)) received
from a real estate investment trust which meets the
requirements of this part shall not be considered as a
dividend.
(2) Treatment for section 243.--For purposes of
section 243 (relating to deductions for dividends
received by corporations), a dividend received from a
real estate investment trust which meets the
requirements of this part shall not be considered as a
dividend.
* * * * * * *
SEC. 873. DEDUCTIONS.
(a) * * *
(b) Exceptions.--The following deductions shall be allowed
whether or not they are connected with income which is
effectively connected with the conduct of a trade or business
within the United States:
[(1) Losses.--The deduction for losses allowed by
section 165(c)(3), but only if the loss is of property
located within the United States.]
(1) Losses.--The deduction allowed by section 165 for
casualty or theft losses described in paragraph (2) or
(3) of section 165(c), but only if the loss is of
property located within the United States.
* * * * * * *
Subchapter N--Tax Bases on Income From Sources Within or Without the
United States
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
* * * * * * *
Subpart F--Controlled of Foreign Corporations
* * * * * * *
SEC. 953. INSURANCE INCOME.
[(a) General Rule.--For purposes of section 952(a)(1), the
term ``insurance income'' means any income which--
[(1) is attributable to the issuing (or reinsuring)
of any insurance or annuity contract--
[(A) in connection with property in,
liability arising out of activity in, or in
connection with the lives or health of
residents of, a country other than the country
under the laws of which the controlled foreign
corporation is created or organized, or
[(B) in connection with risks not described
in subparagraph (A) as the result of any
arrangement whereby another corporation
receives a substantially equal amount of
premiums or other consideration in respect of
issuing (or reinsuring) a contract described in
subparagraph (A), and
[(2) would (subject to the modifications provided by
paragraphs (1) and (2) of subsection (b)) be taxed
under subchapter L of this chapter if such income were
the income of a domestic insurance company.]
(a) Insurance Income.--
(1) In general.--For purposes of section 952(a)(1),
the term ``insurance income'' means any income which--
(A) is attributable to the issuing (or
reinsuring) of an insurance or annuity
contract, and
(B) would (subject to the modifications
provided by subsection (b)) be taxed under
subchapter L of this chapter if such income
were the income of a domestic insurance
company.
(2) Exception.--Such term shall not include any
exempt insurance income (as defined in subsection (e)).
(b) Special Rules.--For purposes of subsection (a)--
(1) * * *
* * * * * * *
(3) Reserves for any insurance or annuity contract
shall be determined in the same manner as under section
954(i).
[(3)] (4) All items of income, expenses, losses, and
deductions shall be properly allocated or apportioned
under regulations prescribed by the Secretary.
* * * * * * *
(e) Exempt Insurance Income.--For purposes of this section--
(1) Exempt insurance income defined.--
(A) In general.--The term ``exempt insurance
income'' means income derived by a qualifying
insurance company which--
(i) is attributable to the issuing
(or reinsuring) of an exempt contract
by such company or a qualifying
insurance company branch of such
company, and
(ii) is treated as earned by such
company or branch in its home country
for purposes of such country's tax
laws.
(B) Exception for certain arrangements.--Such
term shall not include income attributable to
the issuing (or reinsuring) of an exempt
contract as the result of any arrangement
whereby another corporation receives a
substantially equal amount of premiums or other
consideration in respect of issuing (or
reinsuring) a contract which is not an exempt
contract.
(C) Determinations made separately.--For
purposes of this subsection and section 954(i),
the exempt insurance income and exempt
contracts of a qualifying insurance company or
any qualifying insurance company branch of such
company shall be determined separately for such
company and each such branch by taking into
account--
(i) in the case of the qualifying
insurance company, only items of
income, deduction, gain, or loss, and
activities of such company not properly
allocable or attributable to any
qualifying insurance company branch of
such company, and
(ii) in the case of a qualifying
insurance company branch, only items of
income, deduction, gain, or loss and
activities properly allocable or
attributable to such unit.
(2) Exempt contract.--
(A) In general.--The term ``exempt contract''
means an insurance or annuity contract issued
or reinsured by a qualifying insurance company
or qualifying insurance company branch in
connection with property in, liability arising
out of activity in, or the lives or health of
residents of, a country other than the United
States.
(B) Minimum home country income required.--
(i) In general.--No contract of a
qualifying insurance company or of a
qualifying insurance company branch
shall be treated as an exempt contract
unless such company or branch derives
more than 30 percent of its net written
premiums from exempt contracts
(determined without regard to this
subparagraph)--
(I) which cover applicable
home country risks, and
(II) with respect to which no
policyholder, insured,
annuitant, or beneficiary is a
related person (as defined in
section 954(d)(3)).
(ii) Applicable home country risks.--
The term ``applicable home country
risks'' means risks in connection with
property in, liability arising out of
activity in, or the lives or health of
residents of, the home country of the
qualifying insurance company or
qualifying insurance company branch, as
the case may be, issuing or reinsuring
the contract covering the risks.
(C) Substantial activity requirements for
cross border risks.--A contract issued by a
qualifying insurance company or qualifying
insurance company branch which covers risks
other than applicable home country risks (as
defined in subparagraph (B)(ii)) shall not be
treated as an exempt contract unless such
company or branch, as the case may be--
(i) conducts substantial activity
with respect to an insurance business
in its home country, and
(ii) performs in its home country
substantially all of the activities
necessary to give rise to the income
generated by such contract.
(3) Qualifying insurance company.--The term
``qualifying insurance company'' means any controlled
foreign corporation which--
(A) is subject to regulation as an insurance
(or reinsurance) company by its home country,
and is licensed, authorized, or regulated by
the applicable insurance regulatory body for
its home country to sell insurance,
reinsurance, or annuity contracts to persons
other than related persons (within the meaning
of section 954(d)(3)) in such home country,
(B) derives more than 50 percent of its
aggregate net written premiums from the
issuance or reinsurance by suchcontrolled
foreign corporation and each of its qualifying insurance company
branches of contracts--
(i) covering applicable home country
risks (as defined in paragraph (2)) of
such corporation or branch, as the case
may be, and
(ii) with respect to which no
policyholder, insured, annuitant, or
beneficiary is a related person (as
defined in section 954(d)(3)),
except that in the case of a branch, such
premiums shall only be taken into account to
the extent such premiums are treated as earned
by such branch in its home country for purposes
of such country's tax laws, and
(C) is engaged in the insurance business and
would be subject to tax under subchapter L if
it were a domestic corporation.
(4) Qualifying insurance company branch.--The term
``qualifying insurance company branch'' means a
qualified business unit (within the meaning of section
989(a)) of a controlled foreign corporation if--
(A) such unit is licensed, authorized, or
regulated by the applicable insurance
regulatory body for its home country to sell
insurance, reinsurance, or annuity contracts to
persons other than related persons (within the
meaning of section 954(d)(3)) in such home
country, and
(B) such controlled foreign corporation is a
qualifying insurance company, determined under
paragraph (3) as if such unit were a qualifying
insurance company branch.
(5) Life insurance or annuity contract.--For purposes
of this section and section 954, the determination of
whether a contract issued by a controlled foreign
corporation or a qualified business unit (within the
meaning of section 989(a)) is a life insurance contract
or an annuity contract shall be made without regard to
sections 72(s), 101(f), 817(h), and 7702 if--
(A) such contract is regulated as a life
insurance or annuity contract by the
corporation's or unit's home country, and
(B) no policyholder, insured, annuitant, or
beneficiary with respect to the contract is a
United States person.
(6) Home country.--For purposes of this subsection,
except as provided in regulations--
(A) Controlled foreign corporation.--The term
``home country'' means, with respect to a
controlled foreign corporation, the country in
which such corporation is created or organized.
(B) Qualified business unit.--The term ``home
country'' means, with respect to a qualified
business unit (as defined in section 989(a)),
the country in which the principal office of
such unit is located and in which such unit is
licensed, authorized, or regulated by the
applicable insurance regulatory body to sell
insurance, reinsurance, or annuity contracts to
persons other than related persons (as defined
in section 954(d)(3)) in such country.
(7) Anti-abuse rules.--For purposes of applying this
subsection and section 954(i)--
(A) the rules of section 954(h)(7) (other
than subparagraph (B) thereof) shall apply,
(B) there shall be disregarded any item of
income, gain, loss, or deduction of, or derived
from, an entity which is not engaged in regular
and continuous transactions with persons which
are not related persons,
(C) there shall be disregarded any change in
the method of computing reserves a principal
purpose of which is the acceleration or
deferral of any item in order to claim the
benefits of this subsection or section 954(i),
(D) a contract of insurance or reinsurance
shall not be treated as an exempt contract (and
premiums from such contract shall not be taken
into account for purposes of paragraph (2)(B)
or (3)) if--
(i) any policyholder, insured,
annuitant, or beneficiary is a resident
of the United States and such contract
was marketed to such resident and was
written to cover a risk outside the
United States, or
(ii) the contract covers risks
located within and without the United
States and the qualifying insurance
company or qualifying insurance company
branch does not maintain such
contemporaneous records, and file such
reports, with respect to such contract
as the Secretary may require,
(E) the Secretary may prescribe rules for the
allocation of contracts (and income from
contracts) among 2 or more qualifying insurance
company branches of a qualifying insurance
company in order to clearly reflect the income
of such branches, and
(F) premiums from a contract shall not be
taken into account for purposes of paragraph
(2)(B) or (3) if such contract reinsures a
contract issued or reinsured by a related
person (as defined in section 954(d)(3)).
For purposes of subparagraph (D), the determination of
where risks are located shall be made under the
principles of section 953.
(8) Coordination with subsection (c).--In determining
insurance income for purposes of subsection (c), exempt
insurance income shall not include income derived from
exempt contracts which cover risks other than
applicable home country risks.
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection and section 954(i).
(10) Application.--This subsection and section 954(i)
shall apply only to the first taxable year of a foreign
corporation beginning after December 31, 1998, and
before January 1, 2000, and to taxable years of United
States shareholders with or within which such taxable
year of such foreign corporation ends.
(11) Cross reference.--
For income exempt from foreign personal holding company
income, see section 954(i).
SEC. 954. FOREIGN BASE COMPANY INCOME.
(a) * * *
* * * * * * *
(c) Foreign Personal Holding Company Income.--
(1) In general.--For purposes of subsection (a)(1),
the term ``foreign personal holding company income''
means the portion of the gross income which consists
of:
(A) Dividends, etc.--Dividends, interest,
royalties, rents, and annuities.
(B) Certain property transactions.--The
excess of gains over losses from the sale or
exchange of property--
(i) which gives rise to income
described in subparagraph (A) (after
application of paragraph (2)(A)) other
than property which gives rise to
income not treated as foreign personal
holding company income by reason of
subsection (h) or (i) for the taxable
year,
(ii) which is an interest in a trust,
partnership, or REMIC, or
(iii) which does not give rise to any
income.
Gains and losses from the sale or exchange of
any property which, in the hands of the
controlled foreign corporation, is property
described in section 1221(1) shall not be taken
into account under this subparagraph.
* * * * * * *
(2) Exception for certain amounts.--
(A) * * *
* * * * * * *
[(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) Exception for dealers.--Except as
provided by regulations, in the case of a
regular dealer in property which is property
described in 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 company income--
(i) any item of income, gain,
deduction, or loss (other than any item
described in subparagraph (A), (E), or
(G) of paragraph (1)) from any
transaction (including hedging
transactions) entered into in the
ordinary course of such dealer's trade
or business as such a dealer, and
(ii) if such dealer is a dealer in
securities (within the meaning of
section 475), any interest or dividend
or equivalent amount described in
subparagraph (E) or (G) of paragraph
(1) from any transaction (including any
hedging transaction or transaction
described in section 956(c)(2)(J))
entered into in the ordinary course of
such dealer's trade or business as such
a dealer in securities, but only if the
income from the transaction is
attributable to activities of the
dealer in the country under the laws of
which the dealer is created or
organized (or in the case of a
qualified business unit described in
section 989(a), is attributable to
activities of the unit in the country
in which the unit both maintains its
principal office and conducts
substantial business activity).
* * * * * * *
(e) Foreign Base Company Services Income.--
(1) * * *
(2) Exception.--Paragraph (1) shall not apply to
income derived in connection with the performance of
services which are directly related to--
(A) the sale or exchange by the controlled
foreign corporation of property manufactured,
produced, grown, or extracted by it and which
are performed before the time of the sale or
exchange, or
(B) an offer or effort to sell or exchange
such property[, or].
[(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.]
Paragraph (1) shall also not apply to income which is
exempt insurance income (as defined in section 953(e))
or which is not treated as foreign personal holding
income by reason of subsection (c)(2)(C)(ii), (h), or
(i).
* * * * * * *
[(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 0premiums (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 the enactment
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 respect to 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 in the 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 company 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.]
(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 qualified banking or financing income of an
eligible controlled foreign corporation.
(2) Eligible controlled foreign corporation.--For
purposes of this subsection--
(A) In general.--The term ``eligible
controlled foreign corporation'' means a
controlled foreign corporation which--
(i) is predominantly engaged in the
active conduct of a banking, financing,
or similar business, and
(ii) conducts substantial activity
with respect to such business.
(B) Predominantly engaged.--A controlled
foreign corporation shall be treated as
predominantly engaged in the active conduct of
a banking, financing, or similar business if--
(i) more than 70 percent of the gross
income of the controlled foreign
corporation is derived directly from
the active and regular conduct of a
lending or finance business from
transactions with customers which are
not related persons,
(ii) it is engaged in the active
conduct of a banking business and is an
institution licensed to do business as
a bank in the United States (or is any
other corporation not so licensed which
is specified by the Secretary in
regulations), or
(iii) it is engaged in the active
conduct of a securities business and is
registered as a securities broker or
dealer under section 15(a) of the
Securities Exchange Act of 1934 or is
registered as a Government securities
broker or dealer under section 15C(a)
of such Act (or is any other
corporation not so registered which is
specified by the Secretary in
regulations).
(3) Qualified banking or financing income.--For
purposes of this subsection--
(A) In general.--The term ``qualified banking
or financing income'' means income of an
eligible controlled foreign corporation which--
(i) is derived in the active conduct
of a banking, financing, or similar
business by--
(I) such eligible controlled
foreign corporation, or
(II) a qualified business
unit of such eligible
controlled foreign corporation,
(ii) is derived from 1 or more
transactions--
(I) with customers located in
a country other than the United
States, and
(II) substantially all of the
activities in connection with
which are conducted directly by
the corporation or unit in its
home country, and
(iii) is treated as earned by such
corporation or unit in its home country
for purposes of such country's tax
laws.
(B) Limitation on nonbanking businesses.--No
income of an eligible controlled foreign
corporation not described in clause (ii) or
(iii) of paragraph (2)(B) (or of a qualified
business unit of such corporation) shall be
treated as qualified banking or financing
income unless more than 30 percent of such
corporation's or unit's gross income is derived
directly from the active and regular conduct of
a lending or finance business from transactions
with customers which are not related persons
and which are located within such corporation's
or unit's home country.
(C) Substantial activity requirement for
cross border income.--The term ``qualified
banking or financing income'' shall not include
income derived from 1 or more transactions with
customers located in a country other than the
home country of the eligible controlled foreign
corporation or a qualified business unit of
such corporation unless such corporation or
unit conducts substantial activity with respect
to a banking, financing, or similar business in
its home country.
(D) Determinations made separately.--For
purposes of this paragraph, the qualified
banking or financing income of an eligible
controlled foreign corporation and each
qualified business unit of such corporation
shall be determined separately for such
corporation and each such unit by taking into
account--
(i) in the case of the eligible
controlled foreign corporation, only
items of income, deduction, gain, or
loss and activities of such corporation
not properly allocable or attributable
to any qualified business unit of such
corporation, and
(ii) in the case of a qualified
business unit, only items of income,
deduction, gain, or loss and activities
properly allocable or attributable to
such unit.
(4) Lending or finance business.--For purposes of
this subsection, the term ``lending or finance
business'' means the business of--
(A) making loans,
(B) purchasing or discounting accounts
receivable, notes, or installment obligations,
(C) engaging in leasing (including entering
into leases and purchasing, servicing, and
disposing of leases and leased assets),
(D) issuing letters of credit or providing
guarantees,
(E) providing charge and credit card
services, or
(F) rendering services or making facilities
available in connection with activities
described in subparagraphs (A) through (E)
carried on by--
(i) the corporation (or qualified
business unit) rendering services or
making facilities available, or
(ii) another corporation (or
qualified business unit of a
corporation) which is a member of the
same affiliated group (as defined in
section 1504, but determined without
regard to section 1504(b)(3)).
(5) Other definitions.--For purposes of this
subsection--
(A) Customer.--The term ``customer'' means,
with respect to any controlled foreign
corporation or qualified business unit, any
person which has a customer relationship with
such corporation or unit and which is acting in
its capacity as such.
(B) Home country.--Except as provided in
regulations--
(i) Controlled foreign corporation.--
The term ``home country'' means, with
respect to any controlled foreign
corporation, the country under the laws
of which the corporation was created or
organized.
(ii) Qualified business unit.--The
term ``home country'' means, with
respect to any qualified business unit,
the country in which such unit
maintains its principal office.
(C) Located.--The determination of where a
customer is located shall be made under rules
prescribed by the Secretary.
(D) Qualified business unit.--The term
``qualified business unit'' has the meaning
given such term by section 989(a).
(E) Related person.--The term ``related
person'' has the meaning given such term by
subsection (d)(3).
(6) Coordination with exception for dealers.--
Paragraph (1) shall not apply to income described in
subsection (c)(2)(C)(ii) of a dealer in securities
(within the meaning of section 475) which is an
eligible controlled foreign corporation described in
paragraph (2)(B)(iii).
(7) Anti-abuse rules.--For purposes of applying this
subsection and subsection (c)(2)(C)(ii)--
(A) 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
isqualifying income or gain for the exclusion under this section,
including any 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,
(B) there shall be disregarded any item of
income, gain, loss, or deduction of an entity
which is not engaged in regular and continuous
transactions with customers which are not
related persons,
(C) there shall be disregarded any item of
income, gain, loss, or deduction with respect
to any transaction or series of transactions
utilizing, or doing business with--
(i) one or more entities in order to
satisfy any home country requirement
under this subsection, or
(ii) a special purpose entity or
arrangement, including a
securitization, financing, or similar
entity or arrangement,
if one of the principal purposes of such
transaction or series of transactions is
qualifying income or gain for the exclusion
under this subsection, and
(D) a related person, an officer, a director,
or an employee with respect to any controlled
foreign corporation (or qualified business
unit) which would otherwise be treated as a
customer of such corporation or unit with
respect to any transaction shall not be so
treated if a principal purpose of such
transaction is to satisfy any requirement of
this subsection.
(8) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection, subsection
(c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last
sentence of subsection (e)(2).
(9) Application.--This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection
(e)(2) shall apply only to the first taxable year of a
foreign corporation beginning after December 31, 1998,
and before January 1, 2000, and to taxable years of
United States shareholders with or within which such
taxable year of such foreign corporation ends.
(i) Special Rule for Income Derived in the Active Conduct of
Insurance Business.--
(1) In general.--For purposes of subsection (c)(1),
foreign personal holding company income shall not
include qualified insurance income of a qualifying
insurance company.
(2) Qualified insurance income.--The term ``qualified
insurance income'' means income of a qualifying
insurance company which is--
(A) 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 or a qualifying insurance company
branch of its reserves allocable to exempt
contracts or of 80 percent of its unearned
premiums from exempt contracts (as both are
determined in the manner prescribed under
paragraph (4)), or
(B) 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 or a
qualifying insurance company branch of an
amount of its assets allocable to exempt
contracts equal to--
(i) in the case of 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 life insurance or
annuity contracts, 10 percent of the
reserves described in subparagraph (A)
for such contracts.
(3) Principles for determining insurance income.--
Except as provided by the Secretary, for purposes of
subparagraphs (A) and (B) of paragraph (2)--
(A) in the case of any contract which is a
separate account-type contract (including any
variable contract not meeting the requirements
of section 817), income credited under such
contract shall be allocable only to such
contract, and
(B) income not allocable under subparagraph
(A) shall be allocated ratably among contracts
not described in subparagraph (A).
(4) Methods for determining unearned premiums and
reserves.--For purposes of paragraph (2)(A)--
(A) Property and casualty contracts.--The
unearned premiums and reserves of a qualifying
insurance company or a qualifying insurance
company branch with respect to property,
casualty, or health insurance contracts shall
be determined using the same methods and
interest rates which would be used if such
company or branch were subject to tax under
subchapter L, except that--
(i) the interest rate determined for
the functional currency of the company
or branch, and which, except as
provided by the Secretary, is
calculated in the same manner as the
Federal mid-term rate under section
1274(d), shall be substituted for the
applicable Federal interest rate, and
(ii) such company or branch shall use
the appropriate foreign loss payment
pattern.
(B) Life insurance and annuity contracts.--
The amount of the reserve of a qualifying
insurance company or qualifying insurance
company branch for any life insurance or
annuity contract shall be equal to the greater
of--
(i) the net surrender value of such
contract (as defined in section
807(e)(1)(A)), or
(ii) the reserve determined under
paragraph (5).
(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 statement
reserves (less any catastrophe, deficiency,
equalization, or similar reserves).
(5) Amount of reserve.--The amount of the reserve
determined under this paragraph with respect to any
contract shall be determined in the same manner as it
would be determinedif the qualifying insurance company
or qualifying insurance company branch were subject to tax under
subchapter L, except that in applying such subchapter--
(A) the interest rate determined for the
functional currency of the company or branch,
and which, except as provided by the Secretary,
is calculated in the same manner as the Federal
mid-term rate under section 1274(d), shall be
substituted for the applicable Federal interest
rate,
(B) the highest assumed interest rate
permitted to be used in determining foreign
statement reserves shall be substituted for the
prevailing State assumed interest rate, and
(C) tables for mortality and morbidity which
reasonably reflect the current mortality and
morbidity risks in the company's or branch's
home country shall be substituted for the
mortality and morbidity tables otherwise used
for such subchapter.
The Secretary may provide that the interest rate and
mortality and morbidity tables of a qualifying
insurance company may be used for 1 or more of its
qualifying insurance company branches when appropriate.
(6) Definitions.--For purposes of this subsection,
any term used in this subsection which is also used in
section 953(e) shall have the meaning given such term
by section 953.
* * * * * * *
Subchapter X--Renewal Communities
Part I. Designation.
Part II. Renewal community capital gain; renewal community
business.
Part III. Family development accounts.
Part IV. Additional incentives.
PART I--DESIGNATION
Sec. 1400E. Designation of renewal communities.
SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.
(a) Designation.--
(1) Definitions.--For purposes of this title, the
term ``renewal community'' means any area--
(A) which is nominated by one or more local
governments and the State or States in which it
is located for designation as a renewal
community (hereinafter in this section referred
to as a ``nominated area''), and
(B) which the Secretary of Housing and Urban
Development designates as a renewal community,
after consultation with--
(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury; the
Director of the Office of Management
and Budget; and the Administrator of
the Small Business Administration, and
(ii) in the case of an area on an
Indian reservation, the Secretary of
the Interior.
(2) Number of designations.--
(A) In general.--The Secretary of Housing and
Urban Development may designate not more than
20 nominated areas as renewal communities.
(B) Minimum designation in rural areas.--Of
the areas designated under paragraph (1), at
least 4 must be areas--
(i) which are within a local
government jurisdiction or
jurisdictions with a population of less
than 50,000,
(ii) which are outside of a
metropolitan statistical area (within
the meaning of section 143(k)(2)(B)),
or
(iii) which are determined by the
Secretary of Housing and Urban
Development, after consultation with
the Secretary of Commerce, to be rural
areas.
(3) Areas designated based on degree of poverty,
etc.--
(A) In general.--Except as otherwise provided
in this section, the nominated areas designated
as renewal communities under this subsection
shall be those nominated areas with the highest
average ranking with respect to the criteria
described in subparagraphs (B), (C), and (D) of
subsection (c)(3). For purposes of the
preceding sentence, an area shall be ranked
within each such criterion on the basis of the
amount by which the area exceeds such
criterion, with the area which exceeds such
criterion by the greatest amount given the
highest ranking.
(B) Exception where inadequate course of
action, etc.--An area shall not be designated
under subparagraph (A) if the Secretary of
Housing and Urban Development determines that
the course of action described in subsection
(d)(2) with respect to such area is inadequate.
(C) Priority for empowerment zones and
enterprise communities with respect to first
half of designations.-- With respect to the
first 10 designations made under this section--
(i) 10 shall be chosen from nominated
areas which are empowerment zones or
enterprise communities (and are
otherwise eligible for designation
under this section), and
(ii) of such 10, 2 shall be areas
described in paragraph (2)(B).
(4) Limitation on designations.--
(A) Publication of regulations.--The
Secretary of Housing and Urban Development
shall prescribe by regulation no later than 4
months after the date of the enactment of this
section, after consultation with the officials
described in paragraph (1)(B)--
(i) the procedures for nominating an
area under paragraph (1)(A),
(ii) the parameters relating to the
size and population characteristics of
a renewal community, and
(iii) the manner in which nominated
areas will be evaluated based on the
criteria specified in subsection (d).
(B) Time limitations.--The Secretary of
Housing and Urban Development may designate
nominated areas as renewal communities only
during the 24-month period beginning on the
first day of the first month following the
month in which the regulations described in
subparagraph (A) are prescribed.
(C) Procedural rules.--The Secretary of
Housing and Urban Development shall not make
any designation of a nominated area as a
renewal community under paragraph (2) unless--
(i) the local governments and the
States in which the nominated area is
located have the authority--
(I) to nominate such area for
designation as a renewal
community,
(II) to make the State and
local commitments described in
subsection (d), and
(III) to provide assurances
satisfactory to the Secretary
of Housing and Urban
Development that such
commitments will be fulfilled,
(ii) a nomination regarding such area
is submitted in such a manner and in
such form, and contains such
information, as the Secretary of
Housing and Urban Development shall by
regulation prescribe, and
(iii) the Secretary of Housing and
Urban Development determines that any
information furnished is reasonably
accurate.
(5) Nomination process for indian reservations.--For
purposes of this subchapter, in the case of a nominated
area on an Indian reservation, the reservation
governing body (as determined by the Secretary of the
Interior) shall be treated as being both the State and
local governments with respect to such area.
(b) Period for Which Designation Is in Effect.--
(1) In general.--Any designation of an area as a
renewal community shall remain in effect during the
period beginning on the date of the designation and
ending on the earliest of--
(A) December 31, 2006,
(B) the termination date designated by the
State and local governments in their
nomination, or
(C) the date the Secretary of Housing and
Urban Development revokes such designation.
(2) Revocation of designation.--The Secretary of
Housing and Urban Development may revoke the
designation under this section of an area if such
Secretary determines that the local government or the
State in which the area is located--
(A) has modified the boundaries of the area,
or
(B) is not complying substantially with, or
fails to make progress in achieving, the State
or local commitments, respectively, described
in subsection (d).
(c) Area and Eligibility Requirements.--
(1) In general.--The Secretary of Housing and Urban
Development may designate a nominated area as a renewal
community under subsection (a) only if the area meets
the requirements of paragraphs (2) and (3) of this
subsection.
(2) Area requirements.--A nominated area meets the
requirements of this paragraph if--
(A) the area is within the jurisdiction of
one or more local governments,
(B) the boundary of the area is continuous,
and
(C) the area--
(i) has a population, of at least--
(I) 4,000 if any portion of
such area (other than a rural
area described in subsection
(a)(2)(B)(i)) is located within
a metropolitan statistical area
(within the meaning of section
143(k)(2)(B)) which has a
population of 50,000 or
greater, or
(II) 1,000 in any other case,
or
(ii) is entirely within an Indian
reservation (as determined by the
Secretary of the Interior).
(3) Eligibility requirements.--A nominated area meets
the requirements of this paragraph if the State and the
local governments in which it is located certify (and
the Secretary of Housing and Urban Development, after
such review of supporting data as he deems appropriate,
accepts such certification) that--
(A) the area is one of pervasive poverty,
unemployment, and general distress,
(B) the unemployment rate in the area, as
determined by the most recent available data,
was at least 1\1/2\ times the national
unemployment rate for the period to which such
data relate,
(C) the poverty rate for each population
census tract within the nominated area is at
least 20 percent, and
(D) in the case of an urban area, at least 70
percent of the households living in the area
have incomes below 80 percent of the median
income of households within the jurisdiction of
the local government (determined in the same
manner as under section 119(b)(2) of the
Housing and Community Development Act of 1974).
(4) Consideration of high incidence of crime.--The
Secretary of Housing and Urban Development shall take
into account, in selecting nominated areas for
designation as renewal communities under this section,
the extent to which such areas have a high incidence of
crime.
(5) Consideration of communities identified in gao
study.--The Secretary of Housing and Urban Development
shall take into account, in selecting nominated areas
for designation as renewal communities under this
section, if the area has census tracts identified in
the May 12, 1998, report of the General Accounting
Office regarding the identification of economically
distressed areas.
(d) Required State and Local Commitments.--
(1) In general.--The Secretary of Housing and Urban
Development may designate any nominated area as a
renewal community under subsection (a) only if--
(A) the local government and the State in
which the area is located agree in writing
that, during any period during which the area
is a renewal community, such governments will
follow a specified course of action which meets
the requirements of paragraph (2) and is
designed to reduce the various burdens borne by
employers or employees in such area, and
(B) the economic growth promotion
requirements of paragraph (3) are met.
(2) Course of action.--
(A) In general.--A course of action meets the
requirements of this paragraph if such course
of action is a written document, signed by a
State (or local government) and neighborhood
organizations, which evidences a partnership
between such State or government and community-
based organizations and which commits each
signatory to specific and measurable goals,
actions, and timetables. Such course of action
shall include at least five of the following:
(i) A reduction of tax rates or fees
applying within the renewal community.
(ii) An increase in the level of
efficiency of local services within the
renewal community.
(iii) Crime reduction strategies,
such as crime prevention (including the
provision of such services by
nongovernmental entities).
(iv) Actions to reduce, remove,
simplify, or streamline governmental
requirements applying within the
renewal community.
(v) Involvement in the program by
private entities, organizations,
neighborhood organizations, and
community groups, particularly those in
the renewal community, including a
commitment from such private entities
to provide jobs and job training for,
and technical, financial, or other
assistance to, employers, employees,
and residents from the renewal
community.
(vi) State or local income tax
benefits for fees paid for services
performed by a nongovernmental entity
which were formerly performed by a
governmental entity.
(vii) The gift (or sale at below fair
market value) of surplus real property
(such as land, homes, and commercial or
industrial structures) in the renewal
community to neighborhood
organizations, community development
corporations, or private companies.
(B) Recognition of past efforts.--For
purposes of this section, in evaluating the
course of action agreed to by any State or
local government, the Secretary of Housing and
Urban Development shall take into account the
past efforts of such State or local government
in reducing the various burdens borne by
employers and employees in the area involved.
(3) Economic growth promotion requirements.--The
economic growth promotion requirements of this
paragraph are met with respect to a nominated area if
the local government and the State in which such area
is located certify in writing that such government and
State, respectively, have repealed or otherwise will
not enforce within the area, if such area is designated
as a renewal community--
(A) licensing requirements for occupations
that do not ordinarily require a professional
degree,
(B) zoning restrictions on home-based
businesses which do not create a public
nuisance,
(C) permit requirements for street vendors
who do not create a public nuisance,
(D) zoning or other restrictions that impede
the formation of schools or child care centers,
and
(E) franchises or other restrictions on
competition for businesses providing public
services, including but not limited to
taxicabs, jitneys, cable television, or trash
hauling,
except to the extent that such regulation of businesses
and occupations is necessary for and well-tailored to
the protection of health and safety.
(e) Coordination With Treatment of Empowerment Zones and
Enterprise Communities.--For purposes of this title, if there
are in effect with respect to the same area both--
(1) a designation as a renewal community, and
(2) a designation as an empowerment zone or
enterprise community,
both of such designations shall be given full effect with
respect to such area.
(f) Definitions and Special Rules.--For purposes of this
subchapter--
(1) Governments.--If more than one government seeks
to nominate an area as a renewal community, any
reference to, or requirement of, this section shall
apply to all such governments.
(2) State.--The term ``State'' includes Puerto Rico,
the Virgin Islands of the United States, Guam, American
Samoa, the Northern Mariana Islands, and any other
possession of the United States.
(3) Local government.--The term ``local government''
means--
(A) any county, city, town, township, parish,
village, or other general purpose political
subdivision of a State,
(B) any combination of political subdivisions
described in subparagraph (A) recognized by the
Secretary of Housing and Urban Development, and
(C) the District of Columbia.
(4) Application of rules relating to census tracts
and census data.--The rules of sections 1392(b)(4) and
1393(a)(9) shall apply.
PART II--RENEWAL COMMUNITY CAPITAL GAIN; RENEWAL COMMUNITY BUSINESS
Sec. 1400F. Renewal community capital gain.
Sec. 1400G. Renewal community business defined.
SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.
(a) General Rule.--Gross income does not include any
qualified capital gain recognized on the sale or exchange of a
qualified community asset held for more than 5 years.
(b) Qualified Community Asset.--For purposes of this
section--
(1) In general.--The term ``qualified community
asset'' means--
(A) any qualified community stock,
(B) any qualified community partnership
interest, and
(C) any qualified community business
property.
(2) Qualified community stock.--
(A) In general.--Except as provided in
subparagraph (B), the term ``qualified
community stock'' means any stock in a domestic
corporation if--
(i) such stock is acquired by the
taxpayer after December 31, 1999, and
before January 1, 2007, at its original
issue (directly or through an
underwriter) from the corporation
solely in exchange for cash,
(ii) as of the time such stock was
issued, such corporation was a renewal
community business (or, in the case of
a new corporation, such corporation was
being organized for purposes of being a
renewal community business), and
(iii) during substantially all of the
taxpayer's holding period for such
stock, such corporation qualified as a
renewal community business.
(B) Redemptions.--A rule similar to the rule
of section 1202(c)(3) shall apply for purposes
of this paragraph.
(3) Qualified community partnership interest.--The
term ``qualified community partnership interest'' means
any interest in a partnership if--
(A) such interest is acquired by the taxpayer
after December 31, 1999, and before January 1,
2007,
(B) as of the time such interest was
acquired, such partnership was a renewal
community business (or, in the case of a new
partnership, such partnership was being
organized for purposes of being a renewal
community business), and
(C) during substantially all of the
taxpayer's holding period for such interest,
such partnership qualified as a renewal
community business.
A rule similar to the rule of paragraph (2)(B) shall
apply for purposes of this paragraph.
(4) Qualified community business property.--
(A) In general.--The term ``qualified
community 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,
1999, and before January 1, 2007,
(ii) the original use of such
property in the renewal community
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 renewal
community business of the taxpayer.
(B) Special rule for substantial
improvements.--The requirements of clauses (i)
and (ii) of subparagraph (A) shall be treated
as satisfied with respect to--
(i) property which is substantially
improved (within the meaning of section
1400B(b)(4)(B)(ii)) by the taxpayer
before January 1, 2007, and
(ii) any land on which such property
is located.
(c) Certain Rules To Apply.--Rules similar to the rules of
paragraphs (5), (6), and (7) of subsection (b), and subsections
(e), (f), and (g), of section 1400B shall apply for purposes of
this section.
SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.
For purposes of this part, the term ``renewal community
business'' means any entity or proprietorship which would be a
qualified business entity or qualified proprietorship under
section 1397B if--
(1) references to renewal communities were
substituted for references to empowerment zones in such
section; and
(2) ``80 percent'' were substituted for ``50
percent'' in subsections (b)(2) and (c)(1) of such
section.
PART III--FAMILY DEVELOPMENT ACCOUNTS
Sec. 1400H. Family development accounts for renewal community
EITC recipients.
Sec. 1400I. Demonstration program to provide matching
contributions to family development accounts in
certain renewal communities.
Sec. 1400J. Designation of earned income tax credit payments for
deposit to family development account.
SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RENEWAL COMMUNITY EITC
RECIPIENTS.
(a) Allowance of Deduction.--
(1) In general.--There shall be allowed as a
deduction--
(A) in the case of a qualified individual,
the amount paid in cash for the taxable year by
such individual to any family development
account for such individual's benefit, and
(B) in the case of any person other than a
qualified individual, the amount paid in cash
for the taxable year by such person to any
family development account for the benefit of a
qualified individual but only if the amount so
paid is designated for purposes of this section
by such individual.
No deduction shall be allowed under this paragraph for
any amount deposited in a family development account
under section 1400I (relating to demonstration program
to provide matching amounts in renewal communities).
(2) Limitation.--
(A) In general.--The amount allowable as a
deduction to any individual for any taxable
year by reason of paragraph (1)(A) shall not
exceed the lesser of--
(i) $2,000, or
(ii) an amount equal to the
compensation includible in the
individual's gross income for such
taxable year.
(B) Persons donating to family development
accounts of others.--The amount which may be
designated under paragraph (1)(B) by any
qualified individual for any taxable year of
such individual shall not exceed $1,000.
(3) Special rules for certain married individuals.--
Rules similar to rules of section 219(c) shall apply to
the limitation in paragraph (2)(A).
(4) Coordination with ira's.--No deduction shall be
allowed under this section to any person by reason of a
payment to an account for the benefit of a qualified
individual if any amount is paid into an individual
retirement account (including a Roth IRA) for the
benefit of such individual.
(5) Rollovers.--No deduction shall be allowed under
this section with respect to any rollover contribution.
(b) Tax Treatment of Distributions.--
(1) Inclusion of amounts in gross income.--Except as
otherwise provided in this subsection, any amount paid
or distributed out of a family development account
shall be included in gross income by the payee or
distributee, as the case may be.
(2) Exclusion of qualified family development
distributions.--Paragraph (1) shall not apply to any
qualified family development distribution.
(c) Qualified Family Development Distribution.--For purposes
of this section--
(1) In general.--The term ``qualified family
development distribution'' means any amount paid or
distributed out of a family development account which
would otherwise be includible in gross income, to the
extent that such payment or distribution is used
exclusively to pay qualified family development
expenses for the holder of the account or the spouse or
dependent (as defined in section 152) of such holder.
(2) Qualified family development expenses.--The term
``qualified family development expenses'' means any of
the following:
(A) Qualified higher education expenses.
(B) Qualified first-time homebuyer costs.
(C) Qualified business capitalization costs.
(D) Qualified medical expenses.
(E) Qualified rollovers.
(3) Qualified higher education expenses.--
(A) In general.--The term ``qualified higher
education expenses'' has the meaning given such
term by section 72(t)(7), determined by
treating postsecondary vocational educational
schools as eligible educational institutions.
(B) Postsecondary vocational education
school.--The term ``postsecondary vocational
educational school'' means an area vocational
education school (as defined in subparagraph
(C) or (D) of section 521(4) of the Carl D.
Perkins Vocational and Applied Technology
Education Act (20 U.S.C. 2471(4))) which is in
any State (as defined in section 521(33) of
such Act), as such sections are in effect on
the date of the enactment of this section.
(C) 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).
(4) Qualified first-time homebuyer costs.--The term
``qualified first-time homebuyer costs'' means
qualified acquisition costs (as defined in section
72(t)(8) without regard to subparagraph (B) thereof)
with respect to a principal residence (within the
meaning of section 121) for a qualified first-time
homebuyer (as defined in such section).
(5) Qualified business capitalization costs.--
(A) In general.--The term ``qualified
business capitalization costs'' means qualified
expenditures for the capitalization of a
qualified business pursuant to a qualified
plan.
(B) Qualified expenditures.--The term
``qualified expenditures'' means expenditures
included in a qualified plan, including
capital, plant, equipment, working capital, and
inventory expenses.
(C) Qualified business.--The term ``qualified
business'' means any business that does not
contravene any law.
(D) Qualified plan.--The term ``qualified
plan'' means a business plan which meets such
requirements as the Secretary may specify.
(6) Qualified medical expenses.--The term ``qualified
medical expenses'' means any amount paid during the
taxable year, not compensated for by insurance or
otherwise, for medical care (as defined in section
213(d)) of the taxpayer, his spouse, or his dependent
(as defined in section 152).
(7) Qualified rollovers.--The term ``qualified
rollover'' means any amount paid from a family
development account of a taxpayer into another such
account established for the benefit of--
(A) such taxpayer, or
(B) any qualified individual who is--
(i) the spouse of such taxpayer, or
(ii) any dependent (as defined in
section 152) of the taxpayer.
Rules similar to the rules of section 408(d)(3) shall
apply for purposes of this paragraph.
(d) Tax Treatment of Accounts.--
(1) In general.--Any family development account is
exempt from taxation under this subtitle unless such
account has ceased to be a family development account
by reason of paragraph (2). Notwithstanding the
preceding sentence, any such account is subject to the
taxes imposed by section 511 (relating to imposition of
tax on unrelated business income of charitable, etc.,
organizations). Notwithstanding any other provision of
this title (including chapters 11 and 12), the basis of
any person in such an account is zero.
(2) Loss of exemption in case of prohibited
transactions.--For purposes of this section, rules
similar to the rules of section 408(e) shall apply.
(3) Other rules to apply.--Rules similar to the rules
of paragraphs (4), (5), and (6) of section 408(d) shall
apply for purposes of this section.
(e) Family Development Account.--For purposes of this title,
the term ``family development account'' means a trust created
or organized in the United States for the exclusive benefit of
a qualified individual or his beneficiaries, but only if the
written governing instrument creating the trust meets the
following requirements:
(1) Except in the case of a qualified rollover (as
defined in subsection (c)(7))--
(A) no contribution will be accepted unless
it is in cash, and
(B) contributions will not be accepted for
the taxable year in excess of $3,000
(determined without regard to any contribution
made under section 1400I (relating to
demonstration program to provide matching
amounts in renewal communities)).
(2) The requirements of paragraphs (2) through (6) of
section 408(a) are met.
(f) Qualified Individual.--For purposes of this section, the
term ``qualified individual'' means, for any taxable year, an
individual--
(1) who is a bona fide resident of a renewal
community throughout the taxable year, and
(2) to whom a credit was allowed under section 32 for
the preceding taxable year.
(g) Other Definitions and Special Rules.--
(1) Compensation.--The term ``compensation'' has the
meaning given such term by section 219(f)(1).
(2) Married individuals.--The maximum deduction under
subsection (a) shall be computed separately for each
individual, and this section shall be applied without
regard to any community property laws.
(3) Time when contributions deemed made.--For
purposes of this section, a taxpayer shall be deemed to
have made a contribution to a family development
account on the last day of the preceding taxable year
if the contribution is made on account of such taxable
year and is made not later than the time prescribed by
law for filing the return for such taxable year (not
including extensions thereof).
(4) Employer payments; custodial accounts.--Rules
similar to the rules of sections 219(f)(5) and 408(h)
shall apply for purposes of this section.
(5) Reports.--The trustee of a family development
account shall make such reports regarding such account
to the Secretary and to the individual for whom the
account is maintained with respect to contributions
(and the years to which they relate), distributions,
and such other matters as the Secretary may require
under regulations. The reports required by this
paragraph--
(A) shall be filed at such time and in such
manner as the Secretary prescribes in such
regulations, and
(B) shall be furnished to individuals--
(i) not later than January 31 of the
calendar year following the calendar
year to which such reports relate, and
(ii) in such manner as the Secretary
prescribes in such regulations.
(6) Investment in collectibles treated as
distributions.--Rules similar to the rules of section
408(m) shall apply for purposes of this section.
(h) Penalty for Distributions Not Used for Qualified Family
Development Expenses.--
(1) In general.--If any amount is distributed from a
family development account and is not used exclusively
to pay qualified family development expenses for the
holder of the account or the spouse or dependent (as
defined in section 152) of such holder, the tax imposed
by this chapter for the taxable year of such
distribution shall be increased by the sum of--
(A) 100 percent of the portion of such amount
which is includible in gross income and is
attributable to amounts contributed under
section 1400I (relating to demonstration
program to provide matching amounts in renewal
communities), and
(B) 10 percent of the portion of such amount
which is includible in gross income and is not
described in subparagraph (A).
For purposes of this subsection, distributions which
are includable in gross income shall be treated as
attributable to amounts contributed under section 1400I
to the extent thereof. For purposes of the preceding
sentence, all family development accounts of an
individual shall be treated as one account.
(2) Exception for certain distributions.--Paragraph
(1) shall not apply to distributions which are--
(A) made on or after the date on which the
account holder attains age 59\1/2\,
(B) made to a beneficiary (or the estate of
the account holder) on or after the death of
the account holder, or
(C) attributable to the account holder's
being disabled within the meaning of section
72(m)(7).
(i) Termination.--No deduction shall be allowed under this
section for any amount paid to a family development account for
any taxable year beginning after December 31, 2006.
SEC. 1400I. DEMONSTRATION PROGRAM TO PROVIDE MATCHING CONTRIBUTIONS TO
FAMILY DEVELOPMENT ACCOUNTS IN CERTAIN RENEWAL
COMMUNITIES.
(a) Designation.--
(1) Definitions.--For purposes of this section, the
term ``FDA matching demonstration area'' means any
renewal community--
(A) which is nominated under this section by
each of the local governments and States which
nominated such community for designation as a
renewal community under section 1400E(a)(1)(A),
and
(B) which the Secretary of Housing and Urban
Development designates as an FDA matching
demonstration area after consultation with--
(i) the Secretaries of Agriculture,
Commerce, Labor, and the Treasury, the
Director of the Office of Management
and Budget, and the Administrator of
the Small Business Administration, and
(ii) in the case of a community on an
Indian reservation, the Secretary of
the Interior.
(2) Number of designations.--
(A) In general.--The Secretary of Housing and
Urban Development may designate not more than 5
communities as FDA matching demonstration
areas.
(B) Minimum designation in rural areas.--Of
the areas designated under subparagraph (A), at
least 2 must be areas described in section
1400E(a)(2)(B).
(3) Limitations on designations.--
(A) Publication of regulations.--The
Secretary of Housing and Urban Development
shall prescribe by regulation no later than 4
months after the date of the enactment of this
section, after consultation with the officials
described in paragraph (1)(B)--
(i) the procedures for nominating a
renewal community under paragraph
(1)(A) (including procedures for
coordinating such nomination with the
nomination of an area for designation
as a renewal community under section
1400E), and
(ii) the manner in which nominated
renewal communities will be evaluated
for purposes of this section.
(B) Time limitations.--The Secretary of
Housing and Urban Development may designate
renewal communities as FDA matching
demonstration areas only during the 24-month
period beginning on the first day of the first
month following the month in which the
regulations described in subparagraph (A) are
prescribed.
(4) Designation based on degree of poverty, etc.--The
rules of section 1400E(a)(3) shall apply for purposes
of designations of FDA matching demonstration areas
under this section.
(b) Period for Which Designation is in Effect.--Any
designation of a renewal community as an FDA matching
demonstration area shall remain in effect during the period
beginning on the date of such designation and ending on the
date on which such area ceases to be a renewal community.
(c) Matching Contributions to Family Development Accounts.--
(1) In general.--Not less than once each taxable
year, the Secretary shall deposit (to the extent
provided in appropriation Acts) into a family
development account of each qualified individual (as
defined in section 1400H(f))--
(A) who is a resident throughout the taxable
year of an FDA matching demonstration area, and
(B) who requests (in such form and manner as
the Secretary prescribes) such deposit for the
taxable year,
an amount equal to the sum of the amounts deposited
into all of the family development accounts of such
individual during such taxable year (determined without
regard to any amount contributed under this section).
(2) Limitations.--
(A) Annual limit.--The Secretary shall not
deposit more than $1000 under paragraph (1)
with respect to any individual for any taxable
year.
(B) Aggregate limit.--The Secretary shall not
deposit more than $2000 under paragraph (1)
with respect to any individual for all taxable
years.
(3) Exclusion from income.--Except as provided in
section 1400H, gross income shall not include any
amount deposited into a family development account
under paragraph (1).
(d) Notice of Program.--The Secretary shall provide
appropriate notice to residents of FDA matching demonstration
areas of the availability of the benefits under this section.
(e) Termination.--No amount may be deposited under this
section for any taxable year beginning after December 31, 2006.
SEC. 1400J. DESIGNATION OF EARNED INCOME TAX CREDIT PAYMENTS FOR
DEPOSIT TO FAMILY DEVELOPMENT ACCOUNT.
(a) In General.--With respect to the return of any qualified
individual (as defined in section 1400H(f)) for the taxable
year of the tax imposed by this chapter, such individual may
designate that a specified portion (not less than $1) of any
overpayment of tax for such taxable year which is attributable
to the earned income tax credit shall be deposited by the
Secretary into a family development account of such individual.
The Secretary shall so deposit such portion designated under
this subsection.
(b) Manner and Time of Designation.--A designation under
subsection (a) may be made with respect to any taxable year--
(1) at the time of filing the return of the tax
imposed by this chapter for such taxable year, or
(2) at any other time (after the time of filing the
return of the tax imposed by this chapter for such
taxable year) specified in regulations prescribed by
the Secretary.
Such designation shall be made in such manner as the Secretary
prescribes by regulations.
(c) Portion Attributable to Earned Income Tax Credit.--For
purposes of subsection (a), an overpayment for any taxable year
shall be treated as attributable to the earned income tax
credit to the extent that such overpayment does not exceed the
credit allowed to the taxpayer under section 32 for such
taxable year.
(d) Overpayments Treated as Refunded.--For purposes of this
title, any portion of an overpayment of tax designated under
subsection (a) shall be treated as being refunded to the
taxpayer as of the last date prescribed for filing the return
of tax imposed by this chapter (determined without regard to
extensions) or, if later, the date the return is filed.
(e) Termination.--This section shall not apply to any taxable
year beginning after December 31, 2006.
PART IV--ADDITIONAL INCENTIVES
Sec. 1400K. Commercial revitalization credit.
Sec. 1400L. Increase in expensing under section 179.
SEC. 1400K. COMMERCIAL REVITALIZATION CREDIT.
(a) General Rule.--For purposes of section 46, except as
provided in subsection (e), the commercial revitalization
credit for any taxable year is an amount equal to the
applicable percentage of the qualified revitalization
expenditures with respect to any qualified revitalization
building.
(b) Applicable Percentage.--For purposes of this section--
(1) In general.--The term ``applicable percentage''
means--
(A) 20 percent for the taxable year in which
a qualified revitalization building is placed
in service, or
(B) at the election of the taxpayer, 5
percent for each taxable year in the credit
period.
The election under subparagraph (B), once made, shall
be irrevocable.
(2) Credit period.--
(A) In general.--The term ``credit period''
means, with respect to any building, the period
of 10 taxable years beginning with the taxable
year in which the building is placed in
service.
(B) Applicable rules.--Rules similar to the
rules under paragraphs (2) and (4) of section
42(f) shall apply.
(c) Qualified Revitalization Buildings and Expenditures.--For
purposes of this section--
(1) Qualified revitalization building.--The term
``qualified revitalization building'' means any
building (and its structural components) if--
(A) such building is located in a renewal
community and is placed in service after
December 31, 1999,
(B) a commercial revitalization credit amount
is allocated to the building under subsection
(e), and
(C) depreciation (or amortization in lieu of
depreciation) is allowable with respect to the
building.
(2) Qualified revitalization expenditure.--
(A) In general.--The term ``qualified
revitalization expenditure'' means any amount
properly chargeable to capital account--
(i) for property for which
depreciation is allowable under section
168 and which is--
(I) nonresidential real
property, or
(II) an addition or
improvement to property
described in subclause (I), and
(ii) in connection with the
construction of any qualified
revitalization building which was not
previously placed in service or in
connection with the substantial
rehabilitation (within the meaning of
section 47(c)(1)(C)) of a building
which was placed in service before the
beginning of such rehabilitation.
(B) Dollar limitation.--The aggregate amount
which may be treated as qualified
revitalization expenditures with respect to any
qualified revitalization building for any
taxable year shall not exceed the excess of--
(i) $10,000,000, reduced by
(ii) any such expenditures with
respect to the building taken into
account by the taxpayer or any
predecessor in determining the amount
of the credit under this section for
all preceding taxable years.
(C) Certain expenditures not included.--The
term ``qualified revitalization expenditure''
does not include--
(i) Straight line depreciation must
be used.--Any expenditure (other than
with respect to land acquisitions) with
respect to which the taxpayer does not
use the straight line method over a
recovery period determined under
subsection (c) or (g) of section 168.
The preceding sentence shall not apply
to any expenditure to the extent the
alternative depreciation system of
section 168(g) applies to such
expenditure by reason of subparagraph
(B) or (C) of section 168(g)(1).
(ii) Acquisition costs.--The costs of
acquiring any building or interest
therein and any land in connection with
such building to the extent that such
costs exceed 30 percent of the
qualified revitalization expenditures
determined without regard to this
clause.
(iii) Other credits.--Any expenditure
which the taxpayer may take into
account in computing any other credit
allowable under this title unless the
taxpayer elects to take the expenditure
into account only for purposes of this
section.
(d) When Expenditures Taken Into Account.--
(1) In general.--Qualified revitalization
expenditures with respect to any qualified
revitalization building shall be taken into account for
the taxable year in which the qualified revitalization
building is placed in service. For purposes of the
preceding sentence, a substantial rehabilitation or
reconstruction of a building shall be treated as a
separate building.
(2) Progress expenditure payments.--Rules similar to
the rules of subsections (b)(2) and (d) of section 47
shall apply for purposes of this section.
(e) Limitation on Aggregate Credits Allowable With Respect to
Buildings Located in a State.--
(1) In general.--The amount of the credit determined
under this section for any taxable year with respect to
any building shall not exceed the commercial
revitalization credit amount (in the case of an amount
determined under subsection (b)(1)(B), the present
value of such amount as determined under the rules of
section 42(b)(2)(C)) allocated to such building under
this subsection by the commercial revitalization credit
agency. Such allocation shall be made at the same time
and in the same manner as under paragraphs (1) and (7)
of section 42(h).
(2) Commercial revitalization credit amount for
agencies.--
(A) In general.--The aggregate commercial
revitalization credit amount which a commercial
revitalization credit agency may allocate for
any calendar year is the amount of the State
commercial revitalization credit ceiling
determined under this paragraph for such
calendar year for such agency.
(B) State commercial revitalization credit
ceiling.--The State commercial revitalization
credit ceiling applicable to any State--
(i) for each calendar year after 1999
and before 2007 is $2,000,000 for each
renewal community in the State, and
(ii) zero for each calendar year
thereafter.
(C) Commercial revitalization credit
agency.--For purposes of this section, the term
``commercial revitalization credit agency''
means any agency authorized by a State to carry
out this section.
(f) Responsibilities of Commercial Revitalization Credit
Agencies.--
(1) Plans for allocation.--Notwithstanding any other
provision of this section, the commercial
revitalization credit amount with respect to any
building shall be zero unless--
(A) such amount was allocated pursuant to a
qualified allocation plan of the commercial
revitalization credit agency which is approved
(in accordance with rules similar to the rules
of section 147(f)(2) (other than subparagraph
(B)(ii) thereof)) by the governmental unit of
which such agency is a part, and
(B) such agency notifies the chief executive
officer (or its equivalent) of the local
jurisdiction within which the building is
located of such allocation and provides such
individual a reasonable opportunity to comment
on the allocation.
(2) Qualified allocation plan.--For purposes of this
subsection, the term ``qualified allocation plan''
means any plan--
(A) which sets forth selection criteria to be
used to determine priorities of the commercial
revitalization credit agency which are
appropriate to local conditions,
(B) which considers--
(i) the degree to which a project
contributes to the implementation of a
strategic plan that is devised for a
renewal community through a citizen
participation process,
(ii) the amount of any increase in
permanent, full-time employment by
reason of any project, and
(iii) the active involvement of
residents and nonprofit groups within
the renewal community, and
(C) which provides a procedure that the
agency (or its agent) will follow in monitoring
compliance with this section.
(g) Termination.--This section shall not apply to any
building placed in service after December 31, 2002.
SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.
(a) General Rule.--In the case of a renewal community
business (as defined in section 1400G), for purposes of section
179--
(1) the limitation under section 179(b)(1) shall be
increased by the lesser of--
(A) $35,000, or
(B) the cost of section 179 property which is
qualified renewal property placed in service
during the taxable year, and
(2) the amount taken into account under section
179(b)(2) with respect to any section 179 property
which is qualified renewal property shall be 50 percent
of the cost thereof.
(b) Recapture.--Rules similar to the rules under section
179(d)(10) shall apply with respect to any qualified renewal
property which ceases to be used in a renewal community by a
renewal community business.
(c) Qualified Renewal Property.--For purposes of this
section--
(1) In general.--The term ``qualified renewal
property'' means any property to which section 168
applies (or would apply but for section 179) if--
(A) such property was acquired by the
taxpayer by purchase (as defined in section
179(d)(2)) after December 31, 1999, and before
January 1, 2007, and
(B) such property would be qualified zone
property (as defined in section 1397C) if
references to renewal communities were
substituted for references to empowerment zones
in section 1397C.
(2) Certain rules to apply.--The rules of subsections
(a)(2) and (b) of section 1397C shall apply for
purposes of this section.
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter A--Estates of Citizens or Residents
* * * * * * *
PART I--TAX IMPOSES
* * * * * * *
SEC. 2001. IMPOSITION AND RATE OF TAX.
(a) * * *
* * * * * * *
(f) Valuation of Gifts.--
(1) * * *
(2) Final determination.--For purposes of paragraph
(1), a value shall be treated as finally determined for
purposes of chapter 12 if--
(A) * * *
* * * * * * *
For purposes of subparagraph (A), the value of an item
shall be treated as shown on a return if the item is
disclosed in the return, or in a statement attached to
the return, in a manner adequate to apprise the
Secretary of the nature of such item.
* * * * * * *
PART II--CREDITS AGAINST TAX
* * * * * * *
SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.
(a) * * *
* * * * * * *
[(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
The applicable
dying, and gifts made, during:
exclusion 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) Applicable Credit Amount.--
(1) In general.--For purposes of this section, the
applicable credit amount is $345,800.
(2) Applicable exclusion amount.--For purposes of the
provisions of this title which refer to this
subsection, the applicable exclusion amount is
$1,000,000.
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO CERTAIN TAX-FAVORED ACCOUNTS
AND ANNUITIES.
(a) Tax Imposed.--In the case of--
(1) * * *
* * * * * * *
(3) an individual retirement annuity (within the
meaning of section 408(b)), a custodial account treated
as an annuity contract under section 403(b)(7)(A)
(relating to custodial accounts for regulated
investment company stock), [or]
(4) an education individual retirement account (as
defined in section 530, or
(5) a family development account (within the meaning
of section 1400H(e)),
there is imposed for each taxable year a tax in an amount equal
to 6 percent of the amount of the excess contributions to such
individual's accounts or annuities (determined as of the close
of the taxable year). The amount of such tax for any taxable
year shall not exceed 6 percent of the value of the account or
annuity (determined as of the close of the taxable year). In
the case of an endowment contract described in section 408(b),
the tax imposed by this section does not apply to any amount
allocable to life, health, accident, or other insurance under
such contract. The tax imposed by this subsection shall be paid
by such individual.
* * * * * * *
(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
one beneficiary, the term ``excess contributions''
means the sum of--
(A) the amount by which the amount
contributed for the taxable year to such
accounts exceeds $500 (or, if less, the sum of
the maximum amounts permitted to be contributed
under section 530(c) by the contributors to
such accounts for such year);
(B) if any amount is contributed (other than
a contribution described in section
530(b)(2)(B)) during such year to a [qualified
State tuition program] qualified tuition
program for the benefit of such beneficiary,
any amount contributed to such accounts for
such taxable year; and
* * * * * * *
(g) Family Development Accounts.--For purposes of this
section, in the case of a family development account, the term
``excess contributions'' means the sum of--
(1) the excess (if any) of--
(A) the amount contributed for the taxable
year to the account (other than a qualified
rollover, as defined in section 1400H(c)(7), or
a contribution under section 1400I), over
(B) the amount allowable as a deduction under
section 1400H for such contributions, and
(2) the amount determined under this subsection for
the preceding taxable year reduced by the sum of--
(A) the distributions out of the account for
the taxable year which were included in the
gross income of the payee under section
1400H(b)(1),
(B) the distributions out of the account for
the taxable year to which rules similar to the
rules of section 408(d)(5) apply by reason of
section 1400H(b)(3), and
(C) the excess (if any) of the maximum amount
allowable as a deduction under section 1400H
for the taxableyear over the amount contributed
to the account for the taxable year (other than a contribution under
section 1400I).
For purposes of this subsection, any contribution which is
distributed from the family development account in a
distribution to which rules similar to the rules of section
408(d)(4) apply by reason of section 1400H(b)(3) shall be
treated as an amount not contributed.
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) * * *
* * * * * * *
(c) Prohibited Transaction.--
(1) * * *
* * * * * * *
(6) Special rule for family development accounts.--An
individual for whose benefit a family development
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, with respect to such transaction, the
account ceases to be a family development account by
reason of the application of section 1400H(d)(2) to
such account.
* * * * * * *
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) * * *
* * * * * * *
(E) an education individual retirement
account described in section 530, [or]
(F) a family development account described in
section 1400H(e), or
[(F)] (G) a trust, plan, account, or annuity
which, at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART II--TAX RETURNS OR STATEMENTS
* * * * * * *
Subpart B--Income Tax Returns
* * * * * * *
SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON JOINT RETURN.
(a) * * *
* * * * * * *
(e) Petition for Review by Tax Court.--
(1) * * *
* * * * * * *
(3) Applicable rules.--
(A) Allowance of credit or refund.--Except as
provided in subparagraph (B), notwithstanding
any other law or rule of law (other than
section 6512(b), 7121, or 7122), credit or
refund shall be allowed or made to the extent
attributable to the application [of this
section] of subsection (b) or (f).
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart A--General Requirement
* * * * * * *
SEC. 6033. RETURNS BY EXEMPT ORGANIZATIONS.
(a) * * *
* * * * * * *
(c) Additional Provisions Relating to Private Foundations.--
In the case of an organization which is a private foundation
(within the meaning of section 509(a))--
(1) the Secretary shall by regulations provide that
the private foundation shall include in its annual
return under this section such information (not
required to be furnished by subsection (b) or the forms
or regulations prescribed thereunder) as would have
been required to be furnished under section 6056
(relating to annual reports by private foundations) as
such section 6056 was in effect on January 1, 1979, and
[(2) a copy of the notice required by section 6104(d)
(relating to public inspection of private foundations'
annual returns), together with proof of publication
thereof, shall be filed by the foundation together with
the annual return under this section, and]
[(3)] (2) the foundation managers shall furnish
copies of the annual return under this section to such
State officials, at such times, and under such
conditions, as the Secretary may by regulations
prescribe.
* * * * * * *
SEC. 6047. INFORMATION RELATING TO CERTAIN TRUSTS AND ANNUITY PLANS.
(a) * * *
* * * * * * *
(c) Other Programs.--To the extent provided by regulations
prescribed by the Secretary, the provisions of this section
apply with respect to any payment described in section 219 or
section 1400H and to transactions of any trust described in
section 408(a), of any family development account described in
section 1400H(e), or under an individual retirement annuity
described in section 408(b).
* * * * * * *
Subchapter B--Extensions of Time For Payment
* * * * * * *
SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.
(a) * * *
* * * * * * *
(h) Disclosure to Certain Federal Officers and Employees for
Purposes of Tax Administration, Etc.--
(1) * * *
* * * * * * *
[(5)] (6) Internal Revenue Service Oversight Board.--
(A) In general.--Notwithstanding paragraph
(1), and except as provided in subparagraph
(B), no return or return information may be
disclosed to any member of the Oversight Board
described in subparagraph (A) or (D) of section
7802(b)(1) or to any employee or detailee of
such Board by reason of their service with the
Board. Any request for information not
permitted to be disclosed under the preceding
sentence, and any contact relating to a
specific taxpayer, made by any such individual
to an officer or employee of the Internal
Revenue Service shall be reported by such
officer or employee to the Secretary, the
Treasury Inspector General for Tax
Administration, and the Joint Committee on
Taxation.
* * * * * * *
(j) Statistical Use.--
(1) * * *
* * * * * * *
(5) Department of agriculture.--Upon request in
writing by the Secretary of Agriculture, the Secretary
shall furnish such returns, or return information
reflected thereon, as the Secretary may prescribe by
regulation to officers and employees of the Department
of Agriculture whose official duties require access to
such returns or information for the purpose of, but
only to the extent necessary in, structuring,
preparing, and conducting the census of agriculture
pursuant to the Census of Agriculture Act of 1997
(Public Law 105-113).
* * * * * * *
(p) Procedure and Recordkeeping.--
(1) * * *
* * * * * * *
(3) Records of inspection and disclosure.--
(A) System of recordkeeping.--Except as
otherwise provided by this paragraph, the
Secretary shall maintain a permanent system of
standardized records or accountings of all
requests for inspection or disclosure of
returns and return information (including the
reasons for and dates of such requests) and of
returns and return information inspected or
disclosed under this section. Notwithstanding
the provisions of section 552a(c) of title 5,
United States Code, the Secretary shall not be
required to maintain a record or accounting of
requests for inspection or disclosure of
returns and return information, or of returns
and return information inspected or disclosed,
under the authority of subsections (c), (e),
(f)(5), (h)(1), (3)(A), or (4), (i)(4), or
(7)(A)(ii), (k)(1), (2), (6), (8), or (9)
(l)(1), (4)(B), (5), (7), (8), (9), (10), (11),
(12), (13), (14), (15), (16), or (17) (m) or
(n). The records or accountings required to be
maintained under this paragraph shall be
available for examination by the Joint
Committee on Taxation or the Chief of Staff of
such joint committee. Such record or accounting
shall also be available for examination by such
person or persons as may be, but only to the
extent, authorized to make such examination
under section 552a(c)(3) of title 5, United
States Code.
* * * * * * *
(4) Safeguards.--Any Federal agency described in
subsection (h)(2), (h)(5), (i)(1), (2), (3), or (5),
[(j)(1) or (2)] (j)(1), (2), or (5), (k)(8), (l)(1),
(2), (3), (5), (11), (13), (14), or (17) or (o)(1), the
General Accounting Office, or any agency, body, or
commission described in subsection (d), (i)(3)(B)(i) or
(l)(6), (7), (8), (9), (10), (12) or (15) shall, as a
condition for receiving returns or return information--
(A) * * *
* * * * * * *
(F) upon completion of use of such returns or
return information--
(i) * * *
(ii) in the case of an agency
described in subsections (h)(2),
(h)(5), (i)(1), (2), (3), or (5),
[(j)(1) or (2)] (j)(1), (2), or (5),
(k)(8), (l)(1), (2), (3), (5), (10),
(11), (12), (13), (14), (15), or (17)
or (o)(1), or the General Accounting
Office, either--
(I) * * *
* * * * * * *
SEC. 6104. PUBLICITY OF INFORMATION REQUIRED FROM CERTAIN EXEMPT
ORGANIZATIONS AND CERTAIN TRUSTS.
(a) Inspection of Applications for Tax Exemption.--
(1) Public Inspection.--
(A) * * *
(B) Pension, etc., plans.--The following
shall be open to public inspection at such
times and in such places as the Secretary may
prescribe:
(i) any application filed with
respect to the qualification of a
pension, profit-sharing, or stock bonus
plan under section 401(a) or 403(a), an
individual retirement account described
in section 408(a), a family development
account described in section 1400H(e),
or an individual retirement annuity
described in section 408(b),
* * * * * * *
[(d) Public Inspection of Private Foundations' Annual
Returns.--The annual return required to be filed under section
6033 (relating to returns by exempt organizations) by any
organization which is a private foundation within the meaning
of section 509(a) shall be made available by the foundation
managers for inspection at the principal office of the
foundation during regular business hours by any citizen on
request made within 180 days after the date of the publication
of notice of its availability. Such notice shall be published,
not later than the day prescribed for filing such annual return
(determined with regard to any extension of time for filing),
in a newspaper having general circulation in the county in
which the principal office of the private foundation is
located. The notice shall state that the annual return of the
private foundation is available at its principal office for
inspection during regular business hours by any citizen who
requests it within 180 days after the date of such publication,
and shall state the address and the telephone number of the
private foundation's principal office and the name of its
principal manager.
[(e) Public Inspection of Certain Annual Returns and
Applications for Exemption.--
[(1) Annual returns.--
[(A) In general.--During the 3-year period
beginning on the filing date--
[(i) a copy of the annual return
filed under section 6033 (relating to
returns by exempt organizations) by any
organization to which this paragraph
applies shall be made available by such
organization for inspection during
regular business hours by any
individual at the principal office of
such organization and, if such
organization regularly maintains 1 or
more regional or district offices
having 3 or more employees, at each
such regional or district office, and
[(ii) upon request of an individual
made at such principal office or such a
regional or district office, a copy of
such annual return shall be provided to
such individual without charge other
than a reasonable fee for any
reproduction and mailing costs.
The request described in clause (ii) must be made in
person or in writing. If the request under clause (ii)
is made in person, such copy shall be provided
immediately and, if made in writing, shall be provided
within 30 days.
[(B) Organizations to which paragraph
applies.--This paragraph shall apply to any
organization which--
[(i) is described in subsection (c)
or (d) of section 501 and exempt from
taxation under section 501(a), and
[(ii) is not a private foundation
(within the meaning of section 509(a)).
[(C) Nondisclosure of contributors.--
Subparagraph (A) shall not require the
disclosure of the name or address of any
contributor to the organization. In the case of
an organization described in section 501(d),
subparagraph (A) shall not require the
disclosure of the copies referred to in section
6031(b) with respect to such organization.
[(D) Filing date.--For purposes of
subparagraph (A), the term ``filing date''
means the last day prescribed for filing the
return under section 6033 (determined with
regard to any extension of time for filing).
[(2) Application for exemption.--
[(A) In general.--If--
[(i) an organization described in
subsection (c) or (d) of section 501 is
exempt from taxation under section
501(a), and
[(ii) such organization filed an
application for recognition of
exemption under section 501, a copy of
such application (together with a copy
of any papers submitted in support of
such application and any letter or
other document issued by the Internal
Revenue Service with respect to such
application) shall be made available by
the organization for inspection during
regular business hours by any
individual at the principal office of
the organization and, if the
organization regularly maintains 1 or
more regional or district offices
having 3 or more employees, at each
such regional or district office (and,
upon request of an individual made at
such principal office or such a
regional or district office, a copy of
the material requested to be available
for inspection under this subparagraph
shall be provided (in accordance with
the last sentence of paragraph (1)(A))
to such individual without charge other
than reasonable fee for any
reproduction and mailing costs).
[(B) Nondisclosure of certain information.--
Subparagraph (A) shall not require the
disclosure of any information if the Secretary
withheld such information from public
inspection under subsection (a)(1)(D).
[(3) Limitation.--Paragraph (1)(A)(ii) (and the
corresponding provision of paragraph (2)) shall not
apply to any request if, in accordance with regulations
promulgated by the Secretary, the organization has made
the requested documentswidely available, or, the
Secretary determines, upon application by an organization, that such
request is part of a harassment campaign and that compliance with such
request is not in the public interest.]
(d) Public Inspection of Certain Annual Returns and
Applications for Exemption.--
(1) In general.--In the case of an organization
described in subsection (c) or (d) of section 501 and
exempt from taxation under section 501(a)--
(A) a copy of--
(i) the annual return filed under
section 6033 (relating to returns by
exempt organizations) by such
organization, and
(ii) if the organization filed an
application for recognition of
exemption under section 501, the exempt
status application materials of such
organization,
shall be made available by such organization
for inspection during regular business hours by
any individual at the principal office of such
organization and, if such organization
regularly maintains 1 or more regional or
district offices having 3 or more employees, at
each such regional or district office, and
(B) upon request of an individual made at
such principal office or such a regional or
district office, a copy of such annual return
and exempt status application materials shall
be provided to such individual without charge
other than a reasonable fee for any
reproduction and mailing costs.
The request described in subparagraph (B) must be made
in person or in writing. If such request is made in
person, such copy shall be provided immediately and, if
made in writing, shall be provided within 30 days.
(2) 3-year limitation on inspection of returns.--
Paragraph (1) shall apply to an annual return filed
under section 6033 only during the 3-year period
beginning on the last day prescribed for filing such
return (determined with regard to any extension of time
for filing).
(3) Exceptions from disclosure requirement.--
(A) Nondisclosure of contributors, etc.--
Paragraph (1) shall not require the disclosure
of the name or address of any contributor to
the organization. In the case of an
organization described in section 501(d),
subparagraph (A) shall not require the
disclosure of the copies referred to in section
6031(b) with respect to such organization.
(B) Nondisclosure of certain other
information.--Paragraph (1) shall not require
the disclosure of any information if the
Secretary withheld such information from public
inspection under subsection (a)(1)(D).
(4) Limitation on providing copies.--Paragraph (1)(B)
shall not apply to any request if, in accordance with
regulations promulgated by the Secretary, the
organization has made the requested documents widely
available, or the Secretary determines, upon
application by an organization, that such request is
part of a harassment campaign and that compliance with
such request is not in the public interest.
(5) Exempt status application materials.--For
purposes of paragraph (1), the term ``exempt status
applicable materials'' means the application for
recognition of exemption under section 501 and any
papers submitted in support of such application and any
letter or other document issued by the Internal Revenue
Service with respect to such application.
* * * * * * *
CHAPTER 64--COLLECTION
* * * * * * *
Subchapter B--Receipt of Payment
* * * * * * *
SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.
(a) * * *
* * * * * * *
(d) Payment by Other Means.--
(1) * * *
(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]
under any such contract for the use of credit or debit
cards for the payment of taxes imposed by subtitle A.
* * * * * * *
CHAPTER 65--ABATEMENTS, CREDITS, AND REFUNDS
* * * * * * *
Subchapter A--Procedure in General
* * * * * * *
SEC. 6404. ABATEMENTS.
(a) * * *
* * * * * * *
(h) Abatement of Interest on Underpayments by Taxpayers in
Presidentially Declared Disaster Areas.--
(1) * * *
(2) Presidentially declared disaster area.--For
purposes of paragraph (1), the term ``Presidentially
declared disaster area'' means, with respect to any
taxpayer, any area which the President has determined
warrants assistance by theFederal Government under the
Robert T. Stafford Disaster Relief and Emergency Assistance Act.
* * * * * * *
CHAPTER 66--LIMITATIONS
* * * * * * *
Subchapter A--Limitations on Assessment and Collection
* * * * * * *
SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.
(a) * * *
* * * * * * *
(c) Exceptions.--
(1) * * *
* * * * * * *
(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.]
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 6652. FAILURE TO FILE CERTAIN INFORMATION RETURNS, REGISTRATION
STATEMENTS, ETC.
(a) * * *
* * * * * * *
(c) Returns by Exempt Organizations and by Certain Trusts.--
(1) Annual returns under section 6033.--
(A) * * *
* * * * * * *
(C) Public inspection of annual returns.--In
the case of a failure to comply with the
requirements of [subsection (d) or (e)(1) of
section 6104 (relating to public inspection of
annual returns)] section 6104(d) with respect
to any annual return on the date and in the
manner prescribed therefor (determined with
regard to any extension of time for filing),
there shall be paid by the person failing to
meet such requirements $20 for each day during
which such failure continues. The maximum
penalty imposed under this subparagraph on all
persons for failures with respect to any 1
return shall not exceed $10,000.
(D) Public inspection of applications for
exemption.--In the case of a failure to comply
with the requirements of [section 6104(e)(2)
(relating to public inspection of applications
for exemption)] section 6104(d) with respect to
any exempt status application materials (as
defined in such section) on the date and in the
manner prescribed therefor, there shall be paid
by the person failing to meet such requirements
$20 for each day during which such failure
continues.
* * * * * * *
Subchapter B--Assessable Penalties
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 6685. ASSESSABLE PENALTY WITH RESPECT TO PUBLIC INSPECTION
REQUIREMENTS FOR CERTAIN TAX-EXEMPT ORGANIZATIONS.
In addition to the penalty imposed by section 7207 (relating
to fraudulent returns, statements, or other documents), any
person who is required to comply with the requirements of
subsection (d) [or (e)] of section 6104 and who fails to so
comply with respect to any return or application, if such
failure is willful, shall pay a penalty of $5,000 with respect
to each such return or application.
* * * * * * *
SEC. 6693. FAILURE TO PROVIDE REPORTS ON CERTAIN TAX-FAVORED ACCOUNTS
OR ANNUITIES; PENALTIES RELATING TO DESIGNATED
NONDEDUCTIBLE CONTRIBUTIONS.
(a) Reports.--
(1) * * *
(2) Provisions.--The provisions referred to in this
paragraph are--
(A) * * *
* * * * * * *
(C) [Section] section 529(d) (relating to
[qualified State tuition programs] qualified
tuition programs), [and]
(D) [Section] section 530(h) (relating to
education individual retirement accounts)[.],
and
(E) section 1400H(g)(7) (relating to family
development accounts).
* * * * * * *
CHAPTER 75--CRIMES, OTHER OFFENSES, AND FORFEITURES
* * * * * * *
Subchapter A--Crimes
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 7207. FRAUDULENT RETURNS, STATEMENTS, OR OTHER DOCUMENTS.
Any person who willfully delivers or discloses to the
Secretary any list, return, account, statement, or other
document, known by him to be fraudulent or to be false as to
any material matter, shall be fined not more than $10,000
($50,000 in the case of a corporation), or imprisoned not more
than 1 year, or both. Any person required pursuant to
subsection (b) of section 6047 or pursuant to subsection (d)
[or (e)] of section 6104 to furnish any information to the
Secretary or any other person who willfully furnishes to the
Secretary or such other person any information known by him to
be fraudulent or to be false as to any material matter shall be
fined not more than $10,000 ($50,000 in the case of a
corporation), or imprisoned not more than 1 year, or both.
* * * * * * *
CHAPTER 76--JUDICIAL PROCEEDINGS
* * * * * * *
Subchapter B--Proceedings by Taxpayers and Third Parties
* * * * * * *
SEC. 7421. PROHIBITION OF SUITS TO RESTRAIN ASSESSMENT OR COLLECTION.
(a) Tax.--Except as provided in sections [6015(d)] 6015(e),
6212(a) and (c), 6213(a), 6225(b), 6246(b), 6331(i), 6672(b),
6694(c), 7426(a) and (b)(1), and 7429(b), and 7463 no suit for
the purpose of restraining the assessment or collection of any
tax shall be maintained in any court by any person, whether or
not such person is the person against whom such tax was
assessed.
* * * * * * *
Subchapter E--Burden of Proof
* * * * * * *
SEC. 7491. BURDEN OF PROOF.
(a) Burden Shifts Where Taxpayer Produces Credible
Evidence.--
(1) * * *
(2) Limitations.--Paragraph (1) shall apply with
respect to an issue only if--
(A) the taxpayer has complied with the
requirements under this title to substantiate
any item;
(B) the taxpayer has maintained all records
required under this title and has cooperated
with reasonable requests by the Secretary for
witnesses, information, documents, meetings,
and interviews; and
(C) in the case of a partnership,
corporation, or trust, the taxpayer is
described in section 7430(c)(4)(A)(ii).
Subparagraph (C) shall not apply to any qualified
revocable trust (as defined in section 645(b)(1)) with
respect to liability for tax for any taxable year
ending after the date of the decedent's death and
before the applicable date (as defined in section
645(b)(2)).
* * * * * * *
Subtitle I--Trust Fund Code
* * * * * * *
CHAPTER 98--TRUST FUND CODE
* * * * * * *
Subchapter A--Establishment of Trust Fund
* * * * * * *
SEC. 9503. HIGHWAY TRUST FUND.
(a) * * *
* * * * * * *
(f) Determination of Trust Fund Balances After September 30,
1998.--For purposes of determining the balances of the Highway
Trust Fund and the Mass Transit Account after September 30,
1998--
(1) the opening balance of the Highway Trust Fund
(other than the Mass Transit Account) on October 1,
1998, shall be $8,000,000,000, and
[(2) no interest accruing after September 30, 1998,
on any obligation held by such Fund shall be credited
to such Fund.]
(2) notwithstanding section 9602(b), obligations held
by such Fund after September 30, 1998, shall be
obligations of the United States which are not
interest-bearing.
The Secretary shall cancel obligations held by the Highway
Trust Fund to reflect the reduction in the balance under this
subsection.
* * * * * * *
SEC. 9510. VACCINE INJURY COMPENSATION TRUST FUND.
(a) * * *
(b) Transfers to Trust Fund.--
(1) * * *
* * * * * * *
(3) Limitation on transfers to vaccine injury
compensation trust fund.--No amount may be appropriated
to the Vaccine Injury Compensation Trust Fund on and
after the date of any expenditure from the Trust Fund
which is not permitted by this section. The
determination of whether an expenditure is so permitted
shall be made without regard to--
(A) any provision of law which is not
contained or referenced in this title or in a
revenue Act, and
(B) whether such provision of law is a
subsequently enacted provision or directly or
indirectly seeks to waive the application of
this paragraph.
(c) Expenditures from Trust Fund.--
[(1) In general.--Amounts in the Vaccine Injury
Compensation Trust Fund shall be available, as provided
in appropriation Acts, only for the payment of
compensation under subtitle 2 of title XXI of the
Public Health Service Act (as in effect on the date of
the enactment of this section) for vaccine-related
injury or death with respect to vaccines administered
after September 30, 1988 or for the payment of all
expenses of administration (but not in excess of
$6,000,000 for any fiscal year) incurred by the Federal
Government in administering such subtitle.]
(1) In general.--Amounts in the Vaccine Injury
Compensation Trust Fund shall be available, as provided
in appropriation Acts, only for--
(A) the payment of compensation under
subtitle 2 of title XXI of the Public Health
Service Act (as in effect on August 5, 1997)
for vaccine-related injury or death with
respect to any vaccine--
(i) which is administered after
September 30, 1988, and
(ii) which is a taxable vaccine (as
defined in section 4132(a)(1)) at the
time compensation is paid under such
subtitle 2, or
(B) the payment of all expenses of
administration (but not in excess of $9,500,000
for any fiscal year) incurred by the Federal
Government in administering such subtitle.
* * * * * * *
----------
SOCIAL SECURITY ACT
* * * * * * *
TITLE II--FEDERAL OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE BENEFITS
* * * * * * *
reduction of insurance benefits
Maximum Benefits
Sec. 203. (a) * * *
* * * * * * *
Months to Which Earnings Are Charged
(f) For purposes of subsection (b)--
(1) * * *
* * * * * * *
(8)(A) * * *
(B) Except as otherwise provided in subparagraph (D),
the exempt amount which is applicable to individuals
described in such subparagraph and the exempt amount
which is applicable to other individuals, for each
month of a particular taxable year, shall each be
whichever of the following is the larger--
(i) * * *
(ii) the product of the corresponding exempt
amount which is in effect with respect to
months in the taxable year ending [after 2001
and before 2003] after 2007 and before 2009
(with respect to individuals described in
subparagraph (D)) or the taxable year ending
after 1993-and before 1995 (with respect to
other individuals), and the ratio of--
(I) the national average wage index
(as defined in section 209(k)(1)) for
the calendar year before the calendar
year in which the determination under
subparagraph (A) is made, to
(II) the national average wage index
(as so defined) for [2000] 2006 (with
respect to individuals described in
subparagraph (D)) or 1992 (with respect
to other individuals),
with such product, if not a multiple of $10, being
rounded to the next higher multiple of $10 where such
product is a multiple of $5 but not of $10 and to the
nearest multiple of $10 in any other case.
* * * * * * *
(D) Notwithstanding any other provision of this
subsection, the exempt amount which is applicable to an
individual who has attained retirement age (as defined
in section 216(l)) before the close of the taxable year
involved shall be--
(i) * * *
* * * * * * *
[(iv) for each month of any taxable year
ending after 1998 and before 2000, $1,291.66\2/
3\,
[(v) for each month of any taxable year
ending after 1999 and before 2001, $1,416.66\2/
3\,
[(vi) for each month of any taxable year
ending after 2000 and before 2002, $2,083.33\1/
3\,
[(vii) for each month of any taxable year
ending after 2001 and before 2003, $2,500.00.]
(iv) for each month of any taxable year
ending after 1998 and before 2000, $1,416.66\2/
3\,
(v) for each month of any taxable year ending
after 1999 and before 2001, $1,541.66\2/3\,
(vi) for each month of any taxable year
ending after 2000 and before 2002, $2,166.66\2/
3\,
(vii) for each month of any taxable year
ending after 2001 and before 2003, $2,500.00,
(viii) for each month of any taxable year
ending after 2002 and before 2004, $2,608.33\1/
3\,
(ix) for each month of any taxable year
ending after 2003 and before 2005, $2,833.33\1/
3\,
(x) for each month of any taxable year ending
after 2004 and before 2006, $2,950.00,
(xi) for each month of any taxable year
ending after 2005 and before 2007, $3,066.66\2/
3\,
(xii) for each month of any taxable year
ending after 2006 and before 2008, $3,195.83\1/
3\, and
(xiii) for each month of any taxable year
ending after 2007 and before 2009, $3,312.50.
* * * * * * *
computation of primary insurance amount
Sec. 215. For the purposes of this title--
Primary Insurance Amount
(a) * * *
* * * * * * *
Recomputation of Benefits
(f)(1) * * *
(2) If an individual has wages or self-employment income for
a year after 1965 for any part of which he is entitled to old-
age insurance benefits, the Secretary shall, at such time or
times and within such period as he may by regulations
prescribe, recompute such individual's primary insurance amount
with respect to each such year. Such recomputation shall be
made as provided in subsections (a)(1) (A) and (C) and (a)(3)
as though the year with respect to which such recomputation is
made is the last year of the period specified in subsection
(b)(2)(C). A recomputation under this paragraph with respect to
any year shall be effective--
(A) \1\ [in the case of an individual who did not die
in such year, for monthly benefits beginning with
benefits for January of the following year; or] in the
case of an individual who did not die in the year with
respect to which the recomputation is made, for monthly
benefits beginning with benefits for January of--
---------------------------------------------------------------------------
\1\ Subparagraph (A) as in effect in December 1978 and applied in
certain cases under the provisions of such Act as in effect after
December 1978.
---------------------------------------------------------------------------
(i) the second year following the year with
respect to which the recomputation is made, in
any such case in which the individual is
entitled to old-age insurance benefits, the
individual has attained age 65 as of the end of
the year preceding the year with respect to
which the recomputation is made, and the year
with respect to which the recomputation is made
would not be substituted in recomputation under
this subsection for a benefit computation year
in which no wages or self-employment income
have been credited previously to such
individual, or
(ii) the first year following the year with
respect to which the recomputation is made, in
any other such case; or
* * * * * * *
(D) A recomputation under this paragraph with respect to any
year shall be effective--
[(i) in the case of an individual who did not die in
that year, for monthly benefits beginning with benefits
for January of the following year; or]
(i) in the case of an individual who did not die in
the year with respect to which the recomputation is
made, for monthly benefits beginning with benefits for
January of--
(I) the second year following the year with
respect to which the recomputation is made, in
any such case in which the individual is
entitled to old-age insurance benefits, the
individual has attained retirement age (as
defined in section 216(l)) as of the end of the
year preceding the year with respect to which
the recomputation is made, and the year with
respect to which the recomputation is made
would not be substituted in recomputation under
this subsection for a benefit computation year
in which no wages or self-employment income
have been credited previously to such
individual, or
(II) the first year following the year with
respect to which the recomputation is made, in
any other such case; or
* * * * * * *
(7) This subsection as in effect in December 1978, and as
amended by section 122(b)(2) of the Taxpayer Relief Act of
1998, shall continue to apply to the recomputation of a primary
insurance amount computed under subsection (a) or (d) as in
effect (without regard to the table in subsection (a)) in that
month, and, where appropriate, under subsection (d) as in
effect in December 1977, including a primary insurance amount
computed under any suchsubsection whose operation is modified
as a result of the amendments made by section 5117 of the Omnibus
Budget Reconciliation Act of 1990. For purposes of recomputing a
primary insurance amount determined under subsection (a) or (d) (as so
in effect) in the case of an individual to whom those subsections apply
by reason of subsection (a)(4)(B) as in effect after December 1978, no
remuneration shall be taken into account for the year in which the
individual initially became eligible for an old-age or disability
insurance benefit or died, or for any year thereafter, and (effective
January 1982) the recomputation shall be modified by the application of
subsection (a)(6) where applicable.
* * * * * * *
DISABILITY INSURANCE BENEFIT PAYMENTS
Disability Insurance Benefits
Sec. 223. (a) * * *
* * * * * * *
Definition of Disability
(d)(1) * * *
* * * * * * *
(4)(A) The Commissioner of Social Security shall by
regulations prescribe the criteria for determining when
services performed or earnings derived from services
demonstrate an individual's ability to engage in substantial
gainful activity. No individual who is blind shall be regarded
as having demonstrated an ability to engage in substantial
gainful activity on the basis of earnings that do not exceed an
amount equal to the exempt amount which would be applicable
under section 203(f)(8), to individuals described in
subparagraph (D) thereof, if section 102 of the Senior
Citizens' Right to Work Act of 1996 and section 121 of the
Taxpayer Relief Act of 1998 had not been enacted.
Notwithstanding the provisions of paragraph (2), an individual
whose services or earnings meet such criteria shall, except for
purposes of section 222(c), be found not to be disabled. In
determining whether an individual is able to engage in
substantial gainful activity by reason of his earnings, where
his disability is sufficiently severe to result in a functional
limitation requiring assistance in order for him to work, there
shall be excluded from such earnings an amount equal to the
cost (to such individual) of any attendant care services,
medical devices, equipment, prostheses, and similar items and
services (not including routine drugs or routine medical
services unless such drugs or services are necessary for the
control of the disabling condition) which are necessary (as
determined by the Commissioner of Social Security in
regulations) for that purpose, whether or not such assistance
is also needed to enable him to carry out his normal daily
functions; except that the amount to be excluded shall be
subject to such reasonable limits as the Commissioner of Social
Security may prescribe.
* * * * * * *
----------
TAXPAYER RELIEF ACT OF 1997
* * * * * * *
TITLE IX--MISCELLANEOUS PROVISIONS
* * * * * * *
Subtitle B--Revisions Relating to Disasters
* * * * * * *
SEC. 915. ABATEMENT OF INTEREST ON UNDERPAYMENTS BY TAXPAYERS IN
PRESIDENTIALLY DECLARED DISASTER AREAS.
(a) * * *
(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 or 1998 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.]
(d) Effective Date.--This section shall apply to taxable
years ending with or within calendar year 1997.
* * * * * * *
Subtitle D--Provisions Relating to Small Businesses
* * * * * * *
SEC. 933. AVERAGING OF FARM INCOME OVER 3 YEARS.
(a) * * *
* * * * * * *
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
1997[, and before January 1, 2001].
* * * * * * *
----------
SECTION 505 OF THE TRADE ACT OF 1974
SEC. 505. DATE OF TERMINATION.
No duty-free treatment provided under this title shall remain
in effect after [June 30, 1998] February 29, 2000.
----------
INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998
* * * * * * *
TITLE III--TAXPAYER PROTECTION AND RIGHTS
* * * * * * *
Subtitle D--Provisions Relating to Interest and Penalties
SEC. 3301. ELIMINATION OF INTEREST RATE DIFFERENTIAL ON OVERLAPPING
PERIODS OF INTEREST ON TAX OVERPAYMENTS AND
UNDERPAYMENTS.
(a) * * *
* * * * * * *
(c) Effective Dates.--
(1) In general.--Except as provided under paragraph
(2), the amendments made by this section shall apply to
interest for periods beginning after the date of the
enactment of this Act.
(2) Special rule.--[The amendments] Subject to any
applicable statute of limitation not having expired
with regard to either a tax underpayment or a tax
overpayment, the amendments made by this section shall
apply to interest for periods beginning before the date
of the enactment of this Act if the taxpayer--
(A) reasonably identifies and establishes
periods of such tax overpayments and
underpayments for which the zero rate applies;
and
(B) not later than December 31, 1999,
requests the Secretary of the Treasury to apply
section 6621(d) of the Internal Revenue Code of
1986, as added by subsection (a), to such
periods.
* * * * * * *
Subtitle E--Protections for Taxpayers Subject to Audit or Collection
Activities
PART I--DUE PROCESS
SEC. 3401. DUE PROCESS IN INTERNAL REVENUE SERVICE COLLECTION ACTIONS.
(a) * * *
* * * * * * *
(c) Review by Special Trial Judges Allowed.--
(1) In general.--Section [7443(b)] 7443A(b) (relating
to proceedings which may be assigned to special trial
judges) is amended by striking ``and'' at the end of
paragraph (3), by redesignating paragraph (4) as
paragraph (5), and by inserting after paragraph (3) the
following new paragraph:
``(4) any proceeding under section 6320 or 6330,
and''.
(2) Authority to make decisions.--Section [7443(c)]
7443A(c) (relating to authority to make court
decisions) is amended by striking ``or (3)'' and
inserting ``(3), or (4)''.
* * * * * * *
VII. DISSENTING VIEWS ON H.R. 4579 THE TAXPAYER RELIEF ACT OF 1998
Democratic Members of this Committee have voted for every
major deficit reduction act signed by a Democratic or
Republican President--unlike any of the Republicans sitting on
this panel. The fiscal discipline embodied in these acts has
helped to spark economic growth and lower interest rates with
substantial benefits to all working Americans.
This commitment to fiscal discipline has moved us from an
economy riddled with annual deficits of up to $300 billion to
projected unified budget surpluses. We are now at a point where
we can tackle the most difficult of all long-term budget
problems, securing Social Security for the long term.
We should not abandon fiscal discipline or pass up this
opportunity to preserve Security Social simply because it is
seven weeks before an election. We agree with Federal Reserve
Board Chairman Alan Greenspan who has urged caution:
My first choice is to retire debt as much as we can,
because it has a positive economic impact * * * The
overall effect of a large surplus is to increase
national savings, reduce long-term interest rates, and
create positive add-ons to the economy * * * There is
no need to rush into any particular action, because the
debt will be reduced automatically.
Republicans will say that our vigilance in protecting
Social Security is just an excuse to oppose these tax cuts. We
Democrats do not oppose tax cuts. We support tax cuts. Every
single one of us voted for significant tax cuts last year. We
Democrats supported a substitute that provided even more tax
relief for the middle-class than ultimately was enacted. That
bill was fiscally responsible--it was paid for.
Many of the provisions in this tax bill originally were
sponsored by Democrats. Marriage penalty relief; 100 percent
deductibility of the self-employed health insurance premiums;
and simplifying minimum tax rules to ensure that those promised
the $500-per-child credit will be fully eligible for it--these
have all been introduced in this Congress by Committee on Ways
and Means' Democrats. People can check the record and see that
it is the Republicans on this Committee who voted them down
last year or refused to take them up.
So, make no mistake. We support fiscally responsible tax
cuts, but we do not support using the Social Security surplus
in order to pay for them. Therefore, we will support the
Committee bill under the condition that the tax cuts go into
effect as soon as we have achieved the President's goal of
saving Social Security first. We offered an amendment to do
just that. If that amendment had been adopted, the Committee
bill would have a chance of actually becoming law. Republicans
defeated it and, therefore, ensured that tax provisions that we
all support will not become law this year--since the President
will veto this irresponsible bill.
The Republicans argue that the projected surpluses are
sufficient to both cut taxes and preserve Social Security. They
also argue that they are reserving 90 percent of the surpluses
for Social Security. These assertions simply are not true.
The Republicans admit that 10 percent of the surplus is
being diverted from Social Security under this bill. Moreover,
there is nothing in the Republican proposal that actually
reserves the other 90 percent for Social Security. In separate
legislation, Republicans say they will ``protect'' Social
Security. However, in that bill they merely require the
Secretary of the Treasury to make several bookkeeping entries.
They do not prevent the Congress from using the Social Security
surplus for further tax cuts or further increases in spending.
Under their plan, Congress could use the entire amount of the
Social Security surplus next year for tax cuts or spending
increases. There is nothing in the Republican proposal that
would prevent Congress from doing so. With this bill they
already have their noses under the Social Security tent.
When we talk about future budget surpluses, we should be
clear that we are speaking about projections. Hopefully, the
projections will be accurate, but there are many unforseen
events in our global economy. It would be foolhardly to assume
that we can predict all of them. That is why no less an
authority than Alan Greenspan has warned this Congress that we
should not spend money we may not have.
Even if we assume the optimistic projections will come
true, the so-called surplus over the next 5 years is not really
a surplus. It is due to the contributions that American workers
have made to Social Security. It already has been committed to
the Social Security trust fund. If we treated those
contributions like all businesses treat their contributions to
their employees' retirement plans, we would have a $137 billion
deficit over the next 5 years and only a $31 billion surplus
over thenext 10 years, even if the optimistic assumptions prove
to be correct.
Perhaps spending some of this money would not be so bad if
it really was not needed to shore up Social Security. We all
know the challenge that Social Security faces as the baby-
boomers near retirement. The reality is that all of the money
that Congress has committed to the Social Security program is
needed, not only 90 percent of the surplus.
We compliment Chairman Archer for the substance of the tax
bill. The substitute we offered would have allowed the
Chairman's bill to take effect after we ensure the solvency of
the Social Security system. We all have committed to taking
action early next year on the Social Security problem. Acting
now would violate our commitment to the Social Security trust
fund.
Charles B. Rangel.
William J. Coyne.
Ben Cardin.
Jim McDermott.
John Lewis.
John S. Tanner.
Robert T. Matsui.
Pete Stark.
Richard E. Neal.
Sander Levin.
Karen L. Thurman.
Xavier Becerra.
William J. Jefferson.
Jerry Kleczka.