[House Report 105-817]
[From the U.S. Government Publishing Office]
105th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 105-817
_______________________________________________________________________
EXTENSION OF EXPIRING PROVISIONS AND OTHER TAX RELIEF
_______
October 12, 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
[To accompany H.R. 4738]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 4738) to amend the Internal Revenue Code of 1986 to
extend certain expiring provisions, provide tax relief for
farmers and small businesses, 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...........................................19
A. Purpose and Summary................................... 19
B. Background and Need for Legislation................... 21
C. Legislative History................................... 21
II. Explanation of the Bill..........................................22
Title I. Extension and Modification of Certain Expiring Provision22
Subtitle A--Tax Provisions............................... 22
A. Extension of Research Tax Credit (sec. 101)....... 22
B. Extension of Work Opportunity Tax Credit (sec.
102)............................................. 25
C. Permanent Extension of Income Averaging for
Farmers (sec. 103)............................... 26
D. Extend the Deduction Provided for Contributions of
Appreciated Stock to Private Foundations; Public
Inspection of Private Foundation Annual Returns.. 27
1. Extend the deduction for contributions of
appreciated stock to private foundations
(sec. 104(a))................................ 27
2. Public inspection of private foundation annual
returns (sec. 104(b))........................ 28
E. Exceptions under Subpart F for Certain Active
Financing Income (sec. 105)...................... 30
F. Disclosure of Return Information to Department of
Education in Connection With Income Contingent
Student Loans (sec. 106)......................... 51
Subtitle B--Generalized System of Preferences............ 52
A. Extension of the Generalized System of Preferences
(sec. 111)....................................... 52
Title II. Other Provisions.......................................52
A. Comprehensive Study of Recovery Periods and
Depreciation Methods Under Section 168 (sec. 201).... 52
B. Farm Production Flexibility Contract Payments (sec.
202)................................................. 54
C. Increase Deduction for Health Insurance Expenses of
Self-Employed Individuals (sec. 203)................. 55
D. Increase State Volume Limits on Private Activity Tax-
Exempt Bonds (sec. 204).............................. 56
E. Modification of Individual Estimated Tax Safe Harbors
(sec. 205)........................................... 57
F. State Election to Exempt Student Employees From Social
Security (sec. 206).................................. 57
Title III. Revenue Offset Provisions.............................58
A. Treatment of Certain Deductible Liquidating
Distributions of Regulated Investment Companies and
Real Estate Investment Trusts (sec. 301)............. 58
B. Add Vaccines Against Rotavirus Gastroenteritis to the
List of Taxable Vaccines (sec. 302).................. 60
C. Clarify and Expand Mathematical Error Procedures (sec.
303)................................................. 61
D. Restrict 10-Year Net Operating Loss Carryback Rules
for Specified Liability Losses (sec. 304)............ 62
Title IV. Tax Technical Corrections..............................63
A. Technical Corrections to the 1998 Act................. 63
1. Burden of proof (sec. 402(b))..................... 63
2. Relief for innocent spouses (sec. 402(c))......... 63
3. Interest netting (sec. 402(d)).................... 64
4. Effective date for elimination of 18-month holding
period for capital gains (sec. 402 (i)).......... 65
B. Technical Corrections to the 1997 Act................. 66
1. Treatment of interest on qualified education
loans (sec. 403(a)).............................. 66
2. Capital gain distributions of charitable
remainder trusts (sec. 403(b))................... 66
3. Gifts may not be revalued for estate tax purposes
after expiration of statute of limitations (sec.
403(c)).......................................... 67
4. Coordinate Vaccine Injury Compensation Trust Fund
expenditure purposes with list of taxable
vaccines (sec. 403(d))........................... 69
5. Abatement of interest by reason of Presidentially
declared disaster (sec. 403(e)).................. 69
6. Treatment of certain corporate distributions
(sec. 403(f)).................................... 70
7. Treatment of affiliated group including formerly
tax-exempt organization (sec. 403(g))............ 71
8. Treatment of net operating losses arising from
certain eligible losses (sec. 403(h))............ 72
9. Determination of unborrowed cash value under COLI
pro rata interest disallowance rules (sec.
403(i)).......................................... 72
10. Payment of taxes by commercially acceptable means
(sec. 403(k)).................................... 73
C. Technical Corrections to the 1984 Act................. 73
1. Casualty loss deduction (sec. 404)............... 73
D. Disclosure of Tax Return Information to Department of
Agriculture (sec. 405(a))............................ 74
E. Technical Corrections to the Transportation Equity Act
for the 21st Century (sec. 405(b))................... 74
III.Vote of the Committee............................................75
IV. Budget Effects of the Bill.......................................75
A. Committee Estimates of Budgetary Effects.............. 75
B. Budget Authority and Tax Expenditures................. 78
C. Cost Estimate Prepared by the Congressional Budget
Office............................................... 78
V. Other Matters To Be Discussed Under the Rules of the House.......82
A. Committee Oversight Findings and Recommendations...... 82
B. Summary of Findings and Recommendations of the
Committee on Government Reform and Oversight......... 82
C. Constitutional Authority Statement.................... 82
D. Information Relating to Unfunded Mandates............. 82
E. Applicability of House Rule XXI5(c)................... 83
VI. Changes in Existing Law Made by the Bill, as Reported............83
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.
(a) 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.
(b) Table of Contents.--
Sec. 1. Amendment of 1986 Code; table of contents.
TITLE I--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS
Subtitle A--Tax Provisions
Sec. 101. Research credit.
Sec. 102. Work opportunity credit.
Sec. 103. Income averaging for farmers made permanent.
Sec. 104. Contributions of stock to private foundations; expanded
public inspection of private foundations' annual returns.
Sec. 105. Subpart F exemption for active financing income.
Sec. 106. Disclosure of return information on income contingent student
loans.
Subtitle B--Generalized System of Preferences
Sec. 111. Extension of Generalized System of Preferences.
TITLE II--OTHER PROVISIONS
Sec. 201. Depreciation study.
Sec. 202. Production flexibility contract payments.
Sec. 203. 100 percent deduction for health insurance costs of self-
employed individuals.
Sec. 204. Increase in volume cap on private activity bonds.
Sec. 205. Modification of estimated tax safe harbors.
Sec. 206. Exemption for students employed by State schools, colleges,
or universities.
TITLE III--REVENUE OFFSETS
Sec. 301. Treatment of certain deductible liquidating distributions of
regulated investment companies and real estate investment trusts.
Sec. 302. Inclusion of rotavirus gastroenteritis as a taxable vaccine.
Sec. 303. Clarification and expansion of mathematical error assessment
procedures.
Sec. 304. Clarification of definition of specified liability loss.
TITLE IV--TECHNICAL CORRECTIONS
Sec. 401. Definitions; coordination with other titles.
Sec. 402. Amendments related to Internal Revenue Service Restructuring
and Reform Act of 1998.
Sec. 403. Amendments related to Taxpayer Relief Act of 1997.
Sec. 404. Amendments related to Tax Reform Act of 1984.
Sec. 405. Other amendments.
TITLE I--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS
Subtitle A--Tax Provisions
SEC. 101. RESEARCH CREDIT.
(a) Temporary Extension.--Paragraph (1) of section 41(h) (relating to
termination) is amended--
(1) by striking ``June 30, 1998'' and inserting ``December
31, 1999'';
(2) by striking ``24-month'' and inserting ``42-month''; and
(3) by striking ``24 months'' and inserting ``42 months''.
(b) Technical Amendment.--Subparagraph (D) of section 45C(b)(1) is
amended by striking ``June 30, 1998'' and inserting ``December 31,
1999''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred after June 30, 1998.
SEC. 102. 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 ``December 31, 1999''.
(b) Effective Date.--The amendment made by this section shall apply
to individuals who begin work for the employer after June 30, 1998.
SEC. 103. 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. 104. 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),
paragraph (1) 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 in 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. 105. 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 one 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
branch.
``(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.
SEC. 106. DISCLOSURE OF RETURN INFORMATION ON INCOME CONTINGENT STUDENT
LOANS.
Subparagraph (D) of section 6103(l)(13) (relating to disclosure of
return information to carry out income contingent repayment of student
loans) is amended by striking ``September 30, 1998'' and inserting
``September 30, 2003''.
Subtitle B--Generalized System of Preferences
SEC. 111. 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 ``December 31, 1999''.
(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 II--OTHER PROVISIONS
SEC. 201. DEPRECIATION STUDY.
The Secretary of the Treasury (or the Secretary's delegate)--
(1) shall conduct a comprehensive study of the recovery
periods and depreciation methods under section 168 of the
Internal Revenue Code of 1986, and
(2) not later than March 31, 2000, shall submit the results
of such study, together with recommendations for determining
such periods and methods in a more rational manner, to the
Committee on Ways and Means of the House of Representatives and
the Committee on Finance of the Senate.
SEC. 202. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.
(a) In General.--The options under paragraphs (2) and (3) of section
112(d) of the Federal Agriculture Improvement and Reform Act of 1996 (7
U.S.C. 7212(d) (2) and (3)), as in effect on the date of the enactment
of this Act, shall be disregarded in determining the taxable year for
which any payment under a production flexibility contract under
subtitle B of title I of such Act (as so in effect) is properly
includible in gross income for purposes of the Internal Revenue Code of
1986.
(b) Effective Date.--Subsection (a) shall apply to taxable years
ending after December 31, 1995.
SEC. 203. 100 PERCENT DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
EMPLOYED INDIVIDUALS.
(a) In General.--The table contained in subparagraph (B) of section
162(l)(1) (relating to special rules for health insurance costs of
self-employed individuals) is amended by striking the last 4 items and
inserting the following new items:
``2002........................................ 75
2003 and thereafter.......................... 100.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1998.
SEC. 204. INCREASE IN VOLUME CAP ON PRIVATE ACTIVITY BONDS.
(a) In General.--Subsection (d) of section 146 (relating to volume
cap) is amended by striking paragraphs (1) and (2) and inserting the
following new paragraphs:
``(1) In general.--The State ceiling applicable to any State
for any calendar year shall be the greater of--
``(A) an amount equal to the per capita limit for
such year multiplied by the State population, or
``(B) the aggregate limit for such year.
Subparagraph (B) shall not apply to any possession of the
United States.
``(2) Per capita limit; aggregate limit.--For purposes of
paragraph (1), the per capita limit, and the aggregate limit,
for any calendar year shall be determined in accordance with
the following table:
1999 through 2002.......... $50 $150,000,000
2003....................... 55 165,000,000
2004....................... 60 180,000,000
2005....................... 65 195,000,000
2006....................... 70 210,000,000
2007 and thereafter........ 75 225,000,000.''
(b) Effective Date.--The amendment made by this section shall apply
to calendar years after 1998.
SEC. 205. MODIFICATION OF ESTIMATED TAX SAFE HARBORS.
(a) In General.--The table contained in clause (i) of section
6654(d)(1)(C) (relating to limitation on use of preceding year's tax)
is amended by striking the item relating to 1998, 1999, or 2000 and
inserting the following new items:
``1998........................................ 105
1999 or 2000................................. 106''.
(b) Effective Date.--The amendment made by this section shall apply
with respect to any installment payment for taxable years beginning
after December 31, 1999.
SEC. 206. EXEMPTION FOR STUDENTS EMPLOYED BY STATE SCHOOLS, COLLEGES,
OR UNIVERSITIES.
(a) In General.--Notwithstanding section 218 of the Social Security
Act, any agreement with a State (or any modification thereof) entered
into pursuant to such section may, at the option of such State, be
modified at any time on or after January 1, 1999, and on or before
March 31, 1999, so as to exclude service performed in the employ of a
school, college, or university if such service is performed by a
student who is enrolled and is regularly attending classes at such
school, college, or university.
(b) Effective Date of Modification.--Any modification of an agreement
pursuant to subsection (a) shall be effective with respect to services
performed after June 30, 1999.
(c) Irrevocability of Modification.--If any modification of an
agreement pursuant to subsection (a) terminates coverage with respect
to service performed in the employ of a school, college, or university,
by a student who is enrolled and regularly attending classes at such
school, college, or university, the Commissioner of Social Security and
the State may not thereafter modify such agreement so as to again make
the agreement applicable to such service performed in the employ of
such school, college, or university.
TITLE III--REVENUE OFFSETS
SEC. 301. 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.
SEC. 302. INCLUSION OF ROTAVIRUS GASTROENTERITIS AS A TAXABLE VACCINE.
(a) In General.--Paragraph (1) of section 4132 (defining taxable
vaccine) is amended by adding at the end the following new
subparagraph:
``(K) Any vaccine against rotavirus
gastroenteritis.''.
(b) Effective Date.--
(1) Sales.--The amendment made by this section shall apply to
sales after the date of the enactment of this Act.
(2) Deliveries.--For purposes of paragraph (1), in the case
of sales on or before the date of the enactment of this Act for
which delivery is made after such date, the delivery date shall
be considered the sale date.
SEC. 303. CLARIFICATION AND EXPANSION OF MATHEMATICAL ERROR ASSESSMENT
PROCEDURES.
(a) TIN Deemed Incorrect if Information on Return Differs With Agency
Records.--Paragraph (2) of section 6213(g) (defining mathematical or
clerical error) is amended by adding at the end the following flush
sentence:
``A taxpayer shall be treated as having omitted a correct TIN
for purposes of the preceding sentence if information provided
by the taxpayer on the return with respect to the individual
whose TIN was provided differs from the information the
Secretary obtains from the person issuing the TIN.''.
(b) Expansion of Mathematical Error Procedures to Cases Where TIN
Establishes Individual Not Eligible for Tax Credit.--Paragraph (2) of
section 6213(g) is amended by striking ``and'' at the end of
subparagraph (J), by striking the period at the end of the subparagraph
(K) and inserting ``, and'', and by inserting after subparagraph (K)
the following new subparagraph:
``(L) the inclusion on a return of a TIN required to
be included on the return under section 21, 24, or 32
if--
``(i) such TIN is of an individual whose age
affects the amount of the credit under such
section; and
``(ii) the computation of the credit on the
return reflects the treatment of such
individual as being of an age different from
the individual's age based on such TIN.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years ending after the date of the enactment of this Act.
SEC. 304. CLARIFICATION OF DEFINITION OF SPECIFIED LIABILITY LOSS.
(a) In General.--Subparagraph (B) of section 172(f)(1) (defining
specified liability loss) is amended to read as follows:
``(B)(i) Any amount allowable as a deduction under
this chapter (other than section 468(a)(1) or 468A(a))
which is in satisfaction of a liability under a Federal
or State law requiring--
``(I) the reclamation of land;
``(II) the decommissioning of a nuclear power
plant (or any unit thereof);
``(III) the dismantlement of a drilling
platform;
``(IV) the remediation of environmental
contamination; or
``(V) a payment under any workers
compensation act (within the meaning of section
461(h)(2)(C)(i)).
``(ii) A liability shall be taken into account under
this subparagraph only if--
``(I) the act (or failure to act) giving rise
to such liability occurs at least 3 years
before the beginning of the taxable year; and
``(II) the taxpayer used an accrual method of
accounting throughout the period or periods
during which such act (or failure to act)
occurred.''.
(b) Effective Date.--The amendment made by this section shall apply
to net operating losses arising in taxable years ending after the date
of the enactment of this Act.
TITLE IV--TECHNICAL CORRECTIONS
SEC. 401. 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. 402. 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 3467 of 1998 Act.--The subsection
(d) of section 6159 of the 1986 Code relating to cross reference is
redesignated as subsection (e).
(h) 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),''.
(i) Amendments 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.
(3) Paragraph (13) of section 1(h) of the 1986 Code is
amended by adding at the end the following new subparagraph:
``(D) Charitable remainder trusts.--Subparagraphs (A)
and (B)(ii) shall not apply to any capital gain
distribution made by a trust described in section
664.''
(j) Amendment Related to Section 7004 of 1998 Act.--Clause (i) of
section 408A(c)(3)(C) of the 1986 Code, as amended by section 7004 of
the 1998 Act, is amended by striking the period at the end of subclause
(II) and inserting ``, and''.
(k) 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. 403. AMENDMENTS RELATED TO TAXPAYER RELIEF ACT OF 1997.
(a) Amendments Related to Section 202 of 1997 Act.--
(1) 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).''
(2)(A) Subparagraph (C) of section 221(b)(2) of the 1986 Code
is amended--
(i) by striking ``135, 137,'' in clause (i),
(ii) by inserting ``135, 137,'' after ``sections
86,'' in clause (ii), and
(iii) by striking the last sentence.
(B) Sections 86(b)(2)(A), 135(c)(4)(A), and 219(g)(3)(A)(ii)
of the 1986 Code are each amended by inserting ``221,'' after
``137,''.
(C) Subparagraph (A) of section 137(b)(3) of the 1986 Code is
amended by inserting ``221,'' before ``911,''.
(D) Clause (iii) of section 469(i)(3)(E) of the 1986 Code is
amended to read as follows:
``(iii) the amounts allowable as a deduction
under sections 219 and 221, and''.
(3) The last sentence of section 221(e)(1) of the 1986 Code
is amended by inserting before the period ``or to any person by
reason of a loan under any qualified employer plan (as defined
in section 72(p)(4)) or under any contract referred to in
section 72(p)(5)''.
(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.--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.''.
(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 1997 Act 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) Provision Related to Section 1042 of 1997 Act.--Rules similar to
the rules of section 1.1502-75(d)(5) of the Treasury Regulations shall
apply with respect to any organization described in section 1042(b) of
the 1997 Act.
(h) 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.''
(i) 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.''
(j) Amendment Related to Section 1175 of 1997 Act.--Subparagraph (C)
of section 954(e)(2) of the 1986 Code is amended by striking
``subsection (h)(8)'' and inserting ``subsection (h)(9)''.
(k) 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, debit, or charge cards for the payment
of taxes imposed by subtitle A''.
(l) Effective Date.--The amendments made by this section shall take
effect as if included in the provisions of the 1997 Act to which they
relate.
SEC. 404. 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. 405. 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 plan referred to in such clause
as in effect before the amendment made by the preceding
sentence.
(2) Paragraph (3) of section 56(a) of the 1986 Code is
amended by striking ``section 460(b)(2)'' and inserting
``section 460(b)(1)'' and by striking ``section 460(b)(4)'' and
inserting ``section 460(b)(3)''.
(3) Paragraph (10) of section 2031(c) of the 1986 Code is
amended by striking ``section 2033A(e)(3)'' and inserting
``section 2057(e)(3)''.
(4) Subparagraphs (C) and (D) of section 6693(a)(2) of the
1986 Code are each amended by striking ``Section'' and
inserting ``section''.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
Purpose
The bill, H.R. 4738, provides extensions of expired and
expiring tax and trade provisions, accelerates the increase in
the deduction for self-employed health insurance, requires a
Treasury study of depreciation periods and methods, clarifies
the treatment of certain farm production flexibility payments,
increases the private activity bond volume cap, modifies the
tax treatment of certain deductible liquidating distributions
of regulated investment companies (``RICs'') and real estate
investment trusts (``REITS''), restricts net operating loss
carryback rules for specified liability losses, clarifies and
expands mathematical error procedures, adds vaccines against
rotavirus gastroenteritis to the list of taxable vaccines, and
provides necessary technical corrections to recent tax
legislation.
Summary of the Bill
Extension of expiring provisions
The bill extends the following tax and trade provisions,
retroactive to the existing expiration date:
(1) Research and experimentation tax credit, with
certain modifications (through 1999);
(2) Work opportunity tax credit (through 1999);
(3) Permanent extension of the deduction for
contributions of appreciated stock to private
foundations, along with public inspection of private
foundation annual returns;
(4) Exceptions under subpart F for certain active
financing income, with modifications, applicable only
for taxable years beginning in 1999;
(5) Disclosure of return information to the
Department of Education for income contingent student
loans (through September 30, 2003);
(6) Permanent extension of income averaging for
farmers; and
(7) Reauthorization of the generalized system of
preferences (``GSP''), effective for duties paid on or
after July 1, 1998 and before January 1, 2000.
Treasury study on depreciation
The Treasury Department is to conduct a comprehensive study
of recovery periods and depreciation methods under Code section
168, and to provide recommendations regarding such periods and
methods by March 31, 2000.
Farm production flexibility contract payments
The time a production flexibility contract payment under
the Federal Agriculture Improvement and Reform Act of 1996
(FAIR Act) is properly includible in income is determined
without regard to the options granted by section 112(d)(2)
(allowing receipt of one-half of the annual payment on either
December 15 or January 15 of the fiscal year) or section
112(d)(3) (allowing the acceleration of all payments for fiscal
year 1999) of that Act. The provision is effective for
production flexibility contract payments made under the FAIR
Act in taxable years ending 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 75 percent for taxable years
beginning in 2002 and to 100 percent for taxable years
beginning in 2003 and thereafter.
Volume limits on private activity bonds
The bill increases the limit on State private activity tax-
exempt bonds to $75 per resident of each State or $225 million
(if greater) beginning in calendar year 2007. The limit
increase is phased in, beginning with $55 per capita or $165
million (if greater) in calendar year 2003.
Modification of individual estimated tax safe harbors
For taxable years beginning in 2000 and 2001, the 105
percent of last year's liability safe harbor for any individual
with an AGI of more than $150,000 as shown on the return for
the preceding taxable year is modified to be a 106 percent of
last year's liability safe harbor.
State election to exempt student employees from Social Security
The bill allows a limited window of time (January 1 through
March 31, 1999) for States to modify existing State agreements
to exempt from Social Security coverage students (including
graduate assistants) who are employed by a public school,
university, or college in a nonexempted State. The provision is
effective with respect to earnings after June 30, 1999.
Revenue offset provisions
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 will
notrecognize gain (if any) on the liquidating distribution and the
recipient corporation will hold the assets at a carryover basis. 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.
Mathematical error procedure.--The bill clarifies and
expands the mathematical and clerical error procedures so that
a correct TIN is a TIN assigned by the Social Security
Administration (or IRS) to the individual identified on the tax
return.
Vaccine excise tax.--The bill adds vaccines against
rotavirus gastroenteritis to the list of taxable vaccines,
effective for vaccine purchases after the date of enactment.
Restrict NOL carryback rules for specified liability
losses.--The bill limits the definition of specified liability
losses that can be carried back 10 years. The provision is
effective for net operating losses arising in taxable years
ending after the date of enactment. No inference is intended
regarding the interpretation of the specified liability loss
carryback rules 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.
B. Background and Need for Legislation
Certain tax and trade provisions expired as of July 1,
1998. The Committee believes that these provisions should be
extended, generally through 1999, in order for taxpayers to
have certainty in applying the provisions and for the Congress
to have additional time to review and evaluate the provisions.
The deduction for contributions of appreciated stock to private
foundations and income averaging for farmers are extended
permanently.
The Committee concluded that the scheduled increase to 100
percent for the deduction for self-employed health insurance
should be accelerated in order to make health insurance more
affordable for self-employed individuals.
The Treasury Department is required to conduct a
comprehensive study of recovery periods and depreciation under
Code section 168, and to provide recommendations regarding such
periods and methods.
The bill provides revenue offsets for the costs of the
other provisions of the bill, as well as necessary tax
technical corrections to recent tax legislation.
C. Legislative History
The bill, H.R. 4738, was introduced by Chairman Archer on
October 8, 1998. The Committee marked up the bill on October 9,
1998, and approved the bill with the Chairman's amendment in
the nature of a substitute by a voice vote (with a quorum
present).
The provisions of H.R. 4738 generally were also included in
H.R. 4579 (``Taxpayer Relief Act of 1998''), as passed by the
House of Representatives on September 26, 1998. Three of the
revenue-offset provisions (restrict NOL carryback rules for
specified liability losses, clarify and expand mathematical
error procedures, and adding the vaccine against rotavirus
gastroenteritis as a taxable vaccine) were included in H.R.
4250 (``Patient Protection Act of 1998''), as passed by the
House of Representatives on July 24, 1998.
II. EXPLANATION OF THE BILL
TITLE I. EXTENSION OF EXPIRING PROVISIONS
Subtitle A--Tax Provisions
A. Extension of Research Tax Credit (Sec. 101 of the Bill and Sec. 41
of the Code)
Present Law
General rule
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenditures for a taxable year exceeded its base amount for
that year. The research tax credit expired and generally 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.\1\
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\1\ A special rule is designed to gradually recompute a start-up
firm's fixed-base percentate based on its actual research experience.
Under this special rule, a start-up firm will be assigned a fixed-based
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 qualifed 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'').\2\
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\2\ 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 ofpresent-law section 174 but must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended to be
useful in the development of a new or improved business component of
the taxpayer, and must 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.
Explanation of Provision
The bill extends the research tax credit for 18 months--
i.e., generally, for the period July 1, 1998, through December
31, 1999.
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 the lack of clarity in the
interpretation of the distinction between internal-use
software, the costs of which may be eligible for the credit if
additional tests are met, and other software. The Committee
emphasizes that application of the definition of internal-use
software should fully reflect Congressional intent.
Effective Date
The extension of the research credit is effective for
qualified research expenditures paid or incurred during the
period July 1, 1998, through December 31, 1999.
B. Extension of the Work Opportunity Tax Credit (Sec. 102 of the Bill
and Sec. 51 of the Code)
Present 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% 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 than 120 hours in the first year of employment.
Expiration date
The credit is 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 18
months (through December 31, 1999).
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 January 1, 2000.
C. Permanent Extension of Income Averaging for Farmers (Sec. 103 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''; \3\ (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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\3\ 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.
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. 104(a) of the bill and sec.
170(e)(5) of the Code)
Present Law
In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair market value
of property contributed to a charitable organization.\4\
However, in the case of a charitable contribution of short-term
gain, inventory, or other ordinary income property, the amount
of the deduction generally is limited to the taxpayer's basis
in the property. In the case of a charitable contribution of
tangible personal property, the deduction is limited to the
taxpayer's basis in such property if the use by the recipient
charitable organization is unrelated to the organization's tax-
exempt purpose.
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\4\ The amount of the deduction allowable for a taxable year with
respect to a charitable contribution may be reduced depending on the
type of property contributed, the type of charitable organization to
which the property is contributed, and the income of the taxpayer
(secs. 170(b) and 170(e)).
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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. 104(b)
of the bill and secs. 6033, 6104, 6652, 6685, 7207 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 public inspection 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.\5\ While
proposed regulations have been issued, final regulations have
not been published; therefore, the provision is not yet in
effect.\6\
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\5\ 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.
\6\ 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.
105 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 limitation purposes.
However, in the case of a corporation that is engaged in the
active conduct of a banking or securities business, the income
that is eligible for this exception is determined under the
principles applicable in determining the income which is
treated as nonpassive income for purposes of the passive
foreign investment company provisions. 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 inwhich 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 insurance business. 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 \7\ 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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\7\ 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 areeligible 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 are not again 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 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 active
conduct 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 customersin 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 which
qualifies as an eligible CFC by satisfying 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 other rules.--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.
In addition, the Committee expects that the Treasury
Department and the Internal Revenue Service will issue timely
guidance to make currently effective conforming changes to
existing regulations in order to reflect the exceptions under
section 954(h), including conforming changes to the regulations
under section 954(c)(3).
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 inthe United States with respect to U.S.
securities. This reflects the Committee's understanding that the
exception from current inclusion under subpart F for income earned by
dealers in securities does not apply to activities that would otherwise
be conducted in the United States. 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 that 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 homecountry 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 whether in 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 an 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 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 company 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
would be 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 disability contracts (other than
credit disability) which are subject to section 846(f)(6)(A),
it is intended that mortality and morbidity tables reasonably
reflect appropriate experience and foreign mortality and
morbidity factors.
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 is 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), theincome 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 is not 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, orannuities. 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 such 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).
Other matters
Nothing in this provision is intended to alter the Treasury
Department's agreement, as reflected in Notice 98-35, not to
finalize regulations regarding so-called hybrid entities prior
to January 1, 2000, in order to allow Congress the opportunity
to fully consider the tax policy issues involved.
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. Disclosure of Return Information to Department of Education in
Connection with Income Contingent Loans (Sec. 106 of the Bill and Sec.
6103(l)(13) of the Code)
Present Law
Under section 6103(l)(13) of the Code, the Secretary of
Treasury was authorized to disclose to the Department of
Education certain return information with respect to any
taxpayer who has received an ``applicable student loan.'' An
``applicable student loan'' is any loan made under (1) part D
of title IV of the Higher Education Act of 1965 or (2) parts B
or E of title IV of the Higher Education Act of 1965 which is
in default and has been assigned to the Department of
Education, if the loan repayment amounts are based in whole or
in part on the taxpayer's income. The Secretary is permitted to
disclose only taxpayer identity information and the adjusted
gross income of the taxpayer. The Department of Education may
use the information only to establish the appropriate income
contingent repayment amount for an applicable student loan.
The disclosure authority under section 6103(l)(13)
terminated with respect to requests made after September 30,
1998.
Reasons for Change
The Committee believes it is appropriate to extend the
disclosure authority with respect to applicable student loans
during the period in which the applicable loan programs are
extended.
Explanation of Provision
The provision reinstates the disclosure authority under
section 6103(l)(13) with respect to requests made after the
date of enactment and before October 1, 2003.
Effective Date
The disclosure authority under section 6103(l)(13) applies
to requests made after the date of enactment and before October
1, 2003.
Subtitle B--Generalized System of Preferences
A. Extension of the Generalized System of Preferences (Sec. 111 of the
Bill and Sec. 505 of the Trade Act of 1974)
Present 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
December 31, 1999. 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 January 1, 2000.
II. OTHER PROVISIONS
A. Comprehensive Study of Recovery Periods and Depreciation Methods
Under Section 168 (Sec. 201 of the Bill)
Present Law
A taxpayer is allowed to deduct a reasonable allowance for
the exhaustion, wear and tear, and obsolescence of property
that is used in a trade or business or is held for the
production of income. For most tangible personal and real
property placed in service after 1986, the amount of the
deductible allowance is determined under section 168 using the
applicable recovery period, the applicable depreciation method,
and the applicable convention specified in section 168.
For some types of assets, the applicable recovery period of
an asset is provided in section 168. In other cases, the
recovery period of an asset is determined by reference to its
class life. The class life of an asset may be provided by
section 168, or may be determined with regard to the list of
class lives provided by the Treasury that was in effect on
January 1, 1986. The Treasury Department is required to monitor
and analyze actual experience with respect to all depreciable
assets.
The applicable depreciation method determines the rate at
which the cost of the property is recovered. In general, the
applicable depreciation method specified in section 168 varies
with the recovery period of the property. For property with a
recovery period of 10 years or less, the applicable method is
the 200 percent declining balance method, switching to
straight-line in the first year in which that method yields a
larger allowance. The 150 percent declining balance, (switching
to straight-line) is the applicable method for property with a
recovery period of 15 or 20 years, as well as for all property
used in the trade or business of farming. The straight-line
method must be used for property with a longer recovery period,
as well as for certain specified types of property.
The applicable convention determines the point of time
during the year that the property is considered placed in
service. Applicable conventions specified in section 168
include the mid- year, the mid-quarter and the mid-month
conventions.
Reasons for Change
The Committee is concerned that, in some cases, the present
law depreciation rules may measure income improperly, may
create competitive disadvantages, and may result in an
inefficient allocation of investment capital. The Committee
also believes that the manner in which recovery periods and
methods are determined should be examined to determine if they
could be improved.
Explanation of Provision
The Secretary of the Treasury (or his delegate) is directed
to conduct a comprehensive study of the recovery periods and
depreciation methods under section 168 of the Code, and to
provide recommendations for determining such periods and
methods in a more rational manner.
Effective Date
The Secretary of the Treasury (or his delegate) is directed
to submit the results of the study and recommendations to the
House Ways and Means and Senate Finance Committees by March 31,
2000.
B. Farm Production Flexibility Contract Payments (Sec. 202 of the Bill)
Present law
A taxpayer generally is required to include an item in
income no later than the time of its actual or constructive
receipt, unless such amount properly is accounted for in 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
(the ``FAIR Act'') provides for production flexibility
contracts between certain eligible owners and producers and the
Secretary of Agriculture. These contracts generally cover crop
years from 1996 through 2002. Annual payments are made under
such contracts at specific times during the Federal
government's fiscal year. Section 112(d)(2) of the FAIR Act
provides that one-half of each annual payment is to be made on
either December 15 or January 15 of the fiscal year, at the
option of the recipient.\8\ This option to receive the payment
on December 15 potentially results in the constructive receipt
(and thus potential inclusion in income) of one-half of the
annual payment at that time, even if the option to receive the
amount on January 15 is elected.
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\8\ This rule applies to fiscal years after 1996. For fiscal year
1996, this payment was to be made not later than 30 days after the
production flexibility contract was entered into.
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The remaining one-half of the annual payment must be made
no later than September 30 of the fiscal year. The Emergency
Farm Financial Relief Act of 1998 added section 112(d)(3) to
the FAIR Act which 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. Thus, the one-half of the
annual amount that would otherwise be required to be paid no
later than September 30, 1999 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 actually are received or the right to their receipt
is fixed.
Reasons for Change
The Committee believes that efficient tax administration
will be furthered by not taking into account those options that
control the timing of a production flexibility contract payment
in determining taxable income.
Explanation of Provision
The time a production flexibility contract payment under
the FAIR Act properly is includible in income would be
determined without regard to the options granted by section
112(d)(2) (allowing receipt of one-half of the annual payment
on either December 15 or January 15 of the fiscal year) or
section 112(d)(3) (allowing the acceleration of all payments
for fiscal year 1999) of that Act.
Effective Date
The provision is effective for production flexibility
contract payments made under the FAIR Act in taxable years
ending after December 31, 1995.
C. Increase Deduction for Health Insurance Expenses of Self-Employed
Individuals (Sec. 203 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.\9\ 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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\9\ 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 75 percent for taxable years
beginning in 2002 and to 100 percent for taxable years
beginning in 2003 and thereafter.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2002.
D. Increase State Volume Limits on Private Activity Tax-Exempt Bonds
(Sec. 204 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 (e.g., airports, docks and wharves, mass transit,
and high speed rail facilities), privately owned and/or
provided municipal services (e.g., water, sewer, solid waste
disposal, and certain electric and heating facilities),
economic development (e.g., small manufacturing facilities and
redevelopment in economically depressed areas), and certain
social programs (e.g., 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 limit for any State is $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).
Reason for Change
The Committee determined that a phased 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 long-range
infrastructure needs and encouraging economic development and
will facilitate continuation of future 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 to $75 per resident of each State
or $225 million (if greater) beginning in calendar year 2007.
The increase is phased-in as follows, beginning in calendar
year 2003:
2003.................................... $55 per resident ($165 million
if greater).
2004.................................... $60 per resident ($180 million
if greater).
2005.................................... $65 per resident ($195 million
if greater).
2006.................................... $70 per resident ($210 million
if greater).
Effective Date
The provision is effective beginning in calendar year 2003.
E. Modification of Individual Estimated Tax Safe Harbors (Sec. 205 of
the Bill and Sec. 6654 of the Code)
Present Law
Under present law, an individual taxpayer generally is
subject to an addition to tax for any underpayment of estimated
tax. An individual generally does not have an underpayment of
estimated tax if he or she makes timely estimated tax payments
at least equal to: (1) 100 percent of the tax shown on the
return of the individual for the preceding year (the ``100
percent of last year's liability safe harbor'') or (2) 90
percent of the tax shown on the return for the current year.
The 100 percent of last year's liability safe harbor is
generally modified to be a 110 percent of last year's liability
safe harbor for any individual with an AGI of more than
$150,000 as shown on the return for the preceding taxable year,
except that it is 105 percent of last year's liability for
taxable years beginning in 1999, 2000, and 2001, and 112
percent of last year's liability for taxable years beginning in
2002. If a married individual files a separate return for the
year for which an estimated tax installment payment was due,
the $150,000 amount becomes $75,000.
Reasons for Change
The Committee believes that it is appropriate to adjust the
individual estimated tax payment safe harbors.
Explanation of Provision
For taxable years beginning in 2000 and 2001, the 105
percent of last year's liability safe harbor for any individual
with an AGI of more than $150,000 as shown on the return for
the preceding taxable year, is modified to be a 106 percent of
last year's liability safe harbor.
Effective Date
The provision is effective for taxable years beginning in
2000 and 2001.
F. State Election to Exempt Student Employees From Social Security
(Sec. 206 of the Bill)
Present Law
The Social Security Amendments of 1972 provided an
opportunity for States to obtain exemptions from Social
Security coverage for student employees of public schools,
colleges, and universities. States choosing to opt out had to
do so prior to January 1, 1974. Most States did. Student
employees in these States do not have to pay FICA taxes on
their wages, allowing them to keep more of their earnings.
Reasons for Change
Three States chose not to seek an exemption from Social
Security coverage. This provision would provide the opportunity
for all student employees to be treated equally under Social
Security law and would assist student employees who are working
to advance their education.
Explanation of Provision
The proposal would allow a limited window of time (January
1 through March 31, 1999) for States to modify existing State
agreements to exempt from Social Security coverage students
(including graduate assistants) who are employed by a public
school, university, or college in a nonexempted State.
Effective Date
The provision permitting States to modify existing
agreement is effective with respect to earnings after June 30,
1999.
TITLE III. REVENUE OFFSET PROVISIONS
A. Treatment of Certain Deductible Liquidating Distributions of
Regulated Investment Companies and Real Estate Investment Trusts (Sec.
301 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 distributed 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.
B. Add Vaccines Against Rotavirus Gastroenteritis to the List of
Taxable Vaccines (Sec. 302 of the Bill and Sec. 4132 of the Code)
Present Law
A manufacturer's excise tax is imposed at the rate of 75
cents per dose (sec. 4131) on the following vaccines routinely
recommended for administration to children (sec. 4132):
diphtheria, pertussis, tetanus, measles, mumps, rubella, polio,
HIB (haemophilus influenza type B), hepatitis B, and varicella
(chicken pox). The tax applied to any vaccine that is a
combination of vaccine components equals 75 cents times the
number of components in the combined vaccine.
Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund to
finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain
injuries following administration of the taxable vaccines. This
program provides a substitute Federal, ``no fault'' insurance
system for the State-law tort and private liability insurance
systems otherwise applicable to vaccine manufacturers. All
persons immunized after September 30, 1988, with covered
vaccines must pursue compensation under this Federal program
before bringing civil tort actions under State law.
Reasons for Change
Rotavirus gastroenteritis is a highly contagious disease
among young children that can lead to life-threatening
diarrhea, cramps, vomiting, and can result in death. In the
United States, more than 50,000 children are hospitalized and
more than 100 die annually from rotavirus gastroenteritis. The
Food and Drug Administration's (``FDA'') has approved a vaccine
against the disease and the Centers for Disease Control have
voted to recommend the vaccine for inoculation of children. The
Committee believes American children will benefit from wide use
of this new vaccine. The Committee believes that, by including
the new vaccine with those presently covered by the Vaccine
Injury Compensation Trust Fund, greater application of the
vaccine will be promoted. The Committee, therefore, believes it
is appropriate to add the vaccine against rotavirus
gastroenteritis to the list of taxable vaccines.
Explanation of Provision
The bill adds any vaccine against rotavirus gastroenteritis
to the list of taxable vaccines.
Effective Date
The provision is effective for vaccines sold by a
manufacturer or importer after the date of enactment. No floor
stocks tax is imposed for amounts held for sale on that date.
For sales on or before the date of enactment for which delivery
is made after the date of enactment, the delivery date is
deemed to be the sale date.
C. Clarify and Expand Mathematical Error Procedures (Sec. 303 of the
Bill and Sec. 6213(g)(2) of the Code)
Present Law
Taxpayer identification numbers (``TINs'')
The IRS may deny a personal exemption for a taxpayer, the
taxpayer's spouse or the taxpayer's dependents if the taxpayer
fails to provide a correct TIN for each person for whom the
taxpayer claims an exemption. This TIN requirement also
indirectly effects other tax benefits currently conditioned on
a taxpayer being able to claim a personal exemption for a
dependent (e.g., head-of-household filing status and the
dependent care credit). Other tax benefits, including the
adoption credit, the child tax credit, the Hope Scholarship
credit and Lifetime Learning credit, and the earned income
credit also have TIN requirements. For most individuals, their
TIN is their Social Security Number (``SSN''). The mathematical
and clerical error procedure currently applies to the omission
of a correct TIN for purposes of personal exemptions and all of
the credits listed above except for the adoption credit.
Mathematical or clerical errors
The IRS may summarily assess additional tax due as a result
of a mathematical or clerical error without sending the
taxpayer a notice of deficiency and giving the taxpayer an
opportunity to petition the Tax Court. Where the IRS uses the
summary assessment procedure for mathematical or clerical
errors, the taxpayer must be given an explanation of the
asserted error and a period of 60 days to request that the IRS
abate its assessment. The IRS may not proceed to collect the
amount of the assessment until the taxpayer has agreed to it or
has allowed the 60-day period for objecting to expire. If the
taxpayer files a request for abatement of the assessment
specified in the notice, the IRS must abate the assessment. Any
reassessment of the abated amount is subject to the ordinary
deficiency procedures. The request for abatement of the
assessment is the only procedure a taxpayer may use prior to
paying the assessed amount in order to contest an assessment
arising out of a mathematical or clerical error. Once the
assessment is satisfied, however, the taxpayer may file a claim
for refund if he or she believes the assessment was made in
error.
Reasons for Change
The Committee believes that it is appropriate to provide
additional guidance to the Internal Revenue Service with
respect to the application of the TIN requirement. It will also
improve compliance to allow the IRS to use date of birth data,
from the Social Security Administration, to determine
ineligibility for the dependent care credit, the child tax
credit and the earned income credit. Once this determination is
made, the Committee believes that the IRS should use the
mathematical and clerical error procedure to correctly assess
the tax due with respect to affected tax returns.
Explanation of Provision
The bill provides in the application of the mathematical
and clerical error procedure that a correct TIN is a TIN that
was assigned by the Social Security Administration (or in
certain limited cases, the IRS) to the individual identified on
the return. For this purpose, the IRS is authorized to
determine that the individual identified on the tax return
corresponds in every aspect (including, name, age, date of
birth, and SSN) to the individual to whom the TIN is issued.
The IRS also is authorized to use the mathematical and clerical
error procedure to deny eligibility for the dependent care tax
credit, the child tax credit, and the earned income credit even
though a correct TIN has been supplied if the IRS determines
that the statutory age restrictions for eligibility for any of
the respective credits is not satisfied (e.g., the TIN issued
for the child claimed as the basis of the child tax credit
identifies the child as over the age of 17 at the end of the
taxable year).
Effective Date
The provision is effective for taxable years ending after
the date of enactment.
D. Restrict 10-Year Net Operating Loss Carryback Rules for Specified
Liability Losses (Sec. 304 of the Bill and Sec. 172(f) of the Code)
Present Law
Under present law, that portion of a net operating loss
that qualifies as a ``specified liability loss'' may be carried
back 10 years rather than being limited to the general two-year
carryback period. A specified liability loss includes amounts
allowable as a deduction with respect to product liability, and
also certain liabilities that arise under Federal or State law
or out of any tort of the taxpayer. In the case of a liability
arising out of a Federal or State law, the act (or failure to
act) giving rise to the liability must occur at least 3 years
before the beginning of the taxable year. In the case of a
liability arising out of a tort, the liability must arise out
of a series of actions (or failures to act) over an extended
period of time a substantial portion of which occurred at least
three years before the beginning of the taxable year. A
specified liability loss cannot exceed the amount of the net
operating loss, and is only available to taxpayers that used an
accrual method of accounting throughout the period that the
acts (or failures to act) occurred.
Reasons for Change
The proper interpretation of the specified liability loss
provisions has been the subject of controversy. The committee
believes it is desirable to lessen controversy by providing a
definitive list of items for which the 10-year specified
liability loss carryback is available.
Explanation of Provision
Under the provision, specified liability losses are limited
to product liability losses and amounts allowable as a
deduction (other than a deduction under sec. 468(a)(1) or sec.
468A(a)) that are in satisfaction of a liability under a
Federal or State law requiring the reclamation of land,
decommissioning of a nuclear power plant (or any unit thereof),
dismantlement of a drilling platform, remediation of
environmental contamination, or a payment under any workers
compensation act (within the meaning of sec. 461(h)(2)(C)(i)),
if the act (or failure to act) giving rise to such liability
occurs at least 3 years before the beginning of the taxable
year. As under present law, the specified liability loss (as
redefined) cannot exceed the amount of the net operating loss
and is only available to taxpayers that used an accrual method
of accounting throughout the period that the act (or failure to
act) giving rise to the liability occurred. No inference
regarding the interpretation of the specified liability loss
carryback rules under present law is intended.
Effective Date
The provision is effective for net operating losses arising
in taxable years ending after the date of enactment.
TITLE IV. 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. 402(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
conditions 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. 402(c) of the bill, sec. 3201 of
the 1998 Act, and secs. 6015(e) and 7421(a) 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 anindividual
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. 402(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. 402(i) 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 after July
28, 1997, and before January 1, 1998, 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 be
reason of 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. 403(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 (sec. 221). The maximum deduction is
phased out ratably for individual taxpayers with modified AGI
between $40,000 and $55,000 ($60,000 and $75,000 for joint
returns). Present law also provides that in the case of a
taxpayer other than a corporation, no deduction is allowed for
personal interest (sec. 163(h)). 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.
Present law provides that a qualified education loan does
not include any indebtedness owed to a person who is related
(within the meaning of sec. 267(b) or 707(b)) to the taxpayer
(sec. 221(e)(1)).
Explanation of Provision
The provision clarifies that otherwise deductible qualified
education loan interest is not treated as nondeductible
personal interest.
The provision also clarifies that, for purposes of section
221, modified AGI is determined after application of section
135 (relating to income from certain U.S. saving bonds) and
section 137 (relating to adoption assistance programs).
The provision also provides that a qualified education loan
does not include any indebtedness owed to any person by reason
of a loan under any qualified employer plan (as defined in
section 72(p)(4)) or under any contract purchased under a
qualified employer plan (as described in sec. 72(p)(5)).
2. Capital gain distributions of charitable remainder trusts (secs.
402(i)(3) and 403(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, gain on
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.\10\
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\10\ The bill contains a similar amendment to section 1(h)(13), as
amended by section 5001 of the 1998 Act, to provide that, for purposes
of taxing the recipient of a distribution made after 1997 by a CRT,
amounts will not be taken into account in computing 28-percent rate
gain by reason of being properly taken into account before May 7, 1997,
or by reason of the property being held for not more than 18 months.
Thus, no amount distributed by a CRT after 1997 will be treated as in
the 28-percent category (other than by reason of the disposition of
collectibles or small business stock).
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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. 403(c) of the bill, sec. 506 of
the 1997 Act, and sec. 2001(f)(2) 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
``period 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 and estate tax period of limitations.--Section 6501(a)
provides the general rule that any tax (including gift and
estate tax) must be assessed, or a proceeding begun in a court
for the collection of such tax without assessment, 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. Section 6501(c)(9)
provides an exception to these rules under which gift tax may
be assessed, or a proceeding in a court for collection of gift
tax may be begun, at any time unless the gift is disclosed on a
gift tax return or a statement attached to a gift tax return.
Revaluation of gifts for estate tax purposes.--The value of
a gift is its value as finally determined under the rules for
purposes of determining the applicable estate tax bracket and
available unified credit. The value of a gift is finally
determined if (1) the value of the gift is shown on a gift tax
return for that gift and that value is not contested by the
Treasury Secretary before the expiration of the period of
limitations on assessment of gift tax 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), (2) the
value is specified by the Treasury Secretary pursuant to a
final notice of redetermination of value (a ``final notice'')
within the period of limitations applicable to the gift for
gift tax purposes (generally, three years) and the taxpayer
does not timely contest that value, or (3) the value is
determined by a court or pursuant of a settlement agreement
between the taxpayer and the Treasury Secretary under 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 gift tax purposes.--Similarly,
under a rule applicable to the computation of the gift tax
(sec. 2504(c)), the value of gifts made in prior years is its
value as finally determined if the period of limitations for
assessment of gift tax on the prior gifts has expired.
Explanation of Provision
The bill clarifies the rules relating to revaluations of
prior transfers for computation of the estate or gift tax to
provide that the value of a prior transfer cannot be
redetermined after the period of limitations if the transfer
was disclosed in a statement attached to the gift tax return,
as well as on a 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.
4. Coordinate Vaccine Injury Compensation Trust Fund expenditure
purposes with list of taxable vaccines (sec. 403(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 December 22, 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 disaster
(sec. 403(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 disastersdeclared 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. 403(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.\11\
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\11\ 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.\12\
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\12\ 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 on 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.
7. Treatment of affiliated group including formerly tax-exempt
organization (sec. 403(g) of the bill and sec. 1042 of the 1997
Act)
Present Law
Present law provides that an organization described in
sections 501(c)(3) or (4) of the Code is exempt from tax only
if no substantial part of its activities consists of providing
commercial-type insurance. When this rule was enacted in 1986,
certain treatment applied to Blue Cross and Blue Shield
organizations providing health insurance that were subject to
this rule and that met certain requirements. Treasury
regulations were promulgated providing rules for filing
consolidated returns for affiliated groups including such
organizations (Treas. Reg. sec. 1.1502-75(d)(5)).
The 1997 Act repealed the grandfather rules provided in
1986 (permitting the retention of tax-exempt status) that were
applicable to that portion of the business of the Teachers
Insurance Annuity Association and College Retirement Equities
Fund which is attributable to pension business and to the
portion of the business of Mutual of America which is
attributable to pension business. The 1997 Act did not
specifically provide rules for filing consolidated returns for
affiliated groups including such organizations.
Present law with respect to consolidated returns provides
for an election to treat a life insurance company as an
includible corporation, and also provides that a life insurance
company may not be treated as an includible corporation for the
5 taxable years immediately preceding the taxable year for
which the consolidated return is filed (sec. 1504(c)(2)).
Present law also provides that a corporation that is exempt
from taxation under Code section 501 is not an includible
corporation (sec. 1504(b)(1)).
explanation of provision
The provision provides rules for filing consolidated
returns for affiliated groups including any organization with
respect to which the grandfather rule under Code section 501(m)
was repealed by section 1042 of the 1997 Act. The provision
provides that rules similar to the rules of Treasury Regulation
section 1.1502-75(d)(5) apply in the case of such an
organization. Thus, an affiliated group including such an
organization may make the election described in section
1504(c)(2) (relating to a 5-year period) without regard to
whether the organization was previously exempt from tax under
Code section 501.
8. Treatment of net operating losses arising from certain eligible
losses (sec. 403(h) 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.
9. Determination of unborrowed policy cash value under COLI pro rata
interest disallowance rules (sec. 403(i) 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.
10. Payment of taxes by commercially acceptable means (sec. 403(k) 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, debit, or charge cards for the payment of income taxes.
C. Technical Corrections to the 1984 Act
1. Casualty loss deduction (sec. 404 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. 405(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. 405(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).
III. VOTE 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. 4738.
Motion to report the bill
The bill, H.R. 4738, as amended, was ordered favorably
reported by a voice vote (with a quorum being present).
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. 4738, as
reported by the Committee.
The bill, as reported, is estimated to have the following
budget effects:
ESTIMATED BUDGET EFFECTS OF H.R. 4738, THE ``REVENUE EXTENSION ACT OF 1998,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS ON OCTOBER 9, 1998
[Fiscal Year 1999-2007, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1999- 1999-
Provision Effective 1999 2000 2001 2002 2003 2004 2005 2006 2007 2002 2003-07 2007
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
I. Extension of Expiring Provisions:
A. Extend the R&E Credit (through 12/31/99).... 7/1/98 -1,526 -866 -409 -296 -170 -39 ........ ........ ........ -3,097 -209 -3,306
B. Extend Work Opportunity Tax Credit (through
12/31/99)..................................... wpoifibwa 6/30/98 -245 -227 -126 -50 -18 -3 ........ ........ ........ -648 -21 -669
C. Extend Contributions of Appreciated Stock of
Private Foundations (permanent); Public
Inspection of Private Foundation Annual
Returns....................................... 7/1/98 \1\ -23 -56 -71 -83 -91 -95 -100 -104 -109 -233 -499 -732
D. 1-Year Modified Extension of Exemption from
Subpart F for Active Financing Income (as in
H.R. 4579).................................... tybi 1999 -117 -378 ........ ........ ........ ........ ........ ........ ........ -495 ........ -495
E. Extend the Generalized System of Preferences
(through 12/31/99) \2\........................ 7/1/98 -393 -84 ........ ........ ........ ........ ........ ........ ........ -477 ........ -477
F. Permanent Extension of Income Averaging for
Farmers....................................... tyba 12/31/00 ........ ........ -2 -21 -22 -22 -23 -24 -24 -23 -115 -138
G. Extension of Tax Information Reporting for
Income Contingent Student Loan Program \2\.... 10/1/98 Negligible Budget Effect
--------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Extension of Expiring Provisions ................... -2,304 -1,611 -608 -450 -301 -159 -123 -128 -133 -4,973 -844 -5,815
============================================================================================================================================
II. Other Provisions:
A. Treasury Study on depreciation (due 3/31/00) ................... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
B. Production Flexibility Contract Payments to
Farmers Not Included in Income Prior to
Receipt....................................... tyea 12/32/95 Negligible Revenue Effect
--------------------------------------------------------------------------------------------------------------------------------------------
C. Self-Employed Health Insurance Deduction--
75% in 2002, and 100% in 2003 and thereafter.. tyba 12/31/01 ........ ........ ........ -120 -474 -637 -680 -602 -257 -120 -2,649 -2,769
D. Increase Private Activity Bond Volume Cap to
the Greater of $55 Per Capita or $165 Million
Starting in 2003; Phased in Ratably to the
Greater of $75 Million Per Capita or $225
Million in 2007............................... 1/1/03 ........ ........ ........ ........ -11 -44 -111 -177 -252 ........ -595 -595
E. Prior Year Estimated Tax Safe Harbor for
Individuals With AGI over $150,000 (106% in
2000 and 2001)................................ tyba 12/31/99 ........ 525 ........ -525 ........ ........ ........ ........ ........ ........ ........ ........
F. State Election to Exempt Student Employees
From Social Security \2\...................... spa 6/30/99 -4 -46 -47 -49 -51 -52 -54 -56 -58 -146 -271 -417
--------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Other Provisions ................... -4 479 -47 -694 -536 -733 -845 -835 -567 -266 -3,515 -3,781
============================================================================================================================================
III. Revenue Offset Provisions:
A. Change the Treatment of Certain Deductible
Liquidating Distributions of RICs and REITs... dma 5/21/98 2,425 1,109 723 640 672 705 741 778 817 4,897 3,713 8,610
B. Add Vaccines Against Rotavirus
Gastroenteritis to the List Taxable Vaccines
($0.75 per dose).............................. vpa DOE 1 2 3 4 5 6 6 6 7 11 31 42
C. Clarity and Expand Math Error Procedures.... tyea DOE 12 25 26 27 28 29 30 31 32 90 150 240
D. Restrict Special Net Operating Loss
Carryback Rules for Specified Liability Losses NOLgi tyea DOE 14 21 29 39 42 40 40 40 42 103 204 308
--------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Revenue Offset Provisions ................... 2,452 1,157 781 710 747 780 817 855 898 5,101 4,098 9,200
============================================================================================================================================
IV. Tax Technical Corrections Provisions ................... No Revenue Effect
Net total ................... 144 25 126 -434 -90 -112 -151 -108 198 -138 -261 -398
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The additional public inspection provisions apply to requests made after the later of the date which is 60 days after the date on which the Treasury Department publishes regulations or 12/
31/98.
\2\ Estimate provided by the Congressional Budget Office.
Legend for ``Effective'' column: dma = distributions made after; DOE = date of enactment; NOLgi = net operating losses generated in; spa = services performed after; tyba = taxable years
beginning after; tybi = taxable years beginning in; tyea = taxable years ending after; vpa = vaccines purchased 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 bill does not involve new or
increased outlays.
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 income tax reduction provisions
(other than the provision relating to farmer production
flexibility contract payments) involve increased tax
expenditures.
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 the bill as reported.
U.S. Congress,
Congressional Budget Office,
Washington, DC, October 9, 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. 4738, a bill to
amend the Internal Revenue Code of 1986 to extend certain
expiring provisions, provide tax relief for farmers and small
businesses, and for other purposes. The estimate reflects two
modifications to the reported bill--dropping the change in the
health insurance deduction for the self-employed in 2002 and
delaying the state election to exempt student employees from
Social Security until July 1, 2000.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Noah
Meyerson.
Sincerely,
James L. Blum
(For June E. O'Neill, Director).
Enclosure.
H.R. 4738--A bill to amend the Internal Revenue Code of 1986 to extend
certain expiring provisions, provide tax relief for farmers and
small businesses, and for other purposes.
Summary: H.R. is a tax bill that would amend existing tax
laws and extend numerous tax provisions that have expired
recently or are about to expire. The Congressional Budget
Office (CBO) and the Joint Committee on Taxation (JCT) estimate
that H.R. 4738 would increase governmental receipts by $204
million over the 1999-2003 period. The bill would have no
effect on direct spending. The estimate reflects two
modifications to the reported bill--dropping the change in the
health insurance deductions for the self-employed in 2002 and
delaying the state election to exempt student employees from
Social Security until July 1, 2000.
H.R. 4738 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
three new private-sector mandates through changes in the
treatment of certain deductible liquidating distributions of
regulated investment companies and real estate investment
trusts, restrictions on the 10-year net operating loss
carryback rules for specified liability losses, and the
imposition of taxes on a certain vaccine. The costs of the new
mandates would exceed the threshold ($100 million in 1996,
adjusted annually for inflation) specific in UMRA in fiscal
years 1999-2003.
Description on major provisions: H.R. 4738 would extend
certain tax provisions that have recently expired or are about
to expire, including:
The reseach and experimentation tax credit through
December 31, 1999;
The work opportunity tax credit through December 31,
1999;
The deduction provided for contributions of
appreciated stock to private foundations on a permanent
basis;
The exemption from Subpart F for active financing
income with modifications for one year;
The Generalized System of Preferences through
December 31, 1999;
Income averaging for farmers on a permanent basis;
and
Tax information reporting for the income-contingent
student loan program through September 30, 2003.
H.R. 4738 would also amend certain existing tax laws in
order to:
Allows farmers not to include payments from
production flexibility contracts in income prior to
receipt;
Accelerate the increase in the deduction for health
insurance expenses for self-employed individuals to 100
percent in 2003 and thereafter;
Increase state volume limits on private activity tax-
exempt bonds and phase in ratably to the greater of $75
million per capita or $225 million in 2007;
Change prior year estimated tax payment rules for
individuals with adjusted gross income over $150,000;
and
Allow States to amend their Social Security coverage
agreements to exempt student employees at state
schools.
H.R. 4738 includes several revenue offset provisions that
would:
Modify the treatment of certain deductible
liquidating distributions of regulated investment
companies and real estate investment trusts;
Add vaccines against rotavirus gastroenteritis to the
list of taxable vaccines ($0.75 per dose);
Clarify and expand math error procedures; and
Restrict special net operating loss carryback rules
for specified liability losses.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 4738 is summarized in the following
table.
TABLE 1.--SUMMARY OF ESTIMATED BUDGETARY EFFECTS OF H.R. 4738
----------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
REVENUES
Extension of Expiring Provisions......................... -2,304 -1,611 -608 -450 -301
Other Provisions......................................... 0 520 -47 -574 -268
Revenue Offsets.......................................... 2,452 1,157 781 710 747
------------------------------------------------------
Total.............................................. 148 66 126 -314 178
======================================================
CHANGE IN SURPLUS
Proposed Changes:
Off-Budget........................................... 0 -4 -42 -44 -46
On-Budget............................................ 148 70 168 -270 224
------------------------------------------------------
Total.............................................. 148 66 126 -314 178
----------------------------------------------------------------------------------------------------------------
Sources: Joint Committee on Taxation and Congressional Budget Office.
Basis of estimate: All the estimates for the revenue
provisions, with the exception of extension of the Generalized
System of Preferences (GSP) and amendment to Social Security
law with respect to student employees at state schools, were
provided by the JCT.
Generalized system of preferences
H.R. 4738 would renew GSP, which expired on June 30, 1998,
through December 31, 1999. Taxpayers could apply for refunds
for the period since July 1, 1998. GSP affordsnonreciprocal
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, $84 million in fiscal year 2000, and a
total of $477 million over the 1999-2000 period, net of payroll and
income tax offsets. This estimate is based on projections of U.S.
imports and recent data on collections from beneficiary countries under
the GSP program.
Revenue provisions relating to Social Security coverage
H.R. 4738 would also allow states to amend their Social
Security coverage agreements to exempt student employees at
state schools. In general, under section 3121(b)(10) of the
Internal Revenue Code, income earned by students employed by
the college or university th ey attend is not subject to FICA
tax. However, in the case of state colleges and universities,
each state may choose in its agreement for the coverage of
state and local employees (``218 agreement'') to cover such
income. This provision would allow states that currently cover
such income--New Jersey, Pennsylvania, and Texas--to amend
their 218 agreements to exempt such income from FICA taxes.
This exemption would be effective for services performed after
June 30, 2000. CBO based its estimate on wage data supplied by
most affected schools and published enrollment data. The
revenue effects of this provision are shown in Table 2.
TABLE 2.--ESTIMATED REVENUE EFFECTS OF PROVISIONS IN H.R. 4738 RELATING TO SOCIAL SECURITY COVERAGE
----------------------------------------------------------------------------------------------------------------
By fiscal years in millions of dollars--
-------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
On-Budget....................... 0 -5 -0 -5 -5 -5 -5 -6 -6 -6
Off-Budget...................... 0 -4 -42 -44 -46 -47 -49 -50 -52 -54
-------------------------------------------------------------------------------
Total..................... 0 -5 -47 -49 -51 -52 -54 -56 -58 -60
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Pay-as-you-go considerations: The Balance 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 3).
TABLE 3.--SUMMARY OF PAY-AS-YOU-GO EFFECTS OF H.R. 4738
----------------------------------------------------------------------------------------------------------------
By fiscal years, in millions of dollars--
---------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
Change in Outlays............. not applicable
Change in Receipts............ 148 70 168 -270 224 -65 -102 -58 250 ( \1\
)
----------------------------------------------------------------------------------------------------------------
\1\ Not available.
Sources: Congressional Budget Office and Joint Committee on Taxation.
Estimated impact on State, local, and tribal governments:
CBO and JCT have determined the provisions of H.R. 4738 are
either excluded from consideration under the Unfunded Mandates
Reform Act (UMRA) or do not contain intergovernmental mandates
as defined in that act.
Estimated impact on the private sector: JCT has determined
that H.R. 4738 would impose three new private-sector mandates
by changing the treatment of certain deductible liquidating
distributions of regulated investment companies and real estate
investment trusts, adding the vaccine against rotavirus
gastroenteritis to the list of taxable vaccines, and
restricting the 10-year net operating loss carryback rules for
specified liability losses. The direct costs of the new
mandates 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 4). CBO and
the JCT have determined that the remaining provisions of the
bill either are excluded from a consideration or do not contain
private-sector mandates as defined in UMRA.
TABLE 4.--ESTIMATED COST OF PRIVATE-SECTOR MANDATES
----------------------------------------------------------------------------------------------------------------
By fiscal years, in millions of dollars--
------------------------------------------------------
1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Cost to the Private Sector............................... 2,440 1,132 755 683 719
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.
Estimate prepared by: Federal revenues: Noah Meyerson and
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) and 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
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, certain other revenue offsets, acceleration of
the increased deduction for self-employed health insurance,
Treasury study of depreciation, treatment of certain farm
production flexibility contract payments, increase in the State
private activity bond limit, 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 H.R. 4738 contains
the following private sector mandates:
Treatment of certain deductible liquidating
distributions of regulated investment companies and
real estate investment trusts;
Restrict 10-year net operating loss carryback rules
for specified liability losses; and
Add vaccines against rotavirus gastroenteritis to the
list of taxable vaccines;
In addition, the provision of the bill adding vaccines
against rotavirus gastroenteritis to the list of taxable
vaccines for purposes of the vaccine excise tax would impose a
Federal intergovernmental mandate because certain State
governments will be required to pay the requisite taxes.
The Committee finds it necessary to adopt these proposals
in order to offset the revenue losses attributable to the
extension of certain expiring tax provisions and to provide tax
relief to farmers and self-employed individuals.
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
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 1. TAX IMPOSED.
(a) * * *
* * * * * * *
(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.
* * * * * * *
(D) Charitable remainder trusts.--
Subparagraphs (A) and (B)(ii) shall not apply
to any capital gain distribution made by a
trust described in section 664.
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart D--Business Related Credits
* * * * * * *
SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.
(a) * * *
* * * * * * *
(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] December 31, 1999.
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] 42-
month period beginning with the first month of such
year. The [24 months] 42 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. 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] December 31, 1999.
* * * * * * *
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] December 31, 1999.
(d) Members of Targeted Groups.--For purposes of this
subpart--
(1) * * *
* * * * * * *
(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
* * * * * * *
PART VI--MINIMUM TAX FOR TAX PREFERENCES
* * * * * * *
SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.
(a) Adjustments Applicable to All Taxpayers.--In determining
the amount of the alternative minimum taxable income for any
taxable year the following treatment shall apply (in lieu of
the treatment applicable for purposes of computing the regular
tax):
(1) * * *
* * * * * * *
(3) Treatment of certain long-term contracts.--In the
case of any long-term contract entered into by the
taxpayer on or after March 1, 1986, the taxable income
from such contract shall be determined under the
percentage of completion method of accounting (as
modified by section 460(b)). For purposes of the
preceding sentence, in the case of a contract described
in section 460(e)(1), the percentage of the contract
completed shall be determined under [section 460(b)(2)]
section 460(b)(1) by using the simplified procedures
for allocation of costs prescribed under [section
460(b)(4)] section 460(b)(3). The first sentence of
this paragraph shall not apply to any home construction
contract (as defined in section 460(e)(6)).
* * * * * * *
Subchapter B--Computation of taxable income
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
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).
* * * * * * *
SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.
(a) * * *
(b) Taxpayers to Whom Subsection (a) Applies.--
(1) * * *
(2) Modified adjusted gross income.--For purposes of
this subsection, the term ``modified adjusted gross
income'' means adjusted gross income--
(A) determined without regard to this section
and sections 135, 137, 221, 911, 931, and 933,
and
* * * * * * *
SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER.
(a) * * *
* * * * * * *
(c) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
(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 137, 221, 911, 931, and 933, and
* * * * * * *
SEC. 137. ADOPTION ASSISTANCE PROGRAMS.
(a) * * *
(b) Limitations.--
(1) * * *
* * * * * * *
(3) Determination of adjusted gross income.--For
purposes of paragraph (2), adjusted gross income shall
be determined--
(A) without regard to this section and
sections 221, 911, 931, and 933, and
(B) after the application of sections 86,
135, 219, and 469.
* * * * * * *
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 the per capita limit
for such year multiplied by the State
population, or
(B) the aggregate limit for such year.
Subparagraph (B) shall not apply to any possession of
the United States.
(2) Per capita limit; aggregate limit.--For purposes
of paragraph (1), the per capita limit, and the
aggregate limit, for any calendar year shall be
determined in accordance with the following table:
1999 through 2002.......... $50 $150,000,000
2003....................... 55 165,000,000
2004....................... 60 180,000,000
2005....................... 65 195,000,000
2006....................... 70 210,000,000
2007 and thereafter........ 75 225,000,000.
* * * * * * *
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) * * *
(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.]
2002................................................ 75
100. 2003 and thereafter.................................
* * * * * * *
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) * * *
* * * * * * *
(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
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 219. RETIREMENT SAVINGS.
(a) * * *
* * * * * * *
(g) Limitation on Deduction for Active Participants in
Certain Pension Plans.--
(1) * * *
* * * * * * *
(3) Adjusted gross income; applicable dollar
amount.--For purposes of this subsection--
(A) Adjusted gross income.--Adjusted gross
income of any taxpayer shall be determined--
(i) after application of sections 86
and 469, and
(ii) without regard to sections 135,
137, 221, and 911 or the deduction
allowable under this section.
* * * * * * *
SEC. 221. INTEREST ON EDUCATION LOANS.
(a) * * *
(b) Maximum Deduction.--
(1) * * *
(2) Limitation based on modified adjusted gross
income.--
(A) * * *
* * * * * * *
(C) Modified adjusted gross income.--The term
``modified adjusted gross income'' means
adjusted gross income determined--
(i) without regard to this section
and sections [135, 137,] 911, 931, and
933, and
(ii) after application of sections
86, 135, 137, 219, and 469.
[For purposes of sections 86, 135, 137, 219,
and 469, adjusted gross income shall be
determined without regard to the deduction
allowed under this section.]
* * * * * * *
(e) Definitions.--For purposes of this section--
(1) Qualified education loan.--The term ``qualified
education loan'' means any indebtedness incurred by the
taxpayer solely to pay qualified higher education
expenses--
(A) * * *
* * * * * * *
Such term includes indebtedness used to refinance
indebtedness which qualifies as a qualified education
loan. The term qualified education loan' shall not
include any indebtedness owed to a person who is
related (within the meaning of section 267(b) or
707(b)(1)) to the taxpayer or to any person by reason
of a loan under any qualified employer plan (as defined
in section 72(p)(4)) or under any contract referred to
in section 72(p)(5).
* * * * * * *
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.
* * * * * * *
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 D--Deferred Compensation, Etc.
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.
* * * * * * *
Subpart A--General rule
* * * * * * *
SEC. 408A. ROTH IRA'S.
(a) * * *
* * * * * * *
(c) Treatment of Contributions.--
(1) * * *
* * * * * * *
(3) Limits based on modified adjusted gross income.--
(A) * * *
* * * * * * *
(C) Definitions.--For purposes of this
paragraph--
(i) adjusted gross income shall be
determined in the same manner as under
section 219(g)(3), except that--
(I) any amount included in
gross income under subsection
(d)(3) shall not be taken into
account; and
(II) any amount included in
gross income by reason of a
required distribution under a
provision described in
paragraph (5) shall not be
taken into account for purposes
of subparagraph (B)(i)[.], and
* * * * * * *
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) * * *
* * * * * * *
(E) Adjusted gross income.--For purposes of
this paragraph, adjusted gross income shall be
determined without regard to--
(i) * * *
* * * * * * *
[(iii) any amount allowable as a
deduction under section 219, and]
(iii) the amounts allowable as a
deduction under sections 219 and 221,
and
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
* * * * * * *
PART II--REAL ESTATE INVESTMENT TRUSTS
* * * * * * *
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 chapterif 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 branch.
(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).
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)(9), 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 premiums (as both are determined in
the manner prescribed under paragraph (4)), or
[(C) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from investments
made by a qualifying insurance company of an
amount of its assets equal to--
[(i) in the case of contracts
regulated in the country in which sold
as property, casualty, or health
insurance contracts, one-third of its
premiums earned on such insurance
contracts during the taxable year (as
defined in section 832(b)(4), and
[(ii) in the case of contracts
regulated in the country in which sold
as life insurance or annuity contracts,
the greater of--
[(I) 10 percent of the
reserves described in
subparagraph (B) for such
contracts, or
[(II) in the case of a
qualifying insurance company
which is a start-up company,
$10,000,000.
[(2) Principles for determining applicable income.--
[(A) Banking and financing income.--The
determination as to whether income is described
in paragraph (1)(A) shall be made--
[(i) except as provided in clause
(ii), in accordance with the applicable
principles of section 904(d)(2)(C)(ii),
except that such income shall include
income from all leases entered into in
the ordinary course of the active
conduct of a banking, financing, or
similar business, and
[(ii) in the case of a corporation
described in paragraph (3)(B), in
accordance with the applicable
principles of section 1296(b) (as in
effect on the day before 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 countryother 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 one 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.
(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.
* * * * * * *
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter A--Estates of Citizens or Residents
* * * * * * *
PART I--TAX IMPOSED
* * * * * * *
SEC. 2001. IMPOSITION AND RATE OF TAX.
(a) * * *
* * * * * * *
(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 III--GROSS ESTATE
* * * * * * *
SEC. 2031. DEFINITION OF GROSS ESTATE.
(a) * * *
* * * * * * *
(c) Estate Tax With Respect to Land Subject to a Qualified
Conservation Easement.--
(1) * * *
* * * * * * *
(10) Application of this section to interests in
partnerships, corporations, and trusts.--This section
shall apply to an interest in a partnership,
corporation, or trust if at least 30 percent of the
entity is owned (directly or indirectly) by the
decedent, as determined under the rules described in
[section 2033A(e)(3)] section 2057(e)(3).
* * * * * * *
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.
* * * * * * *
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).
* * * * * * *
(l) Disclosure of Returns and Return Information for Purposes
Other Than Tax Administration.--
(1) * * *
* * * * * * *
(13) Disclosure of return information to carry out
income contingent repayment of student loans.--
(A) * * *
* * * * * * *
(D) Termination.--This paragraph shall not
apply to any request made after September 30,
[1998] 2003.
* * * * * * *
(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) * * *
* * * * * * *
[(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 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.]
(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),
paragraph (1) 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.
* * * * * * *
SEC. 6159. AGREEMENTS FOR PAYMENT OF TAX LIABILITY IN INSTALLMENTS.
(a) * * *
* * * * * * *
[(d)] (e) Cross Reference.--
For rights to administrative review and appeal, see section
7122(d).
* * * * * * *
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 servicesrelated 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, debit,
or charge 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 the Federal Government under the
Robert T. Stafford Disaster Relief and Emergency
Assistance Act.
* * * * * * *
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.
* * * * * * *
SEC. 6654. FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME TAX.
(a) * * *
* * * * * * *
(d) Amount of Required Installments.--For purposes of this
section--
(1) Amount.--
(A) * * *
* * * * * * *
(C) Limitation on use of preceding year's
tax.--
(i) In general.--If the adjusted
gross income shown on the return of the
individual for the preceding taxable
year beginning in any calendar year
exceeds $150,000, clause (ii) of
subparagraph (B) shall be applied by
substituting the applicable percentage
for ``100 percent''. For purposes of
the preceding sentence, the applicable
percentage shall be determined in
accordance with the following table:
If the preceding taxable The applicable
year begins in: percentage is:
[1998, 1999, or 2000............................... 105]
1998................................................ 105
1999 or 2000........................................ 106
2001................................................ 112
2002 or thereafter.................................. 110.
This clause shall not apply in the case
of a preceding taxable year beginning
in calendar year 1997.
* * * * * * *
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) subsections (i) and (l) of section 408
(relating to individual retirement plans),
(B) section 220(h) (relating to medical
savings accounts),
(C) [Section] section 529(d) (relating to
qualified State tuition programs), and
(D) [Section] section 530(h) (relating to
education individual retirement 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.
* * * * * * *
----------
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] December 31, 1999.
----------
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)''.
* * * * * * *