[Senate Report 105-174]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 341
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-174
_______________________________________________________________________


 
     INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998

                                _______
                                

                 April 22, 1998.--Ordered to be printed

_______________________________________________________________________


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

                              R E P O R T

                        [To accompany H.R. 2676]

    The Committee on Finance, to which was referred the bill 
(H.R. 2676) to amend the Internal Revenue Code of 1986 to 
restructure and reform the Internal Revenue Service, and for 
other purposes, having considered the same, reports favorably 
thereon with an amendment and recommends that the bill as 
amended do pass.


                                CONTENTS

                                                                   Page
 I. Legislative Background............................................7
II. Explanation of the Bill...........................................8
        Title I. Executive Branch Governance and Management of 
            the IRS..............................................     8
            A. IRS Restructuring and Creation of IRS Oversight 
                Board............................................     8
                1. IRS restructuring and mission (secs. 1001-
                    1002)........................................     8
                2. Establishment and duties of IRS Oversight 
                    Board (sec. 1101)............................    10
            B. Appointment and Duties of IRS Commissioner and 
                Chief Counsel and Other Personnel................    17
                1. IRS Commissioner and other personnel (secs. 
                    1102(a) and 1104)............................    17
                2. IRS Chief Counsel (sec. 1102(a))..............    18
            C. Structure and Funding of the Employee Plans and 
                Exempt Organizations Division (``EP/EO'') (sec. 
                1101)............................................    19
            D. Taxpayer Advocate (secs. 1102 (a), (c), and (d))..    21
            E. Treasury Office of Inspector General; IRS Office 
                of the Chief Inspector (secs. 1102(a) and 1103)..    25
            F. Prohibition on Executive Branch Influence Over 
                Taxpayer Audits (sec. 1105)......................    33
            G. IRS Personnel Flexibilities (secs. 1201-1205).....    34
        Title II. Electronic Filing..............................    39
            A. Electronic Filing of Tax and Information Returns 
                (sec. 2001)......................................    39
            B. Due Date for Certain Information Returns (sec. 
                2002)............................................    40
            C. Paperless Electronic Filing (sec. 2003)...........    41
            D. Return-Free Tax System (sec. 2004)................    42
            E. Access to Account Information (sec. 2005).........    42
        Title III. Taxpayer Protection and Rights................    43
            A. Burden of Proof (sec. 3001).......................    43
            B. Proceedings by Taxpayers..........................    47
                1. Expansion of authority to award costs and 
                    certain fees (sec. 3101).....................    47
                2. Civil damages for collection actions (sec. 
                    3102)........................................    49
                3. Increase in size of cases permitted on small 
                    case calendar (sec. 3103)....................    49
                4. Expansion of Tax Court jurisdiction to 
                    responsible person penalties (sec. 3104).....    50
                5. Actions for refund with respect to certain 
                    estates which have elected the installment 
                    method of payment (sec. 3105)................    51
                6. Tax Court jurisdiction to review an adverse 
                    IRS determination of a bond issue's tax-
                    exempt status (sec. 3106)....................    52
                7. Civil action for release of erroneous lien 
                    (sec. 3107)..................................    54
            C. Relief for Innocent Spouses and for Taxpayers 
                Unable to Manage Their Financial Affairs Due to 
                Disabilities.....................................    55
                1. Spousal election to limit joint and several 
                    liability on joint return (sec. 3201)........    55
                2. Suspension of statute of limitations on filing 
                    refund claims during periods of disability 
                    (sec. 3202)..................................    60
            D. Provisions Relating to Interest and Penalties.....    61
                1. Elimination of interest differential on 
                    overlapping periods of interest on income tax 
                    overpayments and underpayments (sec. 3301)...    61
                2. Increase in overpayment rate payable to 
                    taxpayers other than corporations (sec. 3302)    62
                3. Elimination of penalty on individual's failure 
                    to pay during period of installment agreement 
                    (sec. 3303)..................................    63
                4. Mitigation of failure to deposit penalty (sec. 
                    3304)........................................    64
                5. Suspension of interest and penalties where 
                    Secretary fails to contact individual 
                    taxpayer (sec. 3305).........................    64
                6. Procedural requirements for imposition of 
                    penalties and additions to tax (sec. 3306)...    65
                7. Personal delivery of notice of penalty under 
                    section 6672 (sec. 3307).....................    65
                8. Notice of interest charges (sec. 3308)........    66
            E. Protections for Taxpayers Subject to Audit or 
                Collection Activities............................    67
                a. Due Process...................................    67
                i. Due process in IRS collection actions (sec. 
                    3401)........................................    67
                b. Examination Activities........................    69
                i. Uniform application of confidentiality to 
                    taxpayer communications with federally 
                    authorized practitioners (sec. 3411).........    69
                ii. Limitation on financial status audit 
                    techniques (sec. 3412).......................    71
                iii. Software trade secrets protection (sec. 
                    3413)........................................    71
                iv. Threat of audit prohibited to coerce tip 
                    report alternative commitment agreements 
                    (sec. 3414)..................................    75
                v. Taxpayers allowed motion to quash all third-
                    party summones (sec. 3415)...................    75
                vi. Service of summones to third-party 
                    recordkeepers permitted by mail (sec. 3416)..    76
                vii. Prohibition on IRS contact of third parties 
                    without taxpayer pre-notification (sec. 3417)    77
                c. Collection Activities.........................    78
                i. Approval process for liens, levies, or 
                    seizures (sec. 3421).........................    78
                ii. Modification to certain levy exemption 
                    amounts (sec. 3431)..........................    78
                iii. Release of levy upon agreement that amount 
                    is uncollectible (sec. 3432).................    79
                iv. Levy prohibited during pendency of refund 
                    proceedings (sec. 3433)......................    79
                v. Approval required for jeopardy and termination 
                    assessments and jeopardy levies (sec. 3434)..    80
                vi. Increase in amount of certain property on 
                    which lien not valid (sec. 3435).............    81
                vii. Waiver of early withdrawal tax for IRS 
                    levies on employer-sponsored retirement plans 
                    or IRAs (sec. 3436)..........................    82
                viii. Prohibition of sales of seized property at 
                    less than minimum bid (sec. 3441)............    83
                ix. Accounting of sales of seized property (sec. 
                    3442)........................................    84
                x. Uniform asset disposal mechanism (sec. 3443)..    85
                xi. Codification of IRS administrative procedures 
                    for seizure of taxpayer's property (sec. 
                    3444)........................................    85
                xii. Procedures for seizure of residences and 
                    businesses (sec. 3445).......................    86
                d. Provisions Relating to Examination and 
                    Collection Activities........................    87
                i. Procedures relating to extensions of statute 
                    of limitations by agreement (sec. 3461)......    87
                ii. Offers-in-compromise (sec. 3462).............    88
                iii. Notice of deficiency to specify deadlines 
                    for filing Tax Court petition (sec. 3463)....    90
                iv. Refund or credit of overpayments before final 
                    determination (sec. 3464)....................    91
                v. IRS procedures relating to appeal of 
                    examinations and collections (sec. 3465).....    91
                vi. Application of certain fair debt collection 
                    practices (sec. 3466)........................    93
                vii. Guaranteed availability of installment 
                    agreements (sec. 3467).......................    93
            F. Disclosures to Taxpayers..........................    94
                1. Explanation of joint and several liability 
                    (sec. 3501)..................................    94
                2. Explanation of taxpayers' rights in interviews 
                    with the IRS (sec. 3502).....................    95
                3. Disclosure of criteria for examination 
                    selection (sec. 3503)........................    96
                4. Explanation of appeals and collection process 
                    (sec. 3504)..................................    96
                5. Explanation of reason for refund denial (sec. 
                    3505)........................................    97
                6. Statements to taxpayers with installment 
                    agreements (sec. 3506).......................    97
                7. Notification of change in tax matters partner 
                    (sec. 3507)..................................    98
            G. Low-Income Taxpayer Clinics (sec. 3601)...........    99
            H. Other Provisions..................................    99
                1. Cataloging complaints (sec. 3701).............    99
                2. Archive of records of Internal Revenue Service 
                    (sec. 3702)..................................   100
                3. Payment of taxes (sec. 3703)..................   102
                4. Clarification of authority of Secretary 
                    relating to the making of elections (sec. 
                    3704)........................................   103
                5. IRS employee contacts (sec. 3705).............   103
                6. Use of pseudonyms by IRS employees (sec. 3706)   104
                7. Conference of right in the National Office of 
                    IRS (sec. 3707)..............................   104
                8. Illegal tax protestor designations (sec. 3708)   105
                9. Provision of confidential information to 
                    Congress by whistleblowers (sec. 3709).......   105
                10. Listing of local IRS telephone numbers and 
                    addresses (sec. 3710)........................   106
                11. Identification of return preparers (sec. 
                    3711)........................................   106
                12. Offset of past-due, legally enforceable State 
                    income tax obligations against overpayments 
                    (sec. 3712)..................................   107
                13. Moratorium regarding regulations under Notice 
                    98 11 (sec. 3713(a)(1))......................   107
                14. Sense of the Senate regarding Notices 98 5 
                    and 98 11 (sec. 371 (a)(2) and (b))..........   110
            I. Studies...........................................   114
                1. Administration of penalties and interest (sec. 
                    3801)........................................   114
                2. Confidentiality of tax return information 
                    (sec. 3802)..................................   115
        Title IV. Congressional Accountability for the IRS.......   116
            A. Century Date Change (sec. 4001)...................   116
            B. Tax Law Complexity Analysis (sec. 4002)...........   116
        Title V. Revenue Offsets.................................   118
            A. Employer Deduction for Vacation and Severance Pay 
                (sec. 5001)......................................   118
            B. Modify Foreign Tax Credit Carryover Rules (sec. 
                5002)............................................   120
            C. Clarification and Expansion of Mathematical Error 
                Procedures (sec. 5003)...........................   121
            D. Freeze Grandfathered Status of Stapled REITs (sec. 
                5004)............................................   122
            E. Make Certain Trade Receivables Ineligible for 
                Mark-to-Market Treatment (sec. 5005).............   130
            F. Add Vaccines Against Rotavirus Gastroenteritis to 
                List of Taxable Vaccines (sec. 5006).............   131
        Title VI. Tax Technical Corrections......................   132
            Technical Corrections to the Taxpayer Relief Act of 
                1997.............................................   132
            A. Amendments to Title I of the 1997 Act Relating to 
                the Child Credit.................................   132
                1. Stacking rules for the child credit under the 
                    limitations based on tax liability (sec. 
                    6003(a)).....................................   132
                2. Treatment of a portion of the child credit as 
                    a supplemental child credit (sec. 6003(b))...   133
            B. Amendments to Title II of the 1997 Act Relating to 
                Education Incentives.............................   134
                1. Clarifications to HOPE and Lifetime Learning 
                    tax credits (sec. 6004(a))...................   134
                2. Educations IRAs (sec. 6004(d))................   135
                3. Treatment of cancellation of certain student 
                    loans (sec. 6004(f)).........................   138
                4. Deduction on student loan interest (sec. 
                    6004(b)).....................................   138
                5. Enhanced deduction for corporate contributions 
                    of computer technology and equipment (sec. 
                    6004(e)).....................................   139
                6. Qualified State tuition programs (sec. 
                    6004(e)).....................................   140
                7. Qualified zone academy bonds (sec. 6004(g))...   141
            C. Amendments to Title III of the 1997 Act Relating 
                to Savings Incentives............................   142
                1. Conversions of IRAs into Roth IRAs (sec. 
                    6005(b)).....................................   142
                2. Penalty-free distributions from IRAs for 
                    education expenses and purchase of first 
                    homes (sec. 6005(c)).........................   145
                3. Limits based on modified adjusted gross income 
                    (sec. 6005(b))...............................   146
                4. Contribution limit to Roth IRAs (sec. 6005(b))   146
                5. Contribution limitations for active 
                    participation in an IRA (sec. 6005(a)).......   147
            D. Amendments to Title III of the 1997 Act Relating 
                to Capital Gains.................................   148
                1. Individual capital gain rate reductions (sec. 
                    6005(d)).....................................   148
                2. Rollover of gain from sale of qualified stock 
                    (sec. 6005(f))...............................   150
                3. Exclusion of gain on the sale of a principal 
                    residence owned and used less than two years 
                    (sec. 6005(e) (1) and (2))...................   150
                4. Effective date of the exclusion of gain on the 
                    sale of a principal residence (sec. 
                    6005(e)(3))..................................   151
            E. Amendments to Title IV of the 1997 Act Relating to 
                Alternative Minimum Tax..........................   152
                1. Election to use AMT depreciation for regular 
                    tax purposes (sec. 6006(b))..................   152
                2. Clarification of small business exemption 
                    (sec. 6006(a))...............................   152
            F. Amendments to Title V of the 1997 Act Relating to 
                Estate and Gift Taxes............................   154
                1. Clarification of phaseout range for 5 percent 
                    surtax to phase out benefits of the unified 
                    credit and graduated rates (sec. 6007(a)(1)).   154
                2. Clarification of effective date for indexing 
                    of generation-skipping exemption (sec. 
                    6007(a)(2))..................................   154
                3. Conversion of qualified family-owned business 
                    exclusion into a deduction (sec. 
                    6007(b)(1)(A))...............................   155
                4. Coordination between unified credit and 
                    family-owned business provision (sec. 
                    6007(b)(1)(B) and 6007(b)(4))................   155
                5. Clarification of businesses eligible for 
                    family-owned business provision (sec. 
                    6007(b)(2))..................................   157
                6. Clarification of ``trade or business'' 
                    requirement for family-owned business 
                    provision (sec. 6007(b)(5))..................   157
                7. Clarification that interests eligible for 
                    family-owned business provision must be 
                    passed to a qualified heir (sec. 
                    6007(b)(1)(B))...............................   158
                8. Other modifications to the qualified family-
                    owned business provision (secs. 6007(b)(3), 
                    6007(b)(6), and 6007(b)(7))..................   158
                9. Clarification of interest on installment 
                    payment of estate tax on holding companies 
                    (sec. 6007(c))...............................   159
                10. Clarification on declaratory judgment 
                    jurisdiction of U.S. Tax Court regarding 
                    installment payment of estate tax (sec. 
                    6007(d)).....................................   159
                11. Clarification of rules governing revaluation 
                    of gifts (sec. 6007(e))......................   160
                12. Clarification with respect to post-mortem 
                    conservation easements (sec. 6007(g))........   160
            G. Amendments to Title VII of the 1997 Act Relating 
                to Incentives for the District of Columbia (sec. 
                6008)............................................   161
            H. Amendments to Title IX of the 1997 Act Relating to 
                Miscellaneous Provisions.........................   164
                1. Clarification of effect on certain transfers 
                    to Highway Trust Fund (sec. 6009(a)).........   164
                2. Clarification of Mass Transit Account portions 
                    of highway motor fuels taxes (sec. 6009(b))..   165
                3. Clarification of qualification for reduced 
                    rate of tax on certain hard ciders (sec. 
                    6009(c)).....................................   165
                4. Combined employment tax reporting 
                    demonstration project (sec. 6009(f)).........   166
                5. Election for 1987 partnerships to continue 
                    exception from treatment of publicly traded 
                    partnerships as corporations (sec. 6009(d))..   167
                6. Depreciation limitations for electric vehicles 
                    (sec. 6009(e))...............................   168
                7. Modification of operation of elective 
                    carryback of existing net operating losses of 
                    the National Railroad Passenger Corporation 
                    (``Amtrak'') (sec. 6009(g))..................   169
            I. Amendments to Title X of the 1997 Act Relating to 
                Revenue-Raising Provisions.......................   170
                1. Exemption from constructive sales rules for 
                    certain debt positions (sec. 6010(a)(1)).....   170
                2. Definition of forward contract under 
                    constructive sales rules (sec. 6010(a)(2))...   170
                3. Treatment of mark-to-market gains of electing 
                    traders (sec. 6010(a)(3))....................   171
                4. Special effective date for constructive sale 
                    rules (sec. 6010(a)(4))......................   171
                5. Gain recognition for certain extraordinary 
                    dividends (sec. 6010(b)).....................   172
                6. Treatment of certain corporate distributions 
                    (sec. 6010(c))...............................   173
                7. Certain preferred stock treated as ``boot'--
                    statute of limitations (sec. 6010(e)(2)).....   177
                8. Certain preferred stock treated as ``boot'--
                    treatment of transferor (sec. 6010(e)(1))....   177
                9. Application of section 304 to certain 
                    international transactions (sec. 6010(d))....   178
                10. Establish IRS continuous levy and improve 
                    debt collection (sec. 6010(f))...............   179
                11. Clarification regarding aviation gasoline 
                    excise tax (sec. 6010(g))....................   180
                12. Clarification of requirement that registered 
                    fuel terminals offer dyed fuel (sec. 6010(h))   180
                13. Clarification of treatment of prepaid 
                    telephone cards (sec. 6010(i))...............   181
                14. Modify UBIT rules applicable to second-tier 
                    subsidiaries (sec. 6010(j))..................   182
                15. Application of foreign tax credit holding 
                    period rule to RICs (sec. 6010(k))...........   182
                16. Clarification of provision expanding the 
                    limitations on deductibility of premiums and 
                    interest with respect to life insurance, 
                    endowment and annuity contracts (sec. 
                    6010(o)).....................................   183
                17. Clarification of allocation of basis of 
                    properties distributed by a partnership (sec. 
                    6010(m)).....................................   185
                18. Clarification to the definition of modified 
                    adjusted gross income for purposes of the 
                    earned income credit phaseout (sec. 6010(p)).   187
            J. Amendments to Title XI of the 1997 Act Relating to 
                Foreign Provisions...............................   188
                1. Application of attribution rules under PFIC 
                    provisions (sec. 6011(b)(2)).................   188
                2. Treatment of PFIC option holders (sec. 
                    6011(b)(1))..................................   189
                3. Application of PFIC mark-to-market rules to 
                    RICs (sec. 6011(c)(3)).......................   190
                4. Interaction between the PFIC provisions and 
                    other mark-to-market rules (sec. 6011(c)(2)).   191
            K. Amendments to Title XII of the 1997 Act Relating 
                to Simplification Provisions.....................   192
                1. Travel expenses of Federal employees 
                    participating in a Federal criminal 
                    investigation (sec. 6012(a)).................   192
                2. Effective date for provisions relating to 
                    electing large partnerships, partnership 
                    returns required on magnetic media, and 
                    treatment of partnership items of individual 
                    retirement arrangements (sec. 6012(d)).......   193
                3. Modification of distribution rule for REITS 
                    (sec. 6012(f))...............................   193
            L. Amendments to Title XIII of the 1997 Act Relating 
                to Estate, Gift and Trust Simplification.........   194
                1. Clarification of treatment of revocable trusts 
                    for purposes of the generation-skipping 
                    transfer tax (sec. 6013(a))..................   194
                2. Provision of regulatory authority for 
                    simplified reporting of funeral trusts 
                    terminated during taxable year (sec. 6013(b))   194
            M. Amendment to Title XIV of the 1997 Act Relating to 
                Excise Tax Simplification........................   195
                1. Clarification of provision allowing wine 
                    imported in bulk to be transferred to a U.S. 
                    winery without payment of tax (sec. 6014)....   195
            N. Amendments to Title XV of the 1997 Act Relating to 
                Pensions and Employee Benefits...................   196
                1. Treatment of certain disability payments to 
                    public safety employees (sec. 6015(c)).......   196
            O. Amendments to Title XVI of the 1997 Act Relating 
                to Technical Corrections.........................   196
                1. Application of requirements for SIMPLE IRAs in 
                    the case of mergers and acquisitions (sec. 
                    6016(a)).....................................   196
                2. Treatment of Indian tribal governments under 
                    section 403(b) (sec. 6016(a))................   197
            Technical Corrections to Other Tax Legislation.......   198
            A. Treatment of Adoption Tax Credit Carryovers (sec. 
                6017)............................................   198
            B. Disclosure Requirements for Apostolic 
                Organizations (sec. 6018)........................   198
            C. Allow Deduction for Unused Employer Social 
                Security Credit (sec. 6019)......................   199
            D. Earned Income Credit Qualification Rules (sec. 
                6020)............................................   200
III.Budget Effects of the Bill......................................201

        A. Committee Estimates...................................   201
        B. Budget Authority and Tax Expenditures.................   207
        C. Consultation with Congressional Budget Office.........   207
IV. Votes of the Committee..........................................207
 V. Regulatory Impact and Other Matters.............................209
        A. Regulatory Impact.....................................   209
        B. Unfunded Mandates Statement...........................   210
VI. Changes in Existing Law Made by the Bill, as reported...........210

                       I. LEGISLATIVE BACKGROUND

                          A. Committee Action

Committee consideration

    The Committee on Finance marked up H.R. 2676 (the 
``Internal Revenue Service Restructuring and Reform Act of 
1998'') on March 31, 1998. The Committee adopted Chairman 
Roth's amendment in the nature of a substitute, as amended, and 
ordered the bill, as amended, favorably reported by a roll call 
vote of 12-0 (20-0 including proxy votes). The bill also 
includes tax technical corrections provisions.

Committee and subcommittee hearings

    The Committee held several public hearings during the 105th 
Congress as part of its investigation of the operations and 
structure of the Internal Revenue Service (``IRS'). A series of 
investigative hearings were held by the full committee on 
September 23-25, 1997, which examined both the internal and 
public conduct of the IRS. The Finance Committee's Subcommittee 
on Taxation and IRS Oversight held a field hearing in Oklahoma 
City, Oklahoma on December 3, 1997, regarding IRS management 
and operations in the Oklahoma-Arkansas District.
    The Finance Committee continued public hearings on IRS 
administration, including taxpayer rights, on January 28 and 29 
and on February 5, 11, and 25, 1998. The hearing on February 
11, 1998, focused on the tax treatment of ``innocent spouses.''

                          B. Commission Report

    The National Commission on Restructuring the Internal 
Revenue Service (the ``Commission'') was established to review 
the practices of the IRS and to make recommendations for 
modernizing and improving its efficiency and taxpayer services. 
The Commission report was issued on June 25, 1997,1 
and contained recommendations relating to executive branch 
governance and management of the IRS, Congressional oversight 
of the IRS, personnel flexibilities, customer service and 
compliance, technology modernization, electronic filing, tax 
law simplification, taxpayer rights and financial 
accountability.
---------------------------------------------------------------------------
    \1\ Report of the National Commission on Restructuring the Internal 
Revenue Service, ``A Vision for a New IRS,'' June 25, 1997.
---------------------------------------------------------------------------
    S. 1096 (the ``Internal Revenue Service Restructuring and 
Reform Act of 1997''), introduced on July 30, 1997, by Senators 
Kerrey and Grassley, generally followed the Commission's 
recommendations. A similar bill, H.R. 2676, was passed by the 
House on November 5, 1997.2
---------------------------------------------------------------------------
    \2\ The House Committee on Ways and Means reported H.R. 2676 on 
October 31, 1997 (H. Rept. 105-364). H.R. 2676 was amended by the House 
to include (as new Title VI) the provisions of H.R. 2645 (``Tax 
Technical Corrections Act of 1997'') as reported by the House Committee 
on Ways and Means on October 29, 1997 (H. Rept. 105-356).
---------------------------------------------------------------------------

                      II. EXPLANATION OF THE BILL

     Title I. Executive Branch Governance and Management of the IRS

        A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS mission and restructuring (secs. 1001 and 1002 of the bill)

                              Present Law

IRS mission statement

    The IRS mission statement provides that:

          The purpose of the Internal Revenue Service is to 
        collect the proper amount of tax revenue at the least 
        cost; serve the public by continually improving the 
        quality of our products and services; and perform in a 
        manner warranting the highest degree of public 
        confidence in our integrity and fairness.

IRS organizational plan

    Under Reorganization Plan No. 1 of 1952, the Internal 
Revenue Service (``IRS'') is organized into a 3-tier geographic 
structure with a multi-functional National Office, Regional 
Offices, and District Offices. A number of IRS reorganizations 
have occurred since then, but no major changes have been made 
to the basic 3-tier structure. Presently, as a result of a 1995 
reorganization, there is a Regional Commissioner, a Regional 
Counsel and a Regional Director of Appeals for each of the 
following 4 regions: (1) the Northeast Region (headquartered in 
New York); (2) the Southeast Region (Atlanta); (3) the 
Midstates Region (Dallas); and (4) the Western Region (San 
Francisco). There are 33 District Offices, 10 service centers, 
and 3 computing centers.

                           Reasons for Change

    The Committee believes that a key reason for taxpayer 
frustration with the IRS is the lack of appropriate attention 
to taxpayer needs. At a minimum, taxpayers should be able to 
receive from the IRS the same level of service expected from 
the private sector. For example, taxpayer inquiries should be 
answered promptly and accurately; taxpayers should be able to 
obtain timely resolutions of problems and information regarding 
activity on their accounts; and taxpayers should be treated 
fairly and courteously at all times. The Commissioner of 
Internal Revenue has indicated his interest in improving 
customer service. The Committee believes that taxpayer service 
is of such importance that the Committee should not only 
support the Commissioner's efforts, but also mandate that a key 
part of the IRS mission must be taxpayer service.
    The Commissioner has announced a broad outline of a plan to 
reorganize the structure of the IRS in order to help make the 
IRS more oriented toward assisting taxpayers and providing 
better taxpayer service. Under this plan, the present regional 
structure would be replaced with a structure based on units 
that serve particular groups of taxpayers with similar needs. 
The Commissioner has currently identified four different groups 
of taxpayers with similar needs: individual taxpayers, small 
businesses, large businesses, and the tax-exempt sector 
(including employee plans, exempt organizations and State and 
local governments). Under this structure, each unit would be 
charged with end-to-end responsibility for serving a particular 
group of taxpayers. The Commissioner believes that this type of 
structure will solve many of the problems taxpayers encounter 
now with the IRS. For example, each of the 33 district offices 
and 10 service centers are now required to deal with every kind 
of taxpayer and every type of issue. The proposed plan would 
enable IRS personnel to understand the needs and problems 
affecting particular groups of taxpayers, and better address 
those issues. The present-law structure also impedes continuity 
and accountability. For example, if a taxpayer moves, the 
responsibility for the taxpayer's account moves to another 
geographical area. Further, every taxpayer is serviced by both 
a service center and at least one district. Thus, many 
taxpayers have to deal with different IRS offices on the same 
issues. The proposed structure would eliminate many of these 
problems.
    The Committee believes that the current IRS organizational 
structure is one of the factors contributing to the inability 
of the IRS to properly serve taxpayers and the proposed 
structure would help enable the IRS to better serve taxpayers 
and provide the necessary level of services and accountability 
to taxpayers. The Committee supports the Commissioner in his 
efforts to modernize and update the IRS and believes it 
appropriate to provide statutory direction for the 
reorganization of the IRS.

                        Explanation of Provision

    The IRS is directed to revise its mission statement to 
provide greater emphasis on serving the public and meeting the 
needs of taxpayers.
    The IRS Commissioner is directed to restructure the IRS by 
eliminating or substantially modifying the present-law three-
tier geographic structure and replacing it with an 
organizational structure that features operating units serving 
particular groups of taxpayers with similar needs. The plan is 
also required to ensure an independent appeals function within 
the IRS. As part of ensuring an independent appeals function, 
the reorganization plan is to prohibit ex parte communications 
between appeals officers and other IRS employees to the extent 
such communications appear to compromise the independence of 
the appeals officers. The legality of IRS actions will not be 
affected pending further appropriate statutory changes relating 
to such a reorganization (e.g., eliminating statutory 
references to obsolete positions).

                             Effective Date

    The provision is effective on the date of enactment.

2. Establishment and duties of IRS Oversight Board (sec. 1101 of the 
        bill and sec. 7802 of the Code)

                              Present Law

    Under present law, the administration and enforcement of 
the internal revenue laws are performed by or under the 
supervision of the Secretary of the Treasury.3 The 
Secretary has delegated the responsibility to administer and 
enforce the Internal Revenue laws to the Commissioner. The 
Commissioner has the final authority of the IRS concerning the 
substantive interpretation of the tax laws as reflected in 
legislative and regulatory proposals, revenue rulings, letter 
rulings, and technical advice memoranda. Under present law, the 
duties of the Chief Counsel of the IRS are prescribed by the 
Secretary. The Secretary has delegated authority over the Chief 
Counsel to General Counsel of the Treasury. The General Counsel 
has delegated authority to serve as the legal adviser to the 
Commissioner to the Chief Counsel.
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    \3\ Code sec. 7801(a).
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    Federal employees are subject to rules designed to prevent 
conflicts of interest or the appearance of conflicts of 
interest. The rules applicable to any particular employee 
depend in part on whether the employee is a regular, full-time 
Federal Government employee or a special government employee, 
the length of service of the employee and the pay grade of the 
employee. A ``special government employee'' is, in general, an 
officer or employee of the executive or legislative branch of 
the U.S. government who is appointed or employed to perform 
(with or without compensation) for not to exceed 130 days 
during any period of 365 days, temporary duties either on a 
full-time or intermittent basis. Violations of the ethical 
conduct rules are generally punishable by imprisonment for up 
to 1 year (5 years in the case of wilful conduct), a civil 
fine, or both. The amount of the fine with respect to each 
violation cannot exceed the greater of $50,000 or the 
compensation received by the employee in connection with the 
prohibited conduct.
    Under the ethical conduct rules, all Federal Government 
employees (including special government employees) are 
precluded from participating in a matter in which the employee 
(or a related party) has a financial interest. In addition, 
special government employees cannot represent a party (whether 
or not for compensation) or receive compensation for 
representation of a party \4\ in relation to a matter (1) in 
which the employee has at any time participated personally and 
substantially, or (2) which is pending in the department or 
agency of the Government in which the special government 
employee is serving. In the case of a special government 
employee who has served in a department no more than 60 days 
during the immediately preceding 365 days, item (2) does not 
apply. Thus, for example, such an individual can receive 
compensation for representational services with respect to 
matters pending in the department in which the employee serves, 
as long as it is not a matter involving parties in which the 
employee personally and substantially participated.\5\
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    \4\ The prohibition on receipt of compensation applies regardless 
of whether the services are performed by the Federal employee or 
someone else. For example, it would preclude a Federal employee from 
sharing in the compensation received by a partner of the Federal 
employee with respect to covered matters.
    \5\ More stringent rules apply to regular Federal Government 
employees. Such employees cannot receive compensation for 
representational services (whether rendered by the individual or 
another) in matters in which the United States is a party or has a 
direct and substantial interest before any department, agency or court. 
In addition, a Federal Government employee cannot act as agent or 
attorney (whether or not for compensation) for prosecuting any claim 
against the United States or act as agent or attorney for anyone before 
any department, agency, or court in which the United States is a party 
or has a direct and substantial interest.
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    The conflict of interest rules also impose restrictions on 
what a Federal Government employee can do after leaving the 
Government. Under these rules, senior level officers and 
employees (including special government employees) who served 
at least 60 days cannot represent anyone other than the United 
States before the individual's former department or agency for 
1 year after terminating employment. Whether an employee is a 
senior level officer or employee is determined by pay grade. 
The one-year post employment restriction does not apply to 
special government employees who serve less than 60 days during 
the 365-day period before termination of employment.\6\
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    \6\ All Federal Government employees are permanently prohibited 
from representing a party other than the government in connection with 
a particular matter (1) in which the government is a party or has an 
interest, (2) in which the individual participated personally and 
substantially, and (3) which involved a specific party or parties at 
the time of their participation. In addition, Federal employees cannot, 
within 2 years after terminating employment, represent any person other 
than the United States in connection with any matter (1) in which the 
government is a party or has a direct and substantial interest, (2) 
which the person knows or reasonably should know was actually pending 
under his or her official responsibility within one year before 
termination of employment, and (3) which involved a specific party or 
parties at the time it was pending
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    Federal employees with pay grades above certain levels (and 
who have at least 60 days of service) are required to file 
annually public financial disclosures.

                           Reasons for Change

    The Committee believes that a well-run IRS is critical to 
the operation of our tax system. Public confidence in the IRS 
must be restored so that our system of voluntary compliance 
will not be compromised. The Committee believes that most 
Americans are willing to pay their fair share of taxes, and 
that public confidence in the IRS is key to maintaining that 
willingness.
    The National Commission on Restructuring the IRS (the 
``Restructuring Commission'') conducted a year-long study of 
the IRS and found that a number of factors contribute to 
current IRS management problems. The Restructuring Commission 
found that, while the Treasury is responsible for IRS 
oversight, it has generally provided little consistent 
strategic oversight or guidance to the IRS. The Secretary and 
Deputy Secretary have many other broad responsibilities and 
generally leave the IRS largely independent. The average tenure 
of an IRS Commissioner is under 3 years, as is the average 
tenure of senior Treasury officials responsible for IRS 
oversight. Many of the issues that need to be addressed by the 
IRS require expertise in various areas, particularly management 
and technology.
    The Restructuring Commission concluded the following:

          problems throughout the IRS cannot be solved without 
        focus, consistency and direction from the top. The 
        current structure, which includes Congress, the 
        President, the Department of the Treasury, and the IRS 
        itself, does not allow the IRS to set and maintain 
        consistent long-term strategy and priorities, nor to 
        develop and execute focused plans for improvement. 
        Additionally, the structure does not ensure that the 
        IRS budget, staffing and technology are targeted toward 
        achieving organizational success.

    The Committee shares the concerns of the Commission, and 
believes that fundamental change in IRS management and 
oversight is essential. The Committee believes that a new 
management structure that will bring greater expertise in 
needed areas, and more focus and continuity will help the IRS 
to become an efficient, responsive, and respected agency that 
acts appropriately in carrying out its functions.
    The Committee believes that private sector input is a 
necessary part of any new management structure. The Committee 
believes that appropriate ethics rules should be applied to the 
private sector members of the new IRS management in order to 
enhance the ability of such members to demonstrate impartiality 
in the performance of their duties, while not unduly 
restricting the available pool of potential candidates.
    The Committee is aware that the taxpaying public does not 
relish contacts with the agency responsible for collecting 
taxes. Nevertheless, by establishing a new management structure 
that will better enable the IRS to develop and fulfill long-
term goals, the Committee believes the IRS will provide better 
service and reduce IRS contact with taxpayers. The Committee is 
also aware that changes being made to IRS management structure 
are not the final step, and that continued oversight of the 
IRS, by Congress as well as the Administration, is necessary in 
order to ensure long-term progress.

                        Explanation of Provision

Duties, responsibilities, and powers of the IRS Oversight Board

    The bill provides for the establishment within the Treasury 
Department of the Internal Revenue Service Oversight Board 
(referred to as the ``Board''). The general responsibilities of 
the Board are to oversee the IRS in the administration, 
management, conduct, direction, and supervision of the 
execution and application of the internal revenue laws. As part 
of its oversight responsibilities, the Board has the 
responsibility to ensure that the organization and operation of 
the IRS allows it to carry out its mission. The Board will 
sunset September 30, 2008.
    The Board has the following specific responsibilities: (1) 
to review and approve strategic plans of the IRS, including the 
establishment of mission and objectives (and standards of 
performance) and annual and long-range strategic plans; (2) to 
review the operational functions of the IRS, including plans 
for modernization of the tax administration system, outsourcing 
or managed competition, and training and education; (3) to 
review and approve the Commissioner's plans for major 
reorganization of the IRS (except that the approval authority 
does not apply to the reorganization provided for under the 
bill); and (4) to review operations of the IRS in order to 
ensure the proper treatment of taxpayers. The Board also has 
the following specific responsibilities relating to management: 
(1) to recommend to the President candidates for Commissioner 
(and to recommend the removal of the Commissioner); (2) taking 
into account the recommendations, if any, of the Commissioner, 
to recommend to the Secretary 3 candidates for appointment as 
the National Taxpayer Advocate from individuals who have a 
background in customer service and tax law, and experience 
representing individual taxpayers (and to recommend the removal 
of the National Taxpayer Advocate); (3) to review the 
Commissioner's selection, evaluation, and compensation of IRS 
senior executives who have program management responsibility 
over significant functions of the IRS; (4) and to review 
procedures of the IRS relating to financial audits.
    In addition, the Board will review and approve the budget 
request of the IRS prepared by the Commissioner, submit such 
budget request to the Secretary, and ensure that the budget 
request supports the annual and long-range strategic plans of 
the IRS. The Secretary is required to submit the budget request 
approved by the Board to the President, who is required to 
submit such request, without revision, to the Congress together 
with the President's annual budget request for the IRS. The 
bill does not affect the ability of the President to include, 
in addition, his own budget request relating to the IRS.
    It is intended that the Board will reach a formal decision 
on all matters subject to its review. With respect to those 
matters over which the Board has approval authority, the 
Board's decisions will be determinative.
    The Board has no responsibilities or authority with respect 
to the development and formulation of Federal tax policy 
relating to existing or proposed internal revenue laws. In 
addition, the Board has no authority (1) to intervene in 
specific taxpayer cases, including compliance activities 
involving specific taxpayers such as criminal investigations, 
examinations, and collection activities, (2) to engage in 
specific procurement activities of the IRS (e.g., selecting 
vendors or awarding contracts), or (3) to intervene in specific 
individual personnel matters.
    Board members would have limited access to confidential tax 
return and return information under section 6103. This limited 
access would permit the Board to receive such information 
(i.e., information that has not been redacted to remove 
confidential tax return and return information) from the 
Treasury IG for Tax Administration or the Commissioner in 
connection with reports made to the Board. This access to 
section 6103 information does not include the taxpayer's name, 
address, or taxpayer or employer identification number. The 
Board members are subject to the anti-browsing rules applicable 
to IRS employees under present law.7
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    \7\ The provision does not affect the Secretary's (or Deputy 
Secretary's) or the Commissioner's access to section 6103 information 
or the application of the anti-browsing rules to the Secretary (or 
Deputy Secretary) or the Commissioner.
---------------------------------------------------------------------------
    In exercising its duties, it is expected that the members 
of the Board shall maintain appropriate confidentiality (e.g., 
regarding enforcement matters).
    The Board is required to report each year regarding the 
conduct of its responsibilities. The annual report shall be 
provided to the President and the House Committees on Ways and 
Means, Government Reform and Oversight, and Appropriations and 
the Senate Committees on Finance, Governmental Affairs, and 
Appropriations. In addition, the Board is required to report to 
the Ways and Means and Finance Committees if the IRS does not 
address problems identified by the Board.
    It is expected that the Treasury Department will no longer 
utilize the IRS Management Board once the new Board created by 
the bill is in place, as the functions of the IRS Management 
Board would be taken over by the new Board.

Composition of the Board

    The Board is composed of 9 members. Six of the members are 
so-called ``private-life'' members who are not otherwise 
Federal officers or employees. These private-life members are 
appointed by the President, with the advice and consent of the 
Senate. The other members are: (1) the Secretary (or, if the 
Secretary so designates, the Deputy Secretary); (2) the 
Commissioner; and (3) a representative from an employee 
organization that represents a substantial number of IRS 
employees and who is appointed by the President, with the 
advice and consent of the Senate. In appointing the 
representative of an employee organization, the President is 
not required to choose an individual recommended by the 
employee organization,but may choose whoever the President 
determines to be an appropriate representative of the employee 
organization.
    The private-life members of the Board will be appointed 
without regard to political affiliation and based solely on 
their expertise in the following areas: (1) management of large 
service organizations; (2) customer service; (3) the Federal 
tax laws, including administration and compliance; (4) 
information technology; (5) organization development; and (6) 
the needs and concerns of taxpayers. In the aggregate, the 
private-life members of the Board should collectively bring to 
bear expertise in these enumerated areas.
    A private-life Board member and the employee representative 
Board member may be removed at the will of the President. In 
addition, the Secretary (or Deputy Secretary) and the IRS 
Commissioner are automatically removed from the Board upon his 
or her termination of employment as such.

Compensation of Board members

    The private-life members of the Board will be compensated 
at a rate of $30,000 per year, except that the Chair would be 
compensated at a rate of $50,000 a year. The other Board 
members will receive no compensation for their services as a 
Board member. All members of the Board are entitled to travel 
expenses for purposes of attending Board meetings or visiting 
IRS offices in connection with Board functions.

Ethical conduct rules

            Private-life members
    Under the bill, the private-life Board members are subject 
to the public financial disclosure rules applicable to Federal 
government employees above certain pay grades and who have at 
least 60 days of service. Thus, the private-life Board members 
are required to file a public financial disclosure report for 
purposes of confirmation, annually during their tenure on the 
Board, and upon termination of appointment.
    The ethical conduct rules applicable to private-life Board 
members depend on whether or not such members are determined to 
be ``special government employees'' under the present-law 
rules. It is expected that they generally will be. In that 
case, they will be subject, at a minimum, to the ethical 
conduct rules applicable to special government employees. In 
addition, during their term as a Board member, a private-life 
Board member cannot represent any party (whether or not for 
compensation) with respect to (1) any matter before the Board 
or the IRS, (2) any tax-related matter before the Treasury 
Department or (3) any court proceeding with respect to a matter 
described in (1) or (2). Thus, for example, the day after 
appointment to the Board, a private-life Board member could not 
meet with representatives of the IRS or Treasury on behalf of a 
client or the Board member's corporate employer with respect to 
proposed tax regulations. On the other hand, the Board member 
could, for example, represent clients before the U.S. Customs 
Service. The special rules applicable to private-life Board 
members generally do not preclude the Board member from sharing 
in compensation from representation of clients by another 
person (e.g., a partner of the Board member) before the IRS or 
Treasury.8
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    \8\ Certain limitations to this exception to the otherwise 
applicable ethical rules would apply. For example, this exception would 
not apply if the matter was one in which the Board member personally 
and substantially participated. Similarly, the Board member could not 
act with respect to a matter in which he or she has a personal 
financial interest, including the potential to receive a share in 
compensation as a result of another's representation.
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    In addition, private-life Board members are subject to the 
1-year post employment restriction applicable to individuals 
above certain pay grades and who have served at least 60 days 
(whether or not the members are special government employees 
under the present-law rules).
    If the Board members are determined not to be special 
government employees under the present-law rules, then they 
will be subject to the ethical conduct rules relating to 
regular Federal Government employees.
            Representative of employee organization
    In general, the bill provides that the employee 
representative or Board member is subject to the same ethical 
conduct rules as the private-life Board members. However, the 
bill modifies the otherwise applicable ethical conduct rules so 
that they do not preclude the employee representative from 
carrying out his or her duties as a Board member and his or her 
duties with respect to the employee organization. In 
particular, the employee representative is not prohibited from 
(1) representing the interests of the employee organization 
before the Federal Government on any matter, or (2) acting on a 
Board matter because the employee organization has a financial 
interest in the matter. In addition, the employee 
representative can continue to receive his or her compensation 
from the employee organization.9
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    \9\ Certain limitations on this exception would apply. For example, 
the rules relating to bribery would continue to apply. In addition, the 
employee representative would be precluded from acting on a matter in 
which he or she has a financial interest.
---------------------------------------------------------------------------
    The employee representative is subject to the same public 
financial disclosure rules as the private-life Board members. 
In addition, the employee organization is required to provide 
an annual financial report with the House Ways and Means 
Committee and the Senate Finance Committee. Such report is 
required to include the compensation paid to the individual 
serving on the Board, the compensation of individuals employed 
by the employee organization, and membership dues collected by 
the organization.
    The employee representative is subject to the same 1-year 
post employment restriction applicable to the private-life 
Board members, except to the extent the representative is 
acting in his capacity as a representative of the employee 
organization.

Administrative matters

            Term of appointments
    The 6 private-life Board members will be appointed for 5-
year terms. The private-life members may serve no more than two 
5-year terms. Board member terms will be staggered, as a result 
of a special rule providing that some private-life members 
first appointed to the Board would serve terms of less than 5 
years. Under this rule, 2 members first appointed will have a 
term of 2 years, 2 for a term of 4 years, and 2 for a term of 5 
years. The terms of the initial Board members will run from the 
date of employment. Subsequent terms will run from expiration 
of the previous term. A Board member appointed to fill a 
vacancy before the expiration of a term will be appointed to 
the remainder of the term. Of course, such a member could be 
appointed to subsequent 5-year term.
            Chair of the Board
    The members of the Board are to elect a Chair from the 
private-life members for a 2-year term. Except as otherwise 
provided by a majority of the Board, the authority of the Chair 
includes the authority to hire appropriate staff, call 
meetings, establish committees, establish the agenda for 
meetings, and develop rules for the conduct of business.
            Meetings
    The Board is required to meet on a regular basis (as 
determined necessary by the Chair), but no less frequently than 
quarterly. The Board can meet privately, and is not subject to 
public disclosure laws.
    A quorum of 5 members is required in order for the Board to 
conduct business. Actions of the Board can be taken by a 
majority vote of those members present and voting.
            Staffing
    The Chair is authorized to hire (and terminate) such 
personnel as the Chair finds necessary to enable the Board to 
carry out its duties. In addition, the Board will have such 
staff as detailed by the Commissioner or from another Federal 
agency at the request of the Chair of the Board. The Chair can 
procure temporary and intermittent services under section 
3109(b) of title 5 of the U.S. Code.
            Claims against Board members
    The private-life members of the Board have no personal 
liability under Federal law with respect to any claim arising 
out of or resulting form an act or omission by the Board member 
within the scope of service as a Board member. The bill does 
not limit personal liability for criminal acts or omissions, 
wilful or malicious conduct, acts or omissions for private 
gain, or any other act or omission outside the scope of service 
as a Board member. The bill does not affect any other 
immunities and protections that may be available under 
applicable law or any other right or remedy against the United 
States under applicable law, or limit or alter the immunities 
that are available under applicable law for Federal officers 
and employees.

                             Effective Date

    The provision relating to the Board is effective on the 
date of enactment. The President is directed to submit 
nominations for Board members to the Senate within 6 months of 
the date of enactment. The legality of the actions of the IRS 
are not affected pending appointment of the Board.

  B. Appointment and Duties of IRS Commissioner and Chief Counsel and 
                            Other Personnel

1. IRS Commissioner and other personnel (secs. 1102(a) and 1104 of the 
        bill and secs. 7803 and 7804 of the Code)

                              Present Law

    Within the Department of the Treasury is a Commissioner of 
Internal Revenue, who is appointed by the President, with the 
advice and consent of the Senate. The Commissioner has such 
duties and powers as may be prescribed by the 
Secretary.10 The Secretary has delegated to the 
Commissioner the administration and enforcement of the internal 
revenue laws.11 The Commissioner generally does not 
have authority with respect to tax policy matters.12
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    \10\ Code sec. 7802(a).
    \11\ Treasury Order 150-10 (April 22, 1982).
    \12\ See, e.g., Treasury Order 111-2 (March 16, 1981), which 
delegates to the Assistant Secretary (Tax Policy) the exclusive 
authority to make the final determination of the Treasury Department's 
position with respect to issues of tax policy arising in connection 
with regulations, published Revenue Rulings and Revenue Procedures, and 
tax return forms and to determine the time, form and manner for the 
public communication of such position.
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    The Secretary is authorized to employ such persons as the 
Secretary deems appropriate for the administration and 
enforcement of the internal revenue laws and to assign posts of 
duty.

                        Explanation of Provision

    As under present law, the Commissioner is appointed by the 
President, with the advice and consent of the Senate, and may 
be removed at will by the President. Under the bill, one of the 
qualifications of the Commissioner is demonstrated ability in 
management. The Commissioner is appointed to a 5-year term, 
beginning with the date of appointment. The Commissioner may be 
reappointed for more than one 5-year term. The Board recommends 
candidates to the President for the position of Commissioner; 
however, the President is not required to nominate for 
Commissioner a candidate recommended by the Board. The Board 
has the authority to recommend the removal of the Commissioner.
    The Commissioner has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
such duties and powers include the power to administer, manage, 
conduct, direct, and supervise the execution and application of 
the internal revenue laws or related statutes and tax 
conventions to which the United States is a party, to exercise 
the IRS' final authority concerning the substantive 
interpretation of the tax laws, to recommend to the President a 
candidate for Chief Counsel (and recommend the removal of the 
Chief Counsel), and to recommend candidates for the position of 
National Taxpayer Advocate to the IRS Board. If the Secretary 
determines not to delegate such specified duties to the 
Commissioner, such determination will not take effect until 30 
days after the Secretary notifies the House Committees on Ways 
and Means, Government Reform and Oversight, and Appropriations, 
and the Senate Committees on Finance, Governmental Affairs, and 
Appropriations. The Commissioner is to consult with the Board 
on all matters within the Board's authority (other than the 
recommendation of candidates for Commissioner and the 
recommendation to remove the Commissioner).
    Unless otherwise specified by the Secretary, the 
Commissioner is authorized to employ such persons as the 
Commissioner deems proper for the administration and 
enforcement of the internal revenue laws and is required to 
issue all necessary directions, instructions, orders, and rules 
applicable to such persons. Unless otherwise provided by the 
Secretary, the Commissioner will determine and designate the 
posts of duty.

                             Effective Date

    The provisions relating to the Commissioner are effective 
on the date of enactment. The provision relating to the 5-year 
term of office applies to the Commissioner in office on the 
date of enactment. The 5-year term runs from the date of 
appointment.

2. IRS Chief Counsel (sec. 1102(a) and sec. 7803 of the Code)

                              Present Law

    The President is authorized to appoint, by and with the 
consent of the Senate, an Assistant General Counsel of the 
Treasury, who is the Chief Counsel of the IRS. The Chief 
Counsel is the chief law officer for the IRS and has such 
duties as may be prescribed by the Secretary. The Secretary has 
delegated authority over the Chief Counsel to the Treasury 
General Counsel. The Chief Counsel does not report to the 
Commissioner, but to the Treasury General Counsel. As delegated 
by the Treasury General Counsel, the duties of the Chief 
Counsel include: (1) to be the legal advisor to the 
Commissioner and his or her officers and employees; (2) to 
furnish such legal opinions as may be required in the 
preparation and review of rulings and memoranda of technical 
advice and the performance of other duties delegated to the 
Chief Counsel; (3) to prepare, review, or assist in the 
preparation of proposed legislation, treaties, regulations and 
Executive Orders relating to laws affecting the IRS; (4) to 
represent the Commissioner in cases before the Tax Court; (5) 
to determine what civil actions should be brought in the courts 
under the laws affecting the IRS and to prepare recommendations 
to the Department of Justice for the commencement of such 
actions and to authorize or sanction commencement of such 
actions.

                        Explanation of Provision

    As under present law, the Chief Counsel is appointed by the 
President, with the advice and consent of the Senate. Under the 
bill, the Chief Counsel is not an Assistant General Counsel of 
the Treasury and reports directly to the Commissioner.
    The Chief Counsel has such duties and powers as prescribed 
by the Secretary. Unless otherwise specified by the Secretary, 
these duties include the duties currently delegated to the 
Chief Counsel as described above. If the Secretary determined 
not to delegate such specified duties to the Chief Counsel, 
such determination is subject to the same notice requirement 
applicable to changes in the delegation of authority with 
respect to the Commissioner.

                             Effective Date

    The provision is generally effective on the date of 
enactment. The provision providing that the Chief Counsel 
reports directly to the Commissioner is effective 90 days after 
the date of enactment.

C. Structure and Funding of the Employee Plans and Exempt Organizations 
 Division (``EP/EO'') (sec. 1102 of the bill and sec. 7803 of the Code)

                              Present Law

    Prior to 1974, no one specific office in the IRS had 
primary responsibility for employee plans and tax-exempt 
organizations. As part of the reforms contained in the Employee 
Retirement Income Security Act of 1974 (``ERISA''), Congress 
statutorily created the Office of Employee Plans and Exempt 
Organizations (``EP/EO'') under the direction of an 
AssistantCommissioner.13 EP/EO was created to oversee 
deferred compensation plans governed by sections 401-414 of the Code 
and organizations exempt from tax under Code section 501(a).
---------------------------------------------------------------------------
    \13\ Code section 7802(b).
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    In general, EP/EO was established in response to concern 
about the level of IRS resources devoted to oversight of 
employee plans and exempt organizations. The legislative 
history of Code section 7802(b) states that, with respect to 
administration of laws relating to employee plans and exempt 
organizations, ``the natural tendency is for the Service to 
emphasize those areas that produce revenue rather than those 
areas primarily concerned with maintaining the integrity and 
carrying out the purposes of exemption provisions.'' 
14
---------------------------------------------------------------------------
    \14\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104 
(1974).
---------------------------------------------------------------------------
    To provide funding for the new EP/EO office, ERISA 
authorized the appropriation of an amount equal to the sum of 
the section 4940 excise tax on investment income of private 
foundations (assuming a rate of 2 percent) as would have been 
collected during the second preceding year plus the greater of 
the same amount or $30 million.15 However, amounts 
raised by the section 4940 excise tax have never been dedicated 
to the administration of EP/EO, but are transferred instead to 
general revenues. Thus, the level of EP/EO funding, like that 
of the rest of the IRS, is dependent on annual Congressional 
appropriations to the Treasury Department.
---------------------------------------------------------------------------
    \15\ Code section 7802(b)(2).
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                           Reasons for Change

    To facilitate the reorganization of the IRS along 
functional lines, the Committee believes that the statutory 
provision requiring the establishment of the Office of Employee 
Plans and Exempt Organizations under the direction of an 
Assistant Commissioner should be eliminated. In addition, 
because the funding formula for EP/EO set forth in section 
7802(b)(2) would, if utilized, result in an unstable level of 
funding that may bear little or no relation to the amount of 
financial resources actually required by the EP/EO division, 
the Committee believes that it is appropriate to repeal the 
funding mechanism.

                        Explanation of Provision

    The bill eliminates the statutory requirement contained in 
section 7802(b) that there be an ``Office of Employee Plans and 
Exempt Organizations'' under the supervision and direction of 
an Assistant Commissioner. The Committee intends that a 
comparable structure be created administratively to ensure that 
adequate resources within the IRS are devoted to oversight of 
the tax-exempt sector.
    In addition, because the funding formula for EP/EO set 
forth in section 7802(b)(2) would, if utilized, result in an 
unstable level of funding that may bear little or no relation 
to the amount of financial resources actually required by the 
EP/EO division, the bill repeals the funding mechanism. Thus, 
the appropriate level of funding for EP/EO is, consistent with 
current practice, subject to annual Congressional 
appropriations, as are other functions within the IRS. In this 
regard, however, the Committee believes that, given the 
magnitude of the sectors EP/EO is charged with regulating, as 
well as the unique nature of its mandate, an adequately funded 
EP/EO is extremely important to the efficient and fair 
administration of the Federal tax system. Accordingly, 
financial resources for EP/EO should not be constrained on the 
basis that EP/EO is a ``non-core'' IRS function; rather, EP/EO, 
like all functions of the IRS, should be funded so as to 
promote the efficient and fair administration of the Federal 
tax system.
    For example, it is important to allocate sufficient funds 
for EP/EO staffing adequately to monitor and assist businesses 
in establishing and maintaining retirement plans. Recently, in 
Revenue Procedure 98-22, the IRS announced the expansion of the 
self-correction programs it offers employers to encourage 
companies to identify and correct errors without incurring 
significant penalties. These changes are welcomed, and it is 
not intended that the elimination of the statutory requirement 
contained in section 7802(b)(1) or the self-funding mechanism 
described in section 7802(b)(2) impede the implementation of 
these and EP/EO's other programs and activities. Rather, it is 
intended that there be adequate funding for EP/EO, including 
these self-correction programs that will encourage the 
establishment and continuation of retirement plans to increase 
coverage of American workers while protecting the rights of 
employees to benefits under these plans and maintaining the 
integrity and purposes of the exemption provisions.

                             Effective Date

    The provision is effective on the date of enactment.

D. Taxpayer Advocate (secs. 1102 (a), (c), and (d) of the bill and sec. 
                          7803(c) of the Code)

                              Present Law

Taxpayer Advocate

    In 1996, the Taxpayer Bill of Rights 2 (``TBOR 2'') 
established the position of Taxpayer Advocate, which replaced 
the position of Taxpayer Ombudsman, created in 1979 by the IRS. 
The Taxpayer Advocate is appointed by and reports directly to 
the IRS Commissioner.
    TBOR 2 also created the Office of the Taxpayer Advocate. 
The functions of the office are (1) to assist taxpayers in 
resolving problems with the IRS, (2) to identify areas in which 
taxpayers have problems in dealings with the IRS, (3) to 
propose changes (to the extent possible) in the administrative 
practices of the IRS that will mitigate those problems, and (4) 
to identify potential legislative changes that may mitigate 
those problems.

Taxpayer assistance orders

    Taxpayers can request that the Taxpayer Advocate issue a 
taxpayer assistance order (``TAO'') if the taxpayer is 
suffering or about to suffer a significant hardship as a result 
of the manner in which the internal revenue laws are being 
administered. A TAO may require the IRS to release property of 
the taxpayer that has been levied upon, or to cease any action, 
take any action as permitted by law, or refrain from taking any 
action with respect to the taxpayer.
    Under present law, the direct point of contact for 
taxpayers seeking taxpayer assistance orders is a problem 
resolution officer appointed by a District Director or a 
Regional Director of Appeals. The Taxpayer Advocate has 
designated the authority to issue taxpayer assistance orders to 
the local and regional problem resolution officers.

Reports of the Taxpayer Advocate

    The Taxpayer Advocate is required to report annually to the 
House Committee on Ways and Means and the Senate Finance 
Committee on the objectives of the Taxpayer Advocate for the 
up-coming fiscal year. This report is required to be provided 
no later than June 30 of each calendar year and is to contain 
full and substantive analysis, in addition to statistical 
information.
    The Taxpayer Advocate is also required to report annually 
to the House Committee on Ways and Means and the Senate Finance 
Committee on the activities of the Taxpayer Advocate during the 
most recently ended fiscal year. This report is required to be 
provided no later than December 31 of each calendar year, and 
is to contain full and substantive analysis, in addition to 
statistical information. This report is also required to: (1) 
identify the initiatives the Taxpayer Advocate has taken on 
improving taxpayer services and IRS responsiveness; (2) contain 
recommendations received from individuals with the authority to 
issue TAOs; (3) contain a summary of at least 20 of the most 
serious problems encountered by taxpayers, including a 
description of the nature of such problems; (4) contain an 
inventory of the items described in (1), (2), and (3) for which 
action has been taken and the result of such action; (5) 
contain an inventory of the items described in (1), (2), and 
(3) for which action remains to be completed and the period 
during which each item has remained on such inventory; (6) 
contain an inventory of the items described in (1), (2) and (3) 
for which no action has been taken, the period during which the 
item has remained on the inventory, the reasons for the 
inaction, and identify any IRS official who is responsible for 
the inaction; (7) identify any TAO that was not honored by the 
IRS in a timely manner; (8) contain recommendations for such 
administrative and legislative action as may be appropriate to 
resolve problems encountered by taxpayers; (9) describe the 
extent to which regional problem resolution officers 
participate in the selection and evaluation of local problem 
resolution officers, and (10) include such other information as 
the Taxpayer Advocate deems advisable.
    The reports of the Taxpayer Advocate are to be submitted 
directly to the Congressional Committees without prior review 
or comment from the Commissioner, Secretary, any other officer 
or employee of the Treasury, or the Office of Management and 
Budget.

                           Reasons for Change

    The Committee believes that the Taxpayer Advocate serves an 
important role within the IRS in terms of preserving taxpayer 
rights and solving problems that taxpayers encounter in their 
dealings with the IRS. To that end, it is appropriate that the 
IRS Oversight Board have input in the selection of the Taxpayer 
Advocate. Due to the enhanced powers of the Taxpayer Advocate 
in TBOR2 and this bill, the Committee has been advised that the 
Taxpayer Advocate should be appointed by the Secretary to avoid 
constitutional problems. In addition, the Committee believes 
that the Taxpayer Advocate should have experience appropriate 
to the position and that the Taxpayer Advocate's objectivity 
would be best preserved by limiting prior and future employment 
with the IRS. The Committee also believes that the reporting 
requirements of the Taxpayer Advocate should be targeted not 
only towards solving problems with the IRS but also towards 
preventing problems before they arise.
    The Committee believes that the Taxpayer Advocate must have 
broad discretion to provide relief to taxpayers. In determining 
whether a taxpayer assistance order should be issued, the 
Taxpayer Advocate should consider certain factors as 
constituting a ``significant hardship'' for the taxpayer. In 
addition to providing relief if the taxpayer is about to suffer 
a significant hardship, the Taxpayer Assistance Order should be 
issued in other appropriate situations, such as if there is an 
immediate threat of adverse action, if there has been a delay 
of more than 30 days in resolving the taxpayer's account 
problems, the taxpayer will have to pay significant costs if 
relief is not granted, or the taxpayer will suffer irreparable 
injury, or long-term adverse impact, if relief is not granted. 
The Committee believes that the Taxpayer Advocate should have 
flexibility to issue a TAO under any appropriate circumstances, 
not only when one of the listed factors exists.

                        Explanation of Provision

National Taxpayer Advocate

    The bill renames the Taxpayer Advocate the ``National 
Taxpayer Advocate.'' The bill provides that the IRS Oversight 
Board is to recommend to the Secretary 3 candidates for 
National Taxpayer Advocate from among individuals with a 
background in customer service as well as tax law and with 
experience representing individual taxpayers. The Secretary is 
required to choose a National Taxpayer Advocate from among the 
individuals recommended by the Oversight Board. An individual 
may be appointed as the National Taxpayer Advocate only if the 
individual was not an officer or employee of the IRS during the 
2-year period ending with such appointment and the individual 
agrees not to accept employment with the IRS for at least 5 
years after ceasing to be the National Taxpayer Advocate.
    The bill replaces the present-law problem resolution system 
with a system of local Taxpayer Advocates who report directly 
to the National Taxpayer Advocate and who will be employees of 
the Taxpayer Advocate's Office, independent from the IRS 
examination, collection, and appeals functions. The National 
Taxpayer Advocate has the responsibility to evaluate and take 
personnel actions (including dismissal) with respect to any 
local Taxpayer Advocate or any employee in the Office of the 
National Taxpayer Advocate. In conjunction with the 
Commissioner, the National Taxpayer Advocate is required to 
develop career paths for local Taxpayer Advocates.
    The National Taxpayer Advocate is required to monitor the 
coverage and geographical allocation of the local Taxpayer 
Advocates, develop guidance to be distributed to all IRS 
officers and employees outlining the criteria for referral of 
taxpayer inquires to local taxpayer advocates, ensure that the 
local telephone number for the local taxpayer advocate is 
published and available to taxpayers.
    Each local Taxpayer Advocate may consult with the 
appropriate supervisory personnel of the IRS regarding the 
daily operation of the office of the Taxpayer Advocate. At the 
initial meeting with any taxpayer seeking the assistance of the 
Office of the Taxpayer Advocate, the local taxpayer advocate is 
required to notify the taxpayer that the Office operated 
independently of any other IRS office and reports directly to 
Congress through the National Taxpayer Advocate. At the 
discretion of the local taxpayer advocate, the advocate shall 
not disclose to the IRS any contact with or information 
provided by the taxpayer. Each local office of the Taxpayer 
Advocate is to maintain a separate phone, facsimile, and other 
electronic communication access, and a separate post office 
address.
    The IRS would be required to publish the taxpayer's right 
to contact the local Taxpayer Advocate on the statutory notice 
of deficiency.

Taxpayer assistance orders

    The provision expands the circumstances under which a TAO 
may be issued. The bill provides that a ``significant 
hardship'' is deemed to occur if one of the following four 
factors exists: (1) there is an immediate threat of adverse 
action; (2) there has been a delay of more than 30 days in 
resolving the taxpayer's account problems; (3) the taxpayer 
will have to pay significant costs (including fees for 
professional services) if relief is not granted; or (4) the 
taxpayer will suffer irreparable injury, or a long-term adverse 
impact, if relief is not granted. These factors are not an 
exclusive list of what constitutes a significant hardship; a 
TAO may also be issued in other circumstances in which it is 
determined that the taxpayer is or will suffer a significant 
hardship. The Taxpayer Advocate is also authorized to issue a 
TAO in any circumstances that the Taxpayer Advocate considers 
appropriate for the issuance of a TAO.
    In determining whether to issue a TAO in cases in which the 
IRS failed to follow applicable published guidance (including 
procedures set forth in the Internal Revenue Manual), the 
Taxpayer Advocate is to construe the matter in a manner most 
favorable to the taxpayer.

Reports of the National Taxpayer Advocate

    The provision requires the annual report regarding the 
activities of the National Taxpayer Advocate for the most 
recently ended fiscal year to (in addition to the information 
required under present law): (1) identify areas of the tax law 
that impose significant compliance burdens on taxpayers or the 
IRS, including specific recommendations for remedying such 
problems; and (2) identify the 10 most litigated issues for 
each category of taxpayers, including recommendations for 
mitigating such disputes.

                             Effective Date

    The provision is generally effective on the date of 
enactment. During the period before the appointment of the IRS 
Oversight Board, the National Taxpayer Advocate shall be 
appointed by the Secretary (taking into consideration 
individuals nominated by the Commissioner) from among 
individuals who have a background in customer service as well 
as tax law and experience in representing individual taxpayers. 
The provision providing that the Taxpayer Advocate reports 
directly to the Commissioner, the provision providing that the 
Taxpayer Advocate is appointed by the Secretary, and the 
restrictions on previous and subsequent employment of the 
Taxpayer Advocate do not apply to the individual serving as the 
Taxpayer Advocate on the date of enactment.

   E. Treasury Office of Inspector General; IRS Office of the Chief 
 Inspector (secs. 1102 and 1103 of the bill, sec. 7803(d) of the Code, 
      and secs. 2, 8D, and 9 of the Inspector General Act of 1978)

                              Present Law

Treasury Inspector General

    The Treasury Office of Inspector General (``Treasury IG'') 
was established in 1988 and charged with conducting independent 
audits, investigations and review to help the Department of 
Treasury accomplish its mission, improve its programs and 
operations, promote economy, efficiency and effectiveness, and 
prevent and detect fraud and abuse. The Treasury IG derives its 
statutory authority under the Inspector General Act of 1978, as 
amended (``IG Act of 1978'').
            Appointment and qualifications
    The IG Act of 1978 provides that the Treasury IG is 
selected by the President, with the advice and consent of the 
Senate, without regard to political affiliation and solely on 
the basis of integrity and demonstrated ability in accounting, 
auditing, financial analysis, law, management analysis, public 
administration, or investigations. The Treasury IG can be 
removed from office by the President. The President must 
communicate the reasons for such removal to both Houses of 
Congress.
            Duties and responsibilities
    The Treasury IG generally is authorized to conduct, 
supervise and coordinate internal audits and investigations 
relating to the programs and operations of the Treasury, 
including all of its bureaus and offices.16 Special 
rules apply, however, with respect to the Treasury IG's 
jurisdiction over ATF, Customs, the Secret Service and the 
IRS--the four so-called ``law enforcement bureaus.'' Upon its 
establishment, the Treasury IG assumed the internal audit 
functions previously performed by the offices of internal 
affairs of ATF, Customs and the Secret Service. Although the 
Treasury IG was granted oversight responsibility for the 
internal investigations performed by the Office of Internal 
Affairs of ATF, the Office of Internal Affairs of Customs, and 
the Office of Inspections of the Secret Service, the internal 
investigation or inspection functions of these offices remained 
with the respective bureaus. The Treasury IG did not assume 
responsibility for either the internal audit or inspection 
functions of the IRS Office of the Chief Inspector. However, it 
was directed to oversee the internal audits and internal 
investigations performed by the IRS Office of the Chief 
Inspector.
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    \16\ The Treasury Department organization includes the Departmental 
offices as well as the Bureau of Alcohol, Tobacco and Firearms 
(``ATF''), the Office of the Comptroller of the Currency (``OCC''), the 
U.S. Customs Service (``Customs''), the Bureau of Engraving and 
Printing, the Federal Law Enforcement Training Center, the Financial 
Management Service, the U.S. Mint, the Bureau of the Public Debt, the 
U.S. Secret Service (``Secret Service''), the Office of Thrift 
Supervision, and the IRS.
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    The Commissioner and the Treasury IG have entered into two 
Memorandums of Understanding (``MOUs'') 17 to 
clarify the respective roles of the IRS Office of the Chief 
Inspector and the Treasury IG in two primary areas: (1) the 
investigation of allegations of wrongdoing by IRS executives 
and employees in situations where the independence of the 
Office of the Chief Inspector could be questioned, and (2) 
oversight by the Treasury IG of the IRS Office of the Chief 
Inspector.18 Pursuant to the 1990 MOU, the 
Commissioner agreed to transfer 21 FTEs and $1.9 million from 
the IRS appropriation to the Treasury IG appropriation to be 
used for the following purposes: (1) oversight of the 
operations of the Office of the Chief Inspector; (2) conduct of 
special reviews of IRS operations; (3) investigation of 
allegations of misconduct concerning the Commissioner, the 
Senior Deputy Commissioner, and employees of the IRS Office of 
the Chief Inspector; and (4) investigation of allegations of 
misconduct where the independence of the IRS Office of the 
Chief Inspector might be questioned. With respect to item (4), 
the Commissioner and Treasury IG agreed that all allegations of 
misconduct involving IRS executives and managers (Grade 15 and 
above), as well as any other allegation involving ``significant 
or notorious'' matters were to be referred to the Treasury IG, 
and that investigations arising out of such referrals generally 
would be conducted by the Treasury IG.
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    \17\ The first MOU was entered into in 1990 and the second in 1994.
    \18\ Treasury Directive 40-01 (September 21, 1992) reiterates that 
the Treasury IG is responsible for investigating alleged misconduct on 
the part of IRS employees at the grade 15 level and above, all 
employees of the Office of the Chief Inspector. In addition, Treasury 
Directive 40-01 states that the Treasury IG is responsible for 
investigating alleged misconduct on the part of Office of Chief Counsel 
employees (excluding employees of the National Director, Office of 
Appeals).
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    In general, under the IG Act of 1978, Inspectors General 
are instructed to report expeditiously to the Attorney General 
whenever the Inspector General has reasonable grounds to 
believe there has been a violation of Federal criminal law. 
However, in matters involving criminal violations of the 
Internal Revenue Code, the Treasury IG may report to the 
Attorney General only those offenses under section 7214 of the 
Code (unlawful acts of revenue officers or agents, including 
extortion, bribery and fraud) without the consent of the 
Commissioner.
            Authority
    The Treasury IG reports to and is under the general 
supervision of the Secretary of the Treasury, acting through 
the Deputy Secretary. In general, the Secretary cannot prevent 
or prohibit the Treasury IG from initiating, carrying out, or 
completing any audit or investigation or from issuing any 
subpoena during the course of any audit or investigation.
    However, section 8D of the IG Act of 1978 grants the 
Secretary authority to prohibit audits or investigations by the 
Treasury IG under certain circumstances. In particular, the 
Treasury IG is under the authority, direction, and control of 
the Secretary with respect to audits or investigations, or the 
issuance of subpoenas, which require access to sensitive 
information concerning: (1) ongoing criminal investigations or 
proceedings; (2) undercover operations; (3) the identity of 
confidential sources, including protected witnesses; (4) 
deliberations and decisions on policy matters, including 
documented information used as a basis for making policy 
decisions, the disclosure of which could reasonably be expected 
to have a significant influence on the economy or market 
behavior; (5) intelligence or counterintelligence matters; (6) 
other matters the disclosure of which would constitute a 
serious threat to national security or to the protection of 
certain persons. With respect to audits, investigations or 
subpoenas that require access to the above-listed information, 
the Secretary may prohibit the Treasury IG from carrying out 
such audit, investigation or subpoena if the Secretary 
determines that such prohibition is necessary to prevent the 
disclosure of such information or to prevent significant 
impairment to the national interests of the United States. The 
Secretary must provide written notice of such a prohibition to 
the Treasury IG, who must, in turn, transmit a copy of such 
notice to the Committees on Government Reform and Oversight and 
Ways and Means of the House and the Committees on Governmental 
Affairs and Finance of the Senate.
            Access to taxpayer returns and return information
    The Treasury IG has access to taxpayer returns and return 
information under section 6103(h)(1) of the Code. However, such 
access is subject to certain special requirements, including 
the requirement that the Treasury IG notify the IRS Office of 
the Chief Inspector (or the Deputy Commissioner in certain 
circumstances) of its intent to access returns and return 
information.
            Reporting requirements
    Under the IG Act of 1978, the Treasury IG reports to the 
Congress semiannually on its activities. Reports from the 
Treasury IG are transmitted to the Committees on Government 
Reform and Oversight and Ways and Means of the House and the 
Committees on Governmental Affairs and Finance of the Senate.
            Resources
    For fiscal year 1997, the Treasury IG had 296 FTEs and 
total funding of $29.7 million. 174 FTEs were assigned to the 
Treasury IG's audit function and 61 were assigned to the 
investigative function. The remaining FTEs were divided among 
the following functions: evaluations, legal, program, 
technology and administrative support. Of the total Treasury IG 
FTEs, approximately 23 were used for IRS oversight activities 
in fiscal year 1997.

IRS Office of Chief Inspector

    The IRS Office of the Chief Inspector (also known as the 
``Inspection Service'') was established on October 1, 1951, in 
response to publicity revealing widespread corruption in the 
IRS. At the time of its creation, President Harry S. Truman 
stated, ``A strong, vigorous inspection service will be 
established and will be made completely independent of the rest 
of the Internal Revenue Service.''
            Appointment of the Chief Inspector
    In 1952, the Office of the Assistant Commissioner 
(Inspection) was established. The office was redesignated as 
the Office of the Chief Inspector on March 25, 1990. The Chief 
Inspector is appointed by the Commissioner. In this regard, 
pursuant to Treasury Director 40-01, the Commissioner must 
consult with the Treasury IG before selecting candidates for 
the position of Chief Inspector (and all other senior executive 
service (``SES'') positions in the Office of the Chief 
Inspector). The Commissioner must also consult with the 
Treasury IG regarding annual performance appraisals for the 
Chief Inspector and other SES officials.
    The Office of the Chief Inspector consists of a National 
Office and the offices of the Regional Inspectors. The offices 
of the Regional Inspectors are located in the same cities and 
have the same geographic boundaries as the offices of the four 
IRS Regional Commissioners. The Regional Inspectors report 
directly to the Chief Inspector.
            Duties and responsibilities
    The Office of the Chief Inspector generally is responsible 
for carrying out internal audits and investigations that: (1) 
promote the economic, efficient, and effective administration 
of the nation's tax laws; (2) detect and deter fraud and abuse 
in IRS programs and operations; and (3) protect the IRS against 
external attempts to corrupt or threaten its employees. The 
Chief Inspector reports directly to the Commissioner and Deputy 
Commissioner of the IRS.
    The IRS Inspection Service is divided into three functions: 
Internal Security, Internal Audit, and Integrity Investigations 
and Activities. Internal Security's responsibilities include 
criminal investigations (employee conduct, bribery, assault and 
threat and investigations of non-IRS employees for acts such as 
impersonation, theft, enrolled agent misconduct, disclosure, 
and anti-domestic terrorism) investigative support activities 
(including forensic lab, computer investigative support, and 
maintenance of law enforcement equipment), protection, and 
background investigations.
    Internal Audit is responsible for providing IRS management 
with independent reviews and appraisals of all IRS activities 
and operations. In addition, Internal Audit makes 
recommendations to improve the efficiency and effectiveness of 
programs and to assist IRS officials in carrying out their 
program and operational responsibilities. In this regard, 
Internal Audit generally conducts performance reviews (program 
audits, system development audits, internal control audits) and 
financial reviews (financial statement audits and financial 
related reviews).
    Integrity Investigations and Activities are joint internal 
audit and internal security operations undertaken as a 
proactive effort to detect and deter fraud and abuse within the 
IRS. Integrity Investigations and Activities also includes the 
UNAX Central Case Development Center. The Center was developed 
in October, 1997, in response to the Taxpayer Browsing 
Protection Act of 1997. Its purpose is to detect unauthorized 
accesses to IRS computer systems by IRS employees and to refer 
such instances to Internal Security investigators for further 
investigation.
            Authority
    The Chief Inspector derives specific and general authority 
from delegation by the Commissioner and Deputy Commissioner. In 
addition, under section 7608(b) of the Code, the Chief 
Inspector is authorized to perform certain functions in 
connection with the duty of enforcing any of the criminal 
provisions of the Code, including executing and serving search 
and arrest warrants, serving subpoenas and summonses, making 
arrests without warrant, carrying firearms, and seizing 
property subject to forfeiture under the Code.
            Access to taxpayer returns and return information
    The Office of the Chief Inspector has full access to 
taxpayer returns and return information.
            Reporting requirements
    The Office of the Chief Inspector reports facts developed 
through its internal audit and internal security activities to 
IRS management officials, who are charged with the 
responsibility of reviewing IRS activities. The results of the 
Chief Inspector's internal audit and internal security 
activities also are reported to the Treasury IG and are 
included in the Treasury IG's semiannual reports to Congress.
    Internal audit reports prepared by the Office of the Chief 
Inspector are provided monthly to the Government Accounting 
Office, as well as to the House and Senate Appropriations 
Committees. In addition, a monthly list of Internal Audit 
reports is provided to Treasury and the Office of Management 
and Budget. Reports of Investigation regarding criminal conduct 
are referred to the Department of Justice for prosecution.
            Resources
    The IRS Office of the Chief Inspector had 1,202 FTEs for 
1997 and total funding of $100.1 million. Of these FTEs, 
approximately 442 performed Internal Audit functions, 511 
performed Internal Security functions, and 94 performed 
Integrity Investigations and Activities. Of the remaining FTEs, 
approximately 95 were dedicated to information technology 
functions and 60 staffed the offices of the Chief Inspector and 
the Regional Inspectors.

                           Reasons for Change

    The Committee believes that the current IRS Office of the 
Chief Inspector lacks sufficient structural and actual autonomy 
from the agency it is charged with monitoring and overseeing. 
Further, the current relationship between the Treasury IG and 
the IRS Office of the Chief Inspector does not foster 
appropriate oversight over the IRS. The Committee believes that 
the establishment of an independent Inspector General within 
the Department of Treasury whose primary focus and 
responsibility will be to audit, investigate, and evaluate IRS 
programs will improve the quality as well as the credibility of 
IRS oversight.

                        Explanation of Provision

In general

    The bill establishes a new, independent, Treasury Inspector 
General for Tax Administration (``Treasury IG for Tax 
Administration'') within the Department of Treasury. The IRS 
Office of the Chief Inspector is eliminated, and all of its 
powers and responsibilities are transferred to the Treasury IG 
for Tax Administration. The Treasury IG for Tax Administration 
has the powers and responsibilities generally granted to 
Inspectors General under the IG Act of 1978, without the 
limitations that currently apply to the Treasury IG under 
section D of the Act. The role of the existing Treasury IG is 
redefined to exclude responsibility for the IRS. The Treasury 
IG for Tax Administration is under the supervision of the 
Secretary of Treasury, with certain additional reporting to the 
Board and the Congress.

Appointment and qualifications of Treasury IG for Tax Administration

    The Treasury IG for Tax Administration is selected by the 
President, with the advice and consent of the Senate. The 
Treasury IG for Tax Administration can be removed from office 
by the President. The President must communicate the reasons 
for such removal to both Houses of Congress.
    The Treasury IG for Tax Administration must be selected 
without regard to political affiliation and solely on the basis 
of integrity and demonstrated ability in accounting, auditing, 
financial analysis, law, management analysis, public 
administration, or investigations. In addition, however, the 
Treasury IG for Tax Administration should have experience in 
tax administration and demonstrated ability to lead a large and 
complex organization. The Treasury IG for Tax Administration 
may not be employed by the IRS within the two years preceding 
and the five years following his or her appointment.
    The Treasury IG for Tax Administration is required to 
appoint an Assistant Inspector General for Auditing and an 
Assistant Inspector for Inspections. Under the bill, such 
appointees, as well as any Deputy Inspector General(s) 
appointed by the Treasury IG for Tax Administration, may not be 
employed by the IRS within the two years preceding and the five 
years following their appointments.

Duties and responsibilities of Treasury IG for Tax Administration

    The Treasury IG for Tax Administration has the present-law 
duties and responsibilities currently delegated to the Treasury 
IG with respect to the IRS. In addition, the Treasury IG for 
Tax Administration assumes all of the duties and 
responsibilities currently delegated to the IRS Office of the 
Chief Inspector. The Treasury IG for Tax Administration has 
jurisdiction over IRS matters, as well as matters involving the 
Board.
    Accordingly, the Treasury IG for Tax Administration is 
charged with conducting audits, investigations, and evaluations 
of IRS programs and operations (including the Board) to promote 
the economic, efficient and effective administration of the 
nation's tax laws and to detect and deter fraud and abuse in 
IRS programs and operations. In this regard, the Treasury IG 
for Tax Administration specifically is directed to evaluate the 
adequacy and security of IRS technology on an ongoing basis. In 
addition, the Treasury IG for Tax Administration is responsible 
for protecting the IRS against external attempts to corrupt or 
threaten its employees. The Treasury IG for Tax Administration 
is charged with investigating allegations of criminal 
misconduct (e.g., Code sections 7212 , 7213, 7214, 7216 and new 
section 7217), as well as administrative misconduct (e.g., 
violations of the Taxpayer Bill of Rights and the Taxpayer Bill 
of Rights 2, the Office of Government Ethics Standards of 
Ethical Conduct and the IRS Supplemental Standards of Ethical 
Conduct).
    In addition, the bill directs the Treasury IG for Tax 
Administration to implement a program periodically to audit at 
least one percent of all determinations (identified through a 
random selection process) where the IRS has asserted either 
section 6103 (directly or in connection with the Freedom of 
Information Act or the Privacy Act) or law enforcement 
considerations (i.e., executive privilege) as a rationale for 
refusing to disclose requested information. The program must be 
implemented within 6 months after establishment of the Treasury 
IG for Tax Administration. The Treasury IG for Tax 
Administration is directed to report any findings of improper 
assertion of section 6103 or law enforcement considerations to 
the Board.
    Further, the Treasury IG for Tax Administration is directed 
to establish a toll-free confidential telephone number for 
taxpayers to register complaints of misconduct by IRS employees 
and to publish the telephone number in IRS Publication 1.
    There are no restrictions on the Treasury IG for Tax 
Administration's ability to refer matters to the Department of 
Justice. Thus, the Treasury IG for Tax Administration is 
required to report to the Attorney General whenever the 
Treasury IG for Tax Administration has reasonable grounds to 
believe that there has been a violation of Federal criminal 
law.

Authority of Treasury IG for Tax Administration

    The Treasury IG for Tax Administration reports to and is 
under the general supervision of the Secretary of Treasury. 
Under the bill, the Secretary cannot prevent or prohibit the 
Treasury IG for Tax Administration from initiating, carrying 
out, or completing any audit or investigation or from issuing 
any subpoena during the course of any audit or investigation.
    Under the bill, the Treasury IG for Tax Administration must 
provide to the Board all reports regarding IRS matters on a 
timely basis and conduct audits or investigations requested by 
the Board. The Treasury IG for Tax Administration also must, in 
a timely manner, conduct such audits or investigations and 
provide such reports as may be requested by the Commissioner.
    In carrying out the duties and responsibilities described 
above, the Treasury IG for Tax Administration has the present-
law authority generally granted to Inspectors General under the 
IG Act of 1978. The limitations on the authority of the 
Treasury IG under such Act do not apply to the Treasury IG for 
Tax Administration. In addition, the Treasury IG for Tax 
Administration has the authority granted to the IRS Office of 
the Chief Inspector under present-law Code section 7608, 
including the right to execute and serve search and arrest 
warrants, to serve subpoenas and summonses, to make arrests 
without warrant, to carry firearms, and to seize property 
subject to forfeiture under the Code.

Resources

    To ensure that the Treasury IG for Tax Administration has 
sufficient resources to carry out his or her duties and 
responsibilities under the bill, all but 300 FTEs from the IRS 
Office of the Chief Inspector are transferred to the Treasury 
IG for Tax Administration. Such FTEs include all of the FTEs 
performing investigative functions in the Office of the Chief 
Inspector Internal Security and Integrity Investigations and 
Activities. In addition, the 21 FTEs previously transferred 
from Inspection to Treasury IG pursuant to the 1990 MOU to 
perform oversight of the IRS are transferred to the Treasury IG 
for Tax Administration.
    The Commissioner will retain approximately 300 FTEs from 
the IRS Office of the Chief Inspector to staff an audit 
function (including support staff) for internal IRS management 
purposes. Like other IRS functions, however, this audit 
function is subject to oversight and review by the Treasury IG 
for Tax Administration.

Access to taxpayer returns and return information

    Taxpayer returns and return information are available for 
inspection by the Treasury IG for Tax Administration pursuant 
to section 6103(h)(1). Thus, the Treasury IG for Tax 
Administration has the same access to taxpayer returns and 
return information as does the Chief Inspector under present 
law.

Reporting requirements

    The Treasury IG for Tax Administration is subject to the 
semiannual reporting requirements set forth in section 5 of the 
IG Act of 1978. As under present law, reports are made to the 
Committees on Government Reform and Oversight and Ways and 
Means of the House and the Committees on Governmental Affairs 
and Finance of the Senate. The reports must contain the 
information that is required to be reported by the Treasury IG 
with respect to the IRS under present law, as well as 
information regarding the source, nature and status of taxpayer 
complaints and allegations of serious misconduct by IRS 
employees received by the IRS or by the Treasury IG for Tax 
Administration. In addition, the Treasury IG for Tax 
Administration is required to report annually on certain 
additional information (e.g., regarding the use of enforcement 
statistics in evaluating IRS employees, the implementation of 
various taxpayer rights protections, and IRS employee 
terminations and mitigations) required by the bill.

Treasury IG

    The Treasury IG generally continues to have its present-law 
responsibilities and authority with respect to all Treasury 
functions other than the IRS and the Board. However, the 
Treasury IG generally does not have access to taxpayer returns 
and return information under section 6103 (unless the Secretary 
specifically authorizes such access).
    The Treasury IG for Tax Administration operates 
independently of the Treasury IG. The Secretary of Treasury is 
directed to establish procedures pursuant to which the Treasury 
IG for Tax Administration and the Treasury IG shall coordinate 
audits and investigations in cases involving overlapping 
jurisdiction.
    The Treasury IG continues to have responsibility for 
providing an opinion on the Department of Treasury's 
consolidated financial statement as required under the Chief 
Financial Officer Act. The Treasury IG for Tax Administration 
is responsible for rendering an opinion on the IRS custodial 
and administrative accounts (to the extent the Government 
Accounting Office does not exercise its option to preempt under 
the CFO Act).

                             Effective Date

    The provision is effective 180 days after the date of 
enactment.

F. Prohibition on Executive Branch Influence Over Taxpayer Audits (sec. 
            1105 of the bill and new sec. 7217 of the Code)

                              Present Law

    There is no explicit prohibition in the Code on high-level 
Executive Branch influence over taxpayer audits and collection 
activity.
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431).

                           Reasons for Change

    The Committee believes that the perception that it is 
possible that high-level Executive Branch influence over 
taxpayer audits and collection activity could occur has a 
negative influence on taxpayers' views of the tax system. 
Accordingly, the Committee believes that it is appropriate to 
prohibit such influence.

                        Explanation of Provision

    The bill makes it unlawful for a specified person to 
request that any officer or employee of the IRS conduct or 
terminate an audit or otherwise investigate or terminate the 
investigation of any particular taxpayer with respect to the 
tax liability of that taxpayer. The prohibition applies to the 
President, the Vice President, and employees of the executive 
offices of either the President or Vice President, as well as 
any individual (except the Attorney General) serving in a 
position specified in section 5312 of Title 5 of the United 
States Code (these are generally Cabinet-level positions). The 
prohibition applies to both direct requests and requests made 
through an intermediary. In the case of a law enforcement 
action authorized by the Attorney General, discussions 
involving specified persons with respect to that law 
enforcement action shall not be considered to be requests made 
through an intermediary.
    Any request made in violation of this rule must be reported 
by the IRS employee to whom the request was made to the Chief 
Inspector of the IRS. The Chief Inspector has the authority to 
investigate such violations and to refer any violations to the 
Department of Justice for possible prosecution, as appropriate. 
Anyone convicted of violating this provision will be punished 
by imprisonment of not more than 5 years or a fine not 
exceeding $5,000 (or both).
    Three exceptions to the general prohibition apply. First, 
the prohibition does not apply to a request made to a specified 
person by or on behalf of a taxpayer that is forwarded by the 
specified person to the IRS. This exception is intended to 
cover two types of situations. The first situation is where a 
taxpayer (or a taxpayer's representative) writes to a specified 
person seeking assistance in resolving a difficulty with the 
IRS. This exception permits the specified person who receives 
such a request to forward it to the IRS for resolution without 
violating the general prohibition. The second situation that 
this first exception is intended to cover is an audit or 
investigation by the IRS of a Presidential nominee. Under 
present law (sec. 6103(c)), nominees for Presidentially 
appointed positions consent to disclosure of their tax returns 
and return information so that background checks may be 
conducted. Sometimes an audit or other investigation is 
initiated as part of that background check. The Committee 
anticipates that any such audit or investigation that is part 
of such a background check will be encompassed within this 
first exception.
    The second exception to the general prohibition applies to 
requests for disclosure of returns or return information under 
section 6103 if the request is made in accordance with the 
requirements of section 6103.
    The third exception to the general prohibition applies to 
requests made by the Secretary of the Treasury as a consequence 
of the implementation of a change in tax policy.

                             Effective Date

    The provision applies to violations occurring after the 
date of enactment.

  G. IRS Personnel Flexibilities (Secs. 1201-1205 of the bill and new 
                     chapter 95 of Title 5, U.S.C.)

                              Present Law

    The IRS is subject to the personnel rules and procedures 
set forth in title 5, United States Code. Under these rules, 
IRS employees generally are classified under the General 
Schedule or the Senior Executive Service.

                           Reasons for Change

    The Committee believes that as part of restructuring the 
IRS, the Commissioner should have the ability to bring in 
experts and the flexibility to revitalize the current IRS 
workforce. The current hiring practices often inhibit the 
ability of the Commissioner to change the IRS' institutional 
culture. Commissioner Rossotti has indicated that in order to 
maximize efforts to transform the IRS into an efficient, modern 
and responsive agency, the ability to recruit and retain a top-
notch leadership and technical team is critical.
    The Committee believes the IRS needs the flexibility to 
recruit employees from the private sector, to redesign its 
salary and incentive structures to reward employees who meet 
their objectives, and to hold non-performers accountable. 
Personnel and pay flexibilities are necessary prerequisites for 
larger fundamental changes in the IRS.
    The Committee wants to support the Commissioner's 
initiatives to reposition the current IRS workforce as part of 
implementing a new organization designed around the needs of 
taxpayers.

                        Explanation of Provision

In general

    The bill amends title 5 of the United States Code to 
provide certain personnel flexibilities to the IRS. In general, 
the bill provides that the IRS exercise the personnel 
flexibilities consistently with existing rules relating to 
merit system principles, prohibited personnel practices, and 
preference eligibles. In those cases where the exercise of 
personnel flexibilities would affect members of the employees' 
union, such employees' will not be subject to the exercise of 
any flexibility unless there is a written agreement between the 
IRS and the employees' union. Negotiation impasses between the 
IRS and the employees' union may be appealed to the Federal 
Services Impasse Panel.

Senior management and technical positions

            Streamlined critical pay authority
    The bill provides a streamlined process for the Secretary 
of the Treasury, or his delegate, to fix the compensation of, 
and appoint up to 40 individuals to, designated critical 
technical and professional positions, provided that: (1) the 
positions require expertise of an extremely high level in a 
technical, administrative or professional field and are 
critical to the IRS; (2) exercise of the authority is necessary 
to recruit or retain an individual exceptionally well qualified 
for the position; (3) designation of such positions is approved 
by the Secretary; (4) the terms of such appointments are 
limited to no more than four years; (5) appointees to such 
positions are not IRS employees immediately prior to such 
appointment; and (6) the total annual compensation for any 
position (including performance bonuses) does not exceed the 
rate of pay of the Vice President (currently $175,400).
    These appointments are not subject to the otherwise 
applicable requirements under title 5. All such appointments 
will be excluded from the collective bargaining unit and the 
appointments will not be subject to approval of the Office of 
Management and Budget (``OMB'') or the Office of Personnel 
Management (``OPM'').
    The streamlined authority will be limited to a period of 10 
years.
            Critical pay authority
    The bill provides OMB with authority to set the pay for 
certain critical pay positions requested by the Secretary under 
section 5377 of title 5 of the United States Code at levels 
higher than authorized under current law. These critical pay 
positions would be critical, technical, administrative and 
professional positions other than those designated under the 
streamlined authority. Under the bill, OMB is authorized to 
approve requests for critical position pay up to the rate of 
pay of the Vice President (currently $175,400).
            Recruitment, retention and relocation incentives
    The bill authorizes the Secretary to vary from the existing 
provisions governing recruitment, retention and relocation 
incentives. The authority will be for a period of 10 years and 
will be subject to OPM approval.
            Career-reserve Senior Executive Service (``SES'') positions
    The bill broadens the definition of a ``career reserved 
position'' in the SES to include a limited emergency appointee 
or a limited term appointee who, immediately upon entering the 
career-reserved position, was serving under a career or a 
career-conditional appointment outside the SES or whose limited 
emergency or limited term appointment is approved in advance by 
OPM. The number of appointments to these SES positions will be 
limited to up to 10 percent of the total number of SES 
positions available to the IRS. These positions will be limited 
to a 3-year term, with the option of extending the term for 2 
more 3-year terms.
            Variable compensation
    The bill provides the Secretary with the authority to 
provide performance bonus awards to IRS senior executives of up 
to one-third of the individual's annual compensation. The bonus 
award would be based on meeting preset performance goals 
established by the IRS. An individual's total annual 
compensation, including the bonus, cannot exceed the rate of 
pay of the Vice President. The authority will not be subject to 
OPM approval.
    It is anticipated that the bonuses will not be available to 
more than 25 IRS senior executives annually.

General workforce

            Performance management system
    The bill permits the Secretary to establish a new 
performance management system which will maintain individual 
accountability by: (1) establishing one or more retention 
standards for each employee related to the work of the employee 
and expressed in terms of performance; (2) providing for 
periodic performance evaluations to determine whether employees 
are meeting the applicable retention standard; and (3) taking 
appropriate action, in accordance with applicable laws, with 
respect to any employee whose performance does not meet 
established retention standards.
    The bill requires that the performance management system 
provide for: (1) establishing goals or objectives for 
individual, group or organizational performance and taxpayer 
service surveys; (2) communicating such goals or objectives to 
employees; and (3) using such goals or objectives to make 
performance distinctions among employees or groups of 
employees.
    It is intended that in no event will performance measures 
be used which rank employees or groups of employees based on 
enforcement results, establish dollar goals for assessments or 
collections, or otherwise undermine fair treatment of 
taxpayers.
            Awards
    The bill provides the Secretary the authority to establish 
an awards program for IRS employees. The program will be 
designed to provide incentives for and recognition of 
individual, group and organizational achievements. The 
Secretary will have the authority to provide awards between 
$10,000 and $25,000 without OPM approval.
    These awards will be based on performance under the new 
performance management system, and in no case will awards be 
made (or performance measured) based on tax enforcement 
results.
            Workforce classification and pay banding
    The bill provides the Secretary with authority to establish 
one or more broad band pay systems covering all or any portion 
of the IRS workforce, subject to OPM criteria. At a minimum, 
the OPM criteria will have to: (1) ensure that the pay band 
system maintain the concept of equal pay for substantially 
equal work; (2) establish the minimum and maximum number of 
grades that may be combined into pay bands; (3) establish 
requirements for setting minimum and maximum rates of pay in a 
pay band; (4) establish requirements for adjusting the pay of 
an employee within a pay band; (5) establish requirements for 
setting the pay of a supervisory employee in a pay band; and 
(6) establish requirements and methodologies for setting the 
pay of an employee upon conversion to a broad-banded system, 
initial appointment, change of position or type of appointment 
and movement between a broad-banded system and another pay 
system.
            Workforce staffing
    The bill provides the IRS with flexibility in filling 
certain permanent appointments with qualified temporary 
employees. A qualified temporary employee is defined as a 
temporary employee of the IRS with at least two years of 
continuous service, who has met all applicable retention 
standards and who meets the minimum qualifications for the 
vacant position.
    The bill authorizes the IRS to establish category rating 
systems for evaluating job applicants, under which qualified 
candidates are divided into two or more quality categories on 
the basis of relative degrees of merit, rather than assigned 
individual numerical ratings. Managers will be authorized to 
select any candidate from the highest quality category, and 
will not be limited to the three highest ranked candidates. In 
administering these category rating systems, the IRS generally 
will be required to list preference eligibles ahead of other 
individuals within each quality category. The appointing 
authority, however, could select any candidate from the highest 
quality category, as long as existing requirements relating to 
passing over preference eligibles are satisfied.
    The bill authorizes the IRS to establish probation periods 
for IRS employees of up to 3 years, when it is determined that 
a shorter period will not be sufficient for an employee to 
demonstrate proficiency in a position.

Voluntary separation incentives

    The bill provides authority to the IRS to use Voluntary 
Separation Incentive Pay (``buyouts'') through December 31, 
2002. The use of voluntary separation incentive is not intended 
to necessarily reduce the total number of Full Time Equivalents 
(``FTE'') positions in the IRS.

Demonstration projects

    The bill provides the IRS with authority to conduct one or 
more demonstration projects through a streamlined process. The 
authority will enable the IRS to test new approaches to Human 
Resource Management. The bill provides authority to the 
Secretary and OPM to waive the termination of a demonstration 
project, thereby making it permanent. At least 90 days prior to 
waiving the termination date OPM will be required to publish a 
notice of such intent in the Federal Register and inform the 
appropriate Committees (including the House Ways and Means 
Committee, the House Government Reform and Oversight Committee, 
the Senate Finance Committee and the Senate Governmental 
Affairs Committee) of both Houses of Congress in writing.

Performance measures

    The IRS is directed to develop employee performance 
measures that favor taxpayer service and prohibit awarding 
merit pay or bonuses that are based on enforcement quotas, 
goals, or statistics.

Violations for which IRS employees may be terminated

    The bill requires the IRS to terminate an employee for 
certain proven violations committed by the employee in 
connection with the performance of official duties. The 
violations include: (1) failure to obtain the required approval 
signatures on documents authorizing the seizure of a taxpayer's 
home, personal belongings, or business assets; (2) providing a 
false statement under oath material to a matter involving a 
taxpayer; (3) falsifying or destroying documents to avoid 
uncovering mistakes made by the employee with respect to a 
matter involving a taxpayer; (4) assault or battery on a 
taxpayer or other IRS employee; (5) violation of the civil 
rights of a taxpayer or other IRS employee; (6) violations of 
the Internal Revenue Code, Treasury Regulations, or policies of 
the IRS (including the Internal Revenue Manual) for the purpose 
of retaliating or harassing a taxpayer or other IRS employee; 
and (7) wilful misuse of section 6103 for the purpose of 
concealing data from a Congressional inquiry.
    The bill provides non-delegable authority to the 
Commissioner to determine that mitigating factors exist, that, 
in the Commissioner's sole discretion, mitigate against 
terminating the employee. The bill also provides that the 
Commissioner, in his sole discretion, may establish a procedure 
which will be used to determine whether an individual should be 
referred for such a determination by the Commissioner. The 
Treasury IG is required to track employee terminations and 
terminations that would have occurred had the Commissioner not 
determined that there were mitigation factors and include such 
information in the IG's annual report.

IRS employee training program

    The bill requires the IRS to place a high priority on 
employee training and to adequately fund employee training 
programs. The bill also requires the IRS to provide to the 
Congressional tax writing committees a comprehensive multi-year 
plan to: (1) ensure adequate customer service training; (2) 
review the organizational design of customer service; (3) 
implement a performance development system; and (4) provide, in 
fiscal year 1999, sixteen to twenty-four hours of conflict 
management training for collection employees.

                             Effective Date

    The provision, other than the IRS employee training program 
provision, is effective on the date of enactment. The provision 
relating to the IRS employee training program is effective 90 
days after the date of enactment.

                      Title II. Electronic Filing

 A. Electronic Filing of Tax and Information Returns (sec. 2001 of the 
                                 bill)

                              Present Law

    Treasury Regulations section 1.6012-5 provides that the 
Commissioner may authorize a taxpayer to elect to file a 
composite return in lieu of a paper return. An electronically 
filed return is a composite return consisting of electronically 
transmitted data and certain paper documents that cannot be 
electronically transmitted.
    The IRS periodically publishes a list of the forms and 
schedules that may be electronically transmitted, as well as a 
list of forms, schedules, and other information that cannot be 
electronically filed.
    During the 1997 tax filing season, the IRS received 
approximately 20 million individual income tax returns 
electronically.

                           Reasons for Change

    The Committee believes that the implementation of a 
comprehensive strategy to encourage electronic filing of tax 
and information returns holds significant potential to benefit 
taxpayers and make the IRS returns processing function more 
efficient. For example, the error rate associated with 
processing paper tax returns is approximately 20 percent, half 
of which is attributable to the IRS and half to error in 
taxpayer data. Because electronically-filed returns usually are 
prepared using computer software programs with built-in 
accuracy checks, undergo pre-screening by the IRS, and 
experience no key punch errors, electronic returns have an 
error rate of less than one percent. Thus, the Committee 
believes that an expansion of electronic filing will 
significantly reduce errors (and the resulting notices that are 
triggered by such errors). In addition, taxpayers who file 
their returns electronically receive confirmation from the IRS 
that their return was received.

                        Explanation of Provision

    The provision states that the policy of Congress is to 
promote paperless filing, with a long-range goal of providing 
for the filing of at least 80 percent of all tax returns in 
electronic form by the year 2007. The provision requires the 
Secretary of the Treasury to establish a strategic plan to 
eliminate barriers, provide incentives, and use competitive 
market forces to increase taxpayer use of electronic filing. 
The provision requires all returns prepared in electronic form 
but filed in paper form to be filed electronically, to the 
extent feasible, by the year 2002.
    The provision requires the Secretary to create an 
electronic commerce advisory group and to report annually to 
the tax-writing committees on the IRS's progress in 
implementing its plan to meet the goal of 80 percent electronic 
filing by 2007.

                             Effective Date

    The provision is effective on the date of enactment.

B. Due Date for Certain Information Returns (sec. 2002 of the bill and 
                         sec. 6071 of the Code)

                              Present Law

    Information such as the amount of dividends, partnership 
distributions, and interest paid during the calendar year must 
be supplied to taxpayers by the payors by January 31 of the 
following calendar year. The payors must file an information 
return with the IRS with the information by February 28 of the 
year following the calendar year for which the return must be 
filed. Under present law, the due date for filing information 
returns with the IRS is the same whether such returns are filed 
on paper, on magnetic media, or electronically. Most 
information returns are filed on magnetic media (such as 
computer tapes), which are physically shipped to the IRS.

                           Reasons for Change

    The Committee believes that encouraging information return 
filers to file electronically will substantially increase the 
efficiency of the tax system by avoiding the need to convert 
the information from magnetic media or paper to electronic form 
before return matching.

                        Explanation of Provision

    The provision provides an incentive to filers of 
information returns to use electronic filing by extending the 
due date for filing such returns from February 28 (under 
present law) to March 31 of the year following the calendar 
year to which the return relates.
    The provision also requires the Treasury to issue a study 
evaluating the merits and disadvantages, if any, of extending 
the deadline for providing taxpayers with copies of information 
returns from January 31 to February 15 (Forms W-2 would still 
be required to be furnished by January 31).

                             Effective Date

    The extension of the due date for filing returns applies to 
information returns required to be filed after December 31, 
1999. The Treasury study is due by December 31, 1998.

C. Paperless Electronic Filing (sec. 2003 of the bill and sec. 6061 of 
                               the Code)

                              Present Law

    Code section 6061 requires that tax forms be signed as 
required by the Secretary. The IRS will not accept an 
electronically filed return unless it has also received a Form 
8453, which is a paper form that contains signature information 
of the filer.
    A return generally is considered timely filed when it is 
received by the IRS on or before the due date of the return. If 
the requirements of Code section 7502 are met, timely mailing 
is treated as timely filing. If the return is mailed by 
registered mail, the dated registration statement is prima 
facie evidence of delivery. As an electronically filed return 
is not mailed, section 7502 does not apply.
    The IRS periodically publishes a list of the forms and 
schedules that may be electronically transmitted, as well as a 
list of forms, schedules, and other information that cannot be 
electronically filed.

                           Reasons for Change

    Electronically filed returns cannot provide the maximum 
efficiency for taxpayers and the IRS under current rules that 
require signature information to be filed on paper. Also, 
taxpayers need to know how the IRS will determine the filing 
date of a return filed electronically. The Committee believes 
that more types of returns could be filed electronically if 
proper procedures were in place. Also, as the IRS shifts to a 
paperless tax return system, the Committee intends for the IRS 
to assist taxpayers in shifting to paperless record retention.

                        Explanation of Provision

    The provision requires the Secretary to develop procedures 
that would eliminate the need to file a paper form relating to 
signature information. Until the procedures are in place, the 
provision authorizes the Secretary to provide for alternative 
methods of signing all returns, declarations, statements, or 
other documents. An alternative method of signature would be 
treated identically, for both civil and criminal purposes, as a 
signature on a paper form.
    The provision also provides rules for determining when 
electronic returns are deemed filed and to make it possible for 
taxpayers to authorize, on electronically filed returns, 
persons (such as return preparers) to whom information may be 
disclosed pursuant to section 6103.
    The provision requires the Secretary to establish 
procedures, to the extent practicable, to receive all forms 
electronically for taxable periods beginning after December 31, 
1998.

                             Effective Date

    The provision is effective on the date of enactment.

           D. Return-Free Tax System (sec. 2004 of the bill)

                              Present Law

    Under present law, taxpayers generally are required to 
calculate their own tax liabilities and submit returns showing 
their calculations.

                           Reasons for Change

    The Committee believes that it would benefit taxpayers to 
be relieved, to the extent feasible, from the burden of 
determining tax liability and filing returns.

                        Explanation of Provision

    The provision requires the Secretary or his delegate to 
study the feasibility of, and develop procedures for, the 
implementation of a return-free tax system for appropriate 
individuals for taxable years beginning after 2007. The 
Secretary is required annually to report to the tax-writing 
committees on the progress of the development of such system. 
The Secretary is required to make the first report on the 
development of the return-free tax system to the tax-writing 
committees by June 30, 2000.

                             Effective Date

    The provision is effective on the date of enactment.

        E. Access to Account Information (sec. 2005 of the bill)

                              Present Law

    Taxpayers who file their returns electronically cannot 
review their accounts electronically.

                           Reasons for Change

    The Committee believes that it would be desirable for a 
taxpayer (or the taxpayer's designee) to be able to review that 
taxpayer's account electronically, but only if all necessary 
privacy safeguards are in place.

                        Explanation of Provision

    The provision requires the Secretary to develop procedures 
not later than December 31, 2006, under which a taxpayer filing 
returns electronically (or the taxpayer's designee under 
section 6103(c)) could review the taxpayer's own account 
electronically, but only if all necessary privacy safeguards 
are in place by that date. The Secretary is required to issue 
an interim progress report to the tax-writing committees by 
December 31, 2003.

                             Effective Date

    The provision is effective on the date of enactment.

               Title III. Taxpayer Protection and Rights

  A. Burden of Proof (sec. 3001 of the bill and new sec. 7491 of the 
                                 Code)

                              Present Law

    Under present law, a rebuttable presumption exists that the 
Commissioner's determination of tax liability is 
correct.19 ``This presumption in favor of the 
Commissioner is a procedural device that requires the plaintiff 
to go forward with prima facie evidence to support a finding 
contrary to the Commissioner's determination. Once this 
procedural burden is satisfied, the taxpayer must still carry 
the ultimate burden of proof or persuasion on the merits. Thus, 
the plaintiff not only has the burden of proof of establishing 
that the Commissioner's determination was incorrect, but also 
of establishing the merit of its claims by a preponderance of 
the evidence''.20
---------------------------------------------------------------------------
    \19\ Welch v. Helvering, 290 U.S. 111, 115 (1933).
    \20\ Danville Plywood Corp. v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989); citations omitted.
---------------------------------------------------------------------------
    The general rebuttable presumption that the Commissioner's 
determination of tax liability is correct is a fundamental 
element of the structure of the Internal Revenue Code. Although 
this presumption is judicially based, rather than legislatively 
based, there is considerable evidence that the presumption has 
been repeatedly considered and approved by the Congress. This 
is the case because the Internal Revenue Code contains a number 
of civil provisions that explicitly place the burden of proof 
on the Commissioner in specifically designated circumstances. 
The Congress would have enacted these provisions only if it 
recognized and approved of the general rule of presumptive 
correctness of the Commissioner's determination. A list of 
these civil provisions follows.
    (1) Fraud.--Any proceeding involving the issue of whether 
the taxpayer has been guilty of fraud with intent to evade tax 
(secs. 7454(a) and 7422(e)).
    (2) Required reasonable verification of information 
returns.--In any court proceeding, if a taxpayer asserts a 
reasonable dispute with respect to any item of income reported 
on an information returned filed with the Secretary by a third 
party and the taxpayer has fully cooperated with the Secretary 
(including providing, within a reasonable period of time, 
access to and inspection of all witnesses, information, and 
documents within the control of the taxpayer as reasonably 
requested by the Secretary), the Secretary has the burden of 
producing reasonable and probative information concerning such 
deficiency in addition to such information return (sec. 
6201(d)).
    (3) Foundation managers.--Any proceeding involving the 
issue of whether a foundation manager has knowingly 
participated in prohibited transactions (sec. 7454(b)).
    (4) Transferee liability.--Any proceeding in the Tax Court 
to show that a petitioner is liable as a transferee of property 
of a taxpayer (sec. 6902(a)).
    (5) Review of jeopardy levy or assessment procedures.--Any 
proceeding to review the reasonableness of a jeopardy levy or 
jeopardy assessment (sec. 7429(g)(1)).
    (6) Property transferred in connection with performance of 
services.--In the case of property subject to a restriction 
that by its terms will never lapse and that allows the 
transferee to sell only at a price determined under a formula, 
the price is deemed to be fair market value unless established 
to the contrary by the Secretary (sec. 83(d)(1)).
    (7) Illegal bribes, kickbacks, and other payments.--As to 
whether a payment constitutes an illegal bribe, illegal 
kickback, or other illegal payment (sec. 162(c) (1) and (2)).
    (8) Golden parachute payments.--As to whether a payment is 
a parachute payment on account of a violation of any generally 
enforced securities laws or regulations (sec. 280G(b)(2)(B)).
    (9) Unreasonable accumulation of earnings and profits.--In 
any Tax Court proceeding as to whether earnings and profits 
have been permitted to accumulate beyond the reasonable needs 
of the business, provided that the Commissioner has not 
fulfilled specified procedural requirements (sec. 534).
    (10) Expatriation.--As to whether it is reasonable to 
believe that an individual's loss of citizenship would result 
in a substantial reduction in the individual's income taxes or 
transfer taxes (secs. 877(e), 2107(e), 2501(a)(4)).
    (11) Public inspection of written determinations.--In any 
proceeding seeking additional disclosure of information (sec. 
6110(f)(4)(A)).
    (12) Penalties for promoting abusive tax shelters, aiding 
and abetting the understatement of tax liability, and filing a 
frivolous income return.--As to whether the person is liable 
for the penalty (sec. 6703(a)).
    (13) Income tax return preparers' penalty.--As to whether a 
preparer has willfully attempted to understate tax liability 
(sec. 7427).
    (14) Status as employees.--As to whether individuals are 
employees for purposes of employment taxes (pursuant to the 
safe harbor provisions of section 530 of the Revenue Act of 
1978). 21
---------------------------------------------------------------------------
    \21\  Public Law 95-600 (November 6, 1978), as amended by section 
1122 of the Small Business Job Protection Act of 1996 (Public Law 104-
188; August 20, 1996).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee is concerned that individual and small 
business taxpayers frequently are at a disadvantage when forced 
to litigate with the Internal Revenue Service. The Committee 
believes that the present burden of proof rules contribute to 
that disadvantage. The Committee believes that, all other 
things being equal, facts asserted by individual and small 
business taxpayers who cooperate with the IRS and satisfy 
relevant recordkeeping and substantiation requirements should 
be accepted. The Committee believes that shifting the burden of 
proof to the Secretary in such circumstances will create a 
better balance between the IRS and such taxpayers, without 
encouraging tax avoidance.
    The Committee believes that it is inappropriate for the IRS 
to rely solely on statistical information on unrelated 
taxpayers to reconstruct unreported income of an individual 
taxpayer. The Committee also believes that, in a court 
proceeding, the IRS should not be able to rest on its 
presumption of correctness if it does not provide any evidence 
whatsoever relating to penalties.

                        Explanation of Provision

    The provision provides that the Secretary shall have the 
burden of proof in any court proceeding with respect to a 
factual issue if the taxpayer introduces credible evidence with 
respect to the factual issue relevant to ascertaining the 
taxpayer's income tax liability. Four conditions apply. First, 
the taxpayer must comply with the requirements of the Internal 
Revenue Code and the regulations issued thereunder to 
substantiate any item (as under present law). Second, the 
taxpayer must maintain records required by the Code and 
regulations (as under present law). Third, the taxpayer must 
cooperate with reasonable requests by the Secretary for 
meetings, interviews, witnesses, information, and documents 
(including providing, within a reasonable period of time, 
access to and inspection of witnesses, information, and 
documents within the control of the taxpayer, as reasonably 
requested by the Secretary). Cooperation also includes 
providing reasonable assistance to the Secretary in obtaining 
access to and inspection of witnesses, information, or 
documents not within the control of the taxpayer (including any 
witnesses, information, or documents located in foreign 
countries 22). A necessary element of cooperating 
with the Secretary is that the taxpayer must exhaust his or her 
administrative remedies (including any appeal rights provided 
by the IRS). The taxpayer is not required to agree to extend 
the statute of limitations to be considered to have cooperated 
with the Secretary. Cooperating also means that the taxpayer 
must establish the applicability of any privilege. Fourth, 
taxpayers other than individuals must meet the net worth 
limitations that apply for awarding attorney's fees 
(accordingly, no net worth limitation would be applicable to 
individuals). Corporations, trusts, and partnerships whose net 
worth exceeds $7 million are not eligible for the benefits of 
the provision. The taxpayer has the burden of proving that it 
meets each of these conditions, because they are necessary 
prerequisites to establishing that the burden of proof is on 
the Secretary.
---------------------------------------------------------------------------
    \22\  Cooperation also includes providing English translations, as 
reasonably requested by the Secretary.
---------------------------------------------------------------------------
    The burden will shift to the Secretary under this provision 
only if the taxpayer first introduces credible evidence with 
respect to a factual issue relevant to ascertaining the 
taxpayer's income tax liability. Credible evidence is the 
quality of evidence which, after critical analysis, the court 
would find sufficient upon which to base a decision on the 
issue if no contrary evidence were submitted (without regard to 
the judicial presumption of IRS correctness). A taxpayer has 
not produced credible evidence for these purposes if the 
taxpayer merely makes implausible factual assertions, frivolous 
claims, or tax protestor-type arguments. The introduction of 
evidence will not meet this standard if the court is not 
convinced that it is worthy of belief. If after evidence from 
both sides, the court believes that the evidence is equally 
balanced, the court shall find that the Secretary has not 
sustained his burden of proof.
    Nothing in the provision shall be construed to override any 
requirement under the Code or regulations to substantiate any 
item. Accordingly, taxpayers must meet applicable 
substantiation requirements, whether generally imposed 
23 or imposed with respect to specific items, such 
as charitable contributions 24 or meals, 
entertainment, travel, and certain other expenses. 
25 Substantiation requirements include any 
requirement of the Code or regulations that the taxpayer 
establish an item to the satisfaction of the Secretary. 
26 Taxpayers who fail to substantiate any item in 
accordance with the legal requirement of substantiation will 
not have satisfied the legal conditions that are prerequisite 
to claiming the item on the taxpayer's tax return and will 
accordingly be unable to avail themselves of this provision 
regarding the burden of proof. Thus, if a taxpayer required to 
substantiate an item fails to do so in the manner required (or 
destroys the substantiation), this burden of proof provision is 
inapplicable.27
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    \23\  See e.g., Sec. 6001 and Treas. Reg. sec. 1.6001-1 requiring 
every person liable for any tax imposed by this Title to keep such 
records as the Secretary may from time to time prescribe, and secs. 
6038 and 6038A requiring United States persons to furnish certain 
information the Secretary may prescribe with respect to foreign 
businesses controlled by the U.S. person.
    \24\  Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.
    \25\  See e.g., Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-
5T, and 1.274-5A.
    \26\  For example, sec. 905(b) of the Code provides that foreign 
tax credits shall be allowed only if the taxpayer establishes to the 
satisfaction of the Secretary all information necessary for the 
verification and computation of the credit. Instructions for meeting 
that requirement are set forth in Treas. Reg. sec. 1.905-2.
    \27\  If, however, the taxpayer can demonstrate that he had 
maintained the required substantiation but that it was destroyed or 
lost through no fault of the taxpayer, such as by fire or flood, 
existing tax rules regarding reconstruction of those records would 
continue to apply.
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    The provision also provides that in any instance in which 
the Secretary uses statistical information from unrelated 
taxpayers solely to reconstruct an individual taxpayer's income 
(such as average income for taxpayers in the area in which the 
taxpayer lives), the burden of proof is on the Secretary with 
respect to the item of income that was reconstructed by the 
Secretary.
    Further, the provision provides that, in any court 
proceeding, the Secretary must initially come forward with 
evidence that it is appropriate to apply a particular penalty 
to the taxpayer before the court can impose the penalty. This 
provision is not intended to require the Secretary to introduce 
evidence of elements such as reasonable cause or substantial 
authority. Rather, the Secretary must come forward initially 
with evidence regarding the appropriateness of applying a 
particular penalty to the taxpayer; if the taxpayer believes 
that, because of reasonable cause, substantial authority, or a 
similar provision, it is inappropriate to impose the penalty, 
it is the taxpayer's responsibility (and not the Secretary's 
obligation) to raise those issues.

                             Effective Date

    The provision applies to court proceedings arising in 
connection with examinations commencing after the date of 
enactment.

                      B. Proceedings by Taxpayers

1. Expansion of authority to award costs and certain fees (sec. 3101 of 
        the bill and sec. 7430 of the Code)

                              Present Law

    Any person who substantially prevails in any action by or 
against the United States in connection with the determination, 
collection, or refund of any tax, interest, or penalty may be 
awarded reasonable administrative costs incurred before the IRS 
and reasonable litigation costs incurred in connection with any 
court proceeding. Reasonable administrative costs are defined 
as (1) any administrative fees or similar charges imposed by 
the IRS and (2) expenses, costs and fees related to attorneys, 
expert witnesses, and studies or analyses necessary for 
preparation of the case, to the extent that such costs are 
incurred before earlier of the date of the notice of decision 
by IRS Appeals or the notice of deficiency (sec. 7430(c)(2)). 
Net worth limitations apply.
    Reasonable litigation costs include reasonable fees paid or 
incurred for the services of attorneys, except that the 
attorney's fees will not be reimbursed at a rate in excess of 
$110 per hour (indexed for inflation) unless the court 
determines that a special factor, such as the limited 
availability of qualified attorneys for the proceeding, 
justifies a higher rate.
    Rule 68 of the Federal Rules of Civil Procedure (FRCP) 
provides a procedure under which a party may recover costs if 
the party's offer for judgment was rejected and the subsequent 
court judgment was less favorable to the opposing party than 
the offer. The offering party's costs are limited to the costs 
(excluding attorney's fees) incurred after the offer was made. 
The FRCP generally apply to tax litigation in the district 
courts and the United States Court of Federal Claims.
    Code section 7431 permits the award of civil damages for 
unauthorized inspection or disclosure of return information. 
The Federal appellate courts are split over whether a party 
whosubstantially prevails over the United States in an action under 
Code section 7431 is eligible for an award of fees and reasonable 
costs.28
---------------------------------------------------------------------------
    \28\ See McLarty v. United States, 6 F.2d 545 (8th Cir. 1993) 
(holding that the taxpayer may not recover fees and costs) and Huckaby 
v. United States Department of Treasury, 804 F.2d 297 (5th Cir. 1986) 
(holding that the taxpayer may recover fees and costs).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that taxpayers should be allowed to 
recover the reasonable administrative costs they incur where 
the IRS takes a position against the taxpayer that is not 
substantially justified, beginning at the time that the IRS 
establishes its initial position by issuing a letter of 
proposed deficiency which allows the taxpayer an opportunity 
for administrative review by the IRS Office of Appeals.
    The Committee believes that the pro bono publicum 
representation of taxpayers should be encouraged and the value 
of the legal services rendered in these situations should be 
recognized. Where the IRS takes positions that are not 
substantially justified, it should not be relieved of its 
obligation to bear reasonable administrative and litigation 
costs because representation was provided the taxpayer on a pro 
bono basis.
    The Committee is concerned that the IRS may continue to 
litigate issues that have previously been decided in favor of 
taxpayers in other circuits. The Committee believes that this 
places an undue burden on taxpayers that are required to 
litigate such issues. Accordingly, the Committee believes it is 
important that the court take into account whether the IRS has 
lost in the courts of appeals of other circuits on similar 
issues in determining whether the IRS has taken a position that 
is not substantially justified and thus liable for reasonable 
administrative and litigation costs.
    The Committee believes that settlement of tax cases should 
be encouraged whenever possible. Accordingly, the Committee 
believes that the application of a rule similar to FRCP 68 is 
appropriate to provide an incentive for the IRS to settle 
taxpayers'' cases for appropriate amounts, by requiring 
reimbursement of taxpayer's costs when the IRS fails to do so.
    The Committee believes that when the IRS violates 
taxpayer's right to privacy by engaging in unauthorized 
inspection or disclosure activities, it is appropriate to 
reimburse taxpayers for the costs of their damages.

                        Explanation of Provision

    The provision:
          (1) moves the point in time after which reasonable 
        administrative costs can be awarded to the date on 
        which the first letter of proposed deficiency which 
        allows the taxpayer an opportunity for administrative 
        review in the IRS Office of Appeals is sent;
          (2) permits awards of reasonable attorney's fees by 
        deleting the hourly rate caps (and the exceptions to 
        those caps);
          (3) permits the award of reasonable attorney's fees 
        to specified persons who represent for no more than a 
        nominal fee a taxpayer who is a prevailing party;
          (4) provides that in determining whether the position 
        of the United States was substantially justified, the 
        court shall take into account whether the United States 
        has lost in other courts of appeal on substantially 
        similar issues;
          (5) provides that if a taxpayer makes an offer after 
        the taxpayer has a right to administrative review in 
        the IRS Office of Appeals, the IRS rejects the offer, 
        and later the IRS obtains a judgment 29 
        against the taxpayer in an amount that is equal to or 
        less than the taxpayer's offer for the amount of the 
        tax liability (excluding interest), reasonable costs 
        and attorney's fees from the date of the offer would be 
        awarded; and
---------------------------------------------------------------------------
    \29\ A judgment pursuant to a stipulation or a settlement will not 
be treated as a judgment for this purpose.
---------------------------------------------------------------------------
          (6) permits the award of attorney's fees in actions 
        for civil damages for unauthorized inspection or 
        disclosure of taxpayer returns and return information.
    The above rules for making awards apply subject to the same 
net worth limitations as under present law.

                             Effective Date

    The provision applies to eligible costs and services 
incurred more than 180 days after the date of enactment.

2. Civil damages for collection actions (sec. 3102 of the bill and 
        secs. 7426 and 7433 of the Code)

                              Present Law

    A taxpayer may sue the United States for up to $1 million 
of civil damages caused by an officer or employee of the IRS 
who recklessly or intentionally disregards provisions of the 
Internal Revenue Code or Treasury regulations in connection 
with the collection of Federal tax with respect to the 
taxpayer.

                           Reasons for Change

    The Committee believes that taxpayers should also be able 
to recover economic damages they incur as a result of the 
negligent disregard of the Code or regulations by an officer or 
employee of the IRS in connection with a collection matter. The 
Committee also believes that taxpayers should be able to 
recover civil damages they incur as a result of a willful 
violation ofthe Bankruptcy Code by an officer or employee of 
the IRS. As third parties may also be subject to IRS collection 
actions, the Committee believes that it is appropriate to afford them 
the opportunity to recover damages for unauthorized collection actions.

                        Explanation of Provision

    The provision permits (1) up to $100,000 in civil damages 
caused by an officer or employee of the IRS who negligently 
disregards provisions of the Internal Revenue Code or Treasury 
regulations in connection with the collection of Federal tax 
with respect to the taxpayer, and (2) up to $1 million in civil 
damages caused by an officer or employee of the IRS who 
willfully violates provisions of the Bankruptcy Code relating 
to automatic stays or discharges. The provision also provides 
that persons other than the taxpayer may sue for civil damages 
for unauthorized collection actions. No person is entitled to 
seek civil damages in a court of law without first exhausting 
administrative remedies.

                             Effective Date

    The provision is effective with respect to actions of 
officers or employees of the IRS occurring after the date of 
enactment.

3. Increase in size of cases permitted on small case calendar (sec. 
        3103 of the bill and sec. 7463 of the Code)

                              Present Law

    Taxpayers may choose to contest many tax disputes in the 
Tax Court. Special small case procedures apply to disputes 
involving $10,000 or less, if the taxpayer chooses to utilize 
these procedures (and the Tax Court concurs) (sec. 7463). The 
IRS cannot require the taxpayer to use the small case 
procedures. The Tax Court generally concurs with the taxpayer's 
request to use the small case procedures, unless it decides 
that the case involves an issue that should be heard under the 
normal procedures. After the case has commenced, the Tax Court 
may order that the small case procedures should be discontinued 
only if (1) there is reason to believe that the amount in 
controversy will exceed $10,000 or (2) justice would require 
the change in procedure.
    Small tax cases are conducted as informally as possible. 
Neither briefs nor oral arguments are required and strict rules 
of evidence are not applied. Most taxpayers represent 
themselves in small tax cases, although they may be represented 
by anyone admitted to practice before the Tax Court. Decisions 
in a case conducted under small case procedures are neither 
precedent for future cases nor reviewable upon appeal by either 
the government or the taxpayer.

                           Reasons for Change

    The Committee believes that use of the small case 
procedures should be expanded.

                        Explanation of Provision

    The provision increases the cap for small case treatment 
from $10,000 to $50,000. The Committee recognizes that an 
increase of this size may encompass a small number of cases of 
significant precedential value. Accordingly, the Committee 
anticipates that the Tax Court will carefully consider IRS 
objections to small case treatment, such as objections based 
upon the potential precedential value of the case.

                             Effective Date

    The provision applies to proceedings commenced after the 
date of enactment.

4. Expansion of Tax Court jurisdiction to responsible person penalties 
        (sec. 3104 of the bill and sec. 6672 of the Code)

                              Present Law

    In general, employers are required to withhold income taxes 
(sec. 3402) and social security taxes (sec. 3102) from their 
employee's wages. These withheld taxes constitute a trust in 
favor of the United States from the time that the employer 
deducts them from the employee's wages, and the employer is 
liable to the government for the payment of such taxes (sec. 
7501(a)). Section 6672 subjects all persons considered 
responsible for the withholding and payment of taxes to a 
penalty equal to the amount of taxes due where the employer 
fails to turn over such funds to the government (the 
``responsible person'' penalty, also known as the ``100 
percent'' penalty). Generally, the determination of whether a 
person is a ``responsible person'' is a question of the 
person's status, duty, and authority in the context of the 
business which has failed to collect and pay over taxes 
required to be withheld. A responsible person penalty may also 
be imposed on a payroll lender (sec. 3505).
    The Tax Court has no jurisdiction over the determination of 
the correctness of the assessment of the responsible person 
penalty. Accordingly, as the Tax Court is the only pre-payment 
forum for the determination of tax liability, the imposition of 
the responsible person penalty can only be challenged in a 
refund suit in the appropriate district court or the U.S. Court 
of Federal Claims after payment of such penalty. The 
responsible person penalty is a divisible tax. Thus, unlike a 
refund suit for income taxes, a responsible person need not pay 
the full amount of the assessment to invoke the jurisdiction of 
the district court or the U.S. Court of Federal Claims. 
Instead, the alleged responsible person may commence a refund 
suit after payment of the portion of the penalty attributable 
to one employee for one quarter.

                           Reasons for Change

    The Committee is concerned that persons who have a 
responsible person penalty assessed against them must pay a 
portion of the penalty before challenging the imposition of the 
penalty, before there is a judicial determination that they 
have any liability.

                        Explanation of Provision

    The provision provides Tax Court jurisdiction over the 
``responsible person'' penalty. Accordingly, the responsible 
person does not have to make a payment before challenging the 
imposition of the penalty.

                             Effective Date

    The provision applies to penalties imposed after the date 
of enactment.

5. Actions for refund with respect to certain estates which have 
        elected the installment method of payment (sec. 3105 of the 
        bill and sec. 7422 of the Code)

                              Present Law

    In general, the U.S. Court of Federal Claims and the U.S. 
district courts have jurisdiction over suits for the refund of 
taxes, as long as full payment of the assessed tax liability 
has been made. Flora v. United States, 357 U.S. 63 (1958), 
aff'd on reh'g, 362 U.S. 145 (1960). Under Code section 6166, 
if certain conditions are met, the executor of a decedent's 
estate may elect to pay the estate tax attributable to certain 
closely-held businesses over a 14-year period. Courts have held 
that U.S. district courts and the U.S. Court of Federal Claims 
do not have jurisdiction over claims for refunds by taxpayers 
deferring estate tax payments pursuant to section 6166 unless 
the entire estate tax liability has been paid (i.e., timely 
payment of the installments due prior to the bringing of an 
action is not sufficient to invoke jurisdiction). See, e.g., 
Rocovich v. United States, 933 F.2d 991 (Fed. Cir. 1991), 
Abruzzo v. United States, 24 Ct. Cl. 668 (1991). Under section 
7479, the U.S. Tax Court has limited authority to provide 
declaratory judgments regarding initial or continuing 
eligibility for deferral under section 6166.

                           Reasons for Change

    The Committee believes that the refund jurisdiction of the 
U.S. Court of Federal Claims and the U.S. district courts 
should apply without regard to whether the taxpayer has 
elected, and the Secretary accepted, the payment of that tax in 
installments.

                        Explanation of Provision

    The provision grants the U.S. Court of Federal Claims and 
the U.S. district courts jurisdiction to determine the correct 
amount of estate tax liability (or refund) in actions brought 
by taxpayers deferring estate tax payments under section 6166, 
as long as certain conditions are met. In order to qualify for 
the provision, (1) the estate must have made an election 
pursuant to section 6166, (2) the estate must have fully paid 
each installment of principal and/or interest due (and all non-
6166-related estate taxes due) before the date the suit is 
filed, (3) no portion of the payments due may have been 
accelerated, (4) there must be no suits for declaratory 
judgment pursuant to section 7479 pending, and (5) there must 
be no outstanding deficiency notices against the estate. In 
general, to the extent that a taxpayer has previously litigated 
its estate tax liability, the taxpayer would not be able to 
take advantage of this procedure under principles of res 
judicata. Taxpayers are not relieved of the liability to make 
any installment payments that become due during the pendency of 
the suit (i.e., failure to make such payments would subject the 
taxpayer to the existing provisions of section 6166(g)(3)).
    The provision further provides that once a final judgment 
has been entered by a district court or the U.S. Court of 
Federal Claims, the IRS is not permitted to collect any amount 
disallowed by the court, and any amounts paid by the taxpayer 
in excess of the amount the court finds to be currently due and 
payable are refunded to the taxpayer, with interest. Lastly, 
the provision provides that the two-year statute of limitations 
for filing a refund action is suspended during the pendency of 
any action brought by a taxpayer pursuant to section 7479 for a 
declaratory judgment as to an estate's eligibility for section 
6166.

                             Effective Date

    The provision is effective with respect to claims for 
refunds filed after the date of enactment.

6. Tax Court jurisdiction to review an adverse IRS determination of a 
        bond issue's tax-exempt status (sec. 3106 of the bill and sec. 
        7478 of the Code)

                              Present Law

    Interest on debt incurred by States or local governments 
generally is excluded from gross income if the proceeds of the 
borrowing are used to carry out governmental functions of those 
entities and the debt is repaid with governmental funds (sec. 
103). Interest on debt incurred by those governments where the 
proceeds are used to finance activities of other persons and 
the repayment of which is derived from the funds of such other 
person (e.g., private activity bonds) is taxable unless a 
specific exception is included in the Code.
    In general, an initial determination of whether interest on 
State or local government bonds is tax-exempt is made by 
issuers when the bonds are issued. This initial determination 
is made by reference to how the bond proceeds are ``to be 
used'' (sec. 141). Intentional acts after the date of issuance 
to use bond-financed property (indirectly, a use of bond 
proceeds) in a manner not qualifying for tax exemption may 
render interest on the bonds taxable, retroactive to the date 
of issuance. Like other tax positions taken by taxpayers, this 
initial determination, and issuer decisions relating to the 
effect of subsequent actions are subject to review and 
challenge by the IRS under regular examination procedures.
    A State or local government that seeks to issue bonds, the 
interest on which is intended to be excludable from gross 
income under section 103, can request a ruling from the IRS 
regarding the eligibility of such bonds for tax-exemption. The 
prospective issuer can challenge the IRS's determination (or 
failure to make a timely determination) in a declaratory 
judgment proceeding in the Tax Court under Code section 7478. 
Because bondholders, not issuers, are the parties whose tax 
liability is affected, issuers are not allowed to litigate the 
tax-exempt status of the bonds directly after the bonds are 
issued.

                           Reasons for Change

    The Committee believes that issuers of governmental bonds, 
as parties with a strong incentive to ensure the continued tax-
exemption of outstanding bonds, should have the opportunity to 
challenge IRS revocations of the tax-exempt status of the 
bonds, to protect the holders of those bonds and the market 
better.

                        Explanation of Provision

    The provision extends the declaratory judgment procedures 
currently applicable to prospective bond issuers to issuers of 
outstanding bonds. The issuer must provide adequate notice 
30 to outstanding bondholders, and the bondholders 
are authorized to intervene in court proceedings brought under 
this provision. The statute of limitations on assessment and 
collection of the tax liability of the bondholders is suspended 
during the pendency of the proceeding.
---------------------------------------------------------------------------
    \30\ The Committee anticipates that the Tax Court will determine 
whether the issuer's provision of notice to the bondholders comported 
with the statutory requirements. Notice provided pursuant to this 
provision has no effect on any notice that may be required pursuant to 
any other provision of law.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to determinations of tax-exempt 
status made after the date of enactment. A special rule 
provides that, in the case of a determination under a technical 
advice memorandum the public release of which occurs within one 
year of the date of enactment, a pleading may be filed not 
later than 90 days after the date of enactment.

7. Civil action for release of erroneous lien (sec. 3107 of the bill 
        and sec. 6325 of the Code)

                              Present Law

    Prior to 1995, the provisions governing jurisdiction over 
refund suits had generally been interpreted to apply only if an 
action was brought by the taxpayer against whom tax was 
assessed. Remedies for third parties from whom tax was 
collected (rather than assessed) were found in other provisions 
of the Internal Revenue Code. The Supreme Court held in 
Williams v. United States, 115 S.Ct. 1611 (1995), however, that 
a third party who paid another person's tax under protest to 
remove a lien on the third party's property could bring a 
refund suit, because she had no other adequate administrative 
or judicial remedy. In Williams, the IRS had filed a nominee 
lien against property that was owned by the taxpayer's former 
spouse and that was under a contract for sale. In order to 
complete the sale, the former spouse paid the amount of the 
lien under protest, and then sued in district court to recover 
the amount paid. The Supreme Court held that parties who are 
forced to pay another's tax under duress could bring a refund 
suit, because no other judicial remedy was adequate.

                           Reasons for Change

    The Committee believes that third parties should have a 
mechanism to release an erroneous tax lien. Accordingly, the 
Committee believes it is appropriate to provide relief similar 
to that provided to third parties who are subject to wrongful 
levy of property.

                        Explanation of Provision

    The provision creates an administrative procedure similar 
to the wrongful levy remedy for third parties in section 7426. 
Under this procedure, a record owner of property against which 
a Federal tax lien had been filed could obtain a certificate of 
discharge of property from the lien as a matter of right. The 
third party would be required to apply to the Secretary of the 
Treasury for such a certificate and either to deposit cash or 
to furnish a bond sufficient to protect the lien interest of 
the United States. Although the Secretary would determine the 
amount of the bond necessary to protect the Government's lien 
interest, the Secretary would have no discretion to refuse to 
issue a certificate of discharge if this procedure was 
followed, thus curing the defect in this remedy that the 
Supreme Court found in Williams. A certificate of discharge of 
property from a lien issued pursuant to the procedure would 
enable the record owner to sell the property free and clear of 
the Federal tax lien in all circumstances. The provision also 
authorizes the refund of all or part of the amount deposited, 
plus interest at the same rate that would be made on an 
overpayment of tax by the taxpayer, or the release of all or 
part of the bond, if the tax liability is satisfied or the 
Secretary determines that the United States does not have a 
lien interest or has a lesser lien interest than the amount 
initially determined.
    The provision also establishes a judicial cause of action 
for third parties challenging a lien that is similar to the 
wrongful levy remedy in section 7426. The period within which 
such an action must be commenced would be 120 days after the 
date the certificate of discharge is issued to ensure an early 
resolution of the parties' interests. Upon conclusion of the 
litigation, the IRS would be authorized to apply the deposit or 
bond to the assessed liability and to refund to the third party 
any amount in excess of the liability, plus interest, or to 
release the bond. Actions to quiet title under 28 U.S.C. 
Sec. 2410 would still be available to persons who did not seek 
the expedited review permitted under the new statutory 
procedure.

                             Effective Date

    The provision is effective on the date of enactment.

C. Relief for Innocent Spouses and for Taxpayers Unable to Manage Their 
                 Financial Affairs Due to Disabilities

1. Spousal election to limit joint and several liability on joint 
        return (sec. 3201 of the bill and new sec. 6015 of the Code)

                              Present Law

    Relief from liability for tax, interest and penalties is 
available for ``innocent spouses'' in certain circumstances. To 
qualify for such relief, the innocent spouse must establish: 
(1) that a joint return was made; (2) that an understatement of 
tax, which exceeds the greater of $500 or a specified 
percentage of the innocent spouse's adjusted gross income for 
the preadjustment (most recent) year, is attributable to a 
grossly erroneous item of the other spouse; (3) that in signing 
the return, the innocent spouse did not know, and had no reason 
to know, that there was an understatement of tax; and (4) that 
taking into account all the facts and circumstances, it is 
inequitable to hold the innocent spouse liable for the 
deficiency in tax. The specified percentage of adjusted gross 
income is 10 percent if adjusted gross income is $20,000 or 
less. Otherwise, the specified percentage is 25 percent.
    The proper forum for contesting the Secretary's denial of 
innocent spouse relief is determined by whether an underpayment 
is asserted or the taxpayer is seeking a refund of overpaid 
taxes. Accordingly, the Tax Court may not have jurisdiction to 
review all denials of innocent spouse relief.

                           Reasons for Change

    The Committee is concerned that the innocent spouse 
provisions of present law are inadequate. The Committee 
believes that a system based on separate liabilities will 
provide better protection for innocent spouses than the current 
system. The Committee generally believes that an electing 
spouse's liability should be satisfied by the payment of the 
tax attributable to that spouse's income and that an election 
to limit a spouse's liability to that amount is appropriate.
    The Committee intends that this election be available to 
limit the liability of spouses for tax attributable to items of 
which they had no knowledge. The Committee is concerned that 
taxpayers not be allowed to abuse these rules by knowingly 
signing false returns, or by transferring assets for the 
purpose of avoiding the payment of tax by the use of this 
election. The Committee believes that rules restricting the 
ability of taxpayers to limit their liability in such 
situations are appropriate.
    The Committee believes that taxpayers need to be informed 
of their right to make this election and that the IRS is the 
best source of that information. The Committee also believes 
that the IRS should take appropriate steps to insure that both 
spouses are made aware of their tax situation, and not rely on 
a single notice sent to a single address to inform both 
spouses.

                        Explanation of Provision

In general

    The bill modifies the innocent spouse provisions to permit 
a spouse to elect to limit his or her liability for unpaid 
taxes on a joint return to the spouse's separate liability 
amount. In the case of a deficiency arising from a joint 
return, a spouse would be liable only to the extent items 
giving rise to the deficiency are allocable to the spouse. 
Special rules apply to prevent the inappropriate use of the 
election.
    Items are generally allocated between spouses in the same 
manner as they would have been allocated had the spouses filed 
separate returns. The Secretary may prescribe other methods of 
allocation by regulation. The allocation of items is to be 
accomplished without regard to community property laws.
    The election applies to all unpaid taxes under subtitle A 
of the Internal Revenue Code, including the income tax and the 
self-employment tax. The election may be made at any time not 
later than 2 years after collection activities begin with 
respect to the electing spouse. The Committee intends that 2 
year period not begin until collection activities have been 
undertaken against the electing spouse that have the effect of 
giving the spouse notice of the IRS's intention to collect the 
joint liability from such spouse. For example, garnishment of 
wages, a notice of intent to levy against the property of the 
electing spouse would constitute collection activity against 
the electing spouse. The mailing of a notice of deficiency and 
demand for payment to the last known address of the electing 
spouse, addressed to both spouses, would not.
    The Tax Court has jurisdiction of disputes arising from the 
separate liability election. For example, a spouse who makes 
the separate liability election may petition the Tax Court to 
determine the limits on liability applicable under this 
provision. The Tax Court is authorized to establish rules that 
would allow the Secretary of the Treasury and the electing 
spouse to require, with adequate notice, the other spouse to 
become a party to any proceeding before the Tax Court. The 
Secretary of the Treasury is required to develop a separate 
form with instructions for taxpayers to use in electing to 
limit liability.

Allocations of items

    Under the bill, allocation of items of income and deduction 
follows the present-law rules determining which spouse is 
responsible for reporting an item when the spouses use the 
married, filing separate filing status. The Secretary of the 
Treasury is granted authority to prescribe regulations 
providing simplified methods of allocating items.
    In general, apportionment of items of income are expected 
to follow the source of the income. Wage income is allocated to 
the spouse performing the job and receiving the Form W-2. 
Business and investment income (including any capital gains) is 
allocated in the same proportion as the ownership of the 
business or investment that produces the income. Where 
ownership of the business or investment is held by both spouses 
as joint tenants, it is expected that any income is allocated 
equally to each spouse, in the absence of clear and convincing 
evidence supporting a different allocation.
    The allocation of business deductions is expected to follow 
the ownership of the business. Personal deduction items are 
expected to be allocated equally between spouses, unless the 
evidence shows that a different allocation is appropriate. For 
example, a charitable contribution normally would be allocated 
equally to both spouses. However, if the wife provides evidence 
that the deduction relates to the contribution of an asset that 
was the sole property of the husband, any deficiency assessed 
because it is later determined that the value of the property 
was overstated would be allocated to the husband.
    Items of loss or deduction are allocated to a spouse only 
to the extent that income attributable to the spouse was offset 
by the deduction or loss. Any remainder is allocated to the 
other spouse.
    Income tax withholding is allocated to the spouse from 
whose paycheck the tax was withheld. Estimated tax payments are 
generally expected to be allocated to the spouse who made the 
payments. If the payments were made jointly, the payments are 
expected to be allocated equally to each spouse, in the absence 
of evidence supporting a different allocation.
    The allocation of items is to be made without regard to the 
community property laws of any jurisdiction.
    If the electing spouse establishes that he or she did not 
know, and had no reason to know, of an item and, considering 
all the facts and circumstances, it is inequitable to hold the 
electing spouse responsible for any unpaid tax or deficiency 
attributable to such item, the item may be equitably 
reallocated to the other spouse. In cases where the IRS proves 
fraud, the IRS may distribute, apportion, or allocate any item 
between spouses.

Tax deficiencies

    If a spouse makes the separate liability election, the 
liability for deficiencies determined after a joint return is 
filed is allocated to the spouse whose item gives rise to the 
deficiency. For example, if a deficiency is assessed after an 
IRS audit that relates to the husband's income that he failed 
to report on the return, the entire deficiency is allocated to 
the husband. If the wife elects separate liability, she owes 
none of the deficiency. The deficiency is the sole 
responsibility of the husband who failed to report the income.
    If the deficiency relates to the items of both spouses, the 
separate liability for the deficiency is allocated between the 
spouses in the same proportion as the net items taken into 
account in determining the deficiency. If the deficiency arises 
as a result of the denial of an item of deduction or credit, 
the amount of the deficiency allocated to the spouse to whom 
the item of deduction or credit is allocated is limited to the 
amount of income or tax allocated to such spouse that was 
offset by the deduction or credit. The remainder of the 
liability is allocated to the other spouse to reflect the fact 
that income or tax allocated to that spouse was originally 
offset by a portion of the disallowed deduction or credit.
    For example, a married couple files a joint return with 
wage income of $100,000 allocable to the wife and $30,000 of 
self employment income allocable to the husband. On 
examination, a $20,000 deduction allocated to the husband is 
disallowed, resulting in a deficiency of $5,600. Under the 
provision, the liability is allocated in proportion to the 
items giving rise to the deficiency. Since the only item giving 
rise to the deficiency is allocable to the husband, and because 
he reported sufficient income to offset the item of deduction, 
the entire deficiency is allocated to the husband and the wife 
has no liability with regard to the deficiency, regardless of 
the ability of the IRS to collect the deficiency from the 
husband.
    If the joint return had shown only $15,000 (instead of 
$30,000) of self employment income for the husband, the income 
offset limitation rule discussed above would apply. In this 
case, the disallowed $20,000 deduction entirely offsets the 
$15,000 of income of the husband, and $5,000 remains. This 
remaining $5,000 of the disallowed deduction offsets income of 
the wife. The liability for the deficiency is therefore divided 
in proportion to the amount of income offset for each spouse. 
In this example, the husband is liable for \3/4\ of the 
deficiency ($4,200), and the wife is liable for the remaining 
\1/4\ ($1,400).
    The rule that the election will not apply to the extent any 
deficiency is attributable to an item the electing spouse had 
actual knowledge of is expected to be applied by treating the 
item as fully allocable to both spouses. For example a married 
couple files a joint return with wage income of $150,000 
allocable to the wife and $30,000 of self employment income 
allocable to the husband. On examination, an additional $20,000 
of the husband's self employment income is discovered, 
resulting in a deficiency of $9,000. The IRS proves that the 
wife had actual knowledge of $5,000 of this additional self 
employment income, but had no knowledge of the remaining 
$15,000. In this case, the husband would be liable for the full 
amount of the deficiency, since the item giving rise to the 
deficiency is fully allocable to him. In addition, the wife 
would be liable for the amount that would have been calculated 
as the deficiency based on the $5,000 of unreported income of 
which she had actual knowledge. The IRS would be allowed to 
collect that amount from either spouse, while the remainder of 
the deficiency could be collected from only the husband.

Tax shown on a return, but not paid

    The separate liability election also applies in situations 
where the tax shown on a joint return is not paid with the 
return. In this case, the amount determined under the separate 
liability election equals the amount that would have been 
reported by the electing spouse on a separate return. However, 
if any item of credit or deduction would be disallowed solely 
because a separate return is filed, the item of credit or 
deduction will be computed without regard to such 
prohibition.\31\ Similarly, a base amount and an adjusted base 
amount will be allowed in the determination of the taxable 
portion of social security and tier 1 railroad retirement 
benefits without regard to the rule in section 86(c). The 
calculation of the tax that would be shown on the separate 
return does not constitute the filing of a separate return. 
Other actions whose character may have been dependent upon the 
joint filing status of the taxpayer (for example, the making of 
a deductible IRA contribution under section 219) are unaffected 
by the election.
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    \31\  For example, provisions requiring the filing of a joint 
return in order to claim a credit such as section 21(e)(2) (dependent 
care credit), section 22(e)(1) (credit for the elderly and permanently 
disabled), section 23(f)(1) (adoption credit), section 25A(f)(6) (Hope 
and lifetime learning credits) and section 32(d) (earned income credit) 
would not apply under this provision. Section 221(f)(2) (deductions for 
interest on education loans) would be an example of a rule disallowing 
a deduction that would not apply.
---------------------------------------------------------------------------
    The separate liability election may not be used to create a 
refund, or to direct a refund to a particular spouse.

Special rules

    Special rules apply to prevent the inappropriate use of the 
election.
    First, if the IRS demonstrates that assets were transferred 
between the spouses in a fraudulent scheme joined in by both 
spouses, neither spouse is eligible to make the election under 
the provision (and consequently joint and several liability 
applies to both spouses).
    Second, if the IRS proves that the electing spouse had 
actual knowledge that an item on a return is incorrect, the 
election will not apply to the extent any deficiency is 
attributable to such item. Such actual knowledge must be 
established by the evidence and shall not be inferred based on 
indications that the electing spouse had a reason to know.
    Third, the limitation on the liability of an electing 
spouse is increased by the value of any disqualified assets 
received from the other spouse. Disqualified assets include any 
property or right to property that was transferred to an 
electing spouse if the principle purpose of the transfer is the 
avoidance of tax (including the avoidance of payment of tax). A 
rebuttable presumption exists that a transfer is made for tax 
avoidance purposes if the transfer was made less than one year 
before the earlier of the payment due date or the date of the 
notice of proposed deficiency. The rebuttable presumption does 
not apply to transfers pursuant to a decree of divorce or 
separate maintenance. The presumption may be rebutted by a 
showing that the principal purpose of the transfer was not the 
avoidance of tax or the payment of tax.

Notification of taxpayers

    The Internal Revenue Service is required to notify all 
taxpayers who have filed joint returns of their rights to elect 
to limit their joint and several liability under this 
provision. It is expected that notice will appear in 
appropriate IRS publications, including IRS Publication 1, and 
in collection related notices sent to taxpayers.
    The Internal Revenue Service should, whenever practicable, 
send appropriate notifications separately to each spouse. For 
example, where notifications are being sent by registered mail, 
it is expected a separate notice will be sent by registered 
mail to each spouse. This is intended to increase the 
likelihood that separated or divorced spouses will each receive 
such notices, as well as increase the likelihood that the 
Internal Revenue Service will be made aware of address changes 
that apply to one, but not both spouses.

                             Effective Date

    The provision applies to any liability for tax arising 
after the date of enactment and any liability for tax arising 
on or before such date, but remaining unpaid as of such date.
    The period in which an election may be made under the 
provision will not expire before the date that is 2 years after 
the date of the first collection action undertaken against the 
electing spouse on or after the date of enactment that has the 
effect of giving the spouse notice of the IRS' intention to 
collect the joint liability from the spouse. However, this rule 
does not extend the statute of limitations.
    An individual may elect under the provision without regard 
to whether such individual has previously been denied innocent 
spouse relief under present law.

2. Suspension of statute of limitations on filing refund claims during 
        periods of disability (sec. 3202 of the bill and sec. 6511 of 
        the Code)

                              Present Law

    In general, a taxpayer must file a refund claim within 
three years of the filing of the return or within two years of 
the payment of the tax, whichever period expires later (if no 
return is filed, the two-year limit applies) (sec. 6511(a)). A 
refund claim that is not filed within these time periods is 
rejected as untimely.
    There is no explicit statutory rule providing for equitable 
tolling of the statute of limitations. The U.S. Supreme Court 
has held that Congress did not intend the equitable tolling 
doctrine to apply to the statutory limitations of section 6511 
on the filing of tax refund claims.

                           Reasons for Change

    The Committee believes that, in cases of severe disability, 
equitable tolling should be considered in the application of 
the statutory limitations on the filing of tax refund claims.

                        Explanation of Provision

    The provision permits equitable tolling of the statute of 
limitations for refund claims of an individual taxpayer during 
any period of the individual's life in which he or she is 
unable to manage his or her financial affairs by reason of a 
medically determinable physical or mental impairment that can 
be expected to result in death or to last for a continuous 
period of not less than 12 months. Tolling does not apply 
during periods in which the taxpayer's spouse or another person 
is authorized to act on the taxpayer's behalf in financial 
matters.

                             Effective Date

    The provision applies to periods of disability before, on, 
or after the date of enactment but does not apply to any claim 
for refund or credit which (without regard to the provision) is 
barred by the statute of limitations as of January 1, 1998.

            d. provisions relating to interest and penalties

1. Elimination of interest differential on overlapping periods of 
        interest on income tax overpayments and underpayments (sec. 
        3301 of the bill and sec. 6621 of the Code)

                              Present Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short term interest rate plus three percentage points. A 
special ``hot interest'' rate equal to the Federal short term 
interest rate plus five percentage points applies in the case 
of certain large corporate underpayments.
    A taxpayer that overpays its taxes receives interest on the 
overpayment at a rate equal to the Federal short term interest 
rate plus two percentage points. In the case of corporate 
overpayments in excess of $10,000, this is reduced to the 
Federal short term interest rate plus one-half of a percentage 
point.
    If a taxpayer has an underpayment of tax from one year and 
an overpayment of tax from a different year that are 
outstanding at the same time, the IRS will typically offset the 
overpayment against the underpayment and apply the appropriate 
interest to the resulting net underpayment or overpayment. 
However, if either the underpayment or overpayment has been 
satisfied, the IRS will not typically offset the two amounts, 
but rather will assess or credit interest on the full 
underpayment or overpayment at the underpayment or overpayment 
rate. This has the effect of assessing the underpayment at the 
higher underpayment rate and crediting the overpayment at the 
lower overpayment rate. This results in the taxpayer being 
assessed a net interest charge, even if the amounts of the 
overpayment and underpayment are the same.
    The Secretary has the authority to credit the amount of any 
overpayment against any liability under the Code. 32 
Congress has previously directed the Internal Revenue Service 
to implement procedures for ``netting'' overpayments and 
underpayments to the extent a portion of tax due is satisfied 
by a credit of an overpayment. 33
---------------------------------------------------------------------------
    \32\ Code sec. 6402.
    \33\ Pursuant to TBOR2 (1996), the Secretary conducted a study of 
the manner in which the IRS has implemented the netting of interest on 
overpayments and underpayments and the policy and administrative 
implications of global netting. The legislative history to the General 
Agreement on Trade and Tariffs (GATT) (1994) stated that the Secretary 
should implement the most comprehensive crediting procedures that are 
consistent with sound administrative practice, and should do so as 
rapidly as is practicable. A similar statement was included in the 
Conference Report to the Omnibus Budget Reconciliation Act of 1990.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that taxpayers should be charged 
interest only on the amount they actually owe, taking into 
account overpayments and underpayments from all open years.The 
Committee does not believe that the different interest rates provided 
for overpayments and underpayments were ever intended to result in the 
charging of the differential on periods of mutual indebtedness.
    The Committee is also concerned that current practices 
provide an incentive to taxpayers to delay the payment of 
underpayments they do not contest, so that the underpayments 
will be available to offset any overpayments that are later 
determined. The Committee believes that this is contrary to 
sound tax administrative practice and that taxpayers should not 
be disadvantaged solely because they promptly pay their tax 
bills.

                        Explanation of Provision

    The provision establishes a net interest rate of zero on 
equivalent amounts of overpayment and underpayment that exist 
for any period. Each overpayment and underpayment is considered 
only once in determining whether equivalent amounts of 
overpayment and underpayment exist. The special rules that 
increase the interest rate paid on large corporate 
underpayments and decrease the interest rate received on 
corporate underpayments in excess of $10,000 do not prevent the 
application of the net zero rate. The provision applies to 
income taxes and self-employment taxes.

                             Effective Date

    The provision applies to interest for calendar quarters 
beginning after the date of enactment. Until such time as 
procedures are implemented that allow for the automatic 
application of this provision by the IRS, the Committee expects 
that the Secretary will promptly and carefully consider any 
taxpayer's request to have interest charges recalculated in 
accordance with this provision. It is expected that the 
Secretary will extend the statute of limitations on assessment 
where necessary to allow for the consideration of such 
requests.
    In light of past Congressional statements urging the 
Secretary to eliminate interest rate differentials in these 
circumstances, and taking into consideration Congress' belief 
that the Secretary may do so, the Committee continues to expect 
that the Secretary will implement the most comprehensive 
interest netting procedures that are consistent with sound 
administrative practice, and not only those affected by this 
provision.

2. Increase in overpayment rate payable to taxpayers other than 
        corporations (sec. 3302 of the bill and sec. 6621(a)(1) of the 
        Code)

                              Present Law

    A taxpayer that underpays its taxes is required to pay 
interest on the underpayment at a rate equal to the Federal 
short-term interest rate (AFR) plus three percentage points. A 
taxpayer that overpays its taxes receives interest on the 
overpayment at a rate equal to the Federal short-term interest 
rate (AFR) plus two percentage points.

                           Reasons for Change

    The Committee believes that the interest differential for 
noncorporate taxpayers should be eliminated.

                        Explanation of Provision

    The provision provides that the overpayment interest rate 
will be AFR plus three percentage points, except that for 
corporations, the rate remains at AFR plus two percentage 
points.

                             Effective Date

    The provision applies to interest for calendar quarters 
beginning after the date of enactment.

3. Elimination of penalty for individual's failure to pay during period 
        of installment agreement (sec. 3303 of the bill and sec. 6651 
        of the Code)

                              Present Law

    Taxpayers who fail to pay their taxes are subject to a 
penalty of one-half percent per month on the unpaid amount, up 
to a maximum of 25 percent (sec. 6651(a)). If the liability is 
shown on the return, the penalty begins to accrue on the date 
prescribed for payment of the tax (with regard to extensions 
(sec. 6651(a)(2)). If the liability should have been shown on 
the return but was not, the penalty generally begins to accrue 
after the date that is 21 days from the date of the IRS notice 
and demand for payment with respect to such liability (sec. 
6651(a)(3)). Taxpayers who make installment payments pursuant 
to an agreement with the IRS (under sec. 6159) are also subject 
to this penalty (Treas. reg. sec. 301.6159-1(f) and sec. 
6601(b)).

                           Reasons for Change

    The Committee believes that it is inappropriate to apply 
the penalty for failure to pay taxes to taxpayers who are in 
fact paying their taxes through an installment agreement.

                        Explanation of Provision

    The provision provides that the penalty for failure to pay 
taxes is not imposed with respect to the tax liability of an 
individual for any month in which an installment payment 
agreement with the IRS (under sec. 6159) is in effect, provided 
that the individual filed the tax return in a timely manner 
(including extensions).

                             Effective Date

    The provision is effective for installment agreement 
payments made after the date of enactment.

4. Mitigation of failure to deposit penalty (sec. 3304 of the bill and 
        sec. 6656(a) of the Code)

                              Present Law

    Deposits of payroll taxes are allocated to the earliest 
period for which such a deposit is due. If a taxpayer misses or 
makes an insufficient deposit, later deposits will first be 
applied to satisfy the shortfall for the earlier period; the 
remainder is then applied to satisfy the obligation for the 
current period. If the depositor is not aware this is taking 
place, cascading penalties may result as payments that would 
otherwise be sufficient to satisfy current liabilities are 
applied to satisfy earlier shortfalls.
    Code section 6656(c) authorizes the Secretary to waive the 
failure to make deposit penalty for inadvertent failures by 
first-time depositors of employment taxes.

                           Reasons for Change

    The Committee believes that the cascading penalty effect is 
unfair and that depositors should be able to designate payments 
to minimize its effect.

                        Explanation of Provision

    The provision allows the taxpayer to designate the period 
to which each deposit is applied. The designation must be made 
no later than 90 days of the related IRS penalty notice. The 
provision also extends the authorization to waive the failure 
to deposit penalty to the first deposit a taxpayer is required 
to make after the taxpayer is required to change the frequency 
of the taxpayer's deposits.

                             Effective Date

    The provision applies to deposits made more than 180 days 
after the date of enactment.

5. Suspension of interest and certain penalties where Secretary fails 
        to contact individual taxpayer (sec. 3305 of the bill and sec. 
        6404 of the Code)

                              Present Law

    In general, interest and penalties accrue during periods 
for which taxes are unpaid without regard to whether the 
taxpayer is aware that there is tax due.

                           Reasons for Change

    The Committee believes that the IRS should promptly inform 
taxpayers of their obligations with respect to tax deficiencies 
and amounts due. In addition, the Committee is concerned that 
accrual of interest and penalties absent prompt resolution of 
tax deficiencies may lead to the perception that the IRS is 
more concerned about collecting revenue than in resolving 
taxpayer's problems.

                        Explanation of Provision

    The provision suspends the accrual of penalties and 
interest after 1 year if the IRS has not sent the taxpayer a 
notice of deficiency within 1 year following the date which is 
the later of (1) the original due date of the return or (2) the 
date on which the individual taxpayer timely filed the return. 
The suspension only applies to taxpayers who file a timely tax 
return. The provision applies only to individuals and does not 
apply to the failure to pay penalty, in the case of fraud, or 
with respect to criminal penalties. Interest and penalties 
resume 21 days after the IRS sends a notice and demand for 
payment to the taxpayer.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment.

6. Procedural requirements for imposition of penalties and additions to 
        tax (sec. 3306 of the bill and new sec. 6751 of the Code)

                              Present Law

    Present law does not require the IRS to show how penalties 
are computed on the notice of penalty. In some cases, penalties 
may be imposed without supervisory approval.

                           Reasons for Change

    The Committee believes that taxpayers are entitled to an 
explanation of the penalties imposed upon them. The Committee 
believes that penalties should only be imposed where 
appropriate and not as a bargaining chip.

                        Explanation of Provision

    Each notice imposing a penalty is required to include the 
name of the penalty, the code section imposing the penalty, and 
a computation of the penalty.
    The provision also requires the specific approval of IRS 
management to assess all non-computer generated penalties 
unless excepted. This provision does not apply to failure to 
file penalties, failure to pay penalties, or to penalties for 
failure to pay estimated tax.

                             Effective Date

    The provision applies to notices issued, and penalties 
assessed, more than 180 days after the date of enactment.

7. Personal delivery of notice of penalty under section 6672 (sec. 3307 
        of the bill and sec. 6672(b) of the Code)

                              Present Law

    Any person who is required to collect, truthfully account 
for, and pay over any tax imposed by the Internal Revenue Code 
who willfully fails to do so is liable for a penalty equal to 
the amount of the tax (Code sec. 6672(a)). Before the IRS may 
assess any such ``100-percent penalty,'' it must mail a written 
preliminary notice informing the person of the proposed penalty 
to that person's last known address. The mailing of such notice 
must precede any notice and demand for payment of the penalty 
by at least 60 days. The statute of limitations on assessments 
shall not expire before the date 90 days after the date on 
which the notice was mailed. These restrictions do not apply if 
the Secretary finds the collection of the penalty is in 
jeopardy.

                           Reasons for Change

    The imposition of the 100-percent penalty is a serious 
matter. The Committee believes that permitting personal service 
of the preliminary notice required under Code section 6672 may 
afford taxpayers the opportunity to resolve cases involving the 
100-percent penalty at an earlier stage.

                        Explanation of Provision

    The provision permits in person delivery, as an alternative 
to delivery by mail, of a preliminary notice that the IRS 
intends to assess a 100-percent penalty. (In some cases, 
personal delivery may better assure that the recipient actually 
receives notice.)

                             Effective Date

    The provision is effective on the date of enactment.

8. Notice of interest charges (sec. 3308 of the bill and new sec. 6631 
        of the Code)

                              Present Law

    Taxpayer generally must pay interest on amounts due to the 
IRS.

                           Reasons for Change

    The Committee believes that taxpayers should be provided 
the detail to support the amount of interest charged by the 
IRS. The computation of interest is a complex calculation, 
often involving multiple interest rates. The Committee believes 
that it is appropriate to require the IRS to give notice to the 
taxpayer that interest is being charged, how it is calculated, 
and the total amount of the interest.

                        Explanation of Provision

    The provision requires every IRS notice that includes an 
amount of interest required to be paid by the taxpayer that is 
sent to an individual taxpayer to include a detailed 
computation of the interest charged and a citation to the Code 
section under which such interest is imposed.

                             Effective Date

    The provision applies to notices issued after June 30, 
2000.

 E. Protections for Taxpayers Subject to Audit or Collection Activities

                             a. Due Process

i. Due process in IRS collection actions (sec. 3401 of the bill and new 
        secs. 6320 and 6330 of the Code)

                              Present Law

    Levy is the IRS's administrative authority to seize a 
taxpayer's property to pay the taxpayer's tax liability. The 
IRS is entitled to seize a taxpayer's property by levy if the 
Federal tax lien has attached to such property. The Federal tax 
lien arises automatically where (1) a tax assessment has been 
made; (2) the taxpayer has been given notice of the assessment 
stating the amount and demanding payment; and (3) the taxpayer 
has failed to pay the amount assessed within ten days after the 
notice and demand.
    The IRS may collect taxes by levy upon a taxpayer's 
property or rights to property (including accrued salary and 
wages) if the taxpayer neglects or refuses to pay the tax 
within 10 days after notice and demand that the tax be paid. 
Notice of the IRS's intent to collect taxes by levy must be 
given no less than 30 days (90 days in the case of a life 
insurance contract) before the day of the levy. The notice of 
levy must describe the procedures that will be used, the 
administrative appeals available to the taxpayer and the 
procedures relating to such appeals, the alternatives available 
to the taxpayer that could prevent levy, and the procedures for 
redemption of property and release of liens.
    The effect of a levy on salary or wages payable to or 
received by a taxpayer is continuous from the date the levy is 
first made until it is released.
    If the IRS district director finds that the collection of 
any tax is in jeopardy, collection by levy may be made without 
regard to either notice period. A similar rule applies in the 
case of termination assessments.

                           Reasons for Change

    The Committee believes that taxpayers are entitled to 
protections in dealing with the IRS that are similar to those 
they would have in dealing with any other creditor.Accordingly, 
the Committee believes that the IRS should afford taxpayers adequate 
notice of collection activity and a meaningful hearing before the IRS 
deprives them of their property. When collection of tax is in jeopardy, 
the Committee believes it is appropriate to provide notice and a 
hearing promptly after the deprivation of property. The Committee 
believes that following procedures designed to afford taxpayers due 
process in collections will increase fairness to taxpayers.

                        Explanation of Provision

    The provision establishes formal procedures designed to 
insure due process where the IRS seeks to collect taxes by levy 
(including by seizure). The due process procedures also apply 
after the Federal tax lien attaches, but before the notice of 
the Federal tax lien has been given to the taxpayer.
    As under present law, notice of the intent to levy must be 
given at least 30 days (90 days in the case of a life insurance 
contract) before property can be seized or salary and wages 
garnished. During the 30-day (90-day) notice period, the 
taxpayer may demand a hearing to take place before an appeals 
officer who has had no prior involvement in the taxpayer's 
case. If the taxpayer demands a hearing within that period, the 
proposed collection action may not proceed until the hearing 
has concluded and the appeals officer has issued his or her 
determination.
    During the hearing, the IRS is required to verify that all 
statutory, regulatory, and administrative requirements for the 
proposed collection action have been met. IRS verifications are 
expected to include (but not be limited to) showings that:
          (1) the revenue officer recommending the collection 
        action has verified the taxpayer's liability;
          (2) the estimated expenses of levy and sale will not 
        exceed the value of the property to be seized;
          (3) the revenue officer has determined that there is 
        sufficient equity in the property to be seized to yield 
        net proceeds from sale to apply to the unpaid tax 
        liabilities; and
          (4) with respect to the seizure of the assets of a 
        going business, the revenue officer recommending the 
        collection action has thoroughly considered the facts 
        of the case, including the availability of alternative 
        collection methods, before recommending the collection 
        action.
    The taxpayer (or affected third party) is allowed to raise 
any relevant issue at the hearing. Issues eligible to be raised 
include (but are not limited to):
          (1) challenges to the underlying liability as to 
        existence or amount;
          (2) appropriate spousal defenses;
          (3) challenges to the appropriateness of collection 
        actions; and
          (4) collection alternatives, which could include the 
        posting of a bond, substitution of other assets, an 
        installment agreement or an offer-in-compromise.
Once the taxpayer has had a hearing with respect to an issue, 
the taxpayer would not be permitted to raise the same issue in 
another hearing.
    The determination of the appeals officer is to address 
whether the proposed collection action balances the need for 
the efficient collection of taxes with the legitimate concern 
of the taxpayer that the collection action be no more intrusive 
than necessary. A proposed collection action should not be 
approved solely because the IRS shows that it has followed 
appropriate procedures.
    The taxpayer may contest the determination of the appellate 
officer in Tax Court by filing a petition within 30 days of the 
date of the determination. The Tax Court is expected to review 
the appellate officer's determination for abuse of discretion 
and also may consider procedural issues, as under present law. 
The IRS may not take any collection action pursuant to the 
determination during such 30 day period or while the taxpayer's 
contest is pending in Tax Court.
    IRS Appeals would retain jurisdiction over its 
determinations. IRS Appeals could enter an order requiring the 
IRS collection division to adhere to the original 
determination. In addition, the taxpayer would be allowed to 
return to IRS Appeals to seek a modification of the original 
determination based on any change of circumstances.
    In the case of a continuous levy, the due process 
procedures would apply to the original imposition of the levy. 
Except in jeopardy and termination cases, continuous levy would 
not be allowed to begin without notice and an opportunity for a 
hearing. A determination allowing the continuous levy to 
proceed that is entered at the conclusion of a hearing would be 
subject to post-determination adjustment on application by the 
taxpayer. Thus, taxpayers would have the right to have IRS 
Appeals review any continuous levy and take any changes in 
circumstances into account.
    This provision does not apply in the case of jeopardy and 
termination assessments. Jeopardy and termination assessments 
would be subject to post-seizure review as part of the Appeals 
determination hearing as well as through any existing judicial 
procedure. A jeopardy or termination assessment must be 
approved by the IRS District Counsel responsible for the case. 
Failure to obtain District Counsel approval would render the 
jeopardy or termination assessment void.

                             Effective Date

    The due process procedures apply to collection actions 
initiated more than six months after the date of enactment.

                       b. Examination Activities

i. Uniform application of confidentiality privilege to taxpayer 
        communications with federally authorized practitioners (sec. 
        3411 of the bill and new sec. 7525 of the Code)

                              Present Law

    A common law privilege of confidentiality exists for 
communications between an attorney and client with respect to 
the legal advice the attorney gives the client. Communications 
protected by the attorney-client privilege must be based on 
facts of which the attorney is informed by the taxpayer, 
without the presence of strangers, for the purpose of securing 
the advice of the attorney. The privilege may not be claimed 
where the purpose of the communication is the commission of a 
crime or tort. The taxpayer must either be a client of the 
attorney or be seeking to become a client of the attorney.
    The privilege of confidentiality applies only where the 
attorney is advising the client on legal matters. It does not 
apply in situations where the attorney is acting in other 
capacities. Thus, a taxpayer may not claim the benefits of the 
attorney-client privilege simply by hiring an attorney to 
perform some other function. For example, if an attorney is 
retained to prepare a tax return, the attorney-client privilege 
will not automatically apply to communications and documents 
generated in the course of preparing the return.
    The privilege of confidentiality also does not apply where 
an attorney that is licensed to practice another profession is 
performing such other profession. For example, if a taxpayer 
retains an attorney who is also licensed as a certified public 
accountant (CPA), the taxpayer may not assert the attorney-
client privilege with regard to communications made and 
documents prepared by the attorney in his role as a CPA.
    The attorney-client privilege is limited to communications 
between taxpayers and attorneys. No equivalent privilege is 
provided for communications between taxpayers and other 
professionals authorized to practice before the Internal 
Revenue Service, such as accountants or enrolled agents.

                           Reasons for Change

    The Committee believes that a right to privileged 
communications between a taxpayer and his or her advisor should 
be available in noncriminal proceedings before the IRS and in 
noncriminal proceedings in Federal courts with respect to such 
matters where the IRS is a party, so long as the advisor is 
authorized to practice before the IRS. A right to privileged 
communications in such situations should not depend upon 
whether the advisor is also licensed to practice law.

                        Explanation of Provision

    The provision extends the present law attorney-client 
privilege of confidentiality to tax advice that is furnished to 
a client-taxpayer (or potential client-taxpayer) by any 
individual who is authorized under Federal law to practice 
before the IRS if such practice is subject to regulation under 
section 330 of Title 31, United States Code. Individuals 
subject to regulation under section 330 of Title 31, United 
States Code include attorneys, certified public accountants, 
enrolled agents and enrolled actuaries. Tax advice means advice 
that is within the scope of authority for such individual's 
practice with respect to matters under Title 26 (the Internal 
Revenue Code). The privilege of confidentiality may be asserted 
in any noncriminal tax proceeding before the IRS, as well as in 
noncriminal tax proceedings in the Federal Courts where the IRS 
is a party to the proceeding.
    The provision allows taxpayers to consult with other 
qualified tax advisors in the same manner they currently may 
consult with tax advisors that are licensed to practice law. 
The provision does not modify the attorney-client privilege of 
confidentiality, other than to extend it to other authorized 
practitioners. The privilege established by the provision 
applies only to the extent that communications would be 
privileged if they were between a taxpayer and an attorney. 
Accordingly, the privilege does not apply to any communication 
between a certified public accountant, enrolled agent, or 
enrolled actuary and such individual's client (or prospective 
client) if the communication would not have been privileged 
between an attorney and the attorney's client or prospective 
client. For example, information disclosed to an attorney for 
the purpose of preparing a tax return is not privileged under 
present law. Such information would not be privileged under the 
provision whether it was disclosed to an attorney, certified 
public accountant, enrolled agent or enrolled actuary.
    The privilege granted by the provision may only be asserted 
in noncriminal tax proceedings before the IRS and in the 
Federal Courts with regard to such noncriminal tax matters in 
proceedings where the IRS is a party. The privilege may not be 
asserted to prevent the disclosure of information to any 
regulatory body other than the IRS. The ability of any other 
regulatory body, including the Securities and Exchange 
Commission (SEC), to gain or compel information is unchanged by 
the provision. No privilege may be asserted under this 
provision by a taxpayer in dealings with such other regulatory 
bodies in an administrative or court proceeding.

                             Effective Date

    The provision is effective with regard to communications 
made on or after the date of enactment.

ii. Limitation on financial status audit techniques (sec. 3412 of the 
        bill and sec. 7602 of the Code)

                              Present Law

    The Secretary is authorized and required to make the 
inquiries and determinations necessary to insure the assessment 
of Federal income taxes. For this purpose, any reasonable 
method may be used to determine the amount of Federal income 
tax owed. The courts have upheld the use of financial status 
and economic reality examination techniques to determine the 
existence of unreported income in appropriate circumstances.

                           Reasons for Change

    The Committee believes that financial status audit 
techniques are intrusive, and that their use should be limited 
to situations where the IRS already has indications of 
unreported income.

                        Explanation of Provision

    The provision prohibits the IRS from using financial status 
or economic reality examination techniques to determine the 
existence of unreported income of any taxpayer unless the IRS 
has a reasonable indication that there is a likelihood of 
unreported income.

                             Effective Date

    The provision is effective on the date of enactment.

iii. Software trade secrets protection (sec. 3413 of the bill and new 
        sec. 7612 of the Code)

                              Present Law

    The Secretary of the Treasury is authorized to examine any 
books, papers, records, or other data that may be relevant or 
material to an inquiry into the correctness of any Federal tax 
return. The Secretary may issue and serve summonses necessary 
to obtain such data, including summonses on certain third-party 
record keepers. There are no specific statutory restrictions on 
the ability of the Secretary to demand the production of 
computer records, programs, code or similar materials.

                           Reasons for Change

    The Committee believes that the intellectual property 
rights of the developers and owners of computer programs should 
be respected. The Committee is concerned that the examination 
of computer programs and source code by the IRS could lead to 
the diminution of those rights through the inadvertent 
disclosure of trade secrets and believes that special 
protection against such inadvertent disclosure should be 
established.
    The Committee also believes that the indiscriminate 
examination of computer source code by the IRS is 
inappropriate. Accordingly, the Committee believes that a 
summons for the production of certain computer source code 
should only be issued where the IRS is not otherwise able to 
ascertain through reasonable efforts the manner in which a 
taxpayer has arrived at an item on a return, identifies with 
specificity the portion of the computer source code it seeks to 
examine, and determines that the need to see the source code 
outweighs the risk of unauthorized disclosure of trade secrets.

                        Explanation of Provision

Discovery of computer source code

    The provision generally prohibits the Secretary from 
issuing a summons in a Federal tax matter for any portion of 
computer source code. Exceptions to the general rule are 
provided for inquiries into any criminal offense connected with 
the administration or enforcement of the internal revenue laws 
and for computer software source code that was developed by the 
taxpayer or a related person for internal use by the taxpayer 
or related person. Computer software source code is considered 
to have been developed for internal use by the taxpayer or a 
related person if the software is primarily used in the 
taxpayer or related person's trade or business, as opposed to 
being held for sale or license to others. Software is 
considered to be used in a trade or business if it is used in 
the provision of services to others. It is anticipated that 
software that was originally developed for internal use by the 
taxpayer or a related person will continue to be subject to the 
exception, even if the software is later transferred to 
another. For example, software may have originally been 
developed by the taxpayer to administer the taxpayer's employee 
benefits system. If that function and the software necessary to 
perform it is later transferred to an unrelated third party, 
the software would continue to be subject to the exception.
    In addition, the prohibition of the general rule would not 
apply, and the Secretary would be allowed to summons computer 
source code if the Secretary: (1) is unable to otherwise 
reasonably ascertain the correctness of an item on a return 
from the taxpayer's books and records, or the computer software 
program and any associated data; (2) identifies with reasonable 
specificity the portion of the computer source code to be used 
to verify the correctness of the item; and (3) determines that 
the need for the source code outweighs the risks of disclosure 
of the computer source code. No inference is intended as to 
whether software is included in the definition of a taxpayer's 
books and records.
    It is expected that the Secretary will make a good faith 
and significant effort to ascertain the correctness of an item 
prior to seeking computer source code. The portion of the 
computer source code to be used would be considered identified 
with reasonable specificity where, for example, the Secretary 
requests the portion of the code that is used to determine a 
particular item on the return, that otherwise is necessary to 
the determination of an item on the return, or that implements 
an accounting or other method.
    The Committee is aware that the refusal of the taxpayer or 
the owner of the software to cooperate could, in certain 
situations, prevent the Secretary from establishing the factors 
necessary to support the summons of computer source code. 
Accordingly, the requirement that the Secretary be unable to 
otherwise reasonably ascertain the correctness of an item on a 
return from the taxpayer's books and records, or from the 
computer software program and any associated data, and the 
requirement that the Secretary have identified with reasonable 
specificity the portion of the computer source code requested, 
will be deemed to be satisfied where (1) the Secretary makes a 
good faith determination that it is not feasible to determine 
the correctness of the return item in question without access 
to the computer software program and associated data, (2) the 
Secretary makes a formal request for such program and any data 
from the taxpayer and requests such program from the owner of 
the source code after reaching such determination, and (3) the 
Secretary has not received such program and data within 180 
days of making the formal request. In the case of requests to 
the taxpayer, the Committee expects that a formal request will 
take the form of an Information Document Request (IDR), 
summons, or similar document. The Committee intends that the 
Secretaryactively pursue the recovery of such program and any 
data from the taxpayer before seeking to have the normal requirements 
deemed satisfied under this rule.

Additional protections against disclosure of computer software and 
        source code

    The provision establishes a number of protections against 
the disclosure and improper use of trade secrets and 
confidential information incident to the examination by the 
Secretary of any computer software program or source code that 
comes into the possession or control of the Secretary in the 
course of any examination with respect to any taxpayer. These 
protections include the following:
          (1) Such software or source code may be examined only 
        in connection with the examination of the taxpayer's 
        return with regard to which it was received. It is 
        expected that the taxpayer will be informed of any 
        alternative data or settings to be used in the 
        examination of the software. However, the Committee 
        does not intend to provide the taxpayer with the right 
        to monitor the examination of the software by the IRS 
        on a key stroke by key stroke or similar basis.
          (2) Such software or source code must be maintained 
        in a secure area.
          (3) Such source code may not be removed from the 
        owner's place of business without the owner's consent 
        unless such removal is pursuant to a court order. If 
        the owner does not consent to the removal of source 
        code from its place of business, the owner must make 
        available the necessary equipment to review the source 
        code. The owner shall have the right to require the use 
        of equipment that is configured to prevent electronic 
        communication outside the owner's place of business.
          (4) Such software or source code may not be 
        decompiled or disassembled.
          (5) Such software or source code may only be copied 
        as necessary to perform the specific examination. The 
        owner of the software must be informed of any copies 
        that are made, such copies must be numbered, and at the 
        conclusion of the examination and any related court 
        proceedings, all such copies must be accounted for and 
        returned to the owner, permanently deleted, or 
        destroyed. The Secretary must provide the owner of such 
        software or source code with the names of any 
        individuals who will have access to such software or 
        source code. Source code may be copied (by the use of a 
        scanner or otherwise) from written to machine readable 
        form. However, any such machine readable copies shall 
        be treated as separate copies and must be numbered, 
        accounted for and returned or destroyed at the 
        conclusion of the examination.
          (6) If an individual who is not an officer or 
        employee of the U.S. Government will examine the 
        software or source code, such individual must enter 
        into a written agreement with the Secretary that such 
        individual will not disclose such software or source 
        code to any person other than authorized employees or 
        agents of the Secretary at any time, and that such 
        individual will not participate in the development of 
        software that is intended for a similar purpose as the 
        summoned software for a period of two years.
    Computer source code is the code written by a programmer 
using a programming language that is comprehensible to an 
appropriately trained person, is not machine readable, and is 
not capable of directly being used to give instructions to a 
computer. Computer source code also includes any related 
programmer's notes, design documents, memoranda and similar 
documentation and customer communications regarding the 
operation of the program (other than communications with the 
taxpayer or any person related to the taxpayer).
    The Secretary's determination may be contested in any 
proceeding to enforce the summons, by any person to whom the 
summons is addressed. In any such proceeding, the court may 
issue any order that is necessary to prevent the disclosure of 
confidential information, including (but not limited to) the 
enforcement of the protections established by this provision.
    Criminal penalties are provided where any person willfully 
divulges or makes known software that was obtained (whether or 
not by summons) for the purpose of examining a taxpayer's 
return in violation of this provision.

                             Effective Date

    The provision is effective for summons issued and software 
acquired after the date of enactment. In addition, 90 days 
after the date of enactment, the protections against the 
disclosure and improper use of trade secrets and confidential 
information added by the provision (except for the requirement 
that the Secretary provide a written agreement from non-U.S. 
government officers and employees) apply to software and source 
code acquired on or before the date of enactment.

iv. Threat of audit prohibited to coerce tip reporting alternative 
        commitment agreements (sec. 3414 of the bill)

                              Present Law

    Restaurants may enter into Tip Reporting Alternative 
Commitment (TRAC) agreements. A restaurant entering into a TRAC 
agreement is obligated to educate its employees on their tip 
reporting obligations, to institute formal tip reporting 
procedures, to fulfill all filing and record keeping 
requirements, and to pay and deposit taxes. In return, the IRS 
agrees to base the restaurant's liability for employment taxes 
solely on reported tips and any unreported tips discovered 
during an IRS audit of an employee.

                           Reasons for Change

    The Committee believes that it is inappropriate for the 
Secretary to use the threat of an IRS audit to induce 
participation in voluntary programs.

                        Explanation of Provision

    The provision requires the IRS to instruct its employees 
that they may not threaten to audit any taxpayer in an attempt 
to coerce the taxpayer to enter into a TRAC agreement.

                             Effective Date

    The provision is effective on the date of enactment.

v. Taxpayers allowed motion to quash all third-party summonses (sec. 
        3415 of the bill and sec. 7609(a) of the Code)

                              Present Law

    When the IRS issues a summons to a ``third-party 
recordkeeper'' relating to the business transactions or affairs 
of a taxpayer, Code section 7609 requires that notice of the 
summons be given to the taxpayer within three days by certified 
or registered mail. The taxpayer is thereafter given up to 23 
days to begin a court proceeding to quash the summons. If the 
taxpayer does so, third-party recordkeepers are prohibited from 
complying with the summons until the court rules on the 
taxpayer's petition or motion to quash, but the statute of 
limitations for assessment and collection with respect to the 
taxpayer is stayed during the pendency of such a proceeding. 
Third-party recordkeepers are generally persons who hold 
financial information about the taxpayer, such as banks, 
brokers, attorneys, and accountants.

                           Reasons for Change

    The Committee believes that a taxpayer should have notice 
when the IRS uses its summons power to gather information in an 
effort to determine the taxpayer's liability. Expanding notice 
requirement to cover all third party summonses will ensure that 
taxpayer will receive notice and an opportunity to contest any 
summons issued to a third party in connection with the 
determination of their liability.

                        Explanation of Provision

    The provision generally expands the current ``third-party 
recordkeeper'' procedures to apply to summonses issued to 
persons other than the taxpayer. Thus, the taxpayer whose 
liability is being investigated receives notice of the summons 
and is entitled to bring an action in the appropriate U.S. 
District Court to quash the summons. As under the current 
third-party recordkeeper provision, the statute of limitations 
on assessment and collection is stayed during the litigation, 
and certain kinds of summonses specified under current law are 
not subject to these requirements. No inference is intended 
with respect to the applicability of present law to summonses 
to the taxpayer or the scope of the authority to summons 
testimony, books, papers, or other records.

                             Effective Date

    The provision is effective for summonses served after the 
date of enactment.

vi. Service of summonses to third-party recordkeepers permitted by mail 
        (sec. 3416 of the bill and sec. 7603 of the Code)

                              Present Law

    Code section 7603 requires that a summons shall be served 
``by an attested copy delivered in hand to the person to whom 
it is directed or left at his last and usual place of abode.'' 
By contrast, if a third-party recordkeeper summons is served, 
section 7609 permits the IRS to give the taxpayer notice of the 
summons via certified or registered mail. Moreover, Rule 4 of 
the Federal Rules of Civil Procedure permits service of process 
by mail even in summons enforcement proceedings.

                           Reasons for Change

    The Committee is concerned that, in certain cases, the 
personal appearance of an IRS official at a place of business 
for the purpose of serving a summons may be unnecessarily 
disruptive. The Committee believes that it is appropriate to 
permit service of summons, as well as notice of summons, by 
mail.

                        Explanation of Provision

    The provision allows the IRS the option of serving any 
summons either in person or by mail.

                             Effective Date

    The provision is effective for summonses served after the 
date of enactment.

vii. Prohibition on IRS contact of third parties without taxpayer pre-
        notification (sec. 3417 of the bill and sec. 7602 of the Code)

                              Present Law

    Third parties may be contacted by the IRS in connection 
with the examination of a taxpayer or the collection of the tax 
liability of the taxpayer. The IRS has the right to summon 
third-party recordkeepers under Code section 7609. In general, 
the taxpayer must be notified of the service of summons on a 
third party within three days of the date of service (sec. 
7609(a)). The IRS also has the right to seize property of the 
taxpayer that is held in the hands of third parties (sec. 
6331(a)). Except in jeopardy situations, the Internal Revenue 
Manual provides that IRS will personally contact the taxpayer 
and inform the taxpayer that seizure of the asset is planned.

                           Reasons for Change

    The Committee believes that taxpayers should be notified 
before the IRS contacts third parties regarding examination or 
collection activities with respect to the taxpayer. Such 
contacts may have a chilling effect on the taxpayer's business 
and could damage the taxpayer's reputation in the community. 
Accordingly, the Committee believes that taxpayers should have 
the opportunity to resolve issues and volunteer information 
before the IRS contacts third parties.

                        Explanation of Provision

    The provision requires the IRS to notify the taxpayer 
before contacting third parties regarding examination or 
collection activities (including summonses) with respect to the 
taxpayer. Contacts with government officials relating to 
matters such as the location of assets or the taxpayer's 
current address are not restricted by this provision. The 
provision does not apply to criminal tax matters, if the 
collection of the tax liability is in jeopardy, or if the 
taxpayer authorized the contact.

                             Effective Date

    The provision is effective for contacts made after 180 days 
after the date of enactment.

                        c. Collection Activities

i. Approval process for liens, levies, and seizures (sec. 3421 of the 
        bill)

                              Present Law

    Supervisory approval of liens, levies or seizures is only 
required under certain circumstances. For example, a levy on a 
taxpayer's principal residence is only permitted upon the 
written approval of the District Director or Assistant District 
Director (sec. 6334(e)).

                           Reasons for Change

    The Committee believes that the imposition of liens, 
levies, and seizures may impose significant hardships on 
taxpayers. Accordingly, the Committee believes that extra 
protection in the form of an administrative approval process is 
appropriate.

                        Explanation of Provision

    The provision requires the IRS to implement an approval 
process under which any lien, levy or seizure would be approved 
by a supervisor, who would review the taxpayer's information, 
verify that a balance is due, and affirm that a lien, levy or 
seizure is appropriate under the circumstances. Circumstances 
to be considered include the amount due and the value of the 
asset. Failure to follow such procedures should result in 
disciplinary action against the supervisor and/or revenue 
officer.
    In addition, the Treasury Inspector General for Tax 
Administration is required to collect information on the 
approval process and annually report to the tax-writing 
committees.

                             Effective Date

    The provision is effective for collection actions commenced 
after date of enactment.

ii. Modifications to certain levy exemption amounts (sec. 3431 of the 
        bill and sec. 6334 of the Code)

                              Present Law

    The Code authorizes the IRS to levy on all non-exempt 
property of the taxpayer. Property exempt from levy is 
described in section 6334. Section 6334(a)(2) exempts from levy 
up to $2,500 in value of fuel, provisions, furniture, and 
personal effects in the taxpayer's household. Section 
6334(a)(3) exempts from levy up to $1,250 in value of books and 
tools necessary for the trade, business or profession of the 
taxpayer.

                           Reasons for Change

    The Committee believes that a minimum amount of household 
items and equipment for taxpayer's business should be exempt 
from levy. To ensure that such exemption is meaningful, the 
amounts should be indexed for inflation.

                        Explanation of Provision

    The provision increases the value of personal effects 
exempt from levy to $10,000 and the value of books and tools 
exempt from levy to $5,000. These amounts are indexed for 
inflation.

                             Effective Date

    The provision is effective for collection actions taken 
after the date of enactment.

iii. Release of levy upon agreement that amount is uncollectible (sec. 
        3432 of the bill and sec. 6343 of the Code)

                              Present Law

    Some have contended that the IRS does not release a wage 
levy immediately upon receipt of proof that the taxpayer is 
unable to pay the tax, but instead, the IRS levies on one 
period's wage payment before releasing the levy.

                           Reasons for Change

    Congress believes that taxpayers should not have collection 
activity taken against them once the IRS has determined that 
the amounts are uncollectible.

                        Explanation of Provision

    The IRS is required to immediately release a wage levy upon 
agreement with the taxpayer that the tax is not collectible.

                             Effective Date

    The provision is effective for levies imposed after date of 
enactment.

iv. Levy prohibited during pendency of refund proceedings (sec. 3433 of 
        the bill and sec. 6331 of the Code)

                              Present Law

    The IRS is prohibited from making a tax assessment (and 
thus prohibited from collecting payment) with respect to a tax 
liability while it is being contested in Tax Court. However, 
the IRS is permitted to assess and collect tax liabilities 
during the pendency of a refund suit relating to such tax 
liabilities, under the circumstances described below.
    Generally, full payment of the tax at issue is a 
prerequisite to a refund suit. However, if the tax is divisible 
(such as employment taxes or the trust fund penalty under Code 
section 6672), the taxpayer need only pay the tax for the 
applicable period before filing a refund claim. Most divisible 
taxes are not within the Tax Court's jurisdiction; accordingly, 
the taxpayer has no pre-payment forum for contesting such 
taxes. In the case of divisible taxes, it is possible that the 
taxpayer could be properly under the refund jurisdiction of the 
District Court or the U.S. Court of Federal Claims and still be 
subject to collection by levy with respect to the entire amount 
of the tax at issue. The IRS's policy is generally to exercise 
forbearance with respect to collection while the refund suit is 
pending, so long as the interests of the Government are 
adequately protected (e.g., by the filing of a notice of 
Federal tax lien) and collection is not in jeopardy. Any 
refunds due the taxpayer may be credited to the unpaid portion 
of the liability pending the outcome of the suit.

                           Reasons for Change

    The Committee believes that taxpayers who are litigating a 
refund action over divisible taxes should be protected from 
collection of the full assessed amount, because the court 
considering the refund suit may ultimately determine that the 
taxpayer is not liable.

                        Explanation of Provision

    The provision requires the IRS to withhold collection by 
levy of liabilities that are the subject of a refund suit 
during the pendency of the litigation. This will only apply 
when refund suits can be brought without the full payment of 
the tax, i.e., in the case of divisible taxes. Collection by 
levy would be withheld unless jeopardy exists or the taxpayer 
waives the suspension of collection in writing (because 
collection will stop the running of interest and penalties on 
the tax liability). This provision will not affect the IRS's 
ability to collect other assessments that are not the subject 
of the refund suit, to offset refunds, to counterclaim in a 
refund suit or related proceeding, or to file a notice of 
Federal tax lien. The statute of limitations on collection is 
stayed for the period during which the IRS is prohibited from 
collecting by levy.

                             Effective Date

    The provision is effective for refund suits brought with 
respect to tax years beginning after December 31, 1998.

v. Approval required for jeopardy and termination assessments and 
        jeopardy levies (sec. 3434 of the bill and sec. 7429(a) of the 
        Code)

                              Present Law

    In general, a 30-day waiting period is imposed after 
assessment of all types of taxes. In certain circumstances, the 
waiting period puts the collection of taxes at risk. The Code 
provides special procedures that allow the IRS to make jeopardy 
assessments or termination assessments in certain extraordinary 
circumstances, such as if the taxpayer is leaving or removing 
property from the United States (sec. 6851), or if assessment 
or collection would be jeopardized by delay (secs. 6861 and 
6862). In jeopardy or termination situations, a levy may be 
made without the 30-days' notice of intent to levy that is 
ordinarily required by section 6331(d)(2). Jeopardy assessments 
apply when the tax year is over. Termination assessments apply 
to the current taxable year or the immediately preceding 
taxable year if the filing date has not yet passed. A 
termination assessment serves to terminate the taxable year for 
the purpose of computing the tax to be assessed and collected 
under the termination assessment procedure. Under both the 
jeopardy and termination assessment procedures, the IRS can 
assess the tax and immediately begin collection if any one of 
the following situations exists: (1) the taxpayer is or appears 
to be planning to depart the United States or to go into 
hiding; (2) the taxpayer is or appears to be planning to place 
property beyond the reach of the IRS by removing it from the 
country, hiding it, dissipating it, or by transferring it to 
other persons; or (3) the taxpayer's financial solvency is or 
appears to be imperiled. Because the same criteria apply to 
jeopardy and termination assessments, jeopardy and termination 
assessments are often entered at the same time against the same 
taxpayer.
    The Code and regulations do not presently require Counsel 
to review jeopardy assessments, termination assessments, or 
jeopardy levies, although the Internal Revenue Manual does 
require Counsel review before such actions and it is current 
practice to make such a review. The IRS bears the burden of 
proof with respect to the reasonableness of a jeopardy or 
termination assessment or a jeopardy levy (sec. 7429(g)).

                           Reasons for Change

    The Committee believes that it is appropriate to require 
Counsel review and approval of jeopardy and termination levies, 
because such actions often involve difficult legal issues.

                        Explanation of Provision

    The provision requires IRS Counsel review and approval 
before the IRS could make a jeopardy assessment, a termination 
assessment, or a jeopardy levy. If Counsel's approval was not 
obtained, the taxpayer would be entitled to obtain abatement of 
the assessment or release of the levy, and, if the IRS failed 
to offer such relief, to appeal first to IRS Appeals under the 
new due process procedure for IRS collections (described in E. 
1, above) and then to court.

                             Effective Date

    The provision is effective with respect to taxes assessed 
and levies made after the date of enactment.

vi. Increase in amount of certain property on which lien not valid 
        (sec. 3435 of the bill and sec. 6323 of the Code)

                              Present Law

    The Federal tax lien attaches to all property and rights in 
property of the taxpayer, if the taxpayer fails to pay the 
assessed tax liability after notice and demand (sec. 6321). 
However, the Federal tax lien is not valid as to certain 
``superpriority'' interests as defined in section 6323(b).
    Two of these interests are limited by a specific dollar 
amount. Under section 6323(b)(4), purchasers of personal 
property at a casual sale are presently protected against a 
Federal tax lien attached to such property to the extent the 
sale is for less than $250. Section 6323(b)(7) provides 
protection to mechanic's lienors with respect to the repairs or 
improvements made to owner-occupied personal residences, but 
only to the extent that the contract for repair or improvement 
is for not more than $1,000.
    In addition, a superpriority is granted under section 
6323(b)(10) to banks and building and loan associations which 
make passbook loans to their customers, provided that those 
institutions retain the passbooks in their possession until the 
loan is completely paid off.

                           Reasons for Change

    The Committee believes that it is appropriate to increase 
the dollar limits on the superpriority amounts because the 
dollar limits have not been increased for decades and do not 
reflect current prices or values.

                        Explanation of Provision

    The provision increases the dollar limit in section 
6323(b)(4) for purchasers at a casual sale from $250 to $1,000, 
and further increases the dollar limit in section 6323(b)(7) 
from $1,000 to $5,000 for mechanics lienors providing home 
improvement work for owner-occupied personal residences. The 
provision indexes these amounts for inflation. The provision 
also clarifies section 6323(b)(10) to reflect present banking 
practices, where a passbook-type loan may be made even though 
an actual passbook is not used.

                             Effective Date

    The provision is effective on the date of enactment.

vii. Waiver of early withdrawal tax for IRS levies on employer-
        sponsored retirement plans or IRAs (sec. 3436 of the bill and 
        sec. 72(t)(2)(A) of the Code)

                              Present Law

    Under present law, a distribution of benefits from any 
employer-sponsored retirement plan or an individual retirement 
arrangement (``IRA'') generally is includible in gross income 
in the year it is paid or distributed, except to the extent the 
amount distributed represents the employee's after-tax 
contributions or investment in the contract (i.e., basis). 
Special rules apply to certain lump-sum distributions from 
qualified retirement plans, distributions rolled over to an IRA 
or employer-sponsored retirement plan, and lump-sum 
distributions of employer securities.
    Distributions from qualified plans and IRAs prior to 
attainment of age 59\1/2\ that are includible in income 
generally are subject to a 10-percent early withdrawal tax, 
unless an exception to the tax applies. An exception to the tax 
applies if the withdrawal is due to death or disability, is 
made in the form of certain periodic payments, or is used to 
pay medical expenses in excess of 7.5 percent of adjusted gross 
income (``AGI''). Certain additional exceptions to the tax 
apply separately to withdrawals from IRAs and qualified plans. 
Distributions from IRAs for education expenses, for up to 
$10,000 of first-time homebuyer expenses, or to unemployed 
individuals to purchase health insurance are not subject to the 
10-percent early withdrawal tax. A distribution from a 
qualified plan made by an employee after separation from 
service after attainment of age 55 is not subject to the 10-
percent early withdrawal tax.
    Under present law, the IRS is authorized to levy on all 
non-exempt property of the taxpayer. Benefits under employer-
sponsored retirement plans (including section 403(b) and 457 
plans) and IRAs are not exempt from levy by the IRS.
    Under present law, distributions from employer-sponsored 
retirement plans or IRAs made on account of an IRS levy are 
includible in the gross income of the individual, except to the 
extent the amount distributed represents after-tax 
contributions. In addition, the amount includible in income is 
subject to the 10-percent early withdrawal tax, unless an 
exception described above applies.

                           Reasons for Change

    The Committee believes that the imposition of the 10-
percent early withdrawal tax on amounts distributed from 
employer-sponsored retirement plans or IRAs on account of an 
IRS levy may impose significant hardships on taxpayers. 
Accordingly, the Committee believes such distributions should 
be exempt from the 10-percent early withdrawal tax.

                        Explanation of Provision

    The provision provides an exception from the 10-percent 
early withdrawal tax for amounts withdrawn from any employer-
sponsored retirement plan or an IRA that are subject to a levy 
by the IRS. The exception applies only if the plan or IRA is 
levied; it does not apply, for example, if the taxpayer 
withdraws funds to pay taxes in the absence of a levy, in order 
to release a levy on other interests, or in any other situation 
not addressed by the express statutory exceptions to the 10-
percent early withdrawal tax.

                             Effective Date

    The provision is effective for withdrawals after the date 
of enactment.

viii. Prohibition of sales of seized property at less than minimum bid 
        (sec. 3441 of the bill and sec. 6335(e) of the Code)

                              Present Law

    Section 6335(e) requires that a minimum bid price be 
established for seized property offered for sale. To conserve 
the taxpayer's equity, the minimum bid price should normally be 
computed at 80 percent or more of the forced sale value of the 
property less encumbrances having priority over the Federal tax 
lien. If the group manager concurs, the minimum sales price may 
be set at less than 80 percent. The taxpayer is to receive 
notice of the minimum bid price within 10 days of the sale. The 
taxpayer has the opportunity to challenge the minimum bid 
price, which cannot be more than the tax liability plus the 
expenses of sale. Accordingly, if the minimum bid price is set 
at the tax liability plus the expenses of sale, the taxpayer's 
concurrence is not required. IRM 56(13)5.1(4). Section 6335 
does not contemplate a sale of the seized property at less than 
the minimum bid price. Rather, if no person offers the minimum 
bid price, the IRS may buy the property at the minimum bid 
price or the property may be released to the owner. Code 
section 7433 provides civil damages for certain unauthorized 
collection actions.

                           Reasons for Change

    The Committee believes that strengthening provisions 
regarding the minimum bid price, including preventing the IRS 
from selling the taxpayer's property for less than the minimum 
bid price, are appropriate to preserve taxpayers'' rights.

                        Explanation of Provision

    The provision prohibits the IRS from selling seized 
property for less than the minimum bid price. The provision 
provides that the sale of property for less than the minimum 
bid price would constitute an unauthorized collection action, 
which would permit an affected person to sue for civil damages 
pursuant to section 7433.

                             Effective Date

    The provision is effective for sales occurring after the 
date of enactment.

ix. Accounting of sales of seized property (sec. 3442 of the bill and 
        sec. 6340 of the Code)

                              Present Law

    The IRS is authorized to seize and sell a taxpayer's 
property to satisfy an unpaid tax liability (sec. 6331(b)). The 
IRS is required to give written notice to the taxpayer before 
seizure of the property (sec. 6331(d)). The IRS must also give 
written notice to the taxpayer at least 10 days before the sale 
of the seized property.
    The IRS is required to keep records of all sales of real 
property (sec. 6340). The records must set forth all proceeds 
and expenses of the sale. The IRS is required to apply the 
proceeds first against the expenses of the sale, then against a 
specific tax liability on the seized property, if any, and 
finally against any unpaid tax liability of the taxpayer (sec. 
6342(a)). Any surplus proceeds are credited to the taxpayer or 
persons legally entitled to the proceeds.

                           Reasons for Change

    The Committee believes that taxpayers are entitled to know 
how proceeds from the sale of their property seized by the IRS 
are applied to their tax liability.

                        Explanation of Provision

    The provision requires the IRS to provide a written 
accounting of all sales of seized property, whether real or 
personal, to the taxpayer. The accounting must include a 
receipt for the amount credited to the taxpayer's account.

                             Effective Date

    The provision is effective for seizures occurring after the 
date of enactment.

x. Uniform asset disposal mechanism (sec. 3443 of the bill)

                              Present Law

    The IRS must sell property seized by levy either by public 
auction or by public sale under sealed bids (sec. 
6335(e)(2)(A)). These are often conducted by the revenue 
officer charged with collecting the tax liability.

                           Reasons for Change

    The Committee believes that it is important for fairness 
and the appearance of propriety that revenue officers charged 
with collecting unpaid tax liability are not personally 
involved with the sale of seized property.

                        Explanation of Provision

    The provision requires the IRS to implement a uniform asset 
disposal mechanism for sales of seized property. The disposal 
mechanism should be designed to remove any participation in the 
sale of seized assets by revenue officers. The provision 
authorizes the consideration of outsourcing of the disposal 
mechanism.

                             Effective Date

    The provision requires a uniform asset disposal system to 
be implemented within two years from the date of enactment.

xi. Codification of IRS administrative procedures for seizure of 
        taxpayer's property (sec. 3444 of the bill and sec. 6331 of the 
        Code)

                              Present Law

    The IRS provides guidelines for revenue officers engaged in 
the collection of unpaid tax liabilities. The Internal Revenue 
Manual (IRM) 56(12)5.1 provides general guidelines for seizure 
actions: (1) the revenue officer must first verify the 
taxpayer's liability; (2) no levy may be made if the estimated 
expenses of levy and sale will exceed the fair market value of 
the property to be sized (sec. 6331(f)); (3) no levy may be 
made on the date of an appearance in response to an 
administrative summons, unless jeopardy exists (sec. 6331(g)); 
(4) the taxpayer should have an opportunity to read the levy 
form; (5) the revenue officer must attach a sufficient number 
of warning notices on the property to clearly identify the 
property to be seized; (6) the revenue officer must inventory 
the property to be seized; and (7) a revenue officer may not 
use force in the seizure of property.
    Prior to the levy action, the revenue officer must 
determine that there is sufficient equity in the property to be 
seized to yield net proceeds from the sale to apply to unpaid 
tax liabilities. If it is determined after seizure that the 
taxpayer's equity is insufficient to yield net proceeds from 
sale to apply to the unpaid tax, the revenue officer will 
immediately release the seized property. See IRM 56(12)2.1.
    IRS Policy Statement P-5-34 states that the facts of a case 
and alternative collection methods must be thoroughly 
considered before deciding to seize the assets of a going 
business. IRS Policy Statement P-5-16 advises reasonable 
forbearance on collection activity when the taxpayer's business 
has been affected by a major disaster such as flood, hurricane, 
drought, fire, etc., and whose ability to pay has been impaired 
by such disaster.

                           Reasons for Change

    The Committee believes that the IRS procedures on 
collections provide important protections to taxpayers. 
Accordingly, the Committee believes that it is appropriate to 
codify those procedures to ensure that they are uniformly 
followed by the IRS.

                        Explanation of Provision

    The provision codifies the IRS administrative procedures 
which require the IRS to investigate the status of property 
prior to levy. The Treasury Inspector General for Tax 
Administration would be required to review IRS compliance with 
seizure procedures and report annually to Congress.

                             Effective Date

    The provision is effective on the date of enactment.

xii. Procedures for seizure of residences and businesses (sec. 3445 of 
        the bill and sec. 6334(a)(13) of the Code)

                              Present Law

    Subject to certain procedural rules and limitations, the 
Secretary may seize the property of the taxpayer who neglects 
or refuses to pay any tax within 10 days after notice and 
demand. The IRS may not levy on the personal residence of the 
taxpayer unless the District Director (or the assistant 
District Director) personally approves in writing or in cases 
of jeopardy. There are no special rules for property that is 
used as a residence by parties other than the taxpayer.
    IRS Policy Statement P-5-34 states that the facts of a case 
and alternative collection methods must be thoroughly 
considered before deciding to seize the assets of a going 
business.

                           Reasons for Change

    The Committee is concerned that seizure of the taxpayer's 
principal residence is particularly disruptive for the taxpayer 
as well as the taxpayer's family. The seizure of any residence 
is disruptive to the occupants, and is not justified in the 
case of a small deficiency. In the case of seizure of a 
business, the seizure not only disrupts the taxpayer's life but 
also may adversely impact the taxpayer's ability to enter into 
an installment agreement or otherwise to continue to pay off 
the tax liability. Accordingly, the Committee believes that the 
taxpayer's principal residence or business should only be 
seized to satisfy tax liability as a last resort, and that any 
property used by any person as a residence should not be seized 
for a small deficiency.

                        Explanation of Provision

    The provision prohibits the IRS from seizing real property 
that is used as a residence (by the taxpayer or another person) 
to satisfy an unpaid liability of $5,000 or less, including 
penalties and interest.
    The provision requires the IRS to exhaust all other payment 
options before seizing the taxpayer's business or principal 
residence. The provision does not prohibit the seizure of a 
business or a principal residence, but would treat such seizure 
as a payment option of last resort. The provision does not 
apply in cases of jeopardy. It is anticipated that the IRS 
would consider installment agreements, offer-in-compromise, and 
seizure of other assets of the taxpayer before taking 
collection action against the taxpayer's business or principal 
residence.

                             Effective Date

    The provision is effective on the date of enactment.

    d. Provisions Relating to Examination and Collection Activities

i. Procedures relating to extensions of statute of limitations by 
        agreement (sec. 3461 of the bill and sec. 6502(a) of the Code)

                              Present Law

    The statute of limitations within which the IRS may assess 
additional taxes is generally three years from the date a 
return is filed (sec. 6501).34 Prior to the 
expiration of the statute of limitations, both the taxpayer and 
the IRS may agree in writing to extend the statute, using Form 
872 or 872-A. An extension may be for either a specified period 
or an indefinite period. The statute of limitations within 
which a tax may be collected after assessment is 10 years after 
assessment (sec. 6502). Prior to the expiration of the statute 
of limitations, both the taxpayer and the IRS may agree in 
writing to extend the statute, using Form 900.
---------------------------------------------------------------------------
    \34\ For this purpose, a return filed before the due date is 
considered to be filed on the due date.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that taxpayers should be fully 
informed of their rights with respect to the statute of 
limitations on assessment. The Committee is concerned that in 
some cases taxpayer have not been fully aware of their rights 
to refuse to extend the statute of limitations, and have felt 
that they had no choice but to agree to extend the statute of 
limitations upon the request of the IRS.
    Moreover, the Committee believes that the IRS should 
collect all taxes within 10 years, and that such statute of 
limitation should not be extended.

                        Explanation of Provision

    The provision eliminates the provision of present law that 
allows the statute of limitations on collections to be extended 
by agreement between the taxpayer and the IRS.
    The provision also requires that, on each occasion on which 
the taxpayer is requested by the IRS to extend the statute of 
limitations on assessment, the IRS must notify the taxpayer of 
the taxpayer's right to refuse to extend the statute of 
limitations or to limit the extension to particular issues.

                             Effective Date

    The provision applies to requests to extend the statute of 
limitations made after the date of enactment and to all 
extensions of the statute of limitations on collection that are 
open 180 days after the date of enactment.

ii. Offers-in-compromise (sec. 3462 of the bill and sec. 7122 of the 
        Code)

                              Present Law

    Section 7122 of the Code permits the IRS to compromise a 
taxpayer's tax liability. An offer-in-compromise is a provision 
by the taxpayer to settle unpaid tax accounts for less than the 
full amount of the assessed balance due. An offer-in-compromise 
may be submitted for all types of taxes, as well as interest 
and penalties, arising under the Internal Revenue Code.
    There are two bases on which an offer can be made: doubt as 
to liability for the amount owed and doubt as to ability to pay 
the amount owed.
    A compromise agreement based on doubt as to ability to pay 
requires the taxpayer to file returns and pay taxes for five 
years from the date the IRS accepts the offer. Failure to do so 
permits the IRS to begin immediate collection actions for the 
original amount of the liability. The Internal Revenue Manual 
35 provides guidelines for revenue officers to 
determine whether an offer-in-compromise is adequate. An offer 
is adequate if it reasonably reflects collection potential. 
Although the revenue officer is instructed to consider the 
taxpayer's assets and future and present income, the IRM 
advises that rejection of an offer solely based on narrow asset 
and income evaluations should be avoided.
---------------------------------------------------------------------------
    \35\ IRM 57(10)(10).1
---------------------------------------------------------------------------
    Pursuant to the IRM, collection normally is withheld during 
the period an offer-in-compromise is pending, unless it is 
determined that the offer is a delaying tactic and collection 
is in jeopardy.

                           Reasons for Change

    The Committee believes that the ability to compromise tax 
liability and to make payments of tax liability by installment 
enhances taxpayer compliance. In addition, the Committee 
believes that the IRS should be flexible in finding ways to 
work with taxpayers who are sincerely trying to meet their 
obligations and remain in the tax system. Accordingly, the 
Committee believes that the IRS should make it easier for 
taxpayers to enter into offer-in-compromise agreements, and 
should do more to educate the taxpaying public about the 
availability of such agreements.

                        Explanation of Provision

Rights of taxpayers entering into offers-in-compromise

    The provision requires the IRS to develop and publish 
schedules of national and local allowances that will provide 
taxpayers entering into an offer-in-compromise with adequate 
means to provide for basic living expenses. The IRS also will 
be required to consider the facts and circumstances of a 
particular taxpayer's case in determining whether the national 
and local schedules are adequate for that particular taxpayer. 
If the facts indicate that use of scheduled allowances would be 
inadequate under the circumstances, the taxpayer would not be 
limited by the national or local allowances.
    The provision prohibits the IRS from rejecting an offer-in-
compromise from a low-income taxpayer solely on the basis of 
the amount of the offer.36 The provision provides 
that, in the case of an offer-in-compromise submitted solely on 
the basis of doubt as to liability, the IRS may not reject the 
offer merely because the IRS cannot locate the taxpayer's file. 
The provision prohibits the IRS from requesting a financial 
statement if the taxpayer makes an offer-in-compromise based 
solely on doubt as to liability.
---------------------------------------------------------------------------
    \36\ This provision does not affect the ability of the IRS to 
reject an offer in compromise made by a taxpayer (other than a low-
income taxpayer) because the amount offered is too low.
---------------------------------------------------------------------------

Suspend collection by levy while offer-in-compromise is pending

    The provision prohibits the IRS from collecting a tax 
liability by levy (1) during any period that a taxpayer's 
offer-in-compromise for that liability is being processed, (2) 
during the 30 days following rejection of an offer, and (3) 
during any period in which an appeal of the rejection of an 
offer is being considered. Taxpayers whose offers are rejected 
and who made good faith revisions of their offers and 
resubmitted them within 30 days of the rejection or return 
would be eligible for a continuous period of relief from 
collection by levy. This prohibition on collection by levy 
would not apply if the IRS determines that collection is in 
jeopardy or that the offer was submitted solely to delay 
collection. The provision provides that the statute of 
limitations on collection would be tolled for the period during 
which collection by levy is barred.

Procedures for reviews of rejections of offers-in-compromise and 
        installment agreements

    The provision requires that the IRS implement procedures to 
review all proposed IRS rejections of taxpayer offers-in-
compromise and requests for installment agreements prior to the 
rejection being communicated to the taxpayer. The provision 
requires the IRS to allow the taxpayer to appeal any rejection 
of such offer or agreement to the IRS Office of Appeals. The 
IRS must notify taxpayers of their right to have an appeals 
officer review a rejected offer-in-compromise on the 
application form for an offer-in-compromise.

Publication of taxpayer's rights with respect to offers-in-compromise

    The provision requires the IRS to publish guidance on the 
rights and obligations of taxpayers and the IRS relating to 
offers in compromise, including a compliant spouse's right to 
apply to reinstate an agreement that would otherwise be revoked 
due to the nonfiling or nonpayment of the other spouse, 
providing all payments required under the compromise agreement 
are current.

Liberal acceptance policy

    It is anticipated that the IRS will adopt a liberal 
acceptance policy for offers-in-compromise to provide an 
incentive for taxpayers to continue to file tax returns and 
continue to pay their taxes.

                             Effective Date

    The provision is generally effective for offers-in-
compromise submitted after the date of enactment. The provision 
suspending levy is effective with respect to offers-in-
compromise pending on or made after the 60th day after the date 
of enactment.

iii. Notice of deficiency to specify deadlines for filing Tax Court 
        petition (sec. 3463 of the bill and sec. 6213(a) of the Code)

                              Present Law

    Taxpayers must file a petition with the Tax Court within 90 
days after the deficiency notice is mailed (150 days if the 
person is outside the United States) (sec. 6213). If the 
petition is not filed within that time period, the Tax Court 
does not have jurisdiction to consider the petition.

                           Reasons for Change

    The Committee believes that taxpayers should receive 
assistance in determining the time period within which they 
must file a petition in the Tax Court and that taxpayers should 
be able to rely on the computation of that period by the IRS.

                        Explanation of Provision

    The provision requires the IRS to include on each 
deficiency notice the date determined by the IRS as the last 
day on which the taxpayer may file a petition with the Tax 
Court. The provision provides that a petition filed with the 
Tax Court by this date is treated as timely filed.

                             Effective Date

    The provision applies to notices mailed after December 31, 
1998.

iv. Refund or credit of overpayments before final determination (sec. 
        3464 of the bill and sec. 6213(a) of the Code)

                              Present Law

    Generally, the IRS may not take action to collect a 
deficiency during the period a taxpayer may petition the Tax 
Court, or if the taxpayer petitions the Tax Court, until the 
decision of the Tax Court becomes final. Actions to collect a 
deficiency attempted during this period may be enjoined, but 
there is no authority for ordering the refund of any amount 
collected by the IRS during the prohibited period.
    If a taxpayer contests a deficiency in the Tax Court, no 
credit or refund of income tax for the contested taxable year 
generally may be made, except in accordance with a decision of 
the Tax Court that has become final. Where the Tax Court 
determines that an overpayment has been made and a refund is 
due the taxpayer, and a party appeals a portion of the decision of the 
Tax Court, no provision exists for the refund of any portion of any 
overpayment that is not contested in the appeal.

                           Reasons for Change

    The Committee believes that the Secretary should be allowed 
to refund the uncontested portion of an overpayment of taxes, 
without regard to whether other portions of the overpayment are 
contested, as well as amounts that were collected during a 
period in which collection is prohibited.

                        Explanation of Provision

    The provision provides that a proper court (including the 
Tax Court) may order a refund of any amount that was collected 
within the period during which the Secretary is prohibited from 
collecting the deficiency by levy or other proceeding.
    The provision also allows the refund of that portion of any 
overpayment determined by the Tax Court to the extent the 
overpayment is not contested on appeal.

                             Effective Date

    The provision is effective on the date of enactment.

v. IRS procedures relating to appeal of examinations and collections 
        (sec. 3465 of the bill and new sec. 7123 of the Code)

                              Present Law

    IRS Appeals operates through regional Appeals offices which 
are independent of the local District Director and Regional 
Commissioner's offices. The regional Directors of Appeals 
report to the National Director of Appeals of the IRS, who 
reports directly to the Commissioner and Deputy Commissioner. 
In general, IRS Appeals offices have jurisdiction over both 
pre-assessment and post-assessment cases. The taxpayer 
generally has an opportunity to seek Appeals jurisdiction after 
failing to reach agreement with the Examination function and 
before filing a petition in Tax Court, after filing a petition 
in Tax Court (but before litigation), after assessment of 
certain penalties, after a claim for refund has been rejected 
by the District Director's office, and after a proposed 
rejection of an offer-in-compromise in a collection case 
(Treas. Reg. sec. 601.106(a)(1)).
    In certain cases under Coordinated Examination Program 
procedures, the taxpayer has an opportunity to seek early 
Appeals jurisdiction over some issues while an examination is 
still pending on other issues (Rev. Proc. 96-9, 1996-1 C.B. 
575). The early referral procedures also apply to employment 
tax issues on a limited basis (Announcement 97-52).
    A mediation or alternative dispute resolution (ADR) process 
is also available in certain cases. ADR is used at the end of 
the administrative process as a final attempt to resolve a 
dispute before litigation. ADR is currently only available for 
cases with more than $10 million in dispute. ADR processes are 
also available in bankruptcy cases and cases involving a 
competent authority determination.
    In April 1996, the IRS implemented a Collections Appeals 
Program within the Appeals function, which allows taxpayers to 
appeal lien, levy, or seizure actions proposed by the IRS. In 
January 1997, appeals for installment agreements proposed for 
termination were added to the program.
    The local IRS Offices of Appeals are generally located in 
the same area as the District Director's Offices. The IRS has 
videoconferencing capability. The IRS does not have any program 
to provide for Appeals conferences by videoconferencing 
techniques.

                           Reasons for Change

    The Committee believes that the IRS should be statutorily 
bound to follow the procedures that the IRS has developed to 
facilitate settlement in the IRS Office of Appeals. The 
Committee also believes that mediation, binding arbitration, 
early referral to Appeals, and other procedures would foster 
more timely resolution of taxpayers' problems with the IRS.
    In addition, the Committee believes that the ADR process is 
valuable to the IRS and taxpayers and should be extended to all 
taxpayers.
    The Committee believes that all taxpayers should enjoy 
convenient access to Appeals, regardless of their locality.

                        Explanation of Provision

    The provision codifies existing IRS procedures with respect 
to early referrals to Appeals and the Collections Appeals 
Process. The provision also codifies the existing ADR 
procedures, as modified by eliminating the dollar threshold.
    In addition, the IRS is required to establish a pilot 
program of binding arbitration for disputes of all sizes. Under 
the pilot program, binding arbitration must be agreed to by 
both the taxpayer and the IRS.
    The provision requires the IRS to make Appeals officers 
available on a regular basis in each State, and consider 
videoconferencing of Appeals conferences for taxpayers seeking 
appeals in rural or remote areas.

                             Effective Date

    The provision is effective as of the date of enactment.

vi. Application of certain fair debt collection practices (sec. 3466 of 
        the bill and new sec. 6304 of the Code)

                              Present Law

    The Fair Debt Collection Practices Act provides a number of 
rules relating to debt collection practices. Among these are 
restrictions on communication with the consumer, such as a 
general prohibition on telephone calls outside the hours of 
8:00 a.m. to 9:00 p.m. local time, and prohibitions on 
harassing or abusing the consumer. In general, these provisions 
do not apply to the Federal Government.

                           Reasons for Change

    The Committee believes that the IRS should be at least as 
considerate to taxpayers as private creditors are required to 
be with their customers. Accordingly, the Committee believes 
that it is appropriate to require the IRS to comply with 
applicable portions of the Fair Debt Collection Practices Act, 
so that both taxpayers and the IRS are fully aware of these 
requirements.

                        Explanation of Provision

    The provision makes the restrictions relating to 
communication with the taxpayer/debtor and the prohibitions on 
harassing or abusing the debtor applicable to the IRS by 
incorporating these provisions into the Internal Revenue Code. 
The restrictions relating to communication with the taxpayer/
debtor are not intended to hinder the ability of the IRS to 
respond to taxpayer inquiries (such as answering telephone 
calls from taxpayers).

                             Effective Date

    The provision is effective on the date of enactment.

vii. Guaranteed availability of installment agreements (sec. 3467 of 
        the bill and sec. 6159 of the Code)

                              Present Law

    Section 6159 of the Code authorizes the IRS to enter into 
written agreements with any taxpayer under which the taxpayer 
is allowed to pay taxes owed, as well as interest and 
penalties, in installment payments if the IRS determines that 
doing so will facilitate collection of the amounts owed. An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. However, it does provide for a 
longer period during which payments may be made during which 
other IRS enforcement actions (such as levies or seizures) are 
held in abeyance. Many taxpayers can request an installment 
agreement by filing form 9465. This form is relatively simple 
and does not require the submission of detailed financial 
statements. The IRS in most instances readily approves these 
requests if the amounts involved are not large (in general, 
below $10,000) and if the taxpayer has filed tax returns on 
time in the past. Some taxpayers are required to submit 
background information to the IRS substantiating their 
application. If the request for an installment agreement is 
approved by the IRS, a user fee of $43 is charged. This user 
fee is in addition to the tax, interest, and penalties that are 
owed.

                           Reasons for Change

    The Committee believes that the ability to make payments of 
tax liability by installment enhances taxpayer compliance. In 
addition, the Committee believes that the IRS should be 
flexible in finding ways to work with taxpayers who are 
sincerely trying to meet their obligations. Accordingly, the 
Committee believes that the IRS should make it easier for 
taxpayers to enter into installment agreements.

                        Explanation of Provision

    The provision requires the Secretary to enter an 
installment agreement, at the taxpayer's option, if:
          (1) the liability is $10,000, or less (excluding 
        penalties and interest);
          (2) within the previous 5 years, the taxpayer has not 
        failed to file or to pay, nor entered an installment 
        agreement under this provision;
          (3) if requested by the Secretary, the taxpayer 
        submits financial statements, and the Secretary 
        determines that the taxpayer is unable to pay the tax 
        due in full;
          (4) the installment agreement provides for full 
        payment of the liability within 3 years; and
          (5) the taxpayer agrees to continue to comply with 
        the tax laws and the terms of the agreement for the 
        period (up to 3 years) that the agreement is in place.

                             Effective Date

    The provision is effective on the date of enactment.

                      F. Disclosures to Taxpayers

1. Explanation of joint and several liability (sec. 3501 of the bill)

                              Present Law

    In general, spouses who file a joint tax return are each 
fully responsible for the accuracy of the tax return and for 
the full liability. Spouses who wish to avoid such joint and 
several liability may file as married persons filing 
separately. Special rules apply in the case of innocent spouses 
pursuant to section 6013(e).

                           Reasons for Change

    The Committee believes that married taxpayers need to 
clearly understand the legal implications of signing a joint 
return and that it is appropriate for the IRS to provide the 
information necessary for that understanding.

                        Explanation of Provision

    The provision requires that, no later than 180 days after 
the date of enactment, the IRS must establish procedures 
clearly to alert married taxpayers of their joint and several 
liability on all appropriate tax publications and instructions 
and of the availability of electing separate liability. It is 
anticipated that the IRS will make an appropriate cross-
reference to these statements near the signature line on 
appropriate tax forms.

                             Effective Date

    The provision requires that the procedures be established 
as soon as practicable, but no later than 180 days after the 
date of enactment.

2. Explanation of taxpayers' rights in interviews with the IRS (sec. 
        3502 of the bill)

                              Present Law

    Prior to or at initial in-person audit interviews, the IRS 
must explain to taxpayers the audit process and taxpayers' 
rights under that process (sec. 7521). In addition, prior to or 
at initial in-person collection interviews, the IRS must 
explain the collection process and taxpayers' rights under that 
process. If a taxpayer clearly states during an interview with 
the IRS that the taxpayer wishes to consult with the taxpayer's 
representative, the interview must be suspended to afford the 
taxpayer a reasonable opportunity to consult with the 
representative.

                           Reasons for Change

    The Committee believes that taxpayers should be more fully 
informed of their rights to representation in dealings with the 
IRS, and that those rights should be respected.

                        Explanation of Provision

    The provision requires that the IRS rewrite Publication 1 
(``Your Rights as a Taxpayer'') to more clearly inform 
taxpayers of their rights (1) to be represented by a 
representative and (2) if the taxpayer is so represented, that 
the interview may not proceed without the presence of the 
representative unless the taxpayer consents.
    In addition, the provision requires the Treasury Inspector 
General for Tax Administration to report annually as to whether 
IRS employees are directly contacting taxpayers who have 
indicated that they prefer their representatives be contacted.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment. The annual reports would 
begin in 1999.

3. Disclosure of criteria for examination selection (sec. 3503 of the 
        bill)

                              Present Law

    The IRS examines Federal tax returns to determine the 
correct liability of taxpayers. The IRS selects returns to be 
audited in a number of ways, such as through a computerized 
classification system (the discriminant function (``DIF'') 
system).

                           Reasons for Change

    The Committee believes it is important that taxpayers 
understand the reasons they may be selected for examination.

                        Explanation of Provision

    The provision requires that IRS add to Publication 1 
(``Your Rights as a Taxpayer'') a statement which sets forth in 
simple and nontechnical terms the criteria and procedures for 
selecting taxpayers for examination. The statement must not 
include any information the disclosure of which would be 
detrimental to law enforcement. The statement must specify the 
general procedures used by the IRS, including whether taxpayers 
are selected for examination on the basis of information in the 
media or from informants.

                             Effective Date

    The addition to Publication 1 must be made not later than 
180 days after the date of enactment.

4. Explanations of appeals and collection process (sec. 3504 of the 
        bill)

                              Present Law

    There is no statutory requirement that specific notices be 
given to taxpayers along with the first letter of proposed 
deficiency that allows the taxpayer an opportunity for 
administrative review in the IRS Office of Appeals.

                           Reasons for Change

    The Committee believes it is important that taxpayers 
understand they have a right to have any assessment reviewed by 
the IRS Office of Appeals, as well as be informed of the steps 
they must take to obtain that review.

                        Explanation of Provision

    The provision requires that, no later than 180 days after 
the date of enactment, a description of the entire process from 
examination through collections, including the assistance 
available to taxpayers from the Taxpayer Advocate at various 
points in the process, be provided with the first letter of 
proposed deficiency that allows the taxpayer an opportunity for 
administrative review in the IRS Office of Appeals.

                             Effective Date

    The provision requires that the explanation be included as 
soon as practicable, but no later than 180 days after the date 
of enactment.

5. Explanation of reason for refund denial (sec. 3505 of the bill and 
        new sec. 6402(j) of the Code)

                              Present Law

    The Examination Division of the IRS examines claims for 
refund submitted by taxpayers. The Internal Revenue Manual 
requires examination or other audit action on refund claims 
within 30 days after receipt of the claims. The refund claim is 
preliminarily examined to determine if it should be disallowed 
because it (1) was untimely filed, (2) was based solely on 
alleged unconstitutionality of the Revenue Acts, (3) was 
already waived by the taxpayer as consideration for a 
settlement, (4) covers a taxable year and issues which were the 
subject of a final closing agreement or an offer in compromise, 
or (5) relates to a return closed on the basis of a final order 
of the Tax Court. In those cases, the taxpayer will receive a 
form from the IRS stating that the claim for refund cannot be 
considered. Other cases will be examined as quickly as possible 
and the disposition of the case, including the reasons for the 
disallowance or partial disallowance of the refund claim, must 
be stated in the portion of the revenue agent's report that is 
sent to the taxpayer.

                           Reasons for Change

    The Committee believes that taxpayers are entitled to an 
explanation of the reason for the disallowance or partial 
disallowance of a refund claim so that the taxpayer may 
appropriately respond to the IRS.

                        Explanation of Provision

    The provision requires the IRS to notify the taxpayer of 
the specific reasons for the disallowance (or partial 
disallowance) of the refund claim.

                             Effective Date

    The provision is effective 180 days after the date of 
enactment.

6. Statements to taxpayers with installment agreements (sec. 3506 of 
        the bill)

                              Present Law

    A taxpayer entering into an installment agreement to pay 
tax liabilities due to the IRS must complete a Form 433-D which 
sets forth the installment amounts to be paid monthly and the 
total amount of tax due. The IRS does not provide the taxpayer 
with an annual statement reflecting the amounts paid and the 
amount due remaining.

                           Reasons for Change

    The Committee believes that taxpayers who enter into an 
installment agreement should be kept informed of amounts 
applied towards the outstanding tax liability and amounts 
remaining due.

                        Explanation of Provision

    The provision requires the IRS to send every taxpayer in an 
installment agreement an annual statement of the initial 
balance owed, the payments made during the year, and the 
remaining balance.

                             Effective Date

    The provision is effective no later than 180 days after the 
date of an enactment.

7. Notification of change in tax matters partner (sec. 3507 of the bill 
        and sec. 6231(a)(7) of the Code)

                              Present Law

    In general, the tax treatment of items of partnership 
income, loss, deductions and credits are determined at the 
partnership level in a unified partnership proceeding rather 
than in separate proceedings with each partner. In providing 
notice to taxpayers with respect to partnership proceedings, 
the IRS relies on information furnished by a party designated 
as the tax matters partner (TMP) of the partnership. The TMP is 
required to keep each partner informed of all administrative 
and judicial proceedings with respect to the partnership (sec. 
6233(g)). Under certain circumstances, the IRS may require the 
resignation of the incumbent TMP and designate another partner 
as the TMP of a partnership (sec. 6231(a)(7)).

                           Reasons for Change

    The Committee is concerned that, in cases where the IRS 
designates the TMP, that the other partners may be unaware of 
such designation.

                        Explanation of Provision

    The provision requires the IRS to notify all partners of 
any resignation of the tax matters partner that is required by 
the IRS, and to notify the partners of any successor tax 
matters partner.

                             Effective Date

    The provision applies to selections of tax matters partners 
made by the Secretary after the date of enactment.

G. Low-Income Taxpayer Clinics (sec. 3601 of the bill and new sec. 7526 
                              of the Code)

                              Present Law

    There are no provisions in present law providing for 
assistance to clinics that assist low-income taxpayers.

                           Reasons for Change

    The Committee believes that the provision of tax services 
by accredited nominal fee clinics to low-income individuals and 
those for whom English is a second language will improve 
compliance with the Federal tax laws and should be encouraged.

                        Explanation of Provision

    The Secretary is authorized to provide up to $3,000,000 per 
year in matching grants to certain low-income taxpayer clinics. 
No clinic could receive more than $100,000 per year.
    Eligible clinics would be those that charge no more than a 
nominal fee to either represent low-income taxpayers in 
controversies with the IRS or provide tax information to 
individuals for whom English is a second language.
    A ``clinic'' would include (1) a clinical program at an 
accredited law school, an accredited business school, or an 
accredited accounting school, in which students represent low-
income taxpayers, or (2) an organization exempt from tax under 
Code section 501(c) which either represents low-income 
taxpayers or provides referral to qualified representatives.

                             Effective Date

    The provision is effective on the date of enactment.

                          H. Other Provisions

1. Cataloging complaints (sec. 3701 of the bill)

                              Present Law

    The IRS is required to make an annual report to the 
Congress, beginning in 1997, on all categories of instances 
involving allegations of misconduct by IRS employees, arising 
either from internally identified cases or from taxpayer or 
third-party initiated complaints. The report must identify the 
nature of the misconduct or complaint, the number of instances 
received by category, and the disposition of the complaints.

                           Reasons for Change

    The Committee believes that all allegations of misconduct 
by IRS employees must be carefully investigated. The Committee 
also believes that the annual report to Congress will help 
develop a public perception that the IRS takes such allegations 
of misconduct seriously. The Committee is concerned that, in 
the absence of records detailing taxpayer complaints of 
misconduct on an individual employee basis, the IRS will not be 
able to adequately investigate such allegations or properly 
prepare the required report.

                        Explanation of Provision

    The provision requires that, in collecting data for this 
report, records of taxpayer complaints of misconduct by IRS 
employees must be maintained on an individual employee basis. 
These individual records are not to be listed in the report.

                             Effective Date

    The requirement is effective on the date of enactment.

2. Archive of records of Internal Revenue Service (sec. 3702 of the 
        bill and sec. 6103 of the Code)

                              Present Law

    The IRS is obligated to transfer agency records to the 
National Archives and Records Administration (``NARA'') for 
retention or disposal. The IRS is also obligated to protect 
confidential taxpayer records from disclosure. These two 
obligations have created conflict between NARA and the IRS. 
Under present law, the IRS determines whether records contain 
taxpayer information. Once the IRS has made that determination, 
NARA is not permitted to examine those records. NARA has 
expressed concern that the IRS may be using the disclosure 
prohibition to improperly conceal agency records with 
historical significance.

IRS obligation to archive records

    The IRS, like all other Federal agencies, must create, 
maintain, and preserve agency records in accordance with 
section 3101 of title 44 of the United States Code. NARA is the 
Government agency responsible for overseeing the management of 
the records of the Federal government.\37\ Federal agencies are 
required to deposit significant and historical records with 
NARA.\38\ The head of each Federal agency must also establish 
safeguards against the removal or loss of records.\39\
---------------------------------------------------------------------------
    \37\ 44 U.S.C. sec. 2904.
    \38\ 5 U.S.C. sec. 552a(b)(6).
    \39\ 44 U.S.C. sec. 3105.
---------------------------------------------------------------------------

Authority of NARA

    NARA is authorized, under the Federal Records Act, to 
establish standards for the selective retention of records of 
continuing value.\40\ NARA has the statutory authority to 
inspect records management practices of Federal agencies and to 
make recommendations for improvement.\41\ The head of each 
Federal agency must submit to NARA a list of records to be 
destroyed and a schedule for such destruction.\42\ NARA 
examines the list to determine if any of the records on the 
list have sufficient administrative, legal research, or other 
value to warrant their continued preservation. In many cases, 
the description of the record on the list is sufficient for 
NARA to make the determination. For example, NARA does not need 
to inspect Presidential tax returns to determine that they have 
historical value and should be retained. In some cases, NARA 
may find it helpful to examine a particular record. NARA has 
general authority to inspect records solely for the purpose of 
making recommendations for the improvement of records 
management practices.\43\ However, tax returns and return 
information can only be disclosed under the authority provided 
in section 6103 of the Internal Revenue Code. There is no 
exception to the disclosure prohibition for records management 
inspection by NARA.\44\
---------------------------------------------------------------------------
    \40\ 44 U.S.C. sec. 2905.
    \41\ 44 U.S.C. sec. 2904(c)(7).
    \42\ 44 U.S.C. sec. 3303.
    \43\ 44 U.S.C. sec. 2906.
    \44\ American Friends Service Committee v. Webster, 720 F.2d 29 
(D.C. Cir. 1983).
---------------------------------------------------------------------------
    In connection with its evaluation of the records management 
system of the IRS, NARA noted several instances where the 
disclosure prohibitions of Code section 6103 complicated their 
review of many IRS records.
    NARA is also responsible for the custody, use and 
withdrawal of records transferred to it.\45\ Statutory 
provisions that restrict public access to the records in the 
hands of the agency from which the records were transferred 
also apply to NARA. Thus, if a confidential record, such as a 
Presidential tax return, is transferred to NARA for archival 
storage, NARA is not permitted to disclose it. In general, the 
application of such restrictions to records in the hands of 
NARA expire after the records have been in existence for 30 
years.\46\ The issue of whether the specific disclosure 
prohibition of section 6103 takes precedence over the general 
30-year expiration of restrictions generally applicable to 
records in the hands of NARA has not been addressed by a court, 
but an informal advisory opinion from the Office of Legal 
Counsel of the Attorney General concluded that the 30-year 
expiration provision would not reach records subject to section 
6103.\47\
---------------------------------------------------------------------------
    \45\ 44 U.S.C. sec. 2108.
    \46\ 44 U.S.C. sec. 2108.
    \47\ Department of Justice, Office of Legal Counsel, Memorandum to 
Richard K. Willard, Assistant Attorney General (Civil Division) 
(February 27, 1986).
---------------------------------------------------------------------------

Confidentiality requirements

    The IRS must preserve the confidentiality of taxpayer 
information contained in Federal income tax returns. Such 
information may not be disclosed except as authorized under 
Code section 6103. Section 6103 was substantially revised in 
1976 to address Congress'' concern that tax information was 
being used by Federal agencies in pursuit of objectives 
unrelated to administration and enforcement of the tax laws. 
Congress believed that the wide-spread use of tax information 
by agencies other than the IRS could adversely affect the 
willingness of taxpayers to comply voluntarily with the tax 
laws and could undermine the country's self- assessment tax 
system.\48\ Section 6103 does not authorize the disclosure of 
confidential return information to NARA.
---------------------------------------------------------------------------
    \48\ S. Rept. 94-938, p. 317 (1976).
---------------------------------------------------------------------------
    Section 6103 restricts the disclosure of returns and return 
information only. Return means any tax or information return, 
declaration of estimated tax, or claim for refund, including 
schedules and attachments thereto, filed with the IRS. Return 
information includes the taxpayer's name; nature and source or 
amount of income; and whether the taxpayer's return is under 
investigation. Section 6103(b)(2) provides that ``nothing in 
any other provision of law shall be construed to require the 
disclosure of standards used or to be used for the selection of 
returns for examination, or data used or to be used for 
determining such standards, if the Secretary determines that 
such disclosure will seriously impair assessment, collection, 
or enforcement under the internal revenue laws.'' Section 6103 
does not restrict the disclosure of other records required to 
be maintained by the IRS, such as records documenting agency 
policy, programs and activities, and agency histories. Such 
records are required to be made available to the public under 
the Freedom of Information Act (``FOIA'').\49\
---------------------------------------------------------------------------
    \49\ FOIA does not require disclosure of records or information 
that would frustrate law enforcement efforts. 5 U.S.C. sec. 552(b)(7).
---------------------------------------------------------------------------
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431).

                           Reasons for Change

    The Committee believes that it is appropriate to permit 
disclosure to NARA for purposes of scheduling records for 
destruction or retention, while at the same time preserving the 
confidentiality of taxpayer information in those documents.

                        Explanation of Provision

    The provision provides an exception to the disclosure rules 
to require IRS to disclose IRS records to officers or employees 
of NARA, upon written request from the U.S. Archivist, for 
purposes of the appraisal of such records for destruction or 
retention. The present-law prohibitions on and penalties for 
disclosure of tax information would generally apply to NARA.

                             Effective Date

    The provision is effective for requests made by the 
Archivist after the date of enactment.

3. Payment of taxes (sec. 3703 of the bill)

                              Present Law

    The Code provides that it is lawful for the Secretary to 
accept checks or money orders as payment for taxes, to the 
extent and under the conditions provided in regulations 
prescribed by the Secretary (sec. 6311). Those regulations 
state that checks or money orders should be made payable to the 
Internal Revenue Service.

                           Reasons for Change

    The Committee believes that it more appropriate that checks 
be made payable to the United States Treasury.

                        Explanation of Provision

    The provision requires the Secretary or his delegate to 
establish such rules, regulations, and procedures as are 
necessary to allow payment of taxes by check or money order to 
be made payable to the United States Treasury.

                             Effective Date

    The provision is effective on the date of enactment.

4. Clarification of authority of Secretary relating to the making of 
        elections (sec. 3704 of the bill and sec. 7805 of the Code)

                              Present Law

    Except as otherwise provided, elections provided by the 
Code are to be made in such manner as the Secretary shall by 
regulations or forms prescribe.

                           Reasons for Change

    The Committee wishes to eliminate any confusion over the 
type of guidance in which the Secretary may prescribe the 
manner of making any election.

                        Explanation of Provision

    The provision clarifies that, except as otherwise provided, 
the Secretary may prescribe the manner of making of any 
election by any reasonable means.

                             Effective Date

    The provision is effective as of the date of enactment.

5. IRS employee contacts (sec. 3705 of the bill)

                              Present Law

    The IRS sends many different notices to taxpayers. Some 
(but not all) of these notices contain a name and telephone 
number of an IRS employee who the taxpayer may call if the 
taxpayer has any questions.

                           Reasons for Change

    The Committee believes that it is important that taxpayers 
receive prompt answers to their questions about their tax 
liability. Many taxpayers report frustration because they 
cannot determine the appropriate IRS employee to contact for 
information.

                        Explanation of Provision

    The provision requires that all IRS notices and 
correspondence contain a name and telephone number of an IRS 
employee whom the taxpayer may call. In addition, to the extent 
practicable and where it is advantageous to the taxpayer, the 
IRS should assign one employee to handle a matter with respect 
to a taxpayer until that matter is resolved.

                             Effective Date

    The provision is effective 60 days after the date of 
enactment.

6. Use of pseudonyms by IRS employees (sec. 3706 of the bill)

                              Present Law

    The Federal Service Impasses Panel has ruled that if an 
employee believes that use of the employee's last name only 
will identify the employee due to the unique nature of the 
employee's last name, and/or nature of the office locale, then 
the employee may ``register'' a pseudonym with the employee's 
supervisor.

                           Reasons for Change

    The Committee is concerned that IRS employees may use 
pseudonyms in inappropriate circumstances.

                        Explanation of Provision

    The provision provides that an IRS employee may use a 
pseudonym only if (1) adequate justification, such as 
protecting personal safety, for using the pseudonym was 
provided by the employee as part of the employee's request and 
(2) management has approved the request to use the pseudonym 
prior to its use.

                             Effective Date

    The provision is effective with respect to requests made 
after the date of enactment.

7. Conferences of right in the National Office of IRS (sec. 3707 of the 
        bill)

                              Present Law

    In any matter involving the submission of a substantive 
legal matter involving a specific taxpayer to the National 
Office of the IRS, the taxpayer is entitled to at least one 
conference (the ``conference of right'') at which it can 
explain its position.

                           Reasons for Change

    The Committee is concerned that the presence of the IRS 
employee with whom the taxpayer has previously dealt may hinder 
efficient resolution of the issue in the National Office.

                        Explanation of Provision

    The provision gives a taxpayer the right to limit 
participation in its conference of right to IRS national office 
personnel.

                             Effective Date

    The provision is effective with respect to requests made 
after the date of enactment.

8. Illegal tax protester designations (sec. 3708 of the bill)

                              Present Law

    The IRS designates individuals who meet certain criteria as 
``illegal tax protesters'' in the IRS Master File.

                           Reasons for Change

    The Committee is concerned that taxpayers may be 
stigmatized by a designation as an ``illegal tax protester.''

                        Explanation of Provision

    The provision prohibits the use by the IRS of the ``illegal 
tax protester'' designation. Any extant designation in the 
individual master file (the main computer file) must be removed 
and any other extant designation (such as on paper records that 
have been archived) must be disregarded. The IRS is, however, 
permitted to designate appropriate taxpayers as nonfilers. The 
IRS must remove the nonfiler designation once the taxpayer has 
filed valid tax returns for two consecutive years and paid all 
taxes shown on those returns.

                             Effective Date

    The provision is effective on the date of enactment.

9. Provision of confidential information to Congress by whistleblowers 
        (sec. 3709 of the bill and sec. 6103(f) of the Code)

                              Present Law

    Tax return information generally may not be disclosed, 
except as specifically provided by statute. The Secretary of 
the Treasury may furnish tax return information to the 
Committee on Finance, the Committee on Ways and Means and the 
Joint Committee on Taxation upon a written request from the 
chairmen of such committees. If the information can be 
associated with, or otherwise identify, directly or indirectly, 
a particular taxpayer, the information may by furnished to the 
committee only while sitting in closed executive session unless 
such taxpayer otherwise consents in writing to such disclosure.

                           Reasons for Change

    The Committee believes that it is appropriate to have the 
opportunity to receive tax return information directly from 
whistleblowers.

                        Explanation of Provision

    The provision allows any person who is (or was) authorized 
to receive confidential tax return information to disclose tax 
return information directly to the Chairman of the Senate 
Committee on Finance, the Chairman of the House Committee on 
Ways and Means or the Chief of Staff of the Joint Committee on 
Taxation provided: (1) such disclosure is for the purpose of 
disclosing an incident of IRS employee or taxpayer abuse, and 
(2) the Chairman of the committee to which the information will 
be disclosed gives prior approval for the disclosure in 
writing.

                             Effective Date

    The provision is effective on the date of enactment.

10. Listing of local IRS telephone numbers and addresses (sec. 3710 of 
        the bill)

                              Present Law

    The IRS is not statutorily required to publish the local 
telephone number or address of its local offices, and generally 
does not do so.

                           Reasons for Change

    The Committee believes that every taxpayer should have 
convenient access to the IRS.

                        Explanation of Provision

    The provision requires the IRS, as soon as is practicable 
but no later than 180 days after the date of enactment, to 
publish addresses and local telephone numbers of local IRS 
offices in appropriate local telephone directories.

                             Effective Date

    The provision is effective on the date of enactment.

11. Identification of return preparers (sec. 3711 of the bill and sec. 
        6109(a) of the Code)

                              Present Law

    Any return or claim for refund prepared by an income tax 
return preparer must bear the social security number of the 
return preparer, if such preparer is an individual (sec. 
6109(a)).

                           Reasons for Change

    The Committee is concerned that inappropriate use might be 
made of a preparer's social security number.

                        Explanation of Provision

    The provision authorizes the IRS to approve alternatives to 
Social Security numbers to identify tax return preparers.

                             Effective Date

    The provision is effective on the date of enactment.

12. Offset of past-due, legally enforceable State income tax 
        obligations against overpayments (sec. 3712 of the bill and new 
        sec. 6402(e) of the Code)

                              Present Law

    Overpayments of Federal tax may be used to pay past-due 
child support and debts owed to Federal agencies (sec. 6402), 
without the consent of the taxpayer. Such amount for past-due 
child support may be paid directly to a State. Present law 
provides that offsets are made in the following priority: (1) 
child support; and (2) other Federal debts, in the order in 
which such debts accrued.

                           Reasons for Change

    The Committee believes that it is appropriate to permit 
States to collect past-due, legally enforceable income tax 
debts that have been reduced to judgment from Federal tax 
overpayments.

                        Explanation of Provision

    The provision permits States to participate in the IRS 
refund offset program for past-due, legally enforceable State 
income tax debts that have been reduced to judgment, providing 
the person making the Federal tax overpayment has shown on the 
return establishing the overpayment an address that is within 
the State seeking the tax offset. The offset applies after the 
offsets provided in present law for internal revenue tax 
liabilities, past-due support, and past-due, legally 
enforceable obligations owed a Federal agency. The offset 
occurs before the designation of any refund toward future 
Federal tax liability.

                             Effective Date

    The provision applies to Federal income tax refunds payable 
after December 31, 1998.

13. Moratorium regarding regulations under Notice 98-11 (sec. 
        3713(a)(1) of the bill)

                              Present Law

Overview

    U.S. citizens and residents and U.S. corporations are taxed 
currently by the United States on their worldwide income, 
subject to a credit against U.S. tax on foreign-source income 
for foreign income taxes paid with respect to such income. A 
foreign corporation generally is not subject to U.S. tax on its 
income from operations outside the United States.
    Income of a foreign corporation generally is taxed by the 
United States when it is repatriated to the United States 
through payment to the corporation's U.S. shareholders, subject 
to a foreign tax credit. However, various regimes imposing 
current U.S. tax on income earned through a foreign corporation 
are reflected in the Code. One anti-deferral regime set forth 
in the Code is the controlled foreign corporation rules of 
subpart F (secs. 951-964).
    A controlled foreign corporation (``CFC'') is defined 
generally as any foreign corporation if U.S. persons own more 
than 50 percent of the corporation's stock (measured by vote or 
value), taking into account only those U.S. persons that own at 
least 10 percent of the stock (measured by vote only) (sec. 
957). Stock ownership includes not only stock owned directly, 
but also stock owned indirectly or constructively (sec. 958).
    The United States generally taxes the U.S. 10-percent 
shareholders of a CFC currently on their pro rata shares of 
certain income of the CFC (so-called ``subpart F income'') 
(sec. 951). In effect, the Code treats those shareholders as 
having received a current distribution out of the CFC's subpart 
F income. Such shareholders also are subject to current U.S. 
tax on their pro rata shares of the CFC's earnings invested in 
U.S. property (sec. 951). The foreign tax credit may reduce the 
U.S. tax on these amounts.
    Subpart F income includes, among other items, foreign base 
company income (sec. 952). Foreign base company income, in 
turn, includes foreign personal holding company income, foreign 
base company sales income, foreign base company services 
income, foreign base company shipping income and foreign base 
company oil related income (sec. 954). Foreign personal holding 
company income includes, among other items, dividends, 
interest, rents and royalties. An exception from foreign 
personal holding company income applies to certain dividends 
and interest received from a related person which is created or 
organized in the same country as the CFC and which has a 
substantial part of its assets in that country, and to certain 
rents and royalties received from a related person for the use 
of property in the same country in which the CFC was created or 
organized (the so-called ``same-country exception'').
    Foreign base company sales income includes income derived 
by a CFC from certain related-party transactions, including the 
purchase of personal property from a related person and its 
sale to any person, the purchase of personal property from any 
person and its sale to a related person, and the purchase or 
sale of personal property on behalf of a related person, where 
the property which is purchased or sold is manufactured outside 
the country in which the CFC was created or organized and the 
property is purchased or sold for use or consumption outside 
such foreign country. A special branch rule applies for 
purposes of determining a CFC's foreign base company sales 
income. Under this rule, a branch of a CFC is treated as a 
separate corporation (only for purposes of determining the 
CFC's foreign base company sales income) where the activities 
of the CFC through the branch outside the CFC's country of 
incorporation have substantially the same effect as if such 
branch were a subsidiary.
    Because of differences in U.S. and foreign laws, it is 
possible for a taxpayer to enter into transactions that are 
treated in one manner for U.S. tax purposes and in another 
manner for foreign tax purposes. These transactions are 
referred to as hybrid transactions. For example, a hybrid 
transaction may involve the use of an entity that is treated as 
a corporation for purposes of the tax law of one jurisdiction 
but is treated as a branch or partnership for purposes of the 
tax law of another jurisdiction.

Notice 98-11 and the regulations issued thereunder

    Notice 98-11, issued on January 16, 1998, addresses the 
treatment of hybrid branches under the subpart F provisions of 
the Code. The Notice states that the Treasury Department and 
the Internal Revenue Service have concluded that the use of 
certain arrangements involving hybrid branches is contrary to 
the policy and rules of subpart F. The hybrid branch 
arrangements identified in Notice 98-11 involve structures that 
are characterized for U.S. tax purposes as part of a CFC but 
are characterized for purposes of the tax law of the country in 
which the CFC is incorporated as a separate entity. The Notice 
states that regulations will be issued to prevent the use of 
hybrid branch arrangements to reduce foreign tax while avoiding 
the corresponding creation of subpart F income. The Notice 
states that such regulations will provide that the branch and 
the CFC will be treated as separate corporations for purposes 
of subpart F. The Notice also states that similar issues raised 
under subpart F by certain partnership or trust arrangements 
will be addressed in separate regulation projects.
    On March 23, 1998, temporary and proposed regulations were 
issued to address the issues raised in Notice 98-11 and to 
address certain partnership and other issues raised under 
subpart F. Under the regulations, certain payments between a 
CFC and its hybrid branch or between hybrid branches of the CFC 
(so-called ``hybrid branch payments'') are treated as giving 
rise to subpart F income. The regulations generally provide 
that non-subpart F income of the CFC, in the amount of the 
hybrid branch payment, is recharacterized as subpart F income 
of the CFC if: (1) the hybrid branch payment reduces the 
foreign tax of the payor, (2) the hybrid branch payment would 
have been foreign personal holding company income if made 
between separate CFCs, and (3) there is a disparity between the 
effective tax rate on the payment in the hands of the payee and 
the effective tax rate that would have applied if the income 
had been taxed in the hands of the payor. The regulations also 
apply to other hybrid branch arrangements involving a 
partnership, including a CFC's proportionate share of any 
hybrid branch payment made between a partnership in which the 
CFC is a partner and a hybrid branch of the partnership or 
between hybrid branches of such a partnership. Under the 
regulations, if a partnership is treated as fiscally 
transparent by the CFC's taxing jurisdiction, the 
recharacterization rules are applied by treating the hybrid 
branch payment as if it had been made directly between the CFC 
and the hybrid branch, or as if the hybrid branches of the 
partnership were hybrid branches of the CFC, as applicable. If 
the partnership is treated as a separate entity by the CFC's 
taxing jurisdiction, the recharacterization rules are applied 
to treat the partnership as if it were a CFC.
    The regulations also address the application of the same-
country exception to the foreign personal holding company 
income rules under subpart F in the case of certain hybrid 
branch arrangements. Under the regulations, the same-country 
exception applies to payments by a CFC to a hybrid branch of a 
related CFC only if the payment would have qualified for the 
exception if the hybrid branch had been a separate CFC 
incorporated in the jurisdiction in which the payment is 
subject to tax (other than a withholding tax). The regulations 
provide additional rules regarding the application of the same-
country exception in the case of certain hybrid arrangements 
involving a partnership.
    The regulations generally apply to amounts paid or accrued 
pursuant to hybrid branch arrangements entered into or 
substantially modified on or after January 16, 1998. As a 
result, the regulations generally do not apply to amounts paid 
or accrued pursuant to hybrid branch arrangements entered into 
before January 16, 1998 and not substantially modified on or 
after that date.
    In the case of certain hybrid arrangements involving 
partnerships, the regulations generally apply to amounts paid 
or accrued pursuant to such arrangements entered into or 
substantially modified on or after March 23, 1998. As a result, 
the regulations generally do not apply to amounts paid or 
accrued pursuant to such arrangements entered into before March 
23, 1998 and not substantially modified on or after that date.

                           Reasons for Change

    Notice 98-11 and the regulations issued thereunder address 
complex international tax issues relating to the treatment of 
hybrid transactions under the subpart F provisions of the Code. 
The impact of such administrative guidance on U.S. businesses 
operating abroad may be substantial. The Committee believes 
that it is appropriate to place a moratorium on the 
implementation of the regulations with respect to Notice 98-11 
so that these important issues can be considered by the 
Congress.

                        Explanation of Provision

    The bill provides that no temporary or final regulations 
with respect to Notice 98-11 may be implemented prior to six 
months after the date of enactment of this provision. This 
moratorium applies to the regulations with respect to hybrid 
branches and to the regulations with respect to hybrid 
arrangements involving partnerships. It is intended that the 
moratorium delaying implementation of the regulations would not 
require a modification to the effective dates of the 
regulations. No inference is intended regarding the authority 
of the Department of the Treasury or the Internal Revenue 
Service to issue the Notice or the regulations.

                             Effective Date

    The provision is effective on the date of enactment.

14. Sense of the Senate regarding Notices 98-5 and 98-11 (secs. 3713 
        (a)(2) and (b) of the bill)

                              Present Law

Overview

    U.S. citizens and residents and U.S. corporations are taxed 
currently by the United States on their worldwide income. U.S. 
persons may credit foreign taxes against U.S. tax on foreign-
source income. The amount of foreign tax credits that can be 
claimed in a year is subject to a limitation that prevents 
taxpayers from using foreign tax credits to offset U.S. tax on 
U.S.-source income. Separate limitations are applied to 
specific categories of income.
    A foreign corporation generally is not subject to U.S. tax 
on its income from operations outside the United States. Income 
of a foreign corporation generally is taxed by the United 
States when it is repatriated to the United States through 
payment to the corporation's U.S. shareholders, subject to a 
foreign tax credit. However, various regimes imposing current 
U.S. tax on income earned through a foreign corporation are 
reflected in the Code. One anti-deferral regime set forth in 
the Code is the controlled foreign corporation rules of subpart 
F (secs. 951-964).
    A controlled foreign corporation (``CFC'') is defined 
generally as any foreign corporation if U.S. persons own more 
than 50 percent of the corporation's stock (measured by vote or 
value), taking into account only those U.S. persons that own at 
least 10 percent of the stock (measured by vote only) (sec. 
957). Stock ownership includes not only stock owned directly, 
but also stock owned indirectly or constructively (sec. 958).
    The United States generally taxes the U.S. 10-percent 
shareholders of a CFC currently on their pro rata shares of 
certain income of the CFC (so-called ``subpart F income'') 
(sec. 951). In effect, the Code treats those shareholders as 
having received a current distribution out of the CFC's subpart 
F income. Such shareholders also are subject to current U.S. 
tax on their pro rata shares of the CFC's earnings invested in 
U.S. property (sec. 951). The foreign tax credit may reduce the 
U.S. tax on these amounts.
    Subpart F income includes, among other items, foreign base 
company income (sec. 952). Foreign base company income, in 
turn, includes foreign personal holding company income, foreign 
base company sales income, foreign base company services 
income, foreign base company shipping income and foreign base 
company oil related income (sec. 954). Foreign personal holding 
company income includes, among other items, dividends, 
interest, rents and royalties. An exception from foreign 
personal holding company income applies to certain dividends 
and interest received from a related person which is created or 
organized in the same country as the CFC and which has a 
substantial part of its assets in that country, and to certain 
rents and royalties received from a related person for the use 
of property in the same country in which the CFC was created or 
organized (the so-called ``same-country exception'').
    Foreign base company sales income includes income derived 
by a CFC from certain related-party transactions, including the 
purchase of personal property from a related person and its 
sale to any person, the purchase of personal property from any 
person and its sale to a related person, and the purchase or 
sale of personal property on behalf of a related person, where 
the property which is purchased or sold is manufactured outside 
the country in which the CFC was created or organized and the 
property is purchased or sold for use or consumption outside 
such foreign country. A special branch rule applies for 
purposes of determining a CFC's foreign base company sales 
income. Under this rule, a branch of a CFC is treated as a 
separate corporation (only for purposes of determining the 
CFC's foreign base company sales income) where the activities 
of the CFC through the branch outside the CFC's country of 
incorporation have substantially the same effect as if such 
branch were a subsidiary.
    Because of differences in U.S. and foreign laws, it is 
possible for a taxpayer to enter into transactions that are 
treated in one manner for U.S. tax purposes and in another 
manner for foreign tax purposes. These transactions are 
referred to as hybrid transactions. For example, a hybrid 
transaction may involve the use of an entity that is treated as 
a corporation for purposes of the tax law of one jurisdiction 
but is treated as a branch or partnership for purposes of the 
tax law of another jurisdiction.

Notices 98-5 and 98-11

    Notice 98-5, issued on December 23, 1997, addresses the 
treatment of certain types of transactions under the foreign 
tax credit provisions of the Code. The Notice states that the 
Treasury Department and the Internal Revenue Service have 
concluded that the use of certain transactions creates the 
potential for foreign tax credit abuse. The Notice states that 
such transactions typically involve either: (1) the acquisition 
of an asset that generates an income stream (e.g., royalties or 
interest) subject to a foreign withholding tax, or (2) the 
effective duplication of tax benefits through the use of 
certain structures designed to exploit inconsistencies between 
U.S. and foreign tax laws. The Notice includes five specific 
transactions as illustrations of arrangements creating the 
potential for foreign tax credit abuse. The Notice states that 
it is intended that regulations will be issued to disallow 
foreign tax credits for abusive transactions in cases where the 
reasonably expected economic profit from the transaction is 
insubstantial compared to the value of the foreign tax credits 
expected to be obtained as a result of the arrangement. The 
Notice further states that it is intended that regulations 
generally will apply with respect to such transactions for 
taxes paid or accrued on or after December 23, 1997. 
Regulations have not yet been issued under Notice 98-5.
    Notice 98-11, issued on January 16, 1998, addresses the 
treatment of hybrid branches under the subpart F provisions of 
the Code. The Notice states that the Treasury Department and 
the Internal Revenue Service have concluded that the use of 
certain arrangements involving hybrid branches is contrary to 
the policy and rules of subpart F. The hybrid branch 
arrangements identified in Notice 98-11 involve structures that 
are characterized for U.S. tax purposes as part of a CFC but 
are characterized for purposes of the tax law of the country in 
which the CFC is incorporated as a separate entity. The Notice 
states that regulations will be issued to prevent the use of 
hybrid branch arrangements to reduce foreign tax while avoiding 
the corresponding creation of subpart F income. The Notice 
states that such regulations will provide that the branch and 
the CFC will be treated as separate corporations for purposes 
of subpart F. The Notice also states that similar issues raised 
under subpart F by certain partnership or trust arrangements 
will be addressed in separate regulation projects.
    On March 23, 1998, temporary and proposed regulations were 
issued to address the issues raised in Notice 98-11 and to 
address certain partnership and other issues raised under 
subpart F. Under the regulations, certain payments between a 
CFC and its hybrid branch or between hybrid branches of the CFC 
(so-called ``hybrid branch payments'') are treated as giving 
rise to subpart F income. The regulations generally provide 
that non-subpart F income of the CFC, in the amount of the 
hybrid branch payment, is recharacterized as subpart F income 
of the CFC if: (1) the hybrid branch payment reduces the 
foreign tax of the payor, (2) the hybrid branch payment would 
have been foreign personal holding company income if made 
between separate CFCs, and (3) there is a disparity between the 
effective tax rate on the payment in the hands of the payee and 
the effective tax rate that would have applied if the income 
had been taxed in the hands of the payor. The regulations also 
apply to other hybrid branch arrangements involving a 
partnership, including a CFC's proportionate share of any 
hybrid branch payment made between a partnership in which the 
CFC is a partner and a hybrid branch of the partnership or 
between hybrid branches of such a partnership. Under the 
regulations, if a partnership is treated as fiscally 
transparent by the CFC's taxing jurisdiction, the 
recharacterization rules are applied by treating the hybrid 
branch payment as if it had been made directly between the CFC 
and the hybrid branch, or as if the hybrid branches of the 
partnership were hybrid branches of the CFC, as applicable. If 
the partnership is treated as aseparate entity by the CFC's 
taxing jurisdiction, the recharacterization rules are applied to treat 
the partnership as if it were a CFC.
    The regulations also address the application of the same-
country exception to the foreign personal holding company 
income rules under subpart F in the case of certain hybrid 
branch arrangements. Under the regulations, the same-country 
exception applies to payments by a CFC to a hybrid branch of a 
related CFC only if the payment would have qualified for the 
exception if the hybrid branch had been a separate CFC 
incorporated in the jurisdiction in which the payment is 
subject to tax (other than a withholding tax). The regulations 
provide additional rules regarding the application of the same-
country exception in the case of certain hybrid arrangements 
involving a partnership.
    The regulations generally apply to amounts paid or accrued 
pursuant to hybrid branch arrangements entered into or 
substantially modified on or after January 16, 1998. As a 
result, the regulations generally do not apply to amounts paid 
or accrued pursuant to hybrid branch arrangements entered into 
before January 16, 1998 and not substantially modified on or 
after that date.
    In the case of certain hybrid arrangements involving 
partnerships, the regulations generally apply to amounts paid 
or accrued pursuant to such arrangements entered into or 
substantially modified on or after March 23, 1998. As a result, 
the regulations generally do not apply to amounts paid or 
accrued pursuant to such arrangements entered into before March 
23, 1998 and not substantially modified on or after that date.

                           Reasons for Change

    The subpart F provisions of the Code reflect a balancing of 
various policy objectives. Any modification or refinement to 
that balance should be the subject of serious and thoughtful 
debate. It is the Committee's view that any significant policy 
developments with respect to the subpart F provisions, such as 
those addressed by Notice 98-11 and the regulations issued 
thereunder, should be considered by the Congress as part of the 
normal legislative process. The Committee also believes that 
any regulations issued under Notice 98-5 should be limited to 
the specific transactions described therein. Moreover, the 
Committee is concerned about the potential disruptive effect of 
the issuance of an administrative notice that describes general 
principles to be reflected in regulations that will be issued 
in the future, but provides that such future regulations will 
be effective as of the date of issuance of the notice.

                        Explanation of Provision

    The bill provides that it is the sense of the Senate that 
the Department of the Treasury and the Internal Revenue Service 
should withdraw Notice 98-11 and the regulations issued 
thereunder, and that the Congress, and not the Department of 
the Treasury nor the Internal Revenue Service, should determine 
the international tax policy issues relating to the treatment 
of hybrid transactions under the subpart F provisions of the 
Code.
    The bill further provides that it is the sense of the 
Senate that the Department of the Treasury and the Internal 
Revenue Service should limit any regulations issued under 
Notice98-5 to the specific transactions described therein. In 
addition, such regulations should: (a) not affect transactions 
undertaken in the ordinary course of business, (b) not have an 
effective date any earlier than the date of issuance of proposed 
regulations, and (c) be issued in accordance with normal regulatory 
procedures which include an opportunity for comment. Nothing in this 
sense of the Senate should be construed to limit the ability of the 
Department of the Treasury or the Internal Revenue Service to address 
abusive transactions.

                             Effective Date

    The provision is effective on the date of enactment.

                               I. Studies

1. Administration of penalties and interest (sec. 3801 of the bill)

                              Present Law

    The last major comprehensive revision of the overall 
penalty structure in the Internal Revenue Code was the 
``Improved Penalty Administration and Compliance Tax Act,'' 
enacted as part of the Omnibus Budget Reconciliation Act of 
1989.

                           Reasons for Change

    The Committee believes that it is appropriate to undertake 
a study of penalty and interest administration, which will 
provide the Committee with legislative and administrative 
recommendations for improvement of the current penalty and 
interest structure.

                        Explanation of Provision

    The provision requires the Joint Committee on Taxation and 
the Treasury to each conduct a separate study reviewing the 
interest and penalty provisions of the Code (including the 
administration and implementation of the penalty reform 
provisions of the Omnibus Budget Reconciliation Act of 1989), 
and making any legislative and administrative recommendations 
it deems appropriate to simplify penalty administration and 
reduce taxpayer burden. The studies must also include an 
analysis of the interest provisions in the Code, including 
legislative and administrative recommendations deemed 
appropriate to simplify the administration of the interest 
provisions and to reduce taxpayer burden.

                             Effective Date

    The reports must be provided not later than nine months 
after the date of enactment.

2. Confidentiality of tax return information (sec. 3802 of the bill)

                              Present Law

    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). No tax 
information may be furnished by the IRS to another agency 
unless the other agency establishes procedures satisfactory to 
the IRS for safeguarding the tax information it receives (sec. 
6103(p)).

                           Reasons for Change

    The Committee believes that a study of the confidentiality 
provisions will be useful in assisting the Committee in 
determining whether improvements can be made to these 
provisions.

                        Explanation of Provision

    The provision requires the Joint Committee on Taxation and 
Treasury to each conduct a separate study on provisions 
regarding taxpayer confidentiality. The studies are to examine 
present-law protections of taxpayer privacy, the need, if any, 
for third parties to use tax return information, whether 
greater levels of voluntary compliance can be achieved by 
allowing the public to know who is legally required to file tax 
returns but does not do so, and the interrelationship of the 
taxpayer confidentiality provisions in the Internal Revenue 
Code with those elsewhere in the United States Code (such as 
the Freedom of Information Act).

                             Effective Date

    The findings of the studies, along with any 
recommendations, are required to be reported to the Congress no 
later than one year after the date of enactment.

           Title IV. Congressional Accountability for the IRS

             A. Century Date Change (sec. 4001 of the bill)

                              Present Law

    No specific provision.

                           Reasons for Change

    Operations of the IRS computer systems are critical to the 
viability of the Federal tax system.

                        Explanation of Provision

    The bill provides that it is the sense of the Congress that 
the IRS should place resolving the century date change 
computing problems as a high priority. The bill also provides 
that the Commissioner shall expeditiously submit a report to 
the Congress on the overall impact of the bill on the ability 
of the IRS to resolve the century date change computing 
problems and the provisions of the bill that will require 
significant amounts of computer programming changes prior to 
December 31, 1999, in order to carry out the provisions. It is 
expected that this report will be submitted within 14 days of 
the date of Committee action on the bill.

                             Effective Date

    The provision is effective on the date of enactment.

         B. Tax Law Complexity Analysis (sec. 4002 of the bill)

                              Present Law

    Present law does not require a formal complexity analysis 
with respect to changes to the tax laws.

                           Reasons for Change

    The National Commission on Restructuring the IRS found a 
clear connection between the complexity of the Internal Revenue 
Code and the difficulty of tax law administration and taxpayer 
frustration. The Committee shares the concern that complexity 
is a serious problem with the Federal tax system. Complexity 
and frequent changes in the tax laws create burdens for both 
the IRS and taxpayers. Failure to address complexity may 
ultimately reduce voluntary compliance.
    The Committee is aware that it may not be possible or 
desirable to eliminate all complexity in the tax system. There 
are many objectives of a tax system and particular tax 
provisions, and simplicity is only one. In some cases other 
policies, such as fairness, may outweigh concerns about 
complexity. Nevertheless, the Committee believes complexity of 
the tax system should be reduced whenever possible. 
Accordingly, the Committee believes it appropriate to introduce 
new procedural rules that will focus attention on complexity. 
The Committee also believes that the tax-writing committees 
should receive periodic input from the IRS regarding areas of 
the law that cause problems for taxpayers. This input will be 
valuable in developing future legislation.

                        Explanation of Provision

IRS report on complexity

    The IRS is to report to the House Ways and Means Committee 
and the Senate Finance Committee annually regarding sources of 
complexity in the administration of the Federal tax laws. 
Factors the IRS may take into account include: (1) frequently 
asked questions by taxpayers; (2) common errors made by 
taxpayers in filling out returns; (3) areas of the law that 
frequently result in disagreements between taxpayers and the 
IRS; (4) major areas in which there is no or incomplete 
published guidance or in which the law is uncertain; (5) areas 
in which revenue agents make frequent errors in interpreting or 
applying the law; (6) impact of recent legislation on 
complexity; (7) information regarding forms, including a 
listing of IRS forms, the time it takes for taxpayers to 
complete and review forms, the number of taxpayers who use each 
form, and how the time required changed as a result of recently 
enacted legislation; and (8) recommendations for reducing 
complexity in the administration of the Federal tax system.

Complexity analysis with respect to current legislation

    The bill requires the Joint Committee on Taxation (in 
consultation with the IRS and Treasury) to provide an analysis 
of complexity or administrability concerns raised by tax 
provisions of widespread applicability to individuals or small 
businesses. The analysis is to be included in any Committee 
Report of the House Ways and Means Committee or Senate Finance 
Committee or Conference Report containing tax provisions, or 
provided to the Members of the relevant Committee or Committees 
as soon as practicable after the report is filed. The analysis 
is to include: (1) an estimate of the number and type of 
taxpayers affected; and (2) if applicable, the income level of 
affected individual taxpayers. In addition, such analysis 
should include, if determinable, the following: (1) the extent 
to which existing tax forms would require revision and whether 
a new form or forms would be required; (2) whether and to what 
extent taxpayers would be required to keep additional records; 
(3) the estimated cost to taxpayers to comply with the 
provision; (4) the extent to which enactment of the provision 
would require the IRS to develop or modify regulatory guidance; 
(5) whether and to what extent the provision can be expected to 
lead to disputes between taxpayers and the IRS; and (6) how the 
IRS can be expected to respond to the provision (including the 
impact on internal training, whether the Internal Revenue 
Manual would require revision, whether the change would require 
reprogramming of computers, and the extent to which the IRS 
would be required to divert or redirect resources in response 
to the provision).

                             Effective Date

    The provision requiring the Joint Committee on Taxation to 
provide a complexity analysis is effective with respect to 
legislation considered on or after January 1, 1999. The 
provision requiring the IRS to report on sources of complexity 
is effective on the date of enactment.

                        Title V. Revenue Offsets

A. Employer Deduction for Vacation and Severance Pay (sec. 5001 of the 
                     bill and sec. 404 of the Code)

                              Present Law

    For deduction purposes, any method or arrangement that has 
the effect of a plan deferring the receipt of compensation or 
other benefits for employees is treated as a deferred 
compensation plan (sec. 404(b)). In general, contributions 
under a deferred compensation plan (other than certain pension, 
profit-sharing and similar plans) are deductible in the taxable 
year in which an amount attributable to the contribution is 
includible in income of the employee. However, vacation pay 
which is treated as deferred compensation is deductible for the 
taxable year of the employer in which the vacation pay is paid 
to the employee (sec. 404(a)(5)).
    Temporary Treasury regulations provide that a plan, method, 
or arrangement defers the receipt of compensation or benefits 
to the extent it is one under which an employee receives 
compensation or benefits more than a brief period of time after 
the end of the employer's taxable year in which the services 
creating the right to such compensation or benefits are 
performed. A plan, method or arrangement is presumed to defer 
the receipt of compensation for more than a brief period of 
time after the end of an employer's taxable year to the extent 
that compensation is received after the 15th day of the 3rd 
calendar month after the end of the employer's taxable year in 
which the related services are rendered (the ``2\1/2\ month'' 
period). A plan, method or arrangement is not considered to 
defer the receipt of compensation or benefits for more than a 
brief period of time after the end of the employer's taxable 
year to the extent that compensation or benefits are received 
by the employee on or before the end of the applicable 2\1/2\ 
month period. (Temp. Treas. Reg. sec. 1.404(b)-1T A-2).
    The Tax Court recently addressed the issue of when vacation 
pay and severance pay are considered deferred compensation in 
Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt 
Baking, the taxpayer was an accrual basis taxpayer with a 
fiscal year that ended December 28, 1991. The taxpayer funded 
its accrued vacation and severance pay liabilities for 1991 by 
purchasing an irrevocable letter of credit on March 13, 1992. 
The parties stipulated that the letter of credit represented a 
transfer of substantially vested interest in property to 
employees for purposes of section 83, and that the fair market 
value of such interest was includible in the employees' gross 
incomes for 1992 as a result of the transfer.50 The 
Tax Court held that the purchase of the letter of credit, and 
the resulting income inclusion, constituted payment of the 
vacation and severance pay within the 2\1/2\ month period. 
Thus, the vacation and severance pay were treated as received 
by the employees within the 2\1/2\ month period and were not 
treated as deferred compensation. The vacation pay and 
severance pay were deductible by the taxpayer for its 1991 
fiscal year pursuant to its normal accrual method of 
accounting.
---------------------------------------------------------------------------
    \50\ While the rules of section 83 may govern the income inclusion, 
section 404 governs the deduction if the amount involved is deferred 
compensation.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the decision in Schmidt Baking 
reaches an inappropriate and unintended result. To permit 
methods such as that used in Schmidt Baking to be considered 
payment or receipt would allow taxpayers to avoid the 2\1/2\ 
month rule and inappropriately accelerate deductions. The 
Committee believes that the intent of the 2\1/2\ month rule was 
clearly to provide that a deduction for deferred compensation 
is not available for the current taxable year unless the 
compensation is actually paid to employees within 2\1/2\ months 
after the end of the year. Moreover, previous legislative 
histories reflect Congressional intent and understanding that 
compensation actually paid beyond the 2\1/2\ month period is 
deferred compensation.51
---------------------------------------------------------------------------
    \51\ See, e.g., the legislative history to the Omnibus Budget 
Reconciliation Act of 1987.
---------------------------------------------------------------------------
    Further, the Committee is concerned that taxpayers may 
inappropriately extend the rationale of Schmidt Baking to other 
situations in which a deduction or other tax consequences are 
contingent upon an item being paid. The Committee does not 
believe that, as a general rule, letters of credit and similar 
mechanisms should be considered payment for any purposes of the 
Code.

                        Explanation of Provision

    Under the bill, for purposes of determining whether an item 
of compensation is deferred compensation (under Code sec. 404), 
the compensation is not considered to be paid or received until 
actually received by the employee. In addition, an item of 
deferred compensation is not considered paid to an employee 
until actually received by the employee. The provision is 
intended to overrule the result in Schmidt Baking. For example, 
with respect to the determination of whether vacation pay is 
deferred compensation, the fact that the value of the vacation 
pay is includible in the income of employees within the 
applicable 2\1/2\ month period would not be relevant. Rather, 
the vacation pay must have been actually received by employees 
within the 2\1/2\ month period in order for the compensation 
not to be treated as deferred compensation.
    It is intended that similar arrangements, in addition to 
the letter of credit approach used in Schmidt Baking, do not 
constitute actual receipt by the employee, even if there is an 
income inclusion. Thus, for example, actual receipt does not 
include the furnishing of a note or letter or other evidence of 
indebtedness of the taxpayer, whether or not the evidence is 
guaranteed by any other instrument or by any third party. As a 
further example, actual receipt does not include a promise of 
the taxpayer to provide service or property in the future 
(whether or not the promise is evidenced by a contract or other 
written agreement). In addition, actual receipt does not 
include an amount transferred as a loan, refundable deposit, or 
contingent payment. Amounts set aside in a trust for employees 
are not considered to be actually received by the employee.
    The provision does not change the rule under which deferred 
compensation (other than vacation pay and deferred compensation 
under qualified plans) is deductible in the yearincludible in 
the gross income of employees participating in the plan if separate 
accounts are maintained for each employee.
    While Schmidt Baking involved only vacation pay and 
severance pay, there is concern that this type of arrangement 
may be tried to circumvent other provisions of the Code where 
payment is required in order for a deduction to occur. Thus, it 
is intended that the Secretary will prevent the use of similar 
arrangements. No inference is intended that the result in 
Schmidt Baking is present law beyond its immediate facts or 
that the use of similar arrangements is permitted under present 
law.
    The provision does not affect the determination of whether 
an item is includible in income. Thus, for example, using the 
mechanism in Schmidt Baking for vacation pay could still result 
in income inclusion to the employees, but the employer would 
not be entitled to a deduction for the vacation pay until 
actually paid to and received by the employees.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment. Any change in method of accounting 
required by the bill is treated as initiated by the taxpayer 
with the consent of the Secretary of the Treasury. Any 
adjustment required by section 481 as a result of the change 
will be taken into account in the year of the change.

B. Modify Foreign Tax Credit Carryover Rules (sec. 5002 of the bill and 
                         sec. 904 of the Code)

                              Present Law

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign source income. The amount of foreign tax credits that 
can be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S. source income. Separate foreign tax credit 
limitations are applied to specific categories of income.
    The amount of creditable taxes paid or accrued (or deemed 
paid) in any taxable year which exceeds the foreign tax credit 
limitation is permitted to be carried back two years and 
forward five years. The amount carried over may be used as a 
credit in a carryover year to the extent the taxpayer otherwise 
has excess foreign tax credit limitation for such year. The 
separate foreign tax credit limitations apply for purposes of 
the carryover rules.

                           Reasons for Change

    The Committee believes that reducing the carryback period 
for foreign tax credits to one year and increasing the 
carryforward period to seven years will reduce some of the 
complexity associated with carrybacks while continuing to 
address the timing differences between U.S. and foreign tax 
rules.

                        Explanation of Provision

    The bill reduces the carryback period for excess foreign 
tax credits from two years to one year. The bill also extends 
the excess foreign tax credit carryforward period from five 
years to seven years.

                             Effective Date

    The provision applies to foreign tax credits arising in 
taxable years ending after the date of enactment.

 C. Clarify and Expand Mathematical Error Procedures (sec. 5003 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. Freeze Grandfather Status of Stapled REITs (sec. 5004 of the bill)

                              Present Law

In general

    A real estate investment trust (``REIT'') is an entity that 
receives most of its income from passive real estate related 
investments and that essentially receives pass-through 
treatment for income that is distributed to shareholders. If an 
electing entity meets the qualifications for REIT status, the 
portion of its income that is distributed to the investors each 
year generally is taxed to the investors without being 
subjected to a tax at the REIT level. In general, a REIT must 
derive its income from passive sources and not engage in any 
active trade or business.

Requirements for REIT status

    A REIT must satisfy a number of tests on a year-by-year 
basis that relate to the entity's (1) organizational structure, 
(2) source of income, (3) nature of assets, and (4) 
distribution of income. These tests are intended to allow pass-
through treatment only if there is a pooling of investment 
arrangement, if the entity's investments are basically in real 
estate assets, and its income is passive income from real 
estate investment, as contrasted with income from the operation 
of a business involving real estate. In addition, substantially 
all of the entity's income must be passed through to its 
shareholders on a current basis.
    Under the organizational structure tests, except for the 
first taxable year for which an entity elects to be a REIT, the 
beneficial ownership of the entity must be held by 100 or more 
persons. Generally, no more than 50 percent of the value of the 
REIT's stock can be owned by five or fewer individuals during 
the last half of the taxable year.
    Under the source-of-income tests, at least 95 percent of 
its gross income generally must be derived from rents, 
dividends, interest and certain other passive sources (the 
``95-percent test''). In addition, at least 75 percent of its 
income generally must be from real estate sources, including 
rents from real property and interest on mortgages secured by 
real property (the ``75-percent test'').
    For purposes of these tests, rents from real property 
generally include charges for services customarily rendered in 
connection with the rental of real property, whether or not 
such charges are separately stated. Where a REIT furnishes non-
customary services to tenants, amounts received generally are 
not treated as qualifying rents unless the services are 
furnished through an independent contractor from whom the REIT 
does not derive any income. In general, an independent 
contractor is a person who does not own more than a 35-percent 
interest in the REIT, and in which no more than a 35-percent 
interest is held by persons with a 35-percent or greater 
interest in the REIT.
    To satisfy the REIT asset requirements, at the close of 
each quarter of its taxable year, an entity must have at least 
75 percent of the value of its assets invested in real estate 
assets, cash and cash items, and government securities. Not 
more than 25 percent of the value of theREIT's assets can be 
invested in securities (other than government securities and other 
securities described in the preceding sentence). The securities of any 
one issuer may not comprise more than five percent of the value of a 
REIT's assets. Moreover, the REIT may not own more than 10 percent of 
the outstanding securities of any one issuer, determined by voting 
power.
    A REIT is permitted to have a wholly-owned subsidiary 
subject to certain restrictions. A REIT's subsidiary is treated 
as one with the REIT.
    The income distribution requirement provides generally that 
at least 95 percent of a REIT's income (with certain minor 
exceptions) must be distributed to shareholders as dividends.

Stapled REITs

    In a stapled REIT structure, both the shares of a REIT and 
a C corporation may be traded, but are subject to a provision 
that they may not be sold separately. Thus, the REIT and the C 
corporation have identical ownership at all times.
    In the Deficit Reduction Act of 1984 (the ``1984 Act''), 
Congress required that, in applying the tests for REIT status, 
all stapled entities are treated as one entity (sec. 
269B(a)(3)). The 1984 Act included grandfather rules, one of 
which provided that certain then-existing stapled REITs were 
not subject to the new provision (sec. 136(c)(3) of the 1984 
Act). That grandfather rule provided that the new provision did 
not apply to a REIT that was a part of a group of stapled 
entities if the group of entities was stapled on June 30, 1983, 
and included a REIT on that date.

                           Reasons for Change

    In the 1984 Act, Congress eliminated the tax benefits of 
the stapled REIT structure out of concern that it could 
effectively result in one level of tax on active corporate 
business income that would otherwise be subject to two levels 
of tax. Congress also believed that allowing a corporate 
business to be stapled to a REIT was inconsistent with the 
policy that led Congress to create REITs.
    As part of the 1984 Act provision, Congress provided 
grandfather relief to the small number of stapled REITs that 
were already in existence. Since 1984, however, many of the 
grandfathered stapled REITs have been acquired by new owners. 
Some have entered into new lines of businesses, and most of the 
grandfathered REITs have used the stapled structure to engage 
in large-scale acquisitions of assets. The Committee believes 
that such unlimited relief from a general tax provision by a 
handful of taxpayers raises new questions not only of fairness, 
but of unfair competition, because the stapled REITs are in 
direct competition with other companies that cannot use the 
benefits of the stapled structure.
    The Committee believes that it would be unfair to remove 
the benefit of the stapled REIT structure with respect to real 
estate interests that have already been acquired. On the other 
hand, the Committee believes that future acquisitions of 
interests in real property by these grandfathered entities, or 
improvements of property that are tantamount to new 
acquisitions, should not be accorded the benefits of the 
stapled REIT structure. Accordingly, the rules of the Committee 
bill generally apply with respect to real property interests 
acquired by the REIT or a stapled entity after March 26, 1998, 
pursuant to transactions not in progress on that date. Further, 
the Committee is concerned that the some of the benefit of the 
stapled REIT structure can be derived through mortgages and 
interests in subsidiaries and partnerships. Accordingly, the 
Committee bill provides rules for mortgages acquired after 
March 26, 1998, and indirect acquisitions of real property 
interests through entities after such date (with transition 
relief similar to that for direct acquisitions).

                        Explanation of Provision

Overview

    Under the provision, rules similar to the rules of present 
law treating a REIT and all stapled entities as a single entity 
for purposes of determining REIT status (sec. 269B) apply to 
real property interests acquired after March 26, 1998, by an 
existing stapled REIT, a stapled entity, or a subsidiary or 
partnership in which a 10-percent or greater interest is owned 
by an existing stapled REIT or stapled entity (together 
referred to as the ``stapled REIT group''), unless the real 
property interest is grandfathered as described below. Special 
rules apply to certain mortgages acquired by the stapled REIT 
group after March 26, 1998, where a member of the stapled REIT 
group performs services with respect to the property secured by 
the mortgage.

Rules for real property interests

            In general
    The provision generally applies to real property interests 
acquired by a member of the stapled REIT group after March 26, 
1998. Real property interests that are acquired by a member of 
the REIT group after such date, and which are not grandfathered 
under the rules described below, are referred to as 
``nonqualified real property interests''.
    The provision treats activities and gross income of a 
stapled REIT group with respect to nonqualified real property 
interests held by any member of the stapled REIT group as 
activities and income of the REIT for certain purposes in the 
same manner as if the stapled REIT group were a single entity. 
This treatment applies for purposes of the following provisions 
that depend on a REIT's gross income: (1) the 95-percent test 
(sec. 856(c)(2)); (2) the 75-percent test (sec. 856(c)(3)); (3) 
the ``reasonable cause'' exception for failure to meet either 
test (sec. 856(c)(6)); and (4) the special tax on excess gross 
income for REITs with net income from prohibited transactions 
(sec. 857(b)(5)).
    Thus, for example, where a stapled entity leases 
nonqualified real property from the REIT and earns gross income 
from operating the property, such gross income will be subject 
to the provision. The REIT and the stapled entity will be 
treated as a single entity, with the result that the lease 
payments from the stapled entity to the REIT would be ignored. 
The gross income earned by the stapled entity from operating 
the property will be treated as grossincome of the REIT, with 
the result that either the 75-percent or 95-percent test might not be 
met and REIT status might be lost. Similarly, where a stapled entity 
leases property from a third party after March 26, 1998, and uses that 
property in a business, the gross income it derives will be treated as 
income of the REIT because the lease would be a nonqualified real 
property interest.
            Grandfathered real property interests
    Under the provision, all real property interests acquired 
by a member of the stapled REIT group after March 26, 1998, are 
treated as nonqualified real property interests subject to the 
general rules described above, unless they qualify under one of 
the grandfather rules. An option to acquire real property is 
generally treated as a real property interest for purposes of 
the provision. However, a real property interest acquired by 
exercise of an option after March 26, 1998, is treated as a 
nonqualified real property interest, even though the option was 
acquired before such date.
    Under the provision, grandfathered real property interests 
include properties acquired by a member of the stapled REIT 
group after March 26, 1998, pursuant to a written agreement 
which was binding on March 26, 1998, and all times thereafter. 
Grandfathered properties also include certain properties, the 
acquisition of which were described in a public announcement or 
in a filing with the Securities and Exchange Commission on or 
before March 26, 1998.
    A real property interest does not generally lose its status 
as a grandfathered interest by reason of a repair to, an 
improvement of, or a lease of, the real property. Thus, if a 
REIT leases a grandfathered real property to a stapled entity, 
a renewal of the lease does not cause the property to lose its 
grandfathered status, whether the renewal is pursuant to the 
terms of the lease or otherwise. Similarly, if a REIT owns a 
grandfathered real property interest that is leased to a third 
party and, at the expiration of that lease, the REIT leases the 
property to a stapled entity, the interest would remain a 
grandfathered interest. Finally, if a stapled entity leases a 
grandfathered property interest from a third party and the 
property is repaired or improved, the interest would remain a 
grandfathered interest except as described below.
    An improvement of a grandfathered real property interest 
will cause loss of grandfathered status and become a 
nonqualified real property interest in certain circumstances. 
Any expansion beyond the boundaries of the land of the 
otherwise grandfathered interest occurring after March 26, 
1998, will be treated as a non-qualified real property interest 
to the extent of such expansion. Moreover, any improvement of 
an otherwise grandfathered real property interest (within its 
land boundaries) that is placed in service after December 31, 
1999, is treated as a separate nonqualified real property 
interest in certain circumstances. Such treatment applies where 
(1) the improvement changes the use of the property and (2) its 
cost is greater than (a) 200 percent of the undepreciated cost 
of the property (prior to the improvement) or (b) in the case 
of property acquired where there is a substituted basis, the 
fair market value of the property on the date that the property 
was acquired by the stapled entity or the REIT. There is an 
exception for improvements placed in service before January 1, 
2004, pursuant to a binding contract in effect on December 31, 
1999, and at all times thereafter. The rule treating 
improvements as nonqualified real property interests could 
apply, for example, if a member of the stapled REIT group 
constructs a building after December 31, 1999, on previously 
undeveloped raw land that had been acquired on or before March 
26, 1998.
            Ownership through entities
    If a REIT or stapled entity owns, directly or indirectly, a 
10-percent-or-greater interest in a corporate subsidiary or 
partnership (or other entity described below) that owns a real 
property interest, the above rules apply with respect to a 
proportionate part of the entity's real property interest, 
activities and gross income. Thus, any real property interest 
acquired by such a subsidiary or partnership that is not 
grandfathered under the rules described above is treated as a 
nonqualified real property interest held by the REIT or stapled 
entity in the same proportion as its ownership interest in the 
entity. The same proportion of the subsidiary's or 
partnership's gross income from any nonqualified real property 
interest owned by it or another member of the stapled REIT 
group will be treated as income of the REIT under the rules 
described above. However, an interest in real property acquired 
by a grandfathered 10-percent-or-greater partnership or 
subsidiary is treated as grandfathered if such interest would 
be a grandfathered interest if held directly by the REIT or 
stapled entity. Thus, for example, if a REIT contributes a 
grandfathered real property interest to a partnership 10 
percent or more of which is owned on March 26, 1998, the 
interest will not cease to be a grandfathered 
interest.52
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    \52\ Nevertheless, under the rules below, if the REITs partnership 
interest increases as a result of the contribution, a portion of each 
of the partnership's real estate interests, reflecting the 
proportionate increase in the partnership interest, will be treated as 
a nonqualified real property interest.
---------------------------------------------------------------------------
    Similar rules attributing the proportionate part of the 
subsidiary's or partnership's real property interests and gross 
income will apply when a REIT or stapled entity acquires a 10-
percent-or-greater interest (or in the case of a previously-
owned entity, acquires an additional interest) after March 26, 
1998, with exceptions for interests acquired pursuant to 
binding written agreements or public announcements described 
above. Transition relief can apply to both an entity's assets 
and the interest in the entity under the above rules. Thus, if 
on March 26, 1998, and at all times thereafter, a stapled 
entity has a binding written contract to buy 10-percent or more 
of the stock of a corporation and the corporation also has a 
binding written contract to buy real property, no portion of 
the property will be treated as a nonqualified real property 
interest as a result of the transaction.
    Under the above rules, gross income of a REIT or stapled 
entity with respect to a nonqualified real property interest 
held by a 10-percent-or-greater partnership or subsidiary is 
subject to the rules for nonqualified real property interests 
only in proportion to the interest held in the partnership or 
subsidiary. For example, assume that a stapled entity has a 
contract to manage a nonqualified real property interest held 
by a partnership in which the stapled entity owns an 85-percent 
interest. Under the above rules, for purposes of applying the 
gross income tests, 85 percent of the partnership's activities 
and gross income from the property are attributed to the REIT. 
As a result, 85 percent of the stapled entity's income from 
themanagement contract is ignored under the single-entity analysis 
described above. The remaining 15 percent of the management fee is not 
treated as gross income of the REIT because it is not income from a 
nonqualified real property interest held or deemed held by the REIT or 
a stapled entity.
    Grandfathered real property interests that are deemed owned 
by a REIT or a stapled entity under the rules for 10-percent-
or-greater interests will not be treated as acquired after 
March 26, 1998, if the REIT or a stapled entity subsequently 
becomes the actual owner. For example, assume a REIT has a 50-
percent interest in a partnership that distributes a 
grandfathered real property interest to the REIT in complete 
liquidation of its interest. The 50-percent interest that was 
previously deemed owned by the REIT will continue to be 
grandfathered; the remaining 50-percent interest will be a 
nonqualified real property interest because it was acquired by 
the REIT after March 26, 1998.

Mortgage rules

    Under the provision, special rules apply where a member of 
the stapled REIT group holds a mortgage (that is not an 
existing obligation under the rules described below) that is 
secured by an interest in real property, and a member of the 
stapled REIT group engages in certain activities with respect 
to that property. The activities that have this effect under 
the provision are activities that would result in impermissible 
tenant service income (as defined in sec. 856(d)(7)) if 
performed by the REIT with respect to property it held. In such 
a case, all interest on the mortgage that is allocable to that 
property and all gross income received by a member of the 
stapled REIT group from the activity will be treated as 
impermissible tenant service income of the REIT, which is not 
qualifying income under either the 75-percent or 95-percent 
tests. For example, assume that the REIT makes a mortgage loan 
on a hotel owned by a third party which is operated by a 
stapled entity under a management contract. Unless an exception 
applies, both the management fees earned by the stapled entity 
and the interest earned by the REIT will be treated as 
impermissible tenant services income of the REIT.
    An exception to the above rules is provided for mortgages 
the interest on which does not exceed an arm's-length rate and 
which would be treated as interest for purposes of the REIT 
rules. An exception also is available for mortgages that are 
held by a member of the stapled REIT group on March 26, 1998, 
and at all times thereafter, and which are secured by an 
interest in real property on that date, and at all times 
thereafter (the ``existing mortgage exception''). The existing 
mortgage exception ceases to apply if the mortgage is 
refinanced and the principal amount is increased in such 
refinancing.
    In the case of a partnership or subsidiary in which the 
REIT or a stapled entity owns a 10-percent-or-greater interest, 
a proportionate part of the entity's mortgages, interest and 
gross income from activities would be attributed to the REIT or 
the stapled entity, subject to rules similar to those for 
nonqualified real property interests. Thus, if a REIT or a 
stapled entity acquires a 10-percent-or-greater interest in a 
partnership or corporation after March 26, 1998, no mortgage 
held by the partnership or subsidiary at such time would 
qualify for the existing mortgage exception. Similarly, if a 
REIT or stapled entity owns a 10-percent-or-greater interest in 
a partnership or subsidiary on March 26, 1998, and the REIT or 
the stapled entity subsequently acquires a greater interest, a 
portion of each of the partnership's or subsidiary's mortgages 
that is the same as the proportionate increase in the ownership 
interest would fail to qualify for the existing mortgage 
exception.
    Under the provision's priority rules, the mortgage rules do 
not apply to any part of a real property interest that is owned 
or deemed owned by the REIT or a stapled entity under the rules 
for real property interests described above. Thus, for example, 
if the REIT makes a mortgage loan on real property owned by a 
stapled entity, the mortgage rules would not apply. If the 
property is a nonqualified real property interest, the interest 
on the mortgage would be ignored under the single-entity 
analysis described above, and the gross income of the stapled 
entity from the property would be treated as income of the 
REIT. Similarly, assume that a stapled entity owns 75 percent 
of the stock of a subsidiary and has a management contract to 
operate a hotel owned by the subsidiary. Assume also that the 
REIT makes a mortgage loan for the hotel. Under the real 
property interest rules, 75 percent of the hotel is treated as 
owned by the stapled entity. Thus, if the hotel is a 
nonqualified real property interest, 75 percent of the 
subsidiary's gross income from the hotel is treated as income 
of the REIT and 75 percent of the income on the management 
contract is ignored under the single-entity analysis. With 
respect to the remaining 25-percent interest in the subsidiary, 
the real property interest rules do not apply, but the mortgage 
rules would treat 25 percent of the mortgage interest and 25 
percent of management contract income as impermissible tenant 
services income of the REIT.

Other rules

    For purposes of both the real property interest and 
mortgage rules, if a stapled REIT is not stapled as of March 
26, 1998, and at all times thereafter, or if it fails to 
qualify as a REIT as of such date or any time thereafter, no 
assets of any member of the stapled REIT group would qualify 
under the grandfather rules. Thus, all of the real property 
interests held by the group would be nonqualified real property 
interests and none of the mortgages held by the group would 
qualify for the existing mortgage exception.
    For a corporate subsidiary owned by a stapled entity, the 
10-percent ownership test would be met if a stapled entity 
owns, directly or indirectly, 10 percent or more of the 
corporation's stock, by either vote or value.53 For 
this purpose, any change in proportionate ownership that is 
attributable solely to fluctuations in the relative fair market 
values of different classes of stock is not taken into account. 
For interests in partnerships, the ownership test would be met 
if either the REIT or a stapled entity owns, directly or 
indirectly, a 10-percent or greater interest in the 
partnership's assets or net profits. Interests in other 
entities, such as trusts, are treated in the same manner as 10-
percent-or-greater interests in partnerships or corporations if 
the REIT or a stapled entity owns, directly or indirectly, 10 
percent or more of the beneficial interests in the entity.
---------------------------------------------------------------------------
    \53\ The provision does not apply to a stapled REIT's ownership of 
a corporate subsidiary, although the REIT would be subject to the 
normal restrictions on a REIT's ownership of stock in a corporation.
---------------------------------------------------------------------------
    Under the provision, terms used that are also used in the 
stapled stock rules (sec. 269B) or the REIT rules (sec. 856) 
have the same meanings as under those rules.
    The Secretary of the Treasury is given authority to 
prescribe such guidance as may be necessary or appropriate to 
carry out the purposes of the provision, including guidance to 
prevent the double counting of income and to prevent 
transactions that would avoid the purposes of the provision.

                             Effective Date

    The provision is effective for taxable years ending after 
March 26, 1998.

    E. MAKE CERTAIN TRADE RECEIVABLES INELIGIBLE FOR MARK-TO-MARKET 
       TREATMENT (SEC. 5005 OF THE BILL AND SEC. 475 OF THE CODE)

                              Present Law

    In general, dealers in securities are required to use a 
mark-to-market method of accounting for securities (sec. 475). 
Exceptions to the mark-to-market rule are provided for 
securities held for investment, certain debt instruments and 
obligations to acquire debt instruments and certain securities 
that hedge securities. A dealer in securities is a taxpayer who 
regularly purchases securities from or sells securities to 
customers in the ordinary course of a trade or business, or who 
regularly offers to enter into, assume, offset, assign, or 
otherwise terminate positions in certain types of securities 
with customers in the ordinary course of a trade or business. A 
security includes (1) a share of stock, (2) an interest in a 
widely held or publicly traded partnership or trust, (3) an 
evidence of indebtedness, (4) an interest rate, currency, or 
equity notional principal contract, (5) an evidence of an 
interest in, or derivative financial instrument in, any of the 
foregoing securities, or any currency, including any option, 
forward contract, short position, or similar financial 
instrument in such a security or currency, or (6) a position 
that is an identified hedge with respect to any of the 
foregoing securities.
    Treasury regulations provide that if a taxpayer would be a 
dealer in securities only because of its purchases and sales of 
debt instruments that, at the time of purchase or sale, are 
customer paper with respect to either the taxpayer or a 
corporation that is a member of the same consolidated group, 
the taxpayer will not normally be treated as a dealer in 
securities. However, the regulations allow such a taxpayer to 
elect out of this exception to dealer status.\54\ For this 
purpose, a debt instrument is customer paper with respect to a 
person if: (1) the person's principal activity is selling 
nonfinancial goods or providing nonfinancial services; (2) the 
debt instrument was issued by the purchaser of the goods or 
services at the time of the purchase of those goods and 
services in order to finance the purchase; and (3) at all times 
since the debt instrument was issued, it has been held either 
by the person selling those goods or services or by a 
corporation that is a member of the same consolidated group as 
that person.
---------------------------------------------------------------------------
    \54\ Treas. reg. sec. 1.475(c)-1(b), issued December 23, 1996; the 
``customer paper election.''
---------------------------------------------------------------------------

                           Reasons for Change

    Congress enacted the mark-to-market rules of section 475 to 
provide a more accurate reflection of the income of securities 
dealers. The Committee does not believe that these provisions 
were intended to be used by taxpayers whose principal activity 
is selling goods and services to obtain a deduction for loss in 
value of their receivables at a time earlier than otherwise 
would be permitted.

                        Explanation of Provision

    The provision provides that certain trade receivables are 
not eligible for mark-to-market treatment. A trade receivable 
is covered by the provision if it is a note, bond or debenture 
arising out of the sale of goods by a person the principal 
activity of which is selling or providing nonfinancial goods 
and services and it is held by such person or a related person 
at all times since it was issued.
    Under the provision, a receivable meeting the above 
definition is not treated as a security for purposes of the 
mark-to-market rules (sec. 475). Thus, such receivables are not 
marked-to-market, even if the taxpayer qualifies as a dealer in 
other securities. Because trade receivables cease to meet the 
above definition when they are disposed of (other than to a 
related person), a taxpayer who regularly sells trade 
receivables is treated as a dealer in securities as under 
present law, with the result that the taxpayer's other 
securities would be subject to mark-to-market treatment unless 
an exception to section 475 applies (such as that for 
securities identified as held for investment).

                             Effective Date

    The provision generally is effective for taxable years 
ending after the date of enactment. Adjustments required under 
section 481 as a result of the change in method of accounting 
generally are required to be taken into account ratably over 
the four-year period beginning in the first taxable year for 
which the provision is in effect. However, where the taxpayer 
terminates its existence or ceases to engage in the trade or 
business that generated the receivables (except as a result of 
a tax-free transfer), any remaining balance of the section 481 
adjustment is taken into account entirely in the year of such 
cessation or termination (see sec. 5.04(c) of Rev. Proc. 97-37, 
1997-33 I.R.B. 18).

   F. ADD VACCINES AGAINST ROTAVIRUS GASTROENTERITIS TO THE LIST OF 
   TAXABLE VACCINES (SEC. 5006 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: 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'') advisory committee has 
favorably reviewed a vaccine against the disease and the 
Centers for Disease Control have voted to recommend the vaccine 
for inoculation of children, subject to final FDA approval. 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. 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.

                  Title VI. Tax Technical Corrections

        Technical Corrections to the Taxpayer Relief Act of 1997

 a. amendments to title i of the 1997 act relating to the child credit

1. Stacking rules for the child credit under the limitations based on 
        tax liability (sec. 6003(a) of the bill, sec. 101(a) of the 
        1997 Act, and sec. 24 of the Code)

                              Present Law

    Present law provides a $500 ($400 for taxable year 1998) 
tax credit for each qualifying child under the age of 17. A 
qualifying child is defined as an individual for whom the 
taxpayer can claim a dependency exemption and who is a son or 
daughter of the taxpayer (or a descendent of either), a stepson 
or stepdaughter of the taxpayer or an eligible foster child of 
the taxpayer. For taxpayers with modified adjusted gross income 
in excess of certain thresholds, the allowable child credit is 
phased out. The length of the phase-out range is affected by 
the number of the taxpayer's qualifying children.
    Generally, the maximum amount of a taxpayer's child credit 
for each taxable year is limited to the excess of the 
taxpayer's regular tax liability over the taxpayer's tentative 
minimum tax liability (determined without regard to the 
alternative minimum foreign tax credit). In the case of a 
taxpayer with three or more qualifying children, the maximum 
amount of the taxpayer's child credit for each taxable year is 
limited to the greater of: (1) the amount computed under the 
rule described above, or (2) an amount equal to the excess of 
the sum of the taxpayer's regular income tax liability and the 
employee share of FICA taxes (and one-half of the taxpayer's 
SECA tax liability, if applicable) reduced by the earned income 
credit. In the case of a taxpayer with three or more qualifying 
children, the excess of the amount allowed in (2) over the 
amount computed in (1) is a refundable credit.
    Nonrefundable credits may not be used to reduce tax 
liability below a taxpayer's tentative minimum tax. Certain 
credits not used as result of this rule may be carried over to 
other taxable years, while others may not. Special stacking 
rules apply in determining which nonrefundable credits are used 
in the current year. Generally, the stacking rules require that 
nonrefundable personal credits be considered 
first,55 followed by other credits, business 
credits, and the investment tax credit. Refundable credits, 
which are not limited by the minimum tax, are not stacked until 
after the nonrefundable credits.
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    \55\ It is understood that there is also a stacking rule under 
which the income tax liability limitation applies between the 
nonrefundable personal credits, including the nonrefundable portion of 
the child credit. Generally, the nonrefundable portion of the child 
credit and the other nonrefundable personal credits which do not 
provide a carryforward are grouped together and stacked first followed 
by the nonrefundable personal credits which provide a carryforward for 
purposes of applying the income tax liability limitation. Therefore, if 
the sum of the taxpayer's nonrefundable credits exceeds the difference 
between the taxpayer's regular income tax liability and the taxpayer's 
tentative minimum tax (determined without regard to the alternative 
minimum foreign tax credit) then the nonrefundable personal credits 
which do not provide a carryforward would be applied to reduce the 
income tax liability for that year first and any excess credits which 
allow a carryforward would be available to reduce the taxpayer's income 
tax liability in future years.
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                        Explanation of Provision

    The bill clarifies the application of the income tax 
liability limitation to the refundable portion of the child 
credit by treating the refundable portion of the child credit 
in the same way as the other refundable credits. Specifically, 
after all the other credits are applied according to the 
stacking rules of the income tax limitation then the refundable 
credits are applied first to reduce the taxpayer's tax 
liability for the year and then to provide a credit in excess 
of income tax liability for the year.

                             Effective Date

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

2. Treatment of a portion of the child credit as a supplemental child 
        credit (sec. 6003(b) of the bill, sec. 101(b) of the 1997 Act, 
        and sec. 32(n) of the Code)

                              Present Law

    A portion of the child credit may be treated as a 
supplemental child credit. The supplemental child credit is 
treated as provided under the earned income credit and the 
child credit amount is reduced by the amount of the 
supplemental child credit.

                        Explanation of Provision

    The bill clarifies that the treatment of a portion of the 
child credit as a supplemental child credit under the earned 
income credit (sec. 32) and the offsetting reduction of the 
child credit (sec. 24) does not affect the total tax credits 
allowed to the taxpayer or any other tax credit available to 
the taxpayer. Rather, it simply reduces the otherwise allowable 
nonrefundable child credit dollar-for-dollar by the amount 
treated as a supplemental child credit. The bill also clarifies 
that the amount of the supplemental child credit under section 
32(n) is the lesser of (1) the amount by which the taxpayer's 
total nonrefundable personal credits (as limited by the tax 
liability limitation of section 26(a)) are increased by reason 
of the child credit, or (2) the ``negative'' tax liability of 
the taxpayer, defined as the excess of taxpayer's total tax 
credits, including the earned income credit over the sum of the 
taxpayer's regular income taxes and social security taxes. For 
purposes of this calculation, subsection 32(n) is not taken 
into account. The bill also clarifies that the earned income 
credit rules (e.g., the phaseout of the earned income credit) 
generally do not apply to the supplemental child credit.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

    b. amendments to title ii of the 1997 act relating to education 
                               incentives

1. Clarifications to HOPE and Lifetime Learning tax credits (sec. 
        6004(a) of the bill, sec. 201 of the 1997 Act, and secs. 25A 
        and 6050S of the Code)

                              Present Law

    Individual taxpayers are allowed to claim a nonrefundable 
HOPE credit against Federal income taxes up to $1,500 per 
student for qualified tuition and fees paid during the year on 
behalf of a student (i.e., the taxpayer, the taxpayer's spouse, 
or a dependent of the taxpayer) who is enrolled in a post-
secondary degree or certificate program at an eligible post-
secondary institution on at least a half-time basis. The HOPE 
credit is available only for the first two years of a student's 
post-secondary education. The credit rate is 100 percent of the 
first $1,000 of qualified tuition and fees and 50 percent on 
the next $1,000 of qualified tuition and fees. The HOPE credit 
amount that a taxpayer may otherwise claim is phased out for 
taxpayers with modified adjusted gross income (AGI) between 
$40,000 and $50,000 ($80,000 and $100,000 for joint returns). 
For taxable years beginning after 2001, the $1,500 maximum HOPE 
credit amount and the AGI phase-out range will be indexed for 
inflation. The HOPE credit is available for expenses paid after 
December 31, 1997, for education furnished in academic periods 
beginning after such date.
    If a student is not eligible for the HOPE credit (or in 
lieu of claiming a HOPE credit with respect to a student), 
individual taxpayers are allowed to claim a nonrefundable 
Lifetime Learning credit against Federal income taxes equal to 
20 percent of qualified tuition and fees paid during the 
taxable year on behalf of the taxpayer, the taxpayer's spouse, 
or a dependent. In contrast to the HOPE credit, the student 
need not be enrolled on at least a half-time basis in order to 
be eligible for the Lifetime Learning credit, which is 
available for an unlimited number of years of post-secondary 
training. For expenses paid before January 1, 2003, up to 
$5,000 of qualified tuition and fees per taxpayer return will 
be eligible for the Lifetime Learning credit (i.e., the maximum 
credit per taxpayer return will be $1,000). For expenses paid 
after December 31, 2002, up to $10,000 of qualified tuition and 
fees per taxpayer return will be eligible for the Lifetime 
Learning credit (i.e., the maximum credit per taxpayer return 
will be $2,000). The Lifetime Learning credit amount that a 
taxpayer may otherwise claim is phased out over the same 
modified AGI phase-out range as applies for purposes of the 
HOPE credit. The Lifetime Learning credit is available for 
expenses paid after June 30, 1998, for education furnished in 
academic periods beginning after such date.
    Section 6050S provides that certain educational 
institutions and other taxpayers engaged in a trade or business 
must file information returns with the IRS and certain 
individual taxpayers, as required by regulations prescribed by 
the Secretary of the Treasury, containing information on 
individuals who made payments for qualified tuition and related 
expenses or to whom reimbursements or refunds were made of such 
expenses.

                        Explanation of Provision

    The bill clarifies that, under section 6050S, information 
returns containing information with respect to qualified 
tuition and fees must be filed by a person that is not an 
eligible educational institution only if such person is engaged 
in a trade or business of making payments to any individual 
under an insurance arrangement as reimbursements or refunds (or 
similar payments) of qualified tuition and related expenses. As 
under present law, section 6050S will continue to require the 
filing of information returns by persons engaged in a trade or 
business if, in the course of such trade or business, the 
person receives from any individual interest aggregating $600 
or more for any calendar year on one or more qualified 
education loans.

                             Effective Date

    The provision is effective as if included in the 1997 Act--
i.e., for expenses paid after December 31, 1997, for education 
furnished in academic periods beginning after such date.

2. Education IRAs (sec. 6004(d) of the bill, sec. 213 of the 1997 Act, 
        and sec. 530 of the Code)

                              Present Law

    Section 530 provides that taxpayers may establish 
``education IRAs,'' meaning certain trusts or custodial 
accounts created exclusively for the purpose of paying 
qualified higher education expenses of a named beneficiary. 
Annual contributions to education IRAs may not exceed $500 per 
designated beneficiary, and may not be made after the 
designated beneficiary reaches age 18. Contributions to an 
education IRA may not be made by certain high-income 
taxpayers--i.e., the contribution limit is phased out for 
taxpayers with modified adjusted gross income between $95,000 
and $110,000 ($150,000 and $160,000 for taxpayers filing joint 
returns). No contribution may be made to an education IRA 
during any year in which any contributions are made by anyone 
to a qualified State tuition program on behalf of the same 
beneficiary.
    Until a distribution is made from an education IRA, 
earnings on contributions to the account generally are not 
subject to tax.56 In addition, distributions from an 
education IRA are excludable from gross income to the extent 
that the distribution does not exceed qualified higher 
education expenses incurred by the beneficiary during the year 
the distribution is made (provided that a HOPE credit or 
Lifetime Learning credit is not claimed with respect to the 
beneficiary for the same taxable year). The earnings portion of 
an education IRA distribution not used to pay qualified higher 
education expenses is includible in the gross income of the 
distributee and generally is subject to an additional 10-
percent tax.57 However, the additional 10-percent 
tax does not apply if a distribution is made of excess 
contributions above the $500 limit (and any earnings 
attributable to such excess contributions) if the distribution 
is made on or before the date that a return is required to be 
filed (including extensions of time) by the contributor for the 
year in which the excess contribution was made. In addition, 
section 530 allows tax-free rollovers of account balances from 
an education IRA benefiting one family member to an education 
IRA benefiting another family member. Section 530 is effective 
for taxable years beginning after December 31, 1997.
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    \56\ However, education IRAs are subject to the unrelated business 
income tax (``UBIT'') imposed by section 511.
    \57\ This 10-percent additional tax does not apply if a 
distribution from an education IRA is made on account of the death, 
disability, or scholarship received by the designated beneficiary.
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                        Explanation of Provision

    Consistent with the legislative history to the 1997 Act, 
the bill provides that any balance remaining in an education 
IRA will be deemed to be distributed within 30 days after the 
date that the designated beneficiary reaches age 30 (or, if 
earlier, within 30 days of the date that the beneficiary dies). 
The bill further clarifies that, in the event of the death of 
the designated beneficiary, the balance remaining in an 
education IRA may be distributed (without imposition of the 
additional 10-percent tax) to any other (i.e., contingent) 
beneficiary or to the estate of the deceased designated 
beneficiary. If any member of the family of the deceased 
beneficiary becomes the new designated beneficiary of an 
education IRA, then no tax will be imposed on such 
redesignation and the account will continue to be treated as an 
education IRA.
    Under the bill, the additional 10-percent tax provided for 
by section 530(d)(4) will not apply to a distribution from an 
education IRA, which (although used to pay for qualified higher 
education expenses) is includible in the beneficiary's gross 
income solely because the taxpayer elects to claim a HOPE or 
Lifetime Learning credit with respect to the beneficiary. The 
bill further provides that the additional 10-percent tax will 
not apply to the distribution of any contribution to an 
education IRA made during a taxable year if such distribution 
is made on or before the date that a return is required to be 
filed (including extensions of time) by the beneficiary for the 
taxable year during which the contribution was made (or, if the 
beneficiary is not required to file such a return, April 15th 
of the year following the taxable year during which the 
contribution was made). In addition, the bill amends section 
4973(e) to provide that the excise tax penalty applies under 
that section for each year that an excess contribution remains 
in an education IRA (and not merely the year that the excess 
contribution is made).
    The bill clarifies that, in order for taxpayers to 
establish an education IRA, the designated beneficiary must be 
a life-in-being. The bill also clarifies that, under rules 
contained in present-law section 72, distributions from 
education IRAs are treated as representing a pro-rata share of 
the principal (i.e., contributions) and accumulated earnings in 
the account.58
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    \58\ For example, if an education IRA has a total balance of 
$10,000, of which $4,000 represents principal (i.e., contributions) and 
$6,000 represents earnings, and if a distribution of $2,000 is made 
from such an account, then $800 of that distribution will be treated as 
a return of principal (which under no event is includible in the gross 
income of the distributee) and $1,200 of the distribution will be 
treated as accumulated earnings. In such a case, if qualified higher 
education expenses of the beneficiary during the year of the 
distribution are at least equal to the $2,000 total amount of the 
distribution (i.e., principal plus earnings), then the entire earnings 
portion of the distribution will be excludible under section 530, 
provided that a Hope credit or Lifetime Learning credit is not claimed 
for that same taxable year on behalf of the beneficiary. If, however, 
the qualified higher education expenses of the beneficiary for the 
taxable year are less than the total amount of the distribution, then 
only a portion of the earnings will be excludable from gross income 
under section 530. Thus, in the example discussed above, if the 
beneficiary incurs only $1,500 of qualified higher education expenses 
in the year that a $2,000 distribution is made, then only $900 of the 
earnings will be excludable from gross income under section 530 (i.e., 
an exclusion will be provided for the pro-rata portion of the earnings, 
based on the ratio that the $1,500 of qualified higher education 
expenses bears to the $2,000 distribution) and the remaining $300 of 
the earnings portion of the distribution will be includible in the 
distributee's gross income.
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    The bill also provides that, if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion under section 530 for a distribution 
from an education IRA, then no deduction (under section 162 or 
any other section), or exclusion (under section 135) or credit 
will be allowed under the Internal Revenue Code with respect to 
such qualified higher education expenses.
    In addition, because the 1997 Act allows taxpayers to 
redeem U.S. Savings Bonds and be eligible for the exclusion 
under present-law section 135 (as if the proceeds were used to 
pay qualified higher education expenses) provided the proceeds 
from the redemption are contributed to an education IRA (or to 
a qualified State tuition program defined under section 529) on 
behalf of the taxpayer, the taxpayer's spouse, or a dependent, 
the bill conforms the definition of ``eligible educational 
institution'' under section 135 to the broader definition of 
that term under present-law section 530 (and section 529). 
Thus, for purposes of section 135, as under present-law 
sections 529 and 530, the term ``eligible educational 
institution'' is defined as an institution which (1) is 
described in section 481 of the Higher Education Act of 1965 
(20 U.S.C. 1088) and (2) is eligible to participate in 
Department of Education student aid programs.

                             Effective Date

    The provisions are effective as if included in the 1997 
Act--i.e., for taxable years beginning after December 31, 1997.

3. Treatment of cancellation of certain student loans (6004(f) of the 
        bill, sec. 225 of the 1997 Act, and sec. 108(f) of the Code)

                              Present Law

    Under present law, an individual's gross income does not 
include forgiveness of loans made by tax-exempt educational 
organizations if the proceeds of such loans are used to pay 
costs of attendance at an educational institution or to 
refinance outstanding student loans and the student is not 
employed by the lender organization. The exclusion applies only 
if the forgiveness is contingent on the student's working for a 
certain period of time in certain professions for any of a 
broad class of employers. In addition, the student's work must 
fulfill a public service requirement.

                        Explanation of Provision

    The bill clarifies that gross income does not include 
amounts from the forgiveness of loans made by educational 
organizations and certain tax-exempt organizations to refinance 
any existing student loan (and not just loans made by 
educational organizations). In addition, the bill clarifies 
that refinancing loans made by educational organizations and 
certain tax-exempt organizations must be made pursuant to a 
program of the refinancing organization (e.g., school or 
private foundation) that requires the student to fulfill a 
public service work requirement.

                             Effective Date

    The provision is effective as of August 5, 1997, the date 
of enactment of the 1997 Act.

4. Deduction for student loan interest (sec. 6004(b) of the bill, sec. 
        202 of the 1997 Act, and sec. 221 of the Code)

                              Present Law

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, up to a maximum deduction of $2,500 per 
year. The deduction is allowed only with respect to interest 
paid on a qualified education loan during the first 60 months 
in which interest payments are required. In this regard, 
required payments of interest do not include nonmandatory 
payments, such as interest payments made during a period of 
loan forbearance. Months during which the qualified education 
loan is in deferral or forbearance do not count against the 60-
month period. No deduction is allowed to an individual if that 
individual is claimed as a dependent on another taxpayer's 
return for the taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred to pay for the qualified higher education 
expenses of the taxpayer, the taxpayer's spouse, or any 
dependent of the taxpayer as of the time the indebtedness was 
incurred in attending (1) post-secondaryeducational 
institutions and certain vocational schools defined by reference to 
section 481 of the Higher Education Act of 1965, or (2) institutions 
conducting internship or residency programs leading to a degree or 
certificate from an institution of higher education, a hospital, or a 
health care facility conducting postgraduate training.

                        Explanation of Provision

    The bill clarifies that the student loan interest deduction 
may be claimed only by a taxpayer who is legally obligated to 
make the interest payments pursuant to the terms of the loan.

                             Effective Date

    The provision is effective for interest payments due and 
paid after December 31, 1997, on any qualified education loan.

5. Enhanced deduction for corporate contributions of computer 
        technology and equipment (sec. 6004(e) of the bill, sec. 224 of 
        the 1997 Act, and sec. 170(e)(6) 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. However, 
in the case of a charitable contribution of inventory or other 
ordinary-income property, short-term capital gain property, or 
certain gifts to private foundations, the amount of the 
deduction is limited to the taxpayer's basis in the property. 
In the case of a charitable contribution of tangible personal 
property, a taxpayer's deduction is limited to the adjusted 
basis in such property if the use by the recipient charitable 
organization is unrelated to the organization's tax-exempt 
purpose.
    The Taxpayer Relief Act of 1997 provided that certain 
contributions of computer and other equipment to eligible 
donees to be used for the benefit of elementary and secondary 
school children qualify for an augmented deduction. Under this 
special rule, the amount of the augmented deduction available 
to a corporation making a qualified contribution generally is 
equal to its basis in the donated property plus one-half of the 
amount of ordinary income that would have been realized if the 
property had been sold. However, the augmented deduction cannot 
exceed twice the basis of the donated property. To qualify for 
the augmented deduction, the contribution must satisfy various 
requirements.
    The legislative history of the provision states that the 
special tax treatment for contributions of computer and other 
equipment was to be effective for contributions made during a 
three-year period in taxable years beginning after December 31, 
1997, and before January 1, 2001.59 However, as a 
result of a drafting error, the statutory provision does not 
apply to contributions made during taxable years beginning 
after December 31, 1999.
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    \59\ H. Rept. 105-220, p. 374.
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                        Explanation of Provision

    The bill corrects the termination date of the provision to 
provide that the special rule applies to contributions made 
during taxable years beginning after December 31, 1997, and 
before December 31, 2000.
    In addition, the bill clarifies that the requirements set 
forth in section 170(e)(6)(B)(ii)-(vii) apply regardless of 
whether the donee is an educational organization or a tax-
exempt charitable entity. Similarly, the rule in section 
170(e)(6)(ii)(I) regarding subsequent contributions by private 
foundations is clarified to permit contributions to either 
educational organizations or tax-exempt charitable entities 
described in section 170(e)(6)(B)(i).

                             Effective Date

    The provision is effective as of August 5, 1997, the date 
of enactment of the 1997 Act.

6. Qualified State tuition programs (sec. 6004(c) of the bill, sec. 211 
        of the 1997 Act, and sec. 529 of the Code)

                              Present Law

    Section 529 provides tax-exempt status to ``qualified State 
tuition programs,'' meaning certain programs established and 
maintained by a State (or agency or instrumentality thereof) 
under which persons may (1) purchase tuition credits or 
certificates on behalf of a designated beneficiary that entitle 
the beneficiary to a waiver or payment of qualified higher 
education expenses of the beneficiary, or (2) make 
contributions to an account that is established for the purpose 
of meeting qualified higher education expenses of the 
designated beneficiary of the account. The term ``qualified 
higher education expenses'' means expenses for tuition, fees, 
books, supplies, and equipment required for the enrollment or 
attendance at an eligible postsecondary educational 
institution, as well as room and board expenses (meaning the 
minimum room and board allowance applicable to the student as 
determined by the institution in calculating costs of 
attendance for Federal financial aid programs under sec. 472 of 
the Higher Education Act of 1965) for any period during which 
the student is at least a half-time student.
    Section 529 also provides that no amount shall be included 
in the gross income of a contributor to, or beneficiary of, a 
qualified State tuition program with respect to any 
distribution from, or earnings under, such program, except that 
(1) amounts distributed or educational benefits provided to a 
beneficiary (e.g., when the beneficiary attends college) will 
be included inthe beneficiary's gross income (unless excludable 
under another Code section) to the extent such amounts or the value of 
the educational benefits exceed contributions made on behalf of the 
beneficiary, and (2) amounts distributed to a contributor or another 
distributee (e.g., when a parent receives a refund) will be included in 
the contributor's/distributee's gross income to the extent such amounts 
exceed contributions made on behalf of the beneficiary. Earnings on an 
account may be refunded to a contributor or beneficiary, but the State 
or instrumentality must impose a more than de minimis monetary penalty 
unless the refund is (1) used for qualified higher education expenses 
of the beneficiary, (2) made on account of the death or disability of 
the beneficiary, or (3) made on account of a scholarship received by 
the designated beneficiary to the extent the amount refunded does not 
exceed the amount of the scholarship used for higher education 
expenses.
    A transfer of credits (or other amounts) from one account 
benefiting one designated beneficiary to another account 
benefiting a different beneficiary will be considered a 
distribution (as will a change in the designated beneficiary of 
an interest in a qualified State tuition program), unless the 
beneficiaries are members of the same family. For this purpose, 
the term ``member of the family'' means persons described in 
paragraphs (1) through (8) of section 152(a)--e.g., sons, 
daughters, brothers, sisters, nephews and nieces, certain in-
laws, etc--and any spouse of such persons.

                        Explanation of Provision

    The bill clarifies that, under rules contained in present-
law section 72, distributions from qualified State tuition 
programs are treated as representing a pro-rata share of the 
principal (i.e., contributions) and accumulated earnings in the 
account.
    In addition, the bill modifies section 529(e)(2) to clarify 
that--for purposes of tax-free rollovers and changes of 
designated beneficiaries--a ``member of the family'' includes 
the spouse of the original beneficiary.

                             Effective Date

    The provisions are effective for distributions made after 
December 31, 1997.

7. Qualified zone academy bonds (sec. 6004(g) of the bill, sec. 226 of 
        the 1997 Act, and sec. 1397E of the Code)

                              Present Law

    Certain financial institutions (i.e., banks, insurance 
companies, and corporations actively engaged in the business of 
lending money) that hold ``qualified zone academy bonds'' are 
entitled to a nonrefundable tax credit in an amount equal to a 
credit rate (set monthly by the Treasury Department 
60) multiplied by the face amount of the bond (sec. 
1397E). The credit rate applies to all such bonds issued in 
each month. A taxpayer holding a qualified zone academy bond on 
the credit allowance date (i.e., each one-year anniversary of 
the issuance of the bond) is entitled to a credit. The credit 
is includible in gross income (as if it were an interest 
payment on the bond), and may be claimed against regular income 
tax and AMT liability.
---------------------------------------------------------------------------
    \60\ The Treasury Department will set the credit rate each month at 
a rate estimated to allow issuance of qualified zone academy bonds 
without discount and without interest cost to the issuer.
---------------------------------------------------------------------------
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) at 
least 95 percent of the proceeds are used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy''--meaning certain public schools 
located in empowerment zones or enterprise communities or with 
a certain percentage of students from low-income families--and 
(2) private entities have promised to make contributions to the 
qualified zone academy with a value equal to at least 10 
percent of the bond proceeds.
    A total of $400 million of ``qualified zone academy bonds'' 
may be issued in each of 1998 and 1999. The $400 million 
aggregate bond cap will be allocated each year to the States 
according to their respective populations of individuals below 
the poverty line.61 Each State, in turn, will 
allocate the credit to qualified zone academies within such 
State. A State may carry over any unused allocation into 
subsequent years.
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    \61\ See Rev. Proc. 98-9, which sets forth the maximum face amount 
of qualified zone academy bonds that may be issued for each State 
during 1998; IRS Proposed Rules (REG-119449-97), which provides 
guidance to holders and issuers of qualified zone academy bonds.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill clarifies that, for purposes of section 
6655(g)(1)(B), the credit for certain holders of qualified zone 
academy bonds may be claimed for estimated tax purposes. 
Similarly, the bill clarifies for purposes of section 
6401(b)(1) the manner in which the credit is taken into account 
when determining whether a taxpayer has made an overpayment of 
tax.

                             Effective Date

    The provisions are effective for obligations issued after 
December 31, 1997.

    C. Amendments to Title III of the 1997 Act Relating to Savings 
                               Incentives

1. Conversions of IRAs into Roth IRAs (sec. 6005(b) of the bill, sec. 
        302 of the 1997 Act, and secs. 408A and 72(t) of the Code)

                              Present Law

    A taxpayer with adjusted gross income of less than $100,000 
may convert a present-law deductible or nondeductible IRA into 
a Roth IRA at any time. The amount converted is includible in 
income in the year of the conversion, except that if the 
conversion occurs in 1998, the amount converted is includible 
in income ratably over the 4-year period beginning with the 
year in which the conversion occurs.62 Amounts 
includible in income as a result of the conversion are not 
taken into account in determining whether the $100,000 
threshold is exceeded. The 10-percent tax on early withdrawals 
does not apply to conversions of IRAs into Roth IRAs.
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    \62\ If the conversion is accomplished by means of a withdrawal and 
a rollover into a Roth IRA, the 4-year rule applies if the withdrawal 
is made during 1998 and the rollover occurs within 60 days of the 
withdrawal. In such a case, the 4-year period begins with the year in 
which the withdrawal was made. For purposes of this discussion, such 
conversions are treated as occurring in 1998.
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    In general, distributions of earnings from a Roth IRA are 
excludable from income if the individual has had a Roth IRA for 
at least 5 years and certain other requirements are satisfied. 
The 5-year holding period with respect to conversion Roth IRAs 
begins from the year of the conversion. (Distributions that are 
excludable from income are referred to as qualified 
distributions.)
    Present law does not contain a specific rule addressing 
what happens if an individual dies during the 4-year spread 
period for 1998 conversions.

                        Explanation of Provision

Distributions of converted amounts

            Distributions before the end of the 4-year spread
    The bill modifies the rules relating to conversions of IRAs 
into Roth IRAs in order to prevent taxpayers from receiving 
premature distributions from a Roth conversion IRA while 
retaining the benefits of 4-year income averaging. In the case 
of conversions to which the 4-year income inclusion rule 
applies, income inclusion will be accelerated with respect to 
any amounts withdrawn before the final year of inclusion. Under 
this rule, a taxpayer that withdraws converted amounts prior to 
the last year of the 4-year spread will be required to include 
in income the amount otherwise includible under the 4-year 
rule, plus the lesser of (1) the taxable amount of the 
withdrawal, or (2) the remaining taxable amount of the 
conversion (i.e., the taxable amount of the conversion not 
included in income under the 4-year rule in the current or a 
prior taxable year). In subsequent years (assuming no such 
further withdrawals), the amount includible in income under the 
4-year will be the lesser of (1) the amount otherwise required 
under the 4-year rule (determined without regard to the 
withdrawal) or (2) the remaining taxable amount of the 
conversion.
    Under the bill, application of the 4-year spread will be 
elective. The election will be made in the time and manner 
prescribed by the Secretary. If no election is made, the 4-year 
rule will be deemed to be elected. An election, or deemed 
election, with respect to the 4-year spread cannot be changed 
after the due date for the return for the first year of the 
income inclusion (including extensions).
    The following example illustrates the application of these 
rules.

          Example: Taxpayer A has a nondeductible IRA with a 
        value of $100 (and no other IRAs). The $100 consists of 
        $75 of contributions and $25 of earnings. A converts 
        the IRA into a Roth IRA in 1998 and elects the 4-year 
        spread. As a result of the conversion, $25 is 
        includible in income ratably over 4 years ($6.25 per 
        year). The 10-percent early withdrawal tax does not 
        apply to the conversion. At the beginning of 1999, the 
        value of the account is $110, and A makes a withdrawal 
        of $10. Under the proposal, the withdrawal would be 
        treated as attributable entirely to amounts that were 
        includible in income due to the conversion. In the year 
        of withdrawal, $16.25 would be includible in income 
        (the $6.25 includible in the year of withdrawal under 
        the 4-year rule, plus $10 ($10 is less than the 
        remaining taxable amount of $12.50 ($25-$12.50)). In 
        the next year, $2.50 would be includible in income 
        under the 4-year rule. No amount would be includible in 
        income in year 4 due to the conversion.
            Application of early withdrawal tax to converted amounts
    The bill modifies the rules relating to conversions to 
prevent taxpayers from receiving premature distributions (i.e., 
within 5 years) while retaining the benefit of the nonpayment 
of the early withdrawal tax. Under the bill, if converted 
amounts are withdrawn within the 5-year period beginning with 
the year of the conversion, then, to the extent attributable to 
amounts that were includible in income due to the conversion, 
the amount withdrawn will be subject to the 10- percent early 
withdrawal tax.63
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    \63\ The otherwise available exceptions to the early withdrawal 
tax, e.g., for distributions after age 59\1/2\, would apply.
---------------------------------------------------------------------------
    Applying this rule to the example above, the $10 withdrawal 
would be subject to the 10-percent early withdrawal tax (unless 
as exception applies).
            Application of 5-year holding period
    The bill will also eliminate the special rule under which a 
separate 5-year holding period begins for purposes of 
determining whether a distribution of amounts attributable to a 
conversion is a qualified distribution; thus, the 5-year 
holding rule for Roth IRAs will begin with the year for which a 
contribution is first made to a Roth IRA. A subsequent 
conversion will not start the running of a new 5-year period.
            Ordering rules
    Ordering rules will apply to determine what amounts are 
withdrawn in the event a Roth IRA contains both conversion 
amounts (possibly from different years) and other 
contributions. Under these rules, regular Roth IRA 
contributions will be deemed to be withdrawn first, then 
converted amounts (starting with the amounts first converted). 
Withdrawals of converted amounts will be treated as coming 
first from converted amounts that were includible in income. As 
under present law, earnings will be treated as withdrawn after 
contributions. For purposes of these rules, all Roth IRAs, 
whether or not maintained in separate accounts, will be 
considered a single Roth IRA.
            Corrections
    In order to assist individuals who erroneously convert IRAs 
into Roth IRAs or otherwise wish to change the nature of an IRA 
contribution, contributions to an IRA (and earnings thereon) 
may be transferred in a trustee-to-trustee transfer from any 
IRA to another IRA by the due date for the taxpayer's return 
for the year of the contribution (including extensions). Any 
such transferred contributions will be treated as if 
contributed to the transferee IRA (and not to the transferor 
IRA). Trustee-to-trustee transfers include transfers between 
IRA trustees as well as IRA custodians, apply to transfers from 
and to IRA accounts and annuities, and apply to transfers 
between IRA accounts and annuities with the same trustee or 
custodian.

Effect of death on 4-year spread

    Under the bill, in general, any amounts remaining to be 
included in income as a result of a 1998 conversion will be 
includible in income on the final return of the taxpayer. If 
the surviving spouse is the sole beneficiary of the Roth IRA, 
the spouse may continue the deferral by including the remaining 
amounts in his or her income over the remainder of the 4-year 
period.

Calculation of AGI limit for conversions

    The bill clarifies the determination of AGI for purposes of 
applying the $100,000 AGI limit on IRA conversions into Roth 
IRAs. Under the bill, the conversion amount (to the extent 
otherwise includible in AGI) is subtracted from AGI as 
determined under the rules relating to IRAs (sec. 219) for the 
year of distribution. Thus, for example, the AGI-based phase 
out of the exemption from the disallowance for passive activity 
losses from rental real estate activities (sec. 469(i)(3)) 
would be applied taking into account the amount of the 
conversion that is includible in AGI, and then the amount of 
the conversion would be subtracted from AGI in determining 
whether a taxpayer is eligible to convert an IRA into a Roth 
IRA.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

2. Penalty-free distributions for education expenses and purchase of 
        first homes (sec. 6005(c) of the bill, secs. 203 and 303 of the 
        1997 Act, and sec. 402 of the Code)

                              Present Law

    The 10-percent early withdrawal tax does not apply to 
distributions from an IRA if the distribution is for first-time 
homebuyer expenses, subject to a $10,000 life-time cap, or for 
higher education expenses. These exceptions do not apply to 
distributions from employer-sponsored retirement plans. A 
distribution from an employer-sponsored retirement plan that is 
an ``eligible rollover distribution'' may be rolled over to an 
IRA. The term ``eligible rollover distribution'' means any 
distribution to an employee of all or a portion or the balance 
to the credit of the employee in a qualified trust, except the 
term does not include certain periodic distributions, 
distributions based on life or joint life expectancies and 
distributions required under the minimum distribution rules. 
Generally, distributions from cash or deferred arrangements 
made on account of hardship are eligible rollover 
distributions. An eligible rollover distribution which is not 
transferred directly to another retirement plan or an IRA is 
subject to 20-percent withholding on the distribution.

                        Explanation of Provision

    Under present law, participants in employer-sponsored 
retirement plans can avoid the early withdrawal tax applicable 
to such plans by rolling over hardship distributions to an IRA 
and withdrawing the funds from the IRA. The bill modifies the 
rules relating to the ability to roll over hardship 
distributions from employer-sponsored retirement plans 
(including section 403(b) plans) in order to prevent such 
avoidance of the 10-percent early withdrawal tax. The bill 
provides that distributions from cash or deferred arrangements 
and similar arrangements made on account of hardship of the 
employee are not eligible rollover distributions. Such 
distributions will not be subject to the 20-percent withholding 
applicable to eligible rollover distributions.

                             Effective Date

    The provision is effective for distributions after December 
31, 1998.

3. Limits based on modified adjusted gross income (sec. 6005(b) of the 
        bill, sec. 302(a) of the 1997 Act, and sec. 72(t) of the Code)

                              Present Law

    The $2,000 Roth IRA maximum contribution limit is phased 
out for individual taxpayers with adjusted gross income 
(``AGI'') between $95,000 and $110,000 and for married 
taxpayers filing a joint return with AGI between $150,000 and 
$160,000. The maximum deductible IRA contribution is phased out 
between $0 and $10,000 of AGI in the case of married couples 
filing a separate return.

                        Explanation of Provision

    The bill clarifies the phase-out range for the Roth IRA 
maximum contribution limit for a married individual filing a 
separate return and conforms it to the range for deductible IRA 
contributions. Under the bill, the phase-out range for married 
individuals filing a separate return will be $0 to $10,000 of 
AGI.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

4. Contribution limit to Roth IRAs (sec. 6005(b) of the bill, sec. 302 
        of the 1997 Act, and sec. 408A(c) of the Code)

                              Present Law

    An individual who is an active participant in an employer-
sponsored plan may deduct annual IRA contributions up to the 
lesser of $2,000 or 100 percent of compensation if the 
individual's adjusted gross income (``AGI'') does not exceed 
certain limits. For 1998, the limit is phased-out over the 
following ranges of AGI: $30,000 to $40,000 in the case of a 
single taxpayer and $50,000 to $60,000 in the case of married 
taxpayers. An individual who is not an active participant in an 
employer-sponsored retirement plan (and whose spouse is not an 
active participant) may deduct IRA contributions up to the 
limits described above without limitation based on income. An 
individual who is not an active participant in an employer-
sponsored retirement plan (and whose spouse is such an active 
participant) may deduct IRA contributions up to the limits 
described above if the AGI of the such individuals filing a 
joint return does not exceed certain limits. The limit is 
phased for out for such individuals with AGI between $150,000 
and $160,000.
    An individual may make nondeductible contributions up to 
the lesser of $2,000 or 100 percent of compensation to a Roth 
IRA if the individual's AGI does not exceed certain limits. An 
individual may make nondeductible contributions to an IRA to 
the extent the individual does not or cannot make deductible 
contributions to an IRA or contributions to a Roth IRA. 
Contributions to all an individual's IRAs for a taxable year 
may not exceed $2,000.

                        Explanation of Provision

    The bill clarifies the intent of the Act that an individual 
may contribute up to $2,000 a year to all the individual's 
IRAs. Thus, for example, suppose an individual is not eligible 
to make deductible IRA contributions because of the phase-out 
limits, and is eligible to make a $1,000 Roth IRA contribution. 
The individual could contribute $1,000 to the Roth IRA and 
$1,000 to a nondeductible IRA.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

5. Contribution limitations for active participants in an IRA (sec. 
        6005(a) of the bill, sec. 301(b) of the 1997 Act, and sec. 
        219(g) of the Code)

                              Present Law

    Under present law, if a married individual (filing a joint 
return) is an active participant in an employer-sponsored 
retirement plan, the $2,000 IRA deduction limit is phased out 
over the following levels of adjusted gross income (``AGI''):

Taxable years beginning in:                              Phase-out range
    1997................................................  $40,000-50,000
    1998................................................   50,000-60,000
    1999................................................   51,000-61,000
    2000................................................   52,000-62,000
    2001................................................   53,000-63,000
    2002................................................   54,000-64,000
    2003................................................   60,000-70,000
    2004................................................   65,000-75,000
    2005................................................   70,000-80,000
    2006................................................   75,000-85,000
    2007................................................  80,000-100,000

    An individual is not considered an active participant in an 
employer-sponsored retirement plan merely because the 
individual's spouse is an active participant. The $2,000 
maximum deductible IRA contribution for an individual who is 
not an active participant, but whose spouse is, is phased out 
for taxpayers with AGI between $150,000 and $160,000.

                        Explanation of Provision

    The bill clarifies the intent of the Act relating to the 
AGI phase-out ranges for married individuals who are active 
participants in employer-sponsored plans and the AGI phase-out 
range for spouses of such active participants as described 
above.

                             Effective Date

    The provision is effective as if included in the 1997 Act, 
i.e., for taxable years beginning after December 31, 1997.

  D. Amendments to Title III of the 1997 Act Relating to Capital Gains

1. Individual capital gains rate reductions (sec. 6005(d) of the bill, 
        sec. 311 of the 1997 Act, and sec. 1(h) of the Code)

                              Present Law

    The 1997 Act provided lower capital gains rates for 
individuals. Generally, the 1997 Act reduced the maximum rate 
on the adjusted net capital gain of an individual from 28 
percent to 20 percent and provided a 10-percent rate for the 
adjusted net capital gain otherwise taxed at a 15-percent rate. 
The ``adjusted net capital gain'' means the net capital gain 
determined without regard to certain gain for which the 1997 
Act provided a higher maximum rate of tax. The 1997 Act 
generally retained a 28-percent maximum rate for the long-term 
capital gain from collectibles, certain long-term capital gain 
included in income from the sale of small business stock, and 
the net capital gain determined by including all capital gains 
and losses properly taken into account after July 28, 1997, 
from property held more than one year but not more than 18 
months and all capital gains and losses properly taken into 
account for the portion of the taxable year before May 7, 1997. 
In addition, the 1997 Act provided a maximum rate of 25 percent 
for the long-term capital gain attributable to real estate 
depreciation (``unrecaptured section 1250 gain''). Beginning in 
2001 and 2006, lower rates of 8 and 18 percent will apply to 
certain property held more than five years.
    The amounts taxed at the 28 and 25-percent rates may not 
exceed the individual's net capital gain and also are reduced 
by amounts otherwise taxed at a 15-percent rate.
    Under the provisions of the 1997 Act, net short-term 
capital losses and long-term capital loss carryovers reduce the 
amount of adjusted net capital gain before reducing amounts 
taxed at the maximum 25 and 28-percent rates.
    The 1997 Act failed to coordinate the new multiple holding 
periods with certain provisions of the Code.

                        Explanation of Provision

    Under the bill, the ``adjusted net capital gain'' of an 
individual is the net capital gain reduced (but not below zero) 
by the sum of the 28-percent rate gain and the unrecaptured 
section 1250 gain.
    ``28-percent rate gain'' means the amount of net gain 
attributable to collectibles gains and losses, an amount of 
gain equal to the gain excluded from gross income on the sale 
of certain small business stock under section 1202,\64\ long-
term capital gains and losses properly taken into account after 
July 28, 1997, from property held more than one year but not 
more than 18 months, the net short-term capital loss for the 
taxable year and the long-term capital loss carryover to the 
taxable year. Long-term capital gains and losses properly taken 
into account before May 7, 1997, also are included in computing 
28-percent rate gain.
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    \64\ For example, assume an individual has $300,000 gain from the 
sale of qualified stock in a small business corporation and assume that 
section 1202(b) limits the gain that may be taken into account under 
section 1202(a) to $240,000. $120,000 of the gain (50 percent of 
$240,000) is excluded from gross income under section 1202(a). The 
$180,000 of gain that is included in gross income is included in the 
computation of net capital gain, and $120,000 of that gain is taken 
into account under section 1(h)(5)(i)(III), as added by the bill, in 
computing 28-percent rate gain. The maximum effective regular tax rate 
on the $240,000 of gain to which the 50-percent section 1202 exclusion 
applies is 14 percent and the maximum rate on the remaining $60,000 of 
gain is 20 percent.
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    ``Unrecaptured section 1250 gain'' means the amount of 
long-term capital gain (not otherwise treated as ordinary 
income) which would be treated as ordinary income if section 
1250 recapture applied to all depreciation (rather than only to 
depreciation in excess of straight-line depreciation) from 
property held more than 18 months (one year for amounts 
properly taken into account after May 6, 1997, and before July 
29, 1997).\65\ The unrecaptured section 1250 depreciation is 
reduced (but not below zero) by the excess (if any) of amount 
of losses taken into account in computing 28-percent gain over 
the amount of gains taken into account in computing 28-percent 
rate gain.
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    \65\ In the case of a disposition of a partnership interest held 
more than 18 months, the amount of the individual's long-term capital 
gain which would be treated as ordinary income under section 751(a) if 
section 1250 applied to all depreciation, will be taken into account in 
computing unrecaptured section 1250 gain.
---------------------------------------------------------------------------
    The bill contains several conforming amendments to 
coordinate the multiple holding periods with other provisions 
of the Code. Inherited property (sec. 1223 (11) and (12)) and 
certain patents (sec. 1235) are deemed to have a holding period 
of more than 18 months, allowing the 10 and 20-percent rates to 
apply. Amounts treated as ordinary income by reason of section 
1231(c) will be allocated among categories of net section 1231 
gain in accordance with IRS forms or regulations. The bill 
clarifies that the amount treated as long-term capital gain or 
loss on a section 1256 contract is treated as attributable to 
property held for more than 18 months.
    Under the bill, in applying section 1233(b) where the 
substantially identical property has been held more than one 
year but not more than 18 months, any gain on the closing of 
the short sale will be considered gain from property held not 
more than 18 months, and the substantially identical property 
will have be treated as held for one year on the day before the 
earlier of thedate of the closing of the short sale or the date 
the property is disposed of. In applying section 1233(d) where, on the 
date of the short sale, the substantially identical property has been 
held more than 18 months, any loss on the closing of the short sale 
will be treated as a loss from the sale or exchange of a capital asset 
held more than 18 months. Finally, in applying section 1092(f), any 
loss with respect to the option shall be treated as a loss from the 
sale or exchange of a capital asset held more than 18 months, if at the 
time the loss is realized, gain on the sale or exchange of the stock 
would be treated as gain from the sale or exchange of a capital asset 
held more than 18 months.66
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    \66\ Any loss treated as a long-term capital loss by reason of 
section 1233(d) or 1092(f) will be taken into account in computing 28-
percent rate gain where the property causing such loss to be treated as 
a long-term capital loss was held not more than 18 months on the 
applicable date.
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    The bill reorders the rate structure under sections 1(h)(1) 
and 55(b)(3) without any substantive change.
    The bill makes minor technical changes, including a 
provision to reduce the minimum tax preference on certain small 
business stock to 28 percent, beginning in 2006.67
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    \67\ Thus, the maximum rate under the minimum tax will be 17.92% 
(.64 times 28%).
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                             Effective Date

    The provision applies to taxable years ending after May 6, 
1997.

2. Rollover of gain from sale of qualified stock (sec. 6005(f) of the 
        bill, sec. 313 of the 1997 Act, and sec. 1045 of the Code)

                              Present Law

    The 1997 Act provided that gain from the sale of qualified 
small business stock held by an individual for more than six 
months can be ``rolled over'' tax-free to other qualified small 
business stock.

                        Explanation of Provision

    Under the bill, a partnership or an S corporation can roll 
over gain from qualified small business stock held more than 
six months if (and only if) at all times during the taxable 
year all the interests in the partnership or S corporation are 
held by individuals, estates,68 and trusts with no 
corporate beneficiaries.
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    \68\ The term ``estate'' is intended to include both the estate of 
a decedent and the estate of an individual in bankruptcy.
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                             Effective Date

    The provision applies to sales on or after August 5, 1997, 
the date of enactment of the 1997 Act.

3. Exclusion of gain on the sale of a principal residence owned and 
        used less than two years (sec. 6005(e)(1) and (2) of the bill, 
        sec. 312(a) of the 1997 Act, and sec. 121 of the Code)

                              Present Law

    Under present law, a taxpayer generally is able to exclude 
up to $250,000 ($500,000 if married filing a joint return) of 
gain realized on the sale or exchange of a principal residence. 
To be eligible for the exclusion, the taxpayer must have owned 
the residence and used it as a principal residence for at least 
two of the five years prior to the sale or exchange. A taxpayer 
who fails to meet these requirements by reason of a change of 
place of employment, health, or unforeseen circumstances is 
able to exclude a fraction of the taxpayer's realized gain 
equal to the fraction of the two years that the requirements 
are met.

                        Explanation of Provision

    The bill clarifies that an otherwise qualifying taxpayer 
who fails to satisfy the two-year ownership and use 
requirements is able to exclude an amount equal to the fraction 
of the $250,000 ($500,000 if married filing a joint return), 
not the fraction of the realized gain which is equal to the 
fraction of the two years that the ownership and use 
requirements are met. For example, an unmarried taxpayer who 
owns and uses a principal residence for one year then sells at 
realized gain of $500,000 may exclude $125,000 of gain (one-
half of $250,000) not $250,000 of gain (one-half of the 
realized gain). Similarly, an unmarried taxpayer who owns and 
uses a principal residence for one year then sells at a 
realized gain of $50,000 may exclude the entire $50,000 of gain 
since it is less than one half of $250,000. The exclusion is 
not limited to $25,000 (one-half of the $50,000 realized gain).
    In addition, the bill provides that if a married couple 
filing a joint return does not qualify for the $500,000 maximum 
exclusion, the amount of the maximum exclusion that may be 
claimed by the couple is the sum of each spouse's maximum 
exclusion determined on a separate basis.

                             Effective Date

    The provision is effective as if included in section 312 of 
the 1997 Act.

4. Effective date of the exclusion of gain on the sale of a principal 
        residence (sec. 6005(e)(3) of the bill, sec. 312(d)(2) of the 
        1997 Act, and sec. 121 of the Code)

                              Present law

    The exclusion for gain on sale of a principal residence 
under the 1997 Act generally applies to sales or exchanges 
occurring after May 6, 1997. A taxpayer may elect, however, to 
apply prior law to a sale or exchange (1) made before the date 
of enactment of the Act, (2) made after the date of enactment 
pursuant to a binding contract in effect on such date, or (3) 
where a replacement residence was acquired on or before the 
date of enactment (or pursuant to a binding contract in effect 
on the date of enactment) and the prior-law rollover provision 
would apply.

                        Explanation of Provision

    The bill clarifies that a taxpayer may elect to apply prior 
law with respect to a sale or exchange on the date of enactment 
of section 312 of the 1997 Act.

                             Effective Date

    The provision is effective as if included in section 312 of 
the 1997 Act.

   E. Amendments to Title IV of the 1997 Act Relating to Alternative 
                              Minimum Tax

1. Election to use AMT depreciation for regular tax purposes (sec. 
        6006(b) of the bill, sec. 402 of the 1997 Act, and sec. 168 of 
        the Code)

                              Present Law

    For regular tax purposes, depreciation deductions for 
certain shorter-lived tangible property may be determined using 
the 200-percent declining balance method over 3-, 5-, 7-, or 
10-year recovery periods (depending on the type of property). 
For alternative minimum tax (``AMT'') purposes, depreciation on 
such property placed in service after 1986 and before 1999 is 
computed by using the 150-percent declining balance method over 
the longer class lives prescribed by the alternative 
depreciation system of section 168(g). A taxpayer may elect to 
use the methods and lives applicable to AMT depreciation for 
regular tax purposes.
    The 1997 Act conformed the recovery periods (but not the 
methods) used for purposes of the AMT depreciation to the 
recovery periods used for purposes of the regular tax, for 
property placed in service after 1998. The 1997 Act did not 
make a conforming change to the election to use the pre-1998 
AMT recovery methods and recovery periods for regular tax 
purposes.

                        Explanation of Provision

    For property placed in service after 1998, a taxpayer would 
be allowed to elect, for regular tax purposes, to compute 
depreciation on tangible personal property otherwise qualified 
for the 200-percent declining balance method by using the 150-
percent declining balance method over the recovery periods 
applicable to the regular tax (rather than the longer class 
lives of the alternative depreciation system of sec. 168(g)).

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 1998.

2. Clarification of the small business exemption (sec. 6006(a) of the 
        bill, sec. 401 of the 1997 Act, and sec. 55 of the Code)

                              Present Law

    The corporate alternative minimum tax is repealed for small 
corporations for taxable years beginning after December 31, 
1997. A small corporation is one that had average gross 
receipts of $5 million or less for a prior three-year period. A 
corporation that meets the $5 million gross receipts test will 
continue to be treated as a small corporation exempt from the 
alternative minimum tax so long as its average gross receipts 
do not exceed $7.5 million.

                        Explanation of Provision

    The provision clarifies the application of the $5 million 
and $7.5 million gross receipts tests that a corporation must 
meet to be a small corporation exempt from the AMT. Under the 
provision, in order for a corporation to qualify as a small 
corporation exempt from the AMT for a taxable year, the 
corporation's average gross receipts for all 3-taxable-year 
periods beginning after December 31, 1993 and ending before 
such taxable year must be $7.5 million or less. The $7.5 
million amount is reduced to $5 million for the corporation's 
first 3-taxable-year period (or portion thereof) beginning 
after December 31, 1993, and ending before the taxable year for 
which the exemption is claimed.
    If a corporation's first taxable year beginning after 
December 31, 1997 (the first year the exemption is available) 
is its first taxable year (and the corporation does not lose 
its status as a small corporation because it is aggregated with 
one or more corporations under section 448(c)(2) or treated as 
having a predecessor corporation under section 448(c)(3)(D)), 
the corporation will be treated as an exempt small corporation 
for such year regardless of its gross receipts for such year.
    The operation of the gross receipts tests for the small 
corporation AMT exemption is demonstrated by the following 
examples.
    Example 1.--Assume a calendar-year corporation was in 
existence on January 1, 1994. In order to qualify as a small 
corporation for 1998 (the first year the exemption is 
available), (1) the corporation's average gross receipts for 
the 3-taxable-year period 1994 through 1996 must be $5 million 
or less and (2) the corporation's average gross receipts for 
the 1995 through 1997 period must be $7.5 million or less. If 
the corporation qualifies for 1998, the corporation will 
qualify for 1999 if its average gross receipts for the 3-
taxable-year period 1996 through 1998 also is $7.5 million or 
less. If the corporation does not qualify for 1998, the 
corporation cannot qualify for 1999 or any subsequent year.
    Example 2.--Assume a calendar-year corporation is first 
incorporated in 1999 and is neither aggregated with a related, 
existing corporation under section 448(c)(2) nor treated as 
having a predecessor corporation under section 448(c)(3)(D). 
The corporation will qualify as a small corporation for 1999 
regardless of its gross receipts for such year. In order to 
qualify as a small corporation for 2000, the corporation's 
gross receipts for 1999 must be $5 million or 
less.69 If the corporation qualifies for 2000, the 
corporation also will qualify for 2001 if its average gross 
receipts for the 2-taxable-year period 1999 through 2000 is 
$7.5 million or less. If the corporation does not qualify for 
2000, the corporation cannot qualify for 2001 or any subsequent 
year. If the corporation qualifies for 2001, the corporation 
will qualify for 2002 if its average gross receipts for the 3-
taxable-year period 1999 through 2001 is $7.5 million or less.
---------------------------------------------------------------------------
    \69\ The gross receipts for 1999 must be annualized under section 
448(c)(3)(B) if the 1999 taxable year is less than 12 months.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

 F. Amendments to Title V of the 1997 Act Relating to Estate and Gift 
                                 Taxes

1. Clarification of phaseout range for 5-percent surtax to phase out 
        the benefits of the unified credit and graduated rates (sec. 
        6007(a)(1) of the bill, sec. 501 of the 1997 Act, and sec. 
        2001(c)(2) of the Code)

                              Present Law

    Prior to the 1997 Act, a 5-percent surtax was imposed upon 
cumulative taxable transfers between $10 million and 
$21,040,000 to phase out the benefits of the graduated rates 
and the unified credit. The 1997 Act increased the unified 
credit beginning in 1998, from an effective exemption of 
$600,000 to an effective exemption of $1,000,000 in 2006. A 
conforming amendment was made to the 5-percent surtax provision 
in section 2001(c)(2) that was intended to reflect the 
increased unified credit. However, the conforming amendment was 
drafted in a manner that had the effect of phasing out the 
benefits of the graduated rates but not the unified credit.

                        Explanation of Provision

    The provision clarifies section 2001(c)(2) to properly 
phase out the benefits of both the graduated rates and the 
unified credit.

                             Effective Date

    The provision is effective for decedents dying, and gifts 
made, after December 31, 1997.

2. Clarification of effective date for indexing of generation-skipping 
        exemption (sec. 6007(a)(2) of the bill, secs. 501 (d) and (f) 
        of the 1997 Act, and sec. 2631(c) of the Code)

                              Present Law

    The 1997 Act provided for the indexation of the $1 million 
exemption from generation-skipping transfers effective for 
decedents dying after December 31, 1998.

                        Explanation of Provision

    The provision clarifies that the indexing of the exemption 
from generation-skipping transfers is effective with respect to 
all generation-skipping transfers (i.e., direct skips, taxable 
terminations, and taxable distributions) made after 1998.
    With respect to existing trusts, transferors are permitted 
to make a late allocation of any additional GST exemption 
amount attributable to indexing adjustments in accordance with 
the present-law rules applicable to late allocations as set 
forth in sections 2632 and 2642, and the regulations 
promulgated thereunder. For example, assume an individual 
transferred $2 million to a trust in 1995, and allocated his 
entire $1 million GST exemption to the trust at that time 
(resulting in an inclusion ratio of .50). Assume further that 
in 2001, the GST exemption has increased to $1,100,000 as the 
result of indexing, and that the value of the trust assets is 
now $3 million. If the individual is still alive in 2001, he is 
permitted to make a late allocation of $100,000 of GST 
exemption to the trust, resulting in a new inclusion ratio of 
1-(($1,500,000+100,000)/$3,000,000), or .467.

                             Effective Date

    The provision is effective for generation-skipping 
transfers (i.e., direct skips, taxable terminations, and 
taxable distributions) made after December 31, 1998.

3. Conversion of qualified family-owned business exclusion into a 
        deduction (sec. 6007(b)(1)(A) of the bill, sec. 502 of the 1997 
        Act, and redesignated sec. 2057 of the Code)

                              Present Law

    The qualified family-owned business provision in the 1997 
Act provides an exclusion from estate taxes for certain 
qualified family-owned business interests. It is unclear 
whether the provision provides an exclusion of value or an 
exclusion of property from the estate, and thus it is unclear 
how the new provision interacts with other provisions in the 
Internal Revenue Code (e.g., secs. 1014, 2032A, 2056, 2612, and 
6166).

                        Explanation of Provision

    The provision converts the qualified family-owned business 
exclusion into a deduction, and redesignates section 2033A as 
section 2057. Except as provided below, the requirements of the 
qualified family-owned business provision otherwise remain 
unchanged. The qualified family-owned business deduction is not 
available for generation-skipping transfer tax purposes.

                             Effective Date

    The provision is effective with respect to estates of 
decedents dying after December 31, 1997.

4. Coordination between unified credit and family-owned business 
        provision (sec. 6007(b)(1)(B) and 6007(b)(4) of the bill, sec. 
        502 of the 1997 Act, and redesignated sec. 2057(a) of the Code)

                              Present Law

    The 1997 Act effectively increased the amount of lifetime 
gifts and transfers at death that are exempt from unified 
estate and gift tax from $600,000 to $1,000,000 over the period 
1997 to 2006, through increases in an individual's unified 
credit. In addition, the 1997 Actprovided a limited exclusion 
for certain family-owned business interests. The exclusion for family-
owned business interests may be taken only to the extent that the 
exclusion for family-owned business interests, plus the amount 
effectively exempted by the unified credit, does not exceed $1.3 
million. As a result, for years after 1998, the maximum amount of 
exclusion for family-owned business interests is reduced by increases 
in the dollar amount of transfers effectively exempted through the 
unified credit.
    Because the structure of the 1997 Act increases the unified 
credit over time (until 2006) while decreasing over the same 
period the benefit of the closely-held business exclusion, the 
estate tax on estates with family-owned businesses increases 
over time until 2006. This increase in estate tax results from 
the fact that increases in the unified credit provide a benefit 
at the decedent's lowest estate tax brackets, while the 
exclusion for family-owned businesses provides a benefit at the 
decedent's highest estate tax brackets.

                        Explanation of Provision

    Under the provision, if an executor elects to utilize the 
qualified family-owned business deduction, the estate tax 
liability is calculated as if the estate were allowed a maximum 
qualified family-owned business deduction of $675,000 and an 
applicable exclusion amount under section 2010 (i.e., the 
amount exempted by the unified credit) of $625,000, regardless 
of the year in which the decedent dies. If the estate includes 
less than $675,000 of qualified family-owned business 
interests, the applicable exclusion amount is increased on a 
dollar-for-dollar basis, but only up to the applicable 
exclusion amount generally available for the year of death.
    For example, assume the decedent dies in 2005, when the 
applicable exclusion amount under section 2010 is $800,000. If 
the estate includes qualified family-owned business interests 
valued at $675,000 or more, the estate tax liability is 
calculated as if the estate were allowed a qualified family-
owned business deduction of $675,000, and the applicable 
exclusion amount under section 2010 is limited to $625,000. If 
the estate includes qualified family-owned business interests 
of $500,000 or less, all of the qualified family-owned business 
interests could be deducted from the estate, and the applicable 
exclusion amount under section 2010 is $800,000. If the estate 
includes qualified family-owned business interests valued 
between $500,000 and $675,000, all of the qualified family-
owned business interests could be deducted from the estate, and 
the applicable exclusion amount under section 2010 is 
calculated as the excess of $1.3 million over the amount of 
qualified family-owned business interests. (For example, if the 
qualified family-owned business interests were valued at 
$600,000, the applicable exclusion amount under section 2010 is 
$700,000.)
    If a recapture event occurs with respect to any qualified 
family-owned business interest, the total amount of estate 
taxes potentially subject to recapture is calculated as the 
difference between the actual amount of estate tax liability 
for the estate, and the amount of estate taxes that would have 
been owed had the qualified family-owned business election not 
been made.

                             Effective Date

    The provision is effective for decedents dying after 
December 31, 1997.

5. Clarification of businesses eligible for family-owned business 
        provision (sec. 6007(b)(2) of the bill, sec. 502 of the 1997 
        Act, and redesignated sec. 2057(b)(3) of the Code)

                              Present Law

    In order to be eligible to exclude from the gross estate a 
portion of the value of a family-owned business, the sum of (1) 
the adjusted value of family-owned business interests 
includible in the decedent's estate, and (2) the amount of 
gifts of family-owned business interests to family members of 
the decedent that are not included in the decedent's gross 
estate, must exceed 50 percent of the decedent's adjusted gross 
estate.

                        Explanation of Provision

    The provision clarifies the formula for determining the 
amount of gifts of family-owned business interests made to 
members of the decedent's family that are not otherwise 
includible in the decedent's gross estate.

                             Effective Date

    The provision is effective with respect to decedents dying 
after December 31, 1997.

6. Clarification of ``trade or business'' requirement for family-owned 
        business provision (sec. 6007(b)(5) of the bill, sec. 502 of 
        the Act, and redesignated secs. 2057(e)(1) and 2057(f) of the 
        Code)

                              Present Law

    A qualified family-owned business interest is defined as 
any interest in a trade or business that meets certain 
requirements--e.g., the decedent and members of his family must 
own certain percentages of the trade or business, the decedent 
or members of his family must have materially participated in 
the trade or business for five of the eight years preceding the 
decedent's death, and the qualified heir or members of his 
family must materially participate in the trade or business for 
at least five years of any eight-year period within 10 years 
following the decedent's death.

                        Explanation of Provision

    The provision clarifies that an individual's interest in 
property used in a trade or business may qualify for the 
qualified family-owned business provision as long as such 
property is used in a trade or business by the individual or a 
member of the individual's family. Thus, for example,if a 
brother and sister inherit farmland upon their father's death, and the 
sister cash-leases her portion to her brother, who is engaged in the 
trade or business of farming, the ``trade or business'' requirement is 
satisfied with respect to both the brother and the sister. Similarly, 
if a father cash-leases farmland to his son, and the son materially 
participates in the trade or business of farming the land for at least 
five of the eight years preceding his father's death, the pre-death 
material participation and ``trade or business'' requirements are 
satisfied with respect to the father's interest in the farm.

                             Effective Date

    The provision is effective with respect to estates of 
decedents dying after December 31, 1997.

7. Clarification that interests eligible for family-owned business 
        provision must be passed to a qualified heir (secs. 
        6007(b)(1)(B) of the bill, sec. 502 of the Act, and 
        redesignated sec. 2057(a)(1) of the Code)

                              Present Law

    The 1997 Act provided a new exclusion for qualified family-
owned business interests. One of the requirements for the 
exclusion is that such interests must pass to a ``qualified 
heir,'' which includes members of the decedent's family and any 
individual who has been actively employed by the trade or 
business for at least 10 years prior to the date of the 
decedent's death.

                        Explanation of Provision

    The provision clarifies that qualified family-owned 
business interests must pass to a qualified heir in order to 
qualify for the deduction. For this purpose, if all 
beneficiaries of a trust are qualified heirs (and in such other 
circumstances as the Secretary of the Treasury may provide), 
property passing to the trust may be treated as having passed 
to a qualified heir.

                             Effective Date

    The provision is effective with respect to estates of 
decedents dying after December 31, 1997.

8. Other modifications to the qualified family-owned business provision 
        (secs. 6007(b)(3), 6007(b)(6), and 6007(b)(7) of the bill, sec. 
        502 of the 1997 Act, and redesignated sec. 2057 of the Code)

                              Present Law

    The qualified family-owned business provision incorporates 
by cross-reference several other provisions of the Code, 
including a number of provisions in section 2032A and the 
personal holding company rules of section 543(a).

                        Explanation of Provision

    The provision modifies section 2033A(g) (relating to the 
security requirements for noncitizen qualified heirs) by 
deleting the cross-reference to section 2033A(i)(3)(M), which 
does not appear to be appropriate. The provision also makes 
rules similar to those set forth in section 2032A(h) and (i) 
(relating to conversions and exchanges of property under 
sections 1031 and 1033) applicable for purposes of section 
2033A. Finally, the provision clarifies that, in identifying 
assets that produce (or are held for the production of) income 
of a type described in section 543(a), section 543(a) is 
applied without regard to section 543(a)(2)(B) (the dividend 
requirement for corporate entities).

                             Effective Date

    The provision is effective with respect to estates of 
decedents dying after December 31, 1997.

9. Clarification of interest on installment payment of estate tax on 
        holding companies (sec. 6007(c) of the bill, sec. 503 of the 
        1997 Act, and secs. 6166(b)(7)(A) and 6166(b)(8)(A) of the 
        Code)

                              Present Law

    If certain conditions are met, a decedent's estate may 
elect to pay the estate tax attributable to certain closely-
held businesses over a 14-year period. The 1997 Act provided 
for a 2-percent interest rate on the estate tax on first $1 
million in value of interests in qualified closely-held 
businesses, and a rate equal to 45 percent of the regular 
deficiency rate on the amount in excess of the portion eligible 
for the 2-percent rate, but also provided that none of interest 
on the deferred payment of estate taxes is deductible for 
income or estate tax purposes. Interests in holding companies 
and non-readily-tradeable business interests are not eligible 
for the 2-percent rate.

                        Explanation of Provision

    The provision clarifies that deferred payments of estate 
tax on holding companies and non-readily-tradable business 
interests do not qualify for the 2-percent interest rate, but 
insteadare subject to a rate of 45 percent of the regular 
deficiency rate. Such interest payments are not deductible for income 
or estate tax purposes.

                             Effective Date

    The provision generally is effective for decedents dying 
after December 31, 1997.

10. Clarification on declaratory judgment jurisdiction of U.S. Tax 
        Court regarding installment payment of estate tax (sec. 6007(d) 
        of the bill, sec. 505 of the 1997 Act, and sec. 7479(a) of the 
        Code)

                              Present Law

    If certain conditions are met, a decedent's estate may 
elect to pay estate tax attributable to certain closely-held 
business over a 14-year period. The 1997 Act provided that the 
U.S. Tax Court would have jurisdiction to determine whether the 
estate of a decedent qualifies for the 14-year installment 
payment of estate tax.

                        Explanation of Provision

    The provision clarifies that the jurisdiction of the U.S. 
Tax Court to determine whether an estate qualifies for 
installment payment of estate tax on closely-held businesses 
extends to determining which businesses in an estate are 
eligible for the deferral.

                             Effective Date

    The provision is effective for decedents dying after the 
date of enactment of the 1997 Act.

11. Clarification of rules governing revaluation of gifts (sec. 6007(e) 
        of the bill, sec. 506 of the 1997 Act, and sec. 2504(c) of the 
        Code)

                              Present Law

    The valuation of a gift becomes final for gift tax purposes 
after the statute of limitations on any gift tax assessed or 
paid has expired. The 1997 Act extended that rule to apply for 
estate tax purposes, provided for a lengthened statute of 
limitations for gift tax purposes if certain information is not 
disclosed with the gift tax return, and provided jurisdiction 
to the U.S. Tax Court to determine the value of any gift.

                        Explanation of Provision

    The provision clarifies that in determining the amount of 
taxable gifts made in preceding calendar periods, the value of 
prior gifts is the value of such gifts as finally determined, 
even if no gift tax was assessed or paid on that gift. For this 
purpose, final determinations include, e.g., the value reported 
on the gift tax return (if not challenged by the IRS prior to 
the expiration of the statute of limitations), the value 
determined by the IRS (if not challenged in court by the 
taxpayer), the value determined by the courts, or the value 
agreed to by the IRS and the taxpayer in a settlement 
agreement.

                             Effective Date

    The provision is effective with respect to gifts made after 
the date of enactment of the 1997 Act.

12. Clarification with respect to post-mortem conservation easements 
        (sec. 6007(g) of the bill, sec. 506 of the 1997 Act, and sec. 
        2031(c) of the Code)

                              Present Law

    A deduction is allowed for estate tax purposes for a 
contribution of a qualified real property interest to a charity 
(or other qualified organization) exclusively for conservation 
purposes (sec. 2055(f)). The 1997 Act also provided an election 
to exclude from the taxable estate 40 percent of the value of 
any land subject to a qualified conservation easement that 
meets certain requirements. The 1997 Act provided that the 
executor of the decedent's estate, or the trustee of a trust 
holding the land, could grant a qualifying easement after the 
decedent's death, as long as the easement is granted prior to 
the date of the election (generally, within nine months after 
the date of the decedent's death).

                        Explanation of Provision

    The provision clarifies that, in the case of a qualified 
conservation contribution made after the date of the decedent's 
death, an estate tax deduction is allowed under section 
2055(f). However, no income tax deduction is allowed to the 
estate or the qualified heirs with respect to such post-mortem 
conservation easements.

                             Effective Date

    The provision is effective with respect to estates of 
decedents dying after December 31, 1997.

 G. Amendments to Title VII of the 1997 Act Relating to Incentives for 
 the District of Columbia (sec. 6008 of the bill, sec. 701 of the 1997 
           Act, and secs. 1400, 1400B and 1400C of the Code)

                              Present Law

Designation of D.C. Enterprise Zone

    Certain economically depressed census tracts within the 
District of Columbia are designated as the ``D.C. Enterprise 
Zone,'' within which businesses and individual residents are 
eligible for special tax incentives. The census tracts that 
compose the D.C. Enterprise Zone for purposes of the wage 
credit, expensing, and tax-exempt financing incentives include 
all census tracts that presently are part of the D.C. 
enterprise community and census tracts within the District of 
Columbia where the poverty rate is not less than 20 percent. 
The D.C. Enterprise Zone designation generally will remain in 
effect for five years for the period from January 1, 1998, 
through December 31, 2002.

Empowerment zone wage credit, expensing, and tax-exempt financing

    The following tax incentives generally are available in the 
D.C. Enterprise Zone: (1) a 20-percent wage credit for the 
first $15,000 of wages paid to D.C. residents who work in the 
D.C. Enterprise Zone; (2) an additional $20,000 of expensing 
under Code section 179 for qualified zone property placed in 
service by a ``qualified D.C. Zone business''; and (3) special 
tax-exempt financing for certain zone facilities.

Qualified D.C. Zone business

    For purposes of the increased expensing under section 179, 
as well as for purposes of the zero percent capital gains rate 
(described below), a corporation or partnership is a qualified 
D.C. Zone business if: (1) the sole trade or business of the 
corporation or partnership is the active conduct of a 
``qualified business'' (defined below) within the D.C. Zone; 
(2) at least 50 percent (80 percent for purposes of the zero 
percent capital gains rate) of the total gross income of such 
entity is derived from the active conduct of a qualified 
business within the D.C. Zone; (3) a substantial portion of the 
use of the entity's tangible property (whether owned or leased) 
is within the D.C. Zone; (4) a substantial portion of the 
entity's intangible property is used in the active conduct of 
such business; (5) a substantial portion of the services 
performed for such entity by its employees are performed within 
the D.C. Zone; and (6) less than 5 percent of the average of 
the aggregate unadjusted bases of the property of such entity 
is attributable to (a) certain financial property, or (b) 
collectibles not held primarily for sale to customers in the 
ordinary course of an active trade or business. Similar rules 
apply to a qualified business carried on by an individual as a 
proprietorship.
    In general, a ``qualified business'' means any trade or 
business. However, a ``qualified business'' does not include 
any trade or business that consists predominantly of the 
development or holding of intangibles for sale or license. In 
addition, a qualified business does not include any private or 
commercial golf course, country club, massage parlor, hot tub 
facility, suntan facility, racetrack or other facility used for 
gambling, liquor store, or certain large farms (so- called 
``excluded businesses''). The rental of residential real estate 
is not a qualified business. The rental of commercial real 
estate is a qualified business only if at least 50 percent of 
the gross rental income from the real property is from 
qualified D.C. Zone businesses. The rental of tangible personal 
property to others also is not a qualified business unless at 
least 50 percent of the rental of such property is by qualified 
D.C. Zone businesses or by residents of the D.C. Zone.
    For purposes of the tax-exempt financing provisions, the 
term ``D.C. Zone business'' generally is defined as for 
purposes of the increased expensing under section 179. However, 
a qualified D.C. Zone business for purposes of the tax-exempt 
financing provisions includes a business located in the D.C. 
Zone that would qualify as a D.C. Zone business if it were 
separately incorporated. In addition, under a special rule 
applicable only for purposes of the tax- exempt financing 
rules, a business is not required to satisfy the requirements 
applicable to a D.C. Zone business until the end of a startup 
period if, at the beginning of the startup period, there is a 
reasonable expectation that the business will be a qualified 
D.C. Zone business at the end of the startup period and the 
business makes bona fide efforts to be such a business. With 
respect to each property financed by a bond issue, the startup 
period ends at the beginning of the first taxable year 
beginning more than two years after the later of (1) the date 
of the bond issue financing such property, or (2) the date the 
property was placed in service (but in no event more than three 
years after the date of bond issuance). In addition, if a 
business satisfies certain requirements applicable to a 
qualified D.C. Zone business for a three-year testing period 
following the end of the start-up period and thereafter 
continues to satisfy certain business requirements, then it 
will be treated as a qualified D.C. Zone business for all years 
after the testing period irrespective of whether it satisfies 
all of the requirements of a qualified D.C. Zone business.

Zero-percent capital gains rate

    A zero-percent capital gains rate applies to capital gains 
from the sale of certain qualified D.C. Zone assets held for 
more than five years. For purposes of the zero-percent capital 
gains rate, the D.C. Enterprise Zone is defined to include all 
census tracts within the District of Columbia where the poverty 
rate is not less than 10 percent. Only capital gain that is 
attributable to the 10-year period beginning January 1, 1998, 
and ending December 31, 2007, is eligible for the zero-percent 
rate.
    In general, qualified ``D.C. Zone assets'' mean stock or 
partnership interests held in, or tangible property held by, a 
D.C. Zone business. Such assets must generally be acquired 
after December 31, 1997, and before January 1, 2003. However, 
under a special rule, qualified D.C. Zone assets include 
property that was a qualified D.C. Zone asset in the hands of a 
prior owner, provided that at the time of acquisition, and 
during substantially all of the subsequent purchaser's holding 
period, either (1) substantially all of the use of the property 
is in a qualifiedD.C. Zone business, or (2) the property is an 
ownership interest in a qualified D.C. Zone business.

First-time homebuyer tax credit

    First-time homebuyers of a principal residence in the 
District are eligible for a tax credit of up to $5,000 of the 
amount of the purchase price, except that the credit phases out 
for individual taxpayers with adjusted gross income (``AGI'') 
between $70,000 and $90,000 ($110,000-$130,000 for joint 
filers). The credit is available with respect to property 
purchased after the date of enactment and before January 1, 
2001. Any excess credit may be carried forward indefinitely to 
succeeding taxable years.

                       Explanation of Provisions

Eligible census tracts

    The bill clarifies that the determination of whether a 
census tract in the District of Columbia satisfies the 
applicable poverty criteria for inclusion in the D.C. 
Enterprise Zone for purposes of the wage credit, expensing, and 
special tax-exempt financing incentives (poverty rate of not 
less than 20 percent) or for purposes of the zero-percent 
capital gains rate (poverty rate of not less than 10 percent) 
is based on 1990 decennial census data. Thus, data from the 
2000 decennial census would not result in the expansion or 
other reconfiguration of the D.C. Enterprise Zone.

Qualified D.C. Zone business

    The bill modifies section 1400B(c) to clarify that a 
proprietorship can constitute a D.C. Zone business for purposes 
of the zero-percent capital gains rate.
    The bill also clarifies that qualified D.C. Zone businesses 
that take advantage of the special tax-exempt financing 
incentives do not become subject to a 35-percent zone resident 
requirement after the close of the testing period.

Zero-percent capital gains rate

    The bill clarifies that there is no requirement that D.C. 
Zone business property be acquired by a subsequent purchaser 
prior to January 1, 2003, to be eligible for the special rule 
applicable to subsequent purchasers.
    In addition, the bill clarifies that the termination of the 
D.C. Enterprise Zone designation at the end of 2002 will not, 
by itself, result in property failing to be treated as a 
qualified D.C. Zone asset for purposes of the zero-percent 
capital gains rate, provided that the property otherwise 
continues to qualify were the D.C. Zone designation in effect.

First-time homebuyer credit

    The bill clarifies that, for purposes of the first-time 
homebuyer credit, a ``first-time homebuyer'' means any 
individual if such individual (and, if married, such 
individual's spouse) did not have a present ownership interest 
in a principal residence in the District of Columbia during the 
one-year period ending on the date of the purchase of the 
principal residence to which the credit applies.
    The bill also clarifies that the phaseout of the credit for 
individual taxpayers with adjusted gross income between $70,000 
and $90,000 ($110,000-$130,000 for joint filers) applies only 
in the year the credit is generated, and does not apply in 
subsequent years to which the credit may be carried over.
    In addition, the bill clarifies that the term ``purchase 
price'' means the adjusted basis of the principal residence on 
the date the residence is purchased. Newly constructed 
residences are treated as purchased by the taxpayer on the date 
the taxpayer first occupies such residence.
    The bill clarifies that the first-time homebuyer credit is 
a nonrefundable personal credit and would provide that the 
first-time homebuyer credit is claimed after the credits 
described in Code sections 25 (credit for interest on certain 
home mortgages) and 23 (adoption credit).
    Finally, the bill clarifies that the first-time homebuyer 
credit would be available only for property purchased after 
August 4, 1997, and before January 1, 2001. Thus, the credit is 
available to first-time home purchasers who acquire title to a 
qualifying principal residence on or after August 5, 1997, and 
on or before December 31, 2000, irrespective of the date the 
purchase contract was entered into.

                             Effective Date

    The provisions are effective as of August 5, 1997, the date 
of enactment of the 1997 Act.

  H. Amendments to Title IX of the 1997 Act Relating to Miscellaneous 
                               Provisions

1. Clarification of effect of certain transfers to Highway Trust Fund 
        (sec. 6009(a) of the bill, sec. 901 of the 1997 Act, and sec. 
        9503 of the Code) 70
---------------------------------------------------------------------------

    \70\ S. 1173, as passed by the Senate, and H.R. 2400, as passed by 
the House, would repeal the underlying provision of the 1997 Act to 
which this correction relates.
---------------------------------------------------------------------------

                              Present Law

    The 1997 Act provided for the transfer of an additional 4.3 
cents per gallon of the highway motor fuels tax revenues from 
the General Fund to the Highway Trust Fund, and provided that 
revenues transferred to the Trust Fund under this provision 
could not be used in a manner resulting in changes in direct 
spending. The 1997 Act further changed the dates by which 
certain taxes would be required to be deposited with the 
Treasury in fiscal year 1998.

                        Explanation of Provision

    The bill clarifies that the tax deposit delays included in 
the provisions affecting transfers to the Highway Trust Fund, 
like the revenue transfers themselves, do not affect direct 
spending from the Trust Fund.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

2. Clarification of Mass Transit Account portions of highway motor 
        fuels taxes (sec. 6009(b) of the bill, sec. 907 of the 1997 
        Act, and sec. 9503 of the Code) 71
---------------------------------------------------------------------------

    \71\  S. 1173, as passed by the Senate, and H.R. 2400, as passed by 
the House, include an identical technical correction.
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                              Present Law

    The 1997 Act provided for the transfer to the Highway Trust 
Fund of revenues attributable to a General Fund fuels tax rate 
of 4.3 cents per gallon. That Act further enacted reduced 
rates, based on energy content, for propane, liquefied natural 
tax, compressed natural gas, and methanol produced from natural 
gas. When deposited in the Highway Trust Fund, revenues from 
the taxes on each of these products are divided between the 
Trust Fund's Highway Account and the Mass Transit Account.

                        Explanation of Provision

    The bill clarifies that the Mass Transit Account portion of 
the highway motor fuels taxes generally is 2.86 cents per 
gallon and that taxes on the four fuels eligible for reduced 
rates are divided between the Highway Account and the Mass 
Transit Account in the same proportion as is the tax on 
gasoline.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

3. Clarification of qualification for reduced rate of excise tax on 
        certain hard ciders (sec. 6009(c) of the bill, sec. 908 of the 
        1997 Act, and sec. 5041 of the Code)

                              Present Law

    Distilled spirits are taxed at a rate of $13.50 per proof 
gallon; beer is taxed at a rate of $18 per barrel 
(approximately 58 cents per gallon); and still wines of 14 
percent alcohol or less are taxed at a rate of 1.07 per wine 
gallon. The Code defines still wines as wines containing not 
more than 0.392 gram of carbon dioxide per hundred milliliters 
of wine. Higher rates of tax are applied to wines with greater 
alcohol content, to sparkling wines (e.g., champagne), and to 
artificially carbonated wines.
    Certain small wineries may claim a credit against the 
excise tax on wine of 90 cents per wine gallon on the first 
100,000 gallons of still wine produced annually (i.e., net tax 
rate of 17 cents per wine gallon on wines with an alcohol 
content of 14 percent or less). No credit is allowed on 
sparkling wines. Certain small breweries pay a reduced tax of 
$7.00 per barrel (approximately 22.6 cents per gallon) on the 
first 50,000 barrels of beer produced annually.
    Hard cider is a wine fermented solely from apples or apple 
concentrate and water, containing no other fruit product and 
containing at least one-half of one percent and less than 7 
percent alcohol by volume. Once fermented, eligible hard cider 
may not be altered by the addition of other fruit juices, 
flavor, or other ingredients that alter the flavor that results 
from the fermentation process. The 1997 Act provided a lower 
excise tax rate of 22.6 cents per gallon on hard cider. 
Qualifying small producers that produce 250,000 gallons or less 
of hard cider and other wines in a calendar year may claim a 
credit of 5.6 cents per wine gallon on the first 100,000 
gallons of hard cider produced. This credit produces an 
effective tax rate of 17 cents per gallon, the same effective 
rate as that applied to small producers of still wines having 
an alcohol content of 14 percent or less. This credit is phased 
out for production in excess of 100,000 gallons but less than 
250,000 gallons annually.

                        Explanation of Provision

    The bill clarifies that the 22.6-cents-per-gallon tax rate 
applies only to apple cider that otherwise would be a still 
wine subject to a tax rate of $1.07 per wine gallon, i.e., 
still wines having an alcohol content of 14 percent or less.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

4. Combined employment tax reporting demonstration project (sec. 
        6009(f) of the bill, sec. 976 of the 1997 Act, and sec. 6103 of 
        the Code)

                              Present Law

    Traditionally, Federal tax forms are filed with the Federal 
Government and State tax forms are filed with individual 
states. This necessitates duplication of items common to both 
returns. Some States have recently been working with the IRS to 
implement combined State and Federal reporting of certain types 
of items on one form as a way of reducing the burdens on 
taxpayers. The State of Montana and the IRS have cooperatively 
developed a system to combine State and Federal employment tax 
reporting on one form. The one form would contain exclusively 
Federal data, exclusively State data, and information common to 
both: the taxpayer's name, address, TIN, and signature.
    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). No tax 
information may be furnished by the Internal Revenue Service 
(``IRS'') to another agency unless the other agency establishes 
procedures satisfactory to the IRS for safeguarding the tax 
information it receives (sec. 6103(p)).
    Implementation of the combined Montana-Federal employment 
tax reporting project had been hindered because the IRS 
interprets section 6103 to apply that provision's restrictions 
on disclosure to information common to both the State and 
Federal portions of the combined form, although these 
restrictions would not apply to the State with respect to the 
State's use of State-requested information if that information 
were supplied separately to both the State and the IRS.
    The 1997 Act permits implementation of a demonstration 
project to assess the feasibility and desirability of expanding 
combined reporting in the future. There are several limitations 
on the demonstration project. First, it is limited to the State 
of Montana and the IRS. Second, it is limited to employment tax 
reporting. Third, it is limited to disclosure of the name, 
address, TIN, and signature of the taxpayer, which is 
information common to both the Montana and Federal portions of 
the combined form. Fourth, it is limited to a period of five 
years.

                        Explanation of Provision

    The provision permits Montana to use this information as if 
it had collected it separately by eliminating Federal penalties 
for disclosure of this information. The provision also corrects 
a cross-reference to the provision.

                             Effective Date

    The provision is effective as of the date of enactment of 
the 1997 Act (August 5, 1997), and will expire on the date five 
years after the date of enactment of the 1997 Act.

5. Election for 1987 partnerships to continue exception from treatment 
        of publicly traded partnerships as corporations (sec. 6009(d) 
        of the bill, sec. 964 of the 1997 Act, and sec. 7704 of the 
        Code)

                              Present Law

In general

    In the case of an electing 1987 partnership that elects to 
be subject to a 3.5-percent tax on gross income from the active 
conduct of a trade or business, the general rule treating a 
publicly traded partnership as a corporation does not apply. 
The 3.5-percent tax was intended to approximate the corporate 
tax the partnership would pay if it were treated as a 
corporation for Federal tax purposes.

Tax on partnership

    The 3.5-percent tax is imposed on the electing 1987 
partnership under the provision (sec. 7704(g)(3)). The 
provision does not specifically make inapplicable, however, the 
general rule that a partnership as such is not subject to 
income tax, but rather, the partners are liable for the tax in 
their separate or individual capacities (sec. 701).

Estimated tax payments

    The provision does not specifically make applicable the 
requirements for payment of estimated tax that apply generally 
to payments of corporate tax.

                       Explanation of Provisions

Tax on partnership

    The technical correction clarifies that the 3.5-percent tax 
is paid by the partnership. The general rule of section 701(a) 
that a partnership as such is not subject to income tax, but 
rather, the partners are liable for the tax in their separate 
or individual capacities does not apply to the payment of the 
3.5-percent tax by the partnership.

Estimated tax payments

    The technical correction provides that the corporate 
estimated tax payment rules of section 6655 are applied to the 
3.5-percent tax payable by an electing 1987 partnership in the 
same manner as if the partnership were a corporation and the 
tax were imposed under section 11 (relating to corporate tax 
rates). References in section 11 to taxable income are to be 
applied for this purpose as if they were references to gross 
income of the partnership for the taxable year from the active 
conduct of trades and businesses by the partnership.

                             Effective Date

Tax on partnership

    The provision is effective as if enacted with the 1997 Act.

Estimated tax payments

    The provision is effective for taxable years beginning 
after the date of enactment.

6. Depreciation limitations for electric vehicles (sec. 6009(e) of the 
        bill, sec. 971 of the 1997 Act, and sec. 280F of the Code)

                              Present Law

    Annual depreciation deductions with respect to passenger 
automobiles are limited to specified dollar amounts, indexed 
for inflation. Any cost not recovered during the 6-year 
recovery period of such vehicles may be recovered during the 
years succeeding the recovery period, subject to similar 
limitations. The recovery-period limitations are trebled for 
vehicles that are propelled primarily by electricity.

                        Explanation of Provision

    The depreciation limitations applicable to post-recovery 
periods under section 280F are trebled for vehicles that are 
propelled primarily by electricity.

                             Effective Date

    The provision is effective for property placed in service 
after August 5, 1997 and before January 1, 2005.

7. Modification of operation of elective carryback of existing net 
        operating losses of the National Railroad Passenger Corporation 
        (``Amtrak'') (sec. 6009(g) of the bill and sec. 977 of the 1997 
        Act)

                              Present Law

    The 1997 Act provides elective procedures that allow Amtrak 
to consider the tax attributes of its predecessors (i.e., those 
railroads that were relieved of their responsibility to provide 
intercity rail passenger service as a result of the Rail 
Passenger Service Act of 1970) in the use of Amtrak's net 
operating losses. The benefit allowable under these procedures 
is limited to the least of: (1) 35 percent of Amtrak's existing 
qualified carryovers, (2) the net tax liability for the 
carryback period, or (3) $2,323,000,000. One half of the amount 
so calculated will be treated as a payment of the tax imposed 
by chapter 1 of the Internal Revenue Code of 1986 for Amtrak's 
taxable year ending December 31, 1997, and a similar amount for 
Amtrak's taxable year ending December 31, 1998.
    The availability of the elective procedures is conditioned 
on Amtrak (1) agreeing to make payments of one percent of the 
amount it receives to each of the non-Amtrak States to offset 
certain transportation related expenditures and (2) using the 
balance for certain qualified expenses. Non-Amtrak States are 
those States that are not receiving Amtrak service at any time 
during the period beginning on the date of enactment and ending 
on the date of payment.

                        Explanation of Provision

    The provision provides that the term ``non-Amtrak State'' 
means any State that is not receiving intercity passenger rail 
service from Amtrak as of the date of enactment of the 1997 Act 
(August 5, 1997). Thus, a State will not lose its status as a 
non-Amtrak State with respect to any payment by reason of 
acquiring Amtrak service with any payment from Amtrak under the 
1997 Act provision.

                             Effective Date

    The provision is effective as if included in section 977 of 
the 1997 Act.

 I. AMENDMENTS TO TITLE X OF THE 1997 ACT RELATING TO REVENUE-RAISING 
                               PROVISIONS

1. Exception from constructive sales rules for certain debt positions 
        (sec. 6010(a)(1) of the bill, sec. 1001(a) of the 1997 Act, and 
        sec. 1259(b)(2) of the Code)

                              Present Law

    A taxpayer is required to recognize gain (but not loss) 
upon entering into a constructive sale of an ``appreciated 
financial position,'' which generally includes an appreciated 
position with respect to any stock, debt instrument or 
partnership interest. An exception is provided for positions 
with respect to debt instruments that have an unconditionally 
payable principal amount, that are not convertible into the 
stock of the issuer or a related person, and the interest on 
which is either fixed, payable at certain variable rates or 
based on certain interest payments on a pool of mortgages.

                        Explanation of Provision

    The provision clarifies that, to qualify for the exception 
for positions with respect to debt instruments, the position 
would either have to meet the requirements as to unconditional 
principal amount, non-convertibility and interest terms or, 
alternatively, be a hedge of a position meeting these 
requirements. A hedge for purposes of the provision includes 
any position that reduces the taxpayer's risk of interest rate 
or price changes or currency fluctuations with respect to 
another position.

                             Effective Date

    The provision is generally effective for constructive sales 
entered into after June 8, 1997.

2. Definition of forward contract under constructive sales rules (sec. 
        6010(a)(2) of the bill, sec. 1001(a) of the 1997 Act, and sec. 
        1259(d)(1) of the Code)

                              Present Law

    A constructive sale of an appreciated financial position 
generally results when the taxpayer enters into a forward 
contact to deliver the same or substantially identical 
property. A forward contract for this purpose is defined as a 
contract that provides for delivery of a substantially fixed 
amount of property at a substantially fixed price.

                        Explanation of Provision

    The provision clarifies that the definition of a forward 
contract includes a contract that provides for cash settlement 
with respect to a substantially fixed amount of property at a 
substantially fixed price.

                             Effective Date

    The provision is generally effective for constructive sales 
entered into after June 8, 1997.

3. Treatment of mark-to-market gains of electing traders (sec. 
        6010(a)(3) of the bill, sec. 1001(b) of the 1997 Act, and sec. 
        475(f)(1)(D) of the Code)

                              Present Law

    Securities and commodities traders may elect application of 
the mark-to-market accounting rules. Gain or loss recognized by 
an electing taxpayer under these rules is treated as ordinary 
gain or loss.
    Under the Self-Employment Contributions Act (``SECA''), a 
tax is imposed on an individual's net earnings from self-
employment (``NESE''). Gain or loss from the sale or exchange 
of a capital asset is excluded from NESE.
    A publicly-traded partnership generally is treated as a 
corporation for Federal tax purposes. An exception to this rule 
applies if 90 percent or more of the partnership's gross income 
consists of passive-type income, which includes gain from the 
sale or disposition of a capital asset.

                        Explanation of Provision

    The provision clarifies that gain or loss of a securities 
or commodities trader that is treated as ordinary solely by 
reason of election of mark-to-market treatment is not treated 
as other than gain or loss from a capital asset for purposes of 
determining NESE for SECA tax purposes, determining whether the 
passive-type income exception to the publicly-traded 
partnership rules is met or for purposes of any other Code 
provision specified by the Treasury Department in regulations.

                             Effective Date

    The provision applies to taxable years of electing 
securities and commodities traders ending after the date of 
enactment of the 1997 Act.

4. Special effective date for constructive sale rules (sec. 6010(a)(4) 
        of the bill, sec. 1001(d) of the 1997 Act, and sec. 1259 of the 
        Code)

                              Present Law

    The constructive sales rules contain a special effective 
date provision for decedents dying after June 8, 1997, if (1) a 
constructive sale of an appreciated financial position occurred 
before such date, (2) the transaction remains open for not less 
than two years, (3) the transactionremains open at any time 
during the three years prior to the decedent's death, and (4) the 
transaction is not closed within the 30-day period beginning on the 
date of enactment of the 1997 Act. If the requirements of the special 
effective date provision are met, both the appreciated financial 
position and the transaction resulting in the constructive sale are 
generally treated as property constituting rights to receive income in 
respect of a decedent under section 691. However, gain with respect to 
a position in a constructive sale transaction that accrues after the 
transaction is closed is not included in income in respect of a 
decedent.

                        Explanation of Provision

    The provision clarifies the special effective date rule to 
provide that the rule does not apply if the constructive sale 
transaction is closed at any time prior to the end of the 30th 
day after the date of enactment of the 1997 Act.

                             Effective Date

    The provision is effective for decedents dying after June 
8, 1997.

5. Gain recognition for certain extraordinary dividends (sec. 6010(b) 
        of the bill, sec. 1011 of the 1997 Act, and sec. 1059 of the 
        Code)

                              Present Law

    A corporate shareholder generally can deduct at least 70 
percent of a dividend received from another corporation. This 
dividends received deduction is 80 percent if the corporate 
shareholder owns at least 20 percent of the distributing 
corporation and generally 100 percent if the shareholder owns 
at least 80 percent of the distributing corporation.
    Section 1059 of the Code requires a corporate shareholder 
that receives an ``extraordinary dividend'' to reduce the basis 
of the stock with respect to which the dividend was received by 
the nontaxed portion of the dividend. Whether a dividend is 
``extraordinary'' is determined, among other things, by 
reference to the size of the dividend in relation to the 
adjusted basis of the shareholder's stock. In addition, 
dividends resulting from non pro rata redemptions, partial 
liquidations, and certain other redemptions are extraordinary 
dividends. Pursuant to a provision of the 1997 Act, gain is 
recognized to the extent the reduction in basis of stock 
exceeds the basis in the stock with respect to which an 
extraordinary dividend is received. Prior to the 1997 Act, the 
recognition of such gain generally was deferred until the stock 
to which the adjustment related was sold or disposed of.
    The consolidated return regulations provide basis 
adjustment rules with respect to dividends paid within a 
consolidated group of corporations. These rules provide that a 
dividend paid from one member of a group to its parent reduces 
the parent's basis in the stock of the payor and if such 
reduction exceeds the parent's basis, an ``excess loss 
account'' is created or increased. Excess loss accounts 
generally are not restored to income until the occurrence of 
certain specified events (e.g., when the corporation to which 
the excess loss account relates leaves the consolidated group). 
Legislative history indicates that, except as provided in 
regulations, the extraordinary dividend provisions do not apply 
to result in a double reduction in basis in the case of 
distributions between members of an affiliated group filing 
consolidated returns or in the double inclusion of earnings and 
profits.

                        Explanation of Provision

    The provision provides the Treasury Department regulatory 
authority to coordinate the basis adjustment rules of section 
1059 and the consolidated return regulations. It is expected 
that these rules generally would provide that, except as 
provided in regulations to be issued,72 section 1059 
will not cause current gain recognition to the extent that the 
consolidated return regulations require the creation or 
increase of an excess loss account with respect to a 
distribution.
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    \72\ Thus, current Treas. reg. sec. 1.1059(e)-1(a) will not result 
in gain recognition with respect to distributions within a consolidated 
group to the extent such distribution results in the creation or 
increase of an excess loss account under the consolidated return 
regulations.
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                             Effective Date

    The provision generally is effective for distributions 
after May 3, 1995.

6. Treatment of certain corporate distributions (sec. 6010(c) of the 
        bill, sec. 1012 of the 1997 Act, and secs. 355(e)(3)(A)(iv) and 
        358(c) of the Code)

                              Present Law

    The 1997 Act (sec. 1012(a)) requires a distributing 
corporation (``distributing'') to recognize corporate level 
gain on the distribution of stock of a controlled corporation 
(``controlled'') 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, including, under section 
355(e)(3)(A)(iv), the acquisition by a person of stock in a 
corporation if shareholders owning directly or indirectly stock 
possessing more than 50 percent of the voting power and more 
than 50 percent of the value of the stock in distributing or 
any controlled corporation before such acquisition own directly 
or indirectly stock possessing such vote and value in such 
distributing or controlled corporation after such 
acquisition.73
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    \73\ 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. The Conference Report to the 1997 Act 
states that no adjustment to the basis of the stock or assets 
of either corporation is allowed by reason of the recognition 
of the gain.74
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    \74\ The 1997 Act does not limit the otherwise applicable Treasury 
regulatory authority under section 336(e) of the Code. Nor does it 
limit the otherwise applicable provisions of section 1367 with respect 
to the effect on shareholder stock basis of gain recognized by an S 
corporation under this provision.
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    The 1997 Act (sec. 1012(b)(1)) also provides that, except 
as provided in regulations, section 355 shall not apply to the 
distribution of stock from one member of an affiliated group of 
corporations (as defined in section 1504(a)) to another member 
of such group (an intragroup spin-off) if such distribution is 
part of such a plan or series of related transactions pursuant 
to which one or more persons acquire stock representing a 50-
percent or greater interest in a distributing or controlled 
corporation, determined after the application of the rules of 
section 355(e).
    In addition, the 1997 Act (sec. 1012(b)(2)) provides that 
in the case of any distribution of stock of one member of an 
affiliated group of corporations to another member under 
section 355, the Treasury Department has regulatory authority 
under section 358(g) to provide adjustments to the basis of any 
stock in a corporation which is a member of such group, to 
reflect appropriately the proper treatment of such 
distribution.
    The 1997 Act (sec. 1012(c)) 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), those shareholders 
receiving stock in the distributed corporation are treated as 
in control of the distributed corporation immediately after the 
distribution if they hold stock representing a greater than 50 
percent interest in the vote and value of stock of the 
distributed corporation.
    The effective date (Act section 1012(d)(1)) states that the 
forgoing 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

Acquisition of a 50-percent or greater interest

    The bill clarifies that the acquisitions described in Code 
section 355(e)(3)(A) are disregarded in determining whether 
there has been an acquisition of a 50-percent or greater 
interest in a corporation. However, other transactions that are 
part of a plan or series of related transactions could result 
in an acquisition of a 50-percent or greater interest.
    In the case of acquisitions under section 355(e)(3)(A)(iv), 
the provision clarifies that 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.
    Example: Shareholder A owns 10 percent of the vote and 
value of the stock of corporation D (which owns all of 
corporation C). There are nine other equal shareholders of D. A 
also owns 100 percent of the vote and value of the stock of 
unrelated corporation P. D distributes C to all the 
shareholders of D. Thereafter, pursuant to a plan or series of 
related transactions, D (worth 100x) merges with corporation P 
(worth 900x). After the merger, each of the former shareholders 
of corporation D owns stock of the merged entity reflecting the 
vote and value attributable to that shareholder's respective 10 
percent former stock ownership of D. Each of the former 
shareholders of D owns 1 percent of the stock of the merged 
corporation, except that shareholder A (who owned 100 percent 
of corporation P and 10 percent of corporation D before the 
merger) now owns 91 percent of the stock of the merged 
corporation. In determining whether a 50-percent or greater 
interest in D has been acquired, the interest of each of the 
continuing shareholders is disregarded only to the extent there 
has been no decrease in such shareholder's direct or indirect 
ownership. Thus, the 10 percent interest of A, and the 1 
percent interest of each of the nine other former shareholders 
of D, is not counted. The remaining 81 percent ownership of the 
merged corporation, representing a decrease of nine percent in 
the interests of each of the nine former shareholders other 
than A, is counted in determining the extent of an acquisition. 
Therefore, a 50-percent or greater interest in D has been 
acquired.

Treasury regulatory authority

    The bill also clarifies that the regulatory authority of 
the Treasury Department under section 358(c) applies to 
distributions after April 16, 1997, without regard to whether a 
distribution involves a plan (or series of related 
transactions) which involves an acquisition.
    As stated in the Conference Report to the 1997 Act, with 
respect to the Treasury Department regulatory authority under 
section 358(c) as applied to intragroup spin-off transactions 
that are not part of a plan or series of related transactions 
that involve an acquisition of a 50-percent or greater interest 
under new section 355(f), it is expected that any Treasury 
regulations will be applied prospectively, except in cases to 
prevent abuse.

Section 351(c) and section 368(a)(2)(H) ``control immediately after'' 
        requirement

    In general, the 1997 Act modifications to the control 
immediately after requirement of Section 351(c) and section 
368(a)(2)(H) were intended to minimize certain differences in 
the results of a transaction involving a contribution of assets 
to controlled corporation prior to asection 355 spin-off that 
could occur depending on whether the distributing or controlled 
corporation were acquired subsequent to the spin-off.
    The bill clarifies that 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), 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 shall not be taken into account 
for purposes of the control immediately after requirement of 
section 351(a) or 368(a)(1)(D). For purposes of determining the 
tax treatment of transfers of property to the controlled 
corporation by parties other than the distributing corporation, 
the disposition of part or all of the distributed stock 
continues to be taken into account, as under prior law, in 
determining whether the control immediately after requirement 
is satisfied.
    Example 1: Distributing corporation D transfers appreciated 
business X to subsidiary C in exchange for 100 percent of C 
stock. D distributes its stock of C to D shareholders. As part 
of a plan or series of related transactions, C merges into 
unrelated acquiring corporation A, and the C shareholders 
receive 25 percent of the vote or value of A stock. If the 
requirements of section 355 are met with respect to the 
distribution, then the control immediately after requirement 
will be satisfied solely for purposes of determining the tax 
treatment of the transfers of property by D to C. Accordingly, 
the business X assets transferred to C and held by A after the 
merger will have a carryover basis from D. Section 355(e) will 
require D to recognize gain as if the C stock had been sold at 
fair market value.
    Example 2: Distributing corporation D transfers appreciated 
business X to subsidiary C in exchange for 85 percent of C 
stock. Unrelated persons transfer appreciated assets to C in 
exchange for the remaining 15 percent of C stock. D distributes 
all its stock of C to D shareholders. As part of a plan or 
series of related transactions, C merges into acquiring 
corporation A; and the interests attributable to the D 
shareholders' receipt of C stock with respect to their D stock 
in the distribution represent 25 percent of the vote and value 
of A stock. If the requirements of section 355 are met with 
respect to the distribution, then the control immediately after 
requirement will be satisfied solely for purposes of 
determining the tax treatment of the transfers of property by D 
to C. Section 355(e) will require recognition of gain as if the 
C stock had been sold for fair market value. The business X 
assets transferred to C and held by A after the merger will 
have a carryover basis from D. The persons other than D who 
transferred assets to C for 15 percent of C stock will 
recognize gain on the appreciation in their assets transferred 
to C if the control immediately after requirement is not 
satisfied after taking into account any post-spin-off 
dispositions that would have been taken into account under 
prior law.
    Example 3: The facts are the same as in example 2, except 
that the interests attributable to the D shareholders' receipt 
of C stock with respect to their D stock in the distribution 
represent 55 percent of the vote and value of A stock in the 
merger. If the requirements of section 355 are met with respect 
to the distribution, then the control immediately after 
requirement will be satisfied solely for purposes of 
determining the tax treatment of the transfers by D to C. The 
business X assets in C (and in A after the merger) will 
therefore have a carryover basis from D. Because the D 
shareholders retain more than 50 percent of the stock of A, 
section 355(e) will not apply. The persons other than D who 
transferred property for the 15 percent of C stock will 
recognize gain on the appreciation in their assets transferred 
to C if the control immediately after requirement is not 
satisfied after taking into account any post-spin-off 
dispositions that would have been taken into account under 
prior law.

                             Effective Date

    The provision generally is effective for distributions 
after April 16, 1997.

7. Certain preferred stock treated as ``boot''--statute of limitations 
        (sec. 6010(e)(2) of the bill, sec. 1014 of the 1997 Act, and 
        sec. 354(a) of the Code)

                              Present law

    Under the 1997 Act, certain preferred stock received in 
otherwise tax-free transactions is treated as ``other 
property.'' Exchanges of stock in certain recapitalizations of 
family-owned corporations are excepted from this rule. A 
family-owned corporation is defined as any corporation if at 
least 50 percent of the total voting power and value of the 
stock of such corporation is owned by the same family for five 
years preceding the recapitalization. In addition, a 
recapitalization does not qualify for the exception if the same 
family does not own 50 percent of the total voting power and 
value of the stock throughout the three-year period following 
the recapitalization.

                        Explanation of Provision

    The bill provides that the statutory period for the 
assessment of any deficiency attributable to a corporation 
failing to be a family-owned corporation shall not expire 
before the expiration of three years after the date the 
Secretary of the Treasury is notified by the corporation (in 
such manner as the Secretary may prescribe) of such failure, 
and such deficiency may be assessed before the expiration of 
such three-year period notwithstanding the provisions of any 
other law or rule of law which would otherwise prevent such 
assessment.

                             Effective Date

    The provision applies to transactions after June 8, 1997.

8. Certain preferred stock treated as ``boot''--treatment of transferor 
        (sec. 6010(e)(1) of the bill, sec. 1014 of the 1997 Act, and 
        sec. 351(g) of the Code)

                              Present Law

    The 1997 Act amended section 351 of the Code to provide 
that in the case of a person who transfers property to a 
controlled corporation and receives nonqualified preferred 
stock, section 351(b) will apply to such person. Section 351(b) 
provides that if section 351(a) of the Code would apply to an 
exchange but for the fact that there is received, in addition 
to stock permitted to be received under section 351(a), other 
property or money, then gain but no loss to such recipient 
shall be recognized. The Conference Report to the 1997 Act 
states that if nonqualified preferred stock is received, gain 
but not loss shall be recognized.

                        Explanation of Provision

    The bill clarifies that section 351(b) applies to a 
transferor who transfers property in a section 351 exchange and 
receives nonqualified preferred stock in addition to stock that 
is not treated as ``other property'' under that section. Thus, 
if a transferor received only nonqualified preferred stock but 
the transaction in the aggregate otherwise qualified as a 
section 351 exchange, such a transferor would recognize loss 
and the basis of the nonqualified preferred stock and of the 
property in the hands of the transferee corporation would 
reflect the transaction in the same manner as if that 
particular transferor had received solely ``other property'' of 
any other type. As under the 1997 Act, the nonqualified 
preferred stock continues to be treated as stock received by a 
transferor for purposes of qualification of a transaction under 
section 351(a), unless and until regulations may provide 
otherwise.

                             Effective Date

    The provision applies to transactions after June 8, 1997.

9. Application of section 304 to certain international transactions 
        (sec. 6010(d) of the bill, sec. 1013 of the 1997 Act, and sec. 
        304 of the Code)

                              Present Law

    Under section 304, if one corporation purchases stock of a 
related corporation, the transaction generally is 
recharacterized as a redemption. Under section 304(a), as 
amended by the 1997 Act, to the extent that a section 304 
transaction is treated as a distribution under section 301, the 
transferor and the acquiring corporation are treated as if (1) 
the transferor had transferred the stock involved in the 
transaction to the acquiring corporation in exchange for stock 
of the acquiring corporation in a transaction to which section 
351(a) applies, and (2) the acquiring corporation had then 
redeemed the stock it is treated as having issued. In the case 
of a section 304 transaction, both the amount which is a 
dividend and the source of such dividend is determined as if 
the property were distributed by the acquiring corporation to 
the extent of its earnings and profits and then by the issuing 
corporation to the extent of its earnings and profits (sec. 
304(b)(2)). Section 304(b)(5), as added by the 1997 Act, 
provides special rules that apply if the acquiring corporation 
in a section 304 transaction is a foreign corporation. Under 
section 304(b)(5), the earnings and profits of the acquiring 
corporation that are taken into account are limited to the 
portion of such earnings and profits that (1) is attributable 
to stock of such acquiring corporation held by a corporation or 
individual who is the transferor (or a person related thereto) 
and who is a U.S. shareholder (within the meaning of section 
951(b)) of such corporation and (2) was accumulated during 
periods in which such stock was owned by such person while such 
acquiring corporation was a controlled foreign corporation. For 
purposes of this rule, except as otherwise provided by the 
Secretary of the Treasury, the rules of section 1248(d) 
(relating to certain exclusions from earnings and profits) 
apply. The Secretary is to prescribe regulations as 
appropriate, including regulations determining the earnings and 
profits that are attributable to particular stock of the 
acquiring corporation.
    For foreign tax credit purposes, under section 902, a U.S. 
corporation that receives a dividend from a foreign corporation 
in which it owns at least 10 percent of the voting stock is 
treated as if it had paid the foreign income taxes paid by the 
foreign corporation which are attributable to such dividend. 
The Internal Revenue Service issued rulings providing that a 
domestic corporation that is a transferor in a section 304 
transaction may compute foreign taxes deemed paid under section 
902 on the dividends from both a foreign acquiring corporation 
and a foreign issuing corporation. Rev. Rul. 92-86, 1992-2 C.B. 
199; Rev. Rul. 91-5, 1991-1 C.B. 114. Both rulings involve 
section 304 transactions in which both the domestic transferor 
and the foreign acquiring corporation are wholly owned by a 
domestic parent corporation.

                        Explanation of Provision

    Under the provision, in the case of a section 304 
transaction in which the acquiring corporation or the issuing 
corporation is a foreign corporation, the Secretary of the 
Treasury is to prescribe regulations providing rules to prevent 
the multiple inclusion of an item of income and to provide 
appropriate basis adjustments, including rules modifying the 
application of sections 959 and 961 in the case of a section 
304 transaction. It is expected that such regulations will 
provide for an exclusion from income for distributions from 
earnings and profits of the acquiring corporation and the 
issuing corporation that represent previously taxed income 
under subpart F. It further is expected that such regulations 
will provide for appropriate adjustments to the basis of stock 
held by the corporation treated as receiving the distribution 
or by the corporation that had the prior inclusion with respect 
to the previously taxed income. No inference is intended 
regarding the treatment of previously taxed income in a section 
304 transaction under present law. The 1997 Act amendments to 
section 304, including the modifications under this provision, 
are not intended to change the foreign tax credit results 
reached in Rev. Rul. 92-86 and 91-5.
    The provision also eliminates the cross-reference to the 
rules of section 1248(d) for purposes of determining the 
earnings and profits to be taken into account under section 
304(b)(5).

                             Effective Date

    The provision generally is effective for distributions or 
acquisitions after June 8, 1997.

10. Establish IRS continuous levy and improve debt collection (sec. 
        6010(f) of the bill, secs. 1024, 1025, and 1026 of the 1997 
        Act, and secs. 6331 and 6334 of the Code)

                              Present Law

    If any person is liable for any internal revenue tax and 
does not pay it within 10 days after notice and demand by the 
IRS, the IRS may then collect the tax by levy upon all property 
and rights to property belonging to the person, unless there is 
an explicit statutory restriction on doing so. A levy is the 
seizure of the person's property or rights to property. A levy 
on salary and wages is continuous from the date it is first 
made until the date it is fully paid or becomes unenforceable.
    The 1997 Act provides that a continuous levy is also 
applicable to non-means tested recurring Federal payments and 
specified wage replacement payments.

                        Explanation of Provision

    The provision clarifies that the IRS must approve the use 
of a continuous levy before it may take effect.

                             Effective Date

    The provision is effective for levies issued after the date 
of enactment of the 1997 Act (August 5, 1997).

11. Clarification regarding aviation gasoline excise tax (sec. 6010(g) 
        of the bill, sec. 1031 of the 1997 Act, and sec. 6421 of the 
        Code)

                              Present Law

    Before enactment of the 1997 Act, aviation gasoline was 
subject to a 19.3-cents-per-gallon tax rate, with 15 cents per 
gallon being deposited in the Airport and Airway Trust Fund and 
4.3 cents per gallon being retained in the General Fund. The 
1997 Act extended the 15-cents-per-gallon rate for 10 years, 
through September 30, 2007, and expanded deposits to the Trust 
Fund to include revenues from the 4.3-cents-per-gallon rate. 
The tax does not apply to fuel used in flight segments outside 
the United States or to flight segments from the United States 
to foreign countries.

                        Explanation of Provision

    The bill clarifies the application of the gasoline tax 
refund provisions to aviation gasoline used in flight segments 
outside the United States and to flight segments from the 
United States to foreign countries.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

12. Clarification of requirement that registered fuel terminals offer 
        dyed fuel (sec. 6010(h) of the bill, sec. 1032 of the 1997 Act 
        and sec. 4101 of the Code) 75

                              Present Law

    The 1997 Act provides that fuel terminals are eligible to 
register to handle non-tax-paid diesel fuel and kerosene only 
if the terminal operator offers both undyed (taxable) and dyed 
(nontaxable) fuel.
---------------------------------------------------------------------------
    \75\ S. 1173, as passed by the Senate, and H.R. 2400, as passed by 
the House, would delay the effective date of this requirement for two 
years, until July 1, 2000.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill clarifies that the Code requires terminals 
eligible to handle non-tax-paid diesel to offer dyed diesel 
fuel and terminals eligible to handle non-tax-paid kerosene 
(including diesel fuel #1 and kerosene-type aviation fuel) to 
offer dyed kerosene. The bill does not require that a terminal 
offer for sale kerosene as a condition of receiving diesel fuel 
on a non-tax-paid basis. Similarly, the proposal does not 
require terminals that sell only kerosene to offer diesel fuel 
as a condition of receiving non-tax-paid kerosene.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

13. Clarification of treatment of prepaid telephone cards (sec. 6010(i) 
        of the bill, sec. 1034 of the 1997 Act, and sec. 4251 of the 
        Code)

                              Present Law

    A 3-percent excise tax is imposed on amounts paid for local 
and toll (long-distance) telephone service and teletypewriter 
exchange service. The tax is collected by the provider of the 
service from the consumer. In the case of so-called ``prepaid 
telephone cards'', the tax is treated as paid when the card is 
transferred by any telecommunications carrier to any person who 
is not a telecommunications carrier.
    A ``prepaid telephone card'' is defined as any card or 
other similar arrangement which permits its holder to obtain 
communications services and pay for such services in advance.

                        Explanation of Provision

    The bill inserts the word ``any'' prior to ``other similar 
arrangement'' to clarify that payment to a telecommunications 
carrier from a third party such as a joint venture credit card 
company is treated as payment made by the holder of the credit 
card to obtain communication services and the tax is treated as 
paid in a manner similar to that applied to prepaid telephone 
cards. The tax applies to payments if the rights to telephone 
service for which payments are made can be used in whole or in 
part for telephone service that, if purchased directly, would 
be subject to the 3-percent excise tax on telephone service. 
Also, the tax applies without regard to whether telephone 
service ultimately is provided pursuant to the transferred 
rights.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

14. Modify UBIT rules applicable to second-tier subsidiaries (sec. 
        6010(j) of the bill, sec. 1041 of the 1997 Act, and sec. 
        512(b)(13) of the Code)

                              Present Law

    In general, interest, rents, royalties and annuities are 
excluded from the unrelated business income (``UBI'') of tax-
exempt organizations. However, section 512(b)(13) treats 
otherwise excluded rent, royalty, annuity, and interest income 
as UBI if such income is received from a taxable or tax-exempt 
subsidiary that is controlled by the parent tax-exempt 
organization.
    Under the provision, interest, rent, annuity, or royalty 
payments made by a controlled entity to a tax-exempt 
organization are subject to the unrelated business income tax 
to the extent the payment reduces the net unrelated income (or 
increases any net unrelated loss) of the controlled entity. In 
this regard, section 512(b)(13)(B)(i)(I) cross references a 
non-existent Code section.
    The provision generally applies to taxable years beginning 
after the date of enactment. However, the provision does not 
apply to payments made during the first two taxable years 
beginning on or after the date of enactment if such payments 
are made pursuant to a binding written contract in effect as of 
June 8, 1997, and at all times thereafter before such payment.

                        Explanation of Provision

    The bill clarifies that rent, royalty, annuity, and 
interest income that would otherwise be excluded from UBI is 
included in UBI under section 512(b)(13) if such income is 
received or accrued from a taxable or tax-exempt subsidiary 
that is controlled by the parent tax-exempt organization. The 
bill further clarifies that the provision does not apply to any 
payment received or accrued during the first two taxable years 
beginning on or after the date of enactment if such payment is 
received or accrued pursuant to a binding written contract in 
effect on June 8, 1997, and at all times thereafter before such 
payment (but not pursuant to any contract provision that 
permits optional accelerated payments).

                             Effective Date

    The provision is effective as of August 5, 1997, the date 
of enactment of the 1997 Act.

15. Application of foreign tax credit holding period rule to RICs (sec. 
        6010(k) of the bill, sec. 1053 of the 1997 Act, and secs. 853 
        and 901 of the Code)

                              Present Law

    Section 901(k), as added by the 1997 Act, generally imposes 
a holding period requirement for claiming foreign tax credits 
with respect to dividends. Under section 901(k), foreign tax 
credits with respect to a dividend from a foreign corporation 
or a regulated investment company (a ``RIC'') are disallowed if 
the shareholder has not held the stock for more than 15 days in 
the case of common stock or more than 45 days in the case of 
preferred stock. This disallowance applies both to foreign tax 
credits for foreign withholding taxes that are paid on the 
dividend where the dividend-paying stock is not held for the 
required period and to indirect foreign tax credits for taxes 
paid by a lower-tier foreign corporation or a RIC where any of 
the stock in the required chain of ownership is not held for 
the required period. Foreign taxes for which credits are 
disallowed under section 901(k) may be deducted.
    Under section 853, a RIC may elect to flow through to its 
shareholders the foreign tax credits for foreign taxes paid by 
the RIC. Under this election, the RIC is not entitled to a 
deduction or credit for foreign taxes paid; the shareholders of 
an electing RIC are treated as having paid their proportionate 
shares of the foreign taxes paid by the RIC. Accordingly, 
foreign tax credits are claimed at the shareholder level and 
not at the RIC level.

                        Explanation of Provision

    Under the provision, the flow-through election of section 
853 does not apply to any foreign taxes paid by the RIC for 
which a credit is disallowed under section 901(k) because the 
RIC did not satisfy the applicable holding period. Accordingly, 
such taxes are deductible at the RIC level. The election of 
section 853 applies only to foreign taxes with respect to which 
the RIC has satisfied any applicable holding period 
requirement.

                             Effective Date

    The provision is effective for dividends paid or accrued 
more than 30 days after the date of enactment of the 1997 Act.

16. Clarification of provision expanding the limitations on 
        deductibility of premiums and interest with respect to life 
        insurance, endowment and annuity contracts (sec. 6010(o) of the 
        bill, sec. 1084 of the 1997 Act, and sec. 264 of the Code)

                              Present Law

Master contracts

    The 1997 Act provided limitations on the deductibility of 
interest and premiums with respect to life insurance, endowment 
and annuity contracts. Under the pro rata interest disallowance 
provision added by the Act, an exception is provided for any 
policy or contract owned by an entity engaged in a trade or 
business, covering an individual who is an employee, officer or 
director of the trade or business at the time first covered. 
The exception applies to any policy or contract owned by an 
entity engaged in a trade or business, which covers one 
individual who (at the time first insured under the policy or 
contract) is (1) a 20-percent owner of the entity, or (2) an 
individual (who is not a 20-percent owner) who is an officer, 
director or employee of the trade or business. 76 
The provision is silent as to the treatment of coverage of such 
an individual under a master contract.
---------------------------------------------------------------------------
    \76\  The exception also applies in the case of a joint-life policy 
or contract under which the sole insureds are a 20-percent owner and 
the spouse of the 20-percent owner. A joint-life contract under which 
the sole insureds are a 20-percent owner and his or her spouse is the 
only type of policy or contract with more than one insured that comes 
within the exception.
---------------------------------------------------------------------------

Reporting

    The provision does not apply to any policy or contract held 
by a natural person; however, if a trade or business is 
directly or indirectly the beneficiary under any policy or 
contract, the policy or contract is treated as held by the 
trade or business and not by a natural person. In addition, the 
provision includes a reporting requirement. Specifically, the 
provision provides that the Treasury Secretary shall require 
such reporting from policyholders and issuers as is necessary 
to carry out the rule applicable when the trade or business is 
directly or indirectly the beneficiary under any policy or 
contract held by a natural person. Any report required under 
this reporting requirement is treated as a statement referred 
to in Code section 6724(d)(1) (relating to information 
returns). The provision does not specifically refer to Code 
section 6724(d)(2) (relating to payee statements).

Additional covered lives

    The 1997 Act provision limiting the deductibility of 
certain interest and premiums is effective generally with 
respect to contracts issued after June 8, 1997. To the extent 
of additional covered lives under a contract after June 8, 
1997, the contract is treated as a new contract.

                        Explanation of Provision

Master contracts

    The technical correction clarifies that if coverage for 
each insured individual under a master contract is treated as a 
separate contract for purposes of sections 817(h), 7702, and 
7702A of the Code, then coverage for each such insured 
individual is treated as a separate contract, for purposes of 
the exception to the pro rata interest disallowance rule for a 
policy or contract covering an individual who is a 20-percent 
owner, employee, officer or director of the trade or business 
at the time first covered. A master contract does not include 
any contract if the contract (or any insurance coverage 
provided under the contract) is a group life insurance contract 
within the meaning of Code section 848(e)(2). No inference is 
intended that coverage provided under a master contract, for 
each such insured individual, is not treated as a separate 
contract for each such individual for other purposes under 
present law.

Reporting

    The technical correction clarifies that the required 
reporting to the Treasury Secretary is an information return 
(within meaning of sec. 6724(d)(1)), and any reporting required 
to be made to any other person is a payee statement (within the 
meaning of sec. 6724(d)(2)). Thus, the $50-per-report penalty 
imposed under sections 6722 and 6723 of the Code for failure to 
file or provide such an information return or payee statement 
apply. It is clarified that the Treasury Secretary may require 
reporting by the issuer or policyholder of any relevant 
information either by regulations or by any other appropriate 
guidance (including but not limited to publication of a form).

Additional covered lives

    The technical correction clarifies that the treatment of 
additional covered lives under the effective date of the 1997 
Act provision applies only with respect to coverage provided 
under a master contract, provided that coverage for each 
insured individual is treated as a separate contract for 
purposes of Code sections 817(h), 7702 and 7702A, and the 
master contract or any coverage provided thereunder is not a 
group life insurance contract within the meaning of Code 
section 848(e)(2).

                             Effective Date

    The provisions are effective as if included in the 1997 
Act.

17. Clarification of allocation of basis of properties distributed to a 
        partner by a partnership (sec. 6010(m) of the bill, sec. 1061 
        of the 1997 Act, and sec. 732(c) of the Code)

                              Present Law

    Present law, as amended by the 1997 Act, provides rules for 
allocating basis to property in the hands of a partner that 
receives a distribution from a partnership. Under these rules, 
basis is first allocated to unrealized receivables and 
inventory items in an amount equal to the partnership's 
adjusted basis in each property. If the basis to be allocated 
is less than the sum of the adjusted bases of the properties in 
the hands of the partnership, then, to the extent a decrease is 
required to make the total adjusted bases of the properties 
equal the basis to be allocated, the decrease is allocated (as 
described below) for adjustments that are decreases. To the 
extent of any basis not allocated to inventory and unrealized 
receivables under the above rules, basis is allocated to other 
distributed properties, first to the extent of each distributed 
property's adjusted basis to the partnership. Any remaining 
basis adjustment, if an increase, is allocated among properties 
with unrealized appreciation in proportion to their respective 
amounts of unrealized appreciation (to the extent of each 
property's appreciation), and then in proportion to their 
respective fair market values. If the remaining basis 
adjustment is a decrease, it is allocated among properties with 
unrealized depreciation in proportion to their respective 
amounts of unrealized depreciation (to the extent of each 
property's depreciation), and then in proportion to their 
respective adjusted bases (taking into account the adjustments 
already made).
    For purposes of these rules, ``unrealized receivables'' has 
the meaning set forth in section 751(c) (as provided in sec. 
732(c)(1)(A)(i)). Section 751(c) provides that the term 
``unrealized receivables'' includes certain accrued but 
unreported income. In addition, the last two sentences of 
section 751(c) provide that for purposes of certain specified 
partnership provisions (sections 731, 741 and 751), the term 
``unrealized receivables'' includes certain property the sale 
of which will give rise to ordinary income (for example, 
depreciation recapture under sections 1245 or 1250), but only 
to the extent of the amount that would be treated as ordinary 
income on a sale of that property at fair market value.

                        Explanation of Provision

    The technical correction clarifies that for purposes of the 
allocation rules of section 732(c), ``unrealized receivables'' 
has the meaning in section 751(c) including the last two 
sentences of section 751(c), relating to items of property that 
give rise to ordinary income. Thus, in applying the allocation 
rules of section 732(c) to property listed in the last two 
sentences of section 751(c), such as property giving rise to 
potential depreciation recapture, the amount of unrealized 
appreciation in any such property does not include any amount 
that would be treated as ordinary income if the property were 
sold at fair market value, because such amount is treated as a 
separate asset for purposes of the basis allocation 
rules.77
---------------------------------------------------------------------------
    \77\ Treasury regulations under section 751(b) provide for a 
similar bifurcation of assets among potential ordinary income amounts 
and other amounts in applying the definition of ``unrealized 
receivables'' for purposes of that section. Treas. Reg. 1.751-1(c)(4).
---------------------------------------------------------------------------
    For example, assume that a partnership has 3 partners, A, C 
and D. The partnership has 6 assets. Three are capital assets 
each with adjusted basis equal to fair market value of $20,000. 
The other three are depreciable equipment each with adjusted 
basis of $5,000 and fair market value of $30,000. Each of the 
pieces of equipment would have $25,000 of depreciation 
recapture if sold by the partnership for its $30,000 value. A 
has a basis in its partnership interest of $60,000. Assume that 
one of the capital assets and one of the pieces of equipment is 
distributed to A in liquidation of its interest. A is treated 
as receiving three assets: (1) depreciation recapture (an 
unrealized receivable) with a basis to the partnership of zero 
and a value of $25,000; (2) a piece of equipment with a basis 
to the partnership of $5,000 and a value of $5,000 (its $30,000 
value reduced by the $25,000 of depreciation recapture); and 
(3) a capital asset with a basis to the partnership of $20,000 
and a value of $20,000.
    Under the provision, as clarified by the technical 
correction, A's $60,000 basis in its partnership interest is 
allocated as follows. First, basis is allocated to the 
depreciation recapture, an unrealized receivable, in an amount 
equal to the partnership's adjusted basis in it, or zero (sec. 
732(c)(1)(A)(i)). Then basis is allocated to the extent of each 
of the other distributed properties' adjusted basis to the 
partnership, or $5,000 to the equipment (not including the 
depreciation recapture), and $20,000 to the capital asset. A's 
remaining $35,000 of basis is allocated next among properties 
(other than inventory and unrealized receivables) with 
unrealized appreciation, in proportion to their respective 
amounts of unrealized appreciation (to the extent of each 
property's appreciation), but neither of the distributed 
properties to which basis may be allocated has unrealized 
appreciation. Basis is then allocated then in proportion to the 
properties' respective fair market values ($5,000 for the 
equipment and $20,000 for the capital asset). Thus, of the 
remaining $35,000, $7,000 is allocated to the equipment, so 
that its total basis in the partner's hands is $12,000; and 
$28,000 is allocated to the capital asset, so that its total 
basis in the partner's hands is $48,000.

                             Effective Date

    The provision is effective as if enacted with the 1997 Act.

18. Clarification to the definition of modified adjusted gross income 
        for purposes of the earned income credit phaseout (sec. 6010(p) 
        of the bill, sec. 1085(d) of the 1997 Act, and sec. 32(c) of 
        the Code)

                              Present Law

    The earned income credit (``EIC'') is phased out above 
certain income levels. For individuals with earned income (or 
modified adjusted gross income (``modified AGI'), if greater) 
in excess of the beginning of the phaseout range, the maximum 
credit amount is reduced by the phaseout rate multiplied by the 
amount of earned income (or modified AGI, if greater) in excess 
of the beginning of the phaseout range. For individuals with 
earned income (or modified AGI, if greater) in excess of the 
end of the phaseout range, no credit is allowed. The definition 
of modified AGI used for the phase out of the earned income 
credit is the sum of: (1) AGI with certain losses disregarded, 
and (2) certain nontaxable amounts not generally included in 
AGI. The losses disregarded are: (1) net capital losses (if 
greater than zero); (2) net losses from trustsand estates; (3) 
net losses from nonbusiness rents and royalties; (4) 75 percent of the 
net losses from business, computed separately with respect to sole 
proprietorships (other than in farming), sole proprietorships in 
farming, and other businesses.78 The nontaxable amounts 
included in modified AGI which are generally not included in AGI are: 
(1) tax-exempt interest; and (2) nontaxable distributions from 
pensions, annuities, and individual retirement arrangements (but only 
if not rolled over into similar vehicles during the applicable rollover 
period).
---------------------------------------------------------------------------
    \78\ The 1997 Act increased the amount of net losses from 
businesses, computed separately with respect to sole proprietorships 
(other than farming), sole proprietorships in farming, and other 
businesses disregarded from 50 percent to 75 percent.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill clarifies that the two nontaxable amounts that are 
added to adjusted gross income to compute modified AGI for 
purposes of the EIC phaseout are additions to adjusted gross 
income and not disregarded losses.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

     J. Amendments to Title XI of the 1997 Act Relating to Foreign 
                               Provisions

1. Application of attribution rules under PFIC provisions (sec. 
        6011(b)(2) of the bill, sec. 1121 of the 1997 Act, and sec. 
        1298 of the Code)

                              Present Law

    Special attribution rules apply to the extent that the 
effect is to treat stock of a passive foreign investment 
company (``PFIC'') as owned by a U.S. person. In general, if 50 
percent or more in value of the stock of a corporation is owned 
(directly or indirectly) by or for any person, such person is 
considered as owning a proportionate part of the stock owned 
directly or indirectly by or for such corporation, determined 
based on the person's proportionate interest in the value of 
such corporation's stock. However, this 50-percent limitation 
does not apply in the case of a corporation that is a PFIC. 
Accordingly, a person that is a shareholder of a PFIC is 
considered as owning a proportionate part of the stock owned 
directly or indirectly by or for such PFIC, without regard to 
whether such shareholder owns at least 50 percent of the PFIC's 
stock by value.
    A corporation is not treated as a PFIC with respect to a 
shareholder during the qualified portion of the shareholder's 
holding period for the stock of such corporation. The qualified 
portion of the shareholder's holding period generally is the 
portion of such period which is after the effective date of the 
1997 Act and during which the shareholder is a United States 
shareholder (as defined in sec. 951(b)) and the corporation is 
a controlled foreign corporation.
    If a corporation is not treated as a PFIC with respect to a 
shareholder for the qualified portion of such shareholder's 
holding period, it is unclear whether the attribution rules 
that apply with respect to stock owned by or for such 
corporation apply without regard to the requirement that the 
shareholder own 50 percent or more of the corporation's stock.

                        Explanation of Provision

    The provision clarifies that the attribution rules apply 
without regard to the provision that treats a corporation as a 
non-PFIC with respect to a shareholder for the qualified 
portion of the shareholder's holding period. Accordingly, stock 
owned directly or indirectly by or for a corporation that is 
not treated as a PFIC for the qualified portion of the 
shareholder's holding period nevertheless will be attributed to 
such shareholder, regardless of the shareholder's ownership 
percentage of such corporation.

                             Effective Date

    The provision is effective for taxable years of U.S. 
persons beginning after December 31, 1997 and taxable years of 
foreign corporations ending with or within such taxable years 
of U.S. persons.

2. Treatment of PFIC option holders (sec. 6011(b)(1) of the bill, sec. 
        1121 of the 1997 Act, and secs. 1297 and 1298 of the Code)

                              Present Law

    Under the provisions of subpart F, a controlled foreign 
corporation (a ``CFC'') is defined generally as any foreign 
corporation if U.S. persons own more than 50 percent of the 
corporation's stock (measured by vote or value), taking into 
account only those U.S. persons that own at least 10 percent of 
the stock (measured by vote only) (sec. 957). Stock ownership 
includes not only stock owned directly, but also stock owned 
indirectly through a foreign entity or constructively (sec. 
958). Pursuant to the constructive ownership rules, a person 
that has an option to acquire stock generally is treated as 
owning such stock (secs. 958(b) and 318(a)(4)).
    The U.S. 10-percent shareholders of a CFC are subject to 
current U.S. tax on their pro rata shares of certain income of 
the CFC and their pro rata shares of the CFC's earnings 
invested in certain U.S. property (sec. 951). For purposes of 
determining the U.S. shareholder's includible pro rata share of 
the CFC's income and earnings, only stock held directly or 
indirectly through a foreign entity (and not stock held 
constructively) is taken into account (secs. 951(b) and 
958(a)).
    A foreign corporation is a passive foreign investment 
company (a ``PFIC'') if it satisfies a passive income test or a 
passive assets test for the taxable year (sec. 1297). A U.S. 
shareholder of a PFIC generally is subject to U.S. tax, plus an 
interest charge, on distributions from a PFIC and gain realized 
upon a disposition of PFIC stock (sec. 1291). Alternatively, 
the U.S. shareholder may elect either to be subject to current 
U.S. tax on the shareholder's share of the PFIC's earnings or, 
in the case of PFIC stock that is marketable, to mark to market 
the PFIC stock (secs. 1293 and 1296). For purposes of the PFIC 
provisions, constructive ownership rules apply (sec. 1298(a)). 
Under these rules, an option to acquire stock is treated as 
stock for purposes of applying the interest charge regime to a 
disposition of such option, and the holding period for stock 
acquired pursuant to the exercise of an option includes the 
holding period for such option (sec. 1298(a)(4) and prop. 
Treas. reg. secs. 1.1291-1(d) and (h)(3)).
    A corporation that is a CFC is also a PFIC if it meets the 
passive income test or the passive assets test. Under section 
1297(e), as added by the 1997 Act, a corporation is not treated 
as a PFIC with respect to a shareholder during the period after 
December 31, 1997 in which the corporation is a CFC and the 
shareholder is a U.S. shareholder (within the meaning of 
section 951(b)) thereof. Under this rule eliminating the 
overlap between the PFIC and CFC provisions, a shareholder that 
is subject to the subpart F rules with respect to a corporation 
is not also subject to the PFIC rules with respect to such 
corporation.

                        Explanation of Provision

    Under the provision, the elimination of the overlap between 
the PFIC and the CFC provisions generally does not apply to a 
U.S. person with respect to PFIC stock that such person is 
treated as owning by reason of an option to acquire such stock. 
Accordingly, for example, the PFIC rules continue to apply to a 
U.S. person that holds only an option on stock of a corporation 
that is a CFC because such person does not own stock of such 
corporation directly or indirectly through a foreign entity and 
therefore is not subject to the current inclusion rules of 
subpart F with respect to such corporation. However, under the 
provision, the elimination of the overlap will apply to a U.S. 
person that holds an option on stock if such stock is held by a 
person that is subject to the current inclusion rules of 
subpart F with respect to such stock and is not a tax-exempt 
person. Accordingly, an option holder is not subject to the 
PFIC rules with respect to an option if the option is on stock 
that is held by a non-tax-exempt person that is subject to the 
current inclusion rules of subpart F with respect to such 
stock.

                             Effective Date

    The provision is effective for taxable years of U.S. 
persons beginning after December 31, 1997 and taxable years of 
foreign corporations ending with or within such taxable years 
of U.S. persons.

3. Application of PFIC mark-to-market rules to RICs (sec. 6011(c)(3) of 
        the bill, sec. 1122 of the 1997 Act, and sec. 1296 of the Code)

                              Present Law

    Under section 1296, as added by the 1997 Act, a shareholder 
of a passive foreign investment company (a ``PFIC'') may make a 
mark-to-market election with respect to the stock of the PFIC, 
provided that such stock is marketable. Under this election, 
the shareholder includes in income each year an amount equal to 
the excess, if any, of the fair market value of the PFIC stock 
as of the close of the taxable year over the shareholder's 
adjusted basis in such stock. The shareholder is allowed a 
deduction for the excess, if any, of the shareholder's adjusted 
basis in the PFIC stock over its fair market value as of the 
close of the taxable year, but only to the extent of any net 
mark-to-market gains with respect to such stock included by the 
shareholder under section 1296 for prior years.
    The mark-to-market election of section 1296 is effective 
for taxable years of U.S. persons beginning after December 31, 
1997 and taxable years of foreign corporations ending with or 
within such taxable years of U.S. persons. Prior to the 
enactment of section 1296, a proposed Treasury regulation 
provided for a mark-to-market election with respect to PFIC 
stock held by certain regulated investment companies (``RICs'') 
(prop. Treas. reg. sec. 1.1291-8). Under this mark-to-market 
election, gains but not losses were recognized.
    Section 1296(j) provides rules applicable in the case of a 
shareholder that makes a mark-to-market election under section 
1296 later than the beginning of the shareholder's holding 
period for the PFIC stock. Special rules apply in the case of a 
RIC that makes such a mark-to-market election under section 
1296 with respect to PFIC stock that the RIC had previously 
marked to market under the proposed Treasury regulation.

                        Explanation of Provision

    Under the provision, for purposes of determining allowable 
deductions for any excess of the shareholder's adjusted basis 
in PFIC stock over the fair market value of the stock as of the 
close of the taxable year, deductions are allowed to the extent 
not only of prior mark-to-market inclusions under section 1296 
but also of prior mark-to-market inclusions under the proposed 
Treasury regulation applicable to a RIC that holds stock in a 
PFIC.

                             Effective Date

    The provision is effective for taxable years of U.S. 
persons beginning after December 31, 1997 and taxable years of 
foreign corporations ending with or within such taxable years 
of U.S. persons.

4. Interaction between the PFIC provisions and other mark-to-market 
        rules (sec. 6011(c)(2) of the bill, sec. 1122 of the 1997 Act, 
        and secs. 1291 and 1296 of the Code)

                              Present Law

    A U.S. shareholder of a passive foreign investment company 
(a ``PFIC'') generally is subject to U.S. tax, plus an interest 
charge, on distributions from a PFIC and gain realized upon a 
disposition of PFIC stock (sec. 1291). As an alternative to 
this interest charge regime, the U.S. shareholder may elect to 
be subject to current U.S. tax on the shareholder's share of 
the PFIC's earnings (sec. 1293). Section 1296, as added by the 
1997 Act, provides another alternative available in the case of 
a PFIC the stock of which is marketable; under section 1296, a 
U.S. shareholder of a PFIC may make a mark-to-market election 
with respect to the stock of the PFIC.
    The interest charge regime generally does not apply to 
distributions from, and dispositions of stock of, a PFIC for 
which the U.S. shareholder has made either a mark-to-market 
election under section 1296 or an election to include the 
PFIC's earnings in income currently (sec. 1291(d)(1)). However, 
special coordination rules provide for limited application of 
the interest charge regime in the case of a U.S. shareholder 
that makes a mark-to-market election under section 1296 later 
than the beginning of the shareholder's holding period for the 
PFIC stock (sec. 1296(j)).
    Under section 475(a), a dealer in securities is required to 
mark to market certain securities held by the dealer. Under 
section 475(f), as added by the 1997 Act, a trader in 
securities may elect to mark to market securities held in 
connection with the person's trade or business as a trader in 
securities. Other provisions similarly allow stock to be marked 
to market (e.g., sec. 1092(b)(1) and temp. Treas. reg. Sec. 
1.1092-4T).

                        Explanation of Provision

    Under the provision, the interest charge regime generally 
does not apply to distributions from, and dispositions of stock 
of, a PFIC where the U.S. shareholder has marked to market such 
stock under section 475 or any other provision (in the same 
manner that such regime does not apply where the shareholder 
has marked to market such stock under section 1296). In 
addition, under the provision, coordination rules like those 
provided in section 1296(j) apply in the case of a U.S. 
shareholder that marks to market PFIC stock under section 475 
or any other provision later than the beginning of the 
shareholder's holding period for the PFIC stock.

                             Effective Date

    The provision is effective for taxable years of U.S. 
persons beginning after December 31, 1997 and taxable years of 
foreign corporations ending with or within such taxable years 
of U.S. persons. No inference is intended regarding the 
treatment of PFIC stock that was marked to market prior to the 
effective date of the provision.

 K. Amendments to Title XII of the 1997 Act Relating to Simplification 
                               Provisions

1. Travel expenses of Federal employees participating in a Federal 
        criminal investigation (sec. 6012(a) of the bill, sec. 1204 of 
        the 1997 Act, and sec. 162 of the Code)

                              Present Law

    Unreimbursed ordinary and necessary travel expenses paid or 
incurred by an individual in connection with temporary 
employment away from home (e.g., transportation costs and the 
cost of meals and lodging) are generally deductible, subject to 
the two-percent floor on miscellaneous itemized deductions. 
Travel expenses paid or incurred in connection with indefinite 
employment away from home, however, are not deductible. A 
taxpayer's employment away from home in a single location is 
indefinite rather than temporary if it lasts for one year or 
more; thus, no deduction is permitted for travel expenses paid 
or incurred in connection with such employment (sec. 162(a)). 
If a taxpayer's employment away from home in a single location 
lasts for less than one year, whether such employment is 
temporary or indefinite is determined on the basis of the facts 
and circumstances.
    The 1997 Act provided that the one-year limitation with 
respect to deductibility of expenses while temporarily away 
from home does not include any period during which a Federal 
employee is certified by the Attorney General (or the Attorney 
General's designee) as traveling on behalf of the Federal 
Government in a temporary duty status to investigate or provide 
support services to the investigation of a Federal crime. Thus, 
expenses for these individuals during these periods are fully 
deductible, regardless of the length of the period for which 
certification is given (provided that the other requirements 
for deductibility are satisfied).

                        Explanation of Provision

    The provision clarifies that prosecuting a Federal crime or 
providing support services to the prosecution of a Federal 
crime is considered part of investigating a Federal crime.

                             Effective Date

    The provision is effective for amounts paid or incurred 
with respect to taxable years ending after the date of 
enactment of the 1997 Act.

2. Effective date for provisions relating to electing large 
        partnerships, partnership returns required on magnetic media, 
        and treatment of partnership items of individual retirement 
        arrangements (sec. 6012(d) of the bill and sec. 1226 of the 
        1997 Act)

                              Present Law

    Rules for simplified flowthrough and simplified audit 
procedures for electing large partnerships, as well as a March 
15 due date for furnishing information to partners of an 
electing large partnership, were added to present law by the 
1997 Act. The 1997 Act also added a rule providing that 
partnership returns are required on magnetic media, and 
modified the treatment of partnership items of individual 
retirement arrangements. The 1997 Act statement of managers 
provided that these provisions apply to partnership taxable 
years beginning after December 31, 1997. The statute provided 
that the rules for simplified flowthrough for electing large 
partnerships apply to partnership taxable years beginning after 
December 31, 1997 (Act sec. 1221(c)), although the statute also 
provided that all the provisions apply to partnership taxable 
years ending on or after December 31, 1997 (Act sec. 1226).

                        Explanation of Provision

    The technical correction provides that these provisions 
apply to partnership taxable years beginning after December 31, 
1997.

                             Effective Date

    The provision is effective as if enacted in the 1997 Act.

3. Modification of distribution rules for REITs (sec. 6012(f) of the 
        bill, sec. 1256 of the 1997 Act, and sec. 857 of the Code)

                              Present Law

    In general, a real estate investment trust (``REIT'') is an 
entity that receives most of its income from passive real 
estate investments and meets certain other requirements. A REIT 
receives conduit treatment (i.e., one level of tax) for income 
distributed to its shareholders. A REIT generally must 
distribute 95 percent of its earnings (sec. 857(a)(1)). An 
entity loses its status as a REIT if it retains non-REIT 
earnings and profits (sec. 857(a)(2)). A REIT simplification 
provision in the 1997 Act provides that any distribution from a 
REIT will be deemed to first come from the earliest earnings 
and profits of the entity. As a result, in the case of a REIT 
with accumulated REIT earnings and profits that inherits 
subsequently earned non-REIT earnings and profits (e.g., by way 
of merger with a C corporation), that the entity must 
distribute both the accumulated REIT earnings and profits as 
well as the inherited non-REIT earnings and profits under the 
1997 Act provision in order to retain its REIT status.

                        Explanation of Provision

    The provision amends the simplification provision to 
provide that any distribution from a REIT will be deemed to 
first come from earnings and profits that were generated when 
the entity did not qualify as a REIT. The provision does not 
change the requirement that a REIT must distribute 95 percent 
of its REIT earnings, or any other requirement.

                             Effective Date

    The provision is effective for taxable years beginning 
after August 5, 1997.

 L. Amendments to Title XIII of the 1997 Act Relating to Estate, Gift 
                        and Trust Simplification

1. Clarification of treatment of revocable trusts for purposes of the 
        generation-skipping transfer tax (sec. 6013(a) of the bill, 
        sec. 1305 of the 1997 Act and secs. 2652 and 2654 of the Code)

                              Present Law

    The 1997 Act provided an irrevocable election to treat a 
qualified revocable trust as part of the decedent's estate for 
Federal income tax purposes. For this purpose, a qualified 
revocable trust is any trust (or portion thereof) which was 
treated as owned by the decedent with respect to whom the 
election is being made, by reason of a power in the grantor 
(i.e., trusts that are treated as owned by the decedent solely 
by reason of a power in a nonadverse party would not qualify). 
A conforming change was also made to section 2652(b) for 
generation-skipping transfer tax purposes.

                        Explanation of Provision

    The provision clarifies that the election to treat a 
qualified revocable trust as part of the decedent's estate 
would apply for generation-skipping transfer tax purposes only 
with respect to the application of section 2654(b) (describing 
when a single trust may be treated as two or more trusts). The 
election has no other effect for generation-skipping transfer 
tax purposes.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment of the 1997 Act.

2. Provision of regulatory authority for simplified reporting of 
        funeral trusts terminated during the taxable year (sec. 6013(b) 
        of the bill, sec. 1309 of the 1997 Act and sec. 685(f) of the 
        Code)

                              Present Law

    The 1997 Act provided an election which allows the trustee 
of a qualified pre-need funeral trust to elect special tax 
treatment for such a trust, to the extent the trust would 
otherwise be treated as a grantor trust. As part of this 
provision, the Secretary of the Treasury was granted regulatory 
authority to prescribe rules for simplified reporting of all 
trusts having a single trustee.

                        Explanation of Provision

    The provision clarifies that a pre-need funeral trust may 
continue to qualify for these special rules for the 60-day 
period after the decedent's death, even though the trust ceases 
to be a grantor trust during that time. In addition, the 
provision extends the Secretary's regulatory authority to 
include rules providing for the inclusion of trusts terminated 
during the year (e.g., in the event of the death of the 
beneficiary) in the simplified reporting.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment of the 1997 Act.

   M. Amendment to Title XIV of the 1997 Act Relating to Excise Tax 
                             Simplification

1. Clarify that the provision allowing wine imported in bulk to be 
        transferred to a U.S. winery without payment of tax (sec. 
        6014(a) of the bill, sec. 1422 of the 1997 Act, and sec. 5364 
        of the Code)

                              Present Law

    Wine is subject to an excise tax ranging from $1.07 per 
gallon to $3.40 per gallon, depending on its alcohol content. 
Distilled spirits are subject to excise tax at a rate of $13.50 
per proof gallon. A tax credit equal to the difference between 
the distilled spirits tax rate and the wine tax rate is allowed 
for wine that is blended into distilled spirits products (sec. 
5010). The wine excise tax is imposed on removal of the 
beverage from a winery, or on importation. The 1997 Act 
included a provision allowing wine to be imported in bulk and 
transferred to a U.S. winery without payment of tax (generally 
until the wine is removed from the winery).
    U.S. law defines wine generally as alcohol that is derived 
from fruit or fruit residues (``natural wine''). Natural wine 
may not be fortified with grain or other non-fruit derived 
alcohol if produced in the U.S. Certain other countries allow 
wine that is marketed as a natural wine to be fortified with 
alcohol from other sources. U.S. law follows the laws of the 
country of origin in classifying imported wine.

                        Explanation of Provision

    The provision clarifies that the provision of the 1997 Act 
liberalizing rules for bulk importation of wine applies only to 
alcohol that would qualify as a natural wine if produced in the 
United States.

                             Effective Date

    The provision is effective as if included in the 1997 Act.

   N. Amendment to Title XV of the 1997 Act Relating to Pensions and 
                           Employee Benefits

1. Treatment of certain disability payments to public safety employees 
        (sec. 6015(c) of the bill, sec. 1529 of the 1997 Act, and sec. 
        104 of the Code)

                              Present Law

    Under present law, certain payments made on behalf of full-
time employees of any police or fire department organized and 
operated by a State (or any political subdivision, agency, or 
instrumentality thereof) are excludable from income. This 
treatment applies to payments made on account of heart disease 
or hypertension of the employee and that were received in 1989, 
1990, or 1991 pursuant to a State law as amended on May 19, 
1992, which irrebuttably presumed that heart disease and 
hypertension are work-related illnesses (but only for employees 
separating from service before July 1, 1992). Claims for refund 
or credit for overpayments resulting from the provision may be 
filed up to 1 year after August 5, 1997, without regard to the 
otherwise applicable statute of limitations.

                        Explanation of Provision

    In order to address problems taxpayers are encountering 
with the IRS in seeking refunds under the present-law 
provision, the bill clarifies the scope of the provision.
    The bill provides that payments made on account of heart 
disease or hypertension of the employee and that were received 
in 1989, 1990, or 1991 pursuant to a State law as described 
under present law, or received by an individual referred to in 
such State law under any other statute, ordinance, labor 
agreement, or similar provision as a disability pension payment 
or in the nature of a disability pension payment attributable 
to employment as a police officer or as a fireman will be 
excludable from income.

                             Effective Date

    The provision is effective as if included in the Taxpayer 
Relief Act.

   O. Amendments to Title XVI of the 1997 Act Relating to Technical 
                              Corrections

1. Application of requirements for SIMPLE IRAs in the case of mergers 
        and acquisitions (sec. 6016(a)(1) of the bill, sec. 1601(d)(1) 
        of the 1997 Act, and sec. 408(p)(2) of the Code)

                              Present Law

    If an employer maintains a qualified plan and a SIMPLE IRA 
in the same year due to an acquisition, disposition or similar 
transaction the SIMPLE IRA is treated as a qualified salary 
reduction arrangement for the year of the transaction and the 
following calendar year provided rules similar to the special 
coverage rules of section 410(b)(6)(C) apply. There is a 
similar provision with respect to an employer who, because of 
an acquisition, disposition or similar transaction, fails to be 
an eligible employer because such employer employs more than 
100 employees. In this situation, the employer is treated as an 
eligible employer for two years following the transaction 
provided rules similar to the coverage rules of section 
410(b)(6)(C)(i) apply.

                        Explanation of Provision

    The bill conforms the treatment applicable to SIMPLE IRAs 
upon acquisition, disposition or similar transaction for 
purposes of (1) the 100 employee limit, (2) the exclusive plan 
requirement, and (3) the coverage rules for participation. In 
the event of such a transaction, the employer will be treated 
as an eligible employer and the arrangement will be treated as 
a qualified salary reduction arrangement for the year of the 
transaction and the two following years, provided rules similar 
to the rules of section 410(b)(6)(C)(i)(II) are satisfied and 
the arrangement would satisfy the requirements to be a 
qualified salary reduction arrangement after the transaction if 
the trade or business that maintained the arrangement prior to 
the transaction had remained a separate employer.

                             Effective Date

    The provision is effective as if included in the Small 
Business Job Protection Act of 1996.

2. Treatment of Indian tribal governments under section 403(b) (sec. 
        6016(a)(2) of the bill, sec. 1601(d)(4)(A) of the 1997 Act, and 
        sec. 403(b) of the Code)

                              Present Law

    Any 403(b) annuity contract purchased in a plan year 
beginning before January 1, 1995, by an Indian tribal 
government is treated as purchased by an entity permitted to 
maintain a tax-sheltered annuity plan. Such contracts may be 
rolled over into a section 401(k) plan maintained by the Indian 
tribal government in accordance with the rollover rules of 
section 403(b)(8). An employee participating in a 403(b) 
annuity contract of the Indian tribal government may roll over 
amounts from such contract to a section 401(k) plan maintained 
by the Indian tribal government whether or not the annuity 
contract is terminated.

                        Explanation of Provision

    The bill clarifies that an employee participating in a 
403(b)(7) custodial account of the Indian tribal government may 
roll over amounts from such account to a section 401(k) plan 
maintained by the Indian tribal government.

                             Effective Date

    The provision is effective as if included in the Small 
Business Job Protection Act of 1996.

             Technical Corrections to Other Tax Legislation

A. Treatment of Adoption Tax Credit Carryovers (sec. 6017 of the bill, 
sec. 1807(a) of the Small Business Job Protection Act of 1996, and sec. 
                            23 of the Code)

                              Present Law

    Under present law taxpayers are allowed a maximum 
nonrefundable credit against income tax liability of $5,000 per 
child for qualified adoption expenses paid or incurred by the 
taxpayer. In the case of a special needs adoption, the maximum 
credit amount is $6,000 ($5,000 in the case of a foreign 
special needs adoption). To the extent the otherwise allowable 
credit exceeds the tax liability limitation of section 26 
(reduced by other personal credits) the excess is carried 
forward as an adoption credit into the next taxable year, up to 
a maximum of five taxable years.
    The credit is phased out ratably for taxpayers with 
modified adjusted gross income (AGI) above $75,000, and is 
fully phased out at $115,000 of modified AGI. For these 
purposes modified AGI is computed by increasing the taxpayer's 
AGI by the amount otherwise excluded from gross income under 
Code sections 911, 931, or 933 (relating to the exclusion of 
income of U.S. citizens or residents living abroad; residents 
of Guam, American Samoa, and the Northern Mariana Islands, and 
residents of Puerto Rico, respectively).

                        Explanation of Provision

    The bill clarifies that the AGI phaseout only applies in 
the year that the credit is generated and is not reapplied to 
further reduce any carryforward amounts.

                             Effective Date

    The provision is effective as if included in the Small 
Business Job Protection Act of 1996.

 B. Disclosure Requirements for Apostolic Organizations (sec. 6018 of 
the bill, sec. 1313 of the Taxpayer Bill of Rights 2, and sec. 6104 of 
                               the Code)

                              Present Law

    Section 501(d) provides tax-exempt status to certain 
religious or apostolic associations or corporations, if such 
associations or corporations have a common treasury or 
community treasury, even if such associations or corporations 
engage in business for the common benefit of the members, but 
only if the members thereof include (at the time of filing 
their returns) in their gross income their entire pro rata 
shares, whether distributed or not, of the taxable income of 
the association or corporation for such year.79 Any 
amount so included in the gross income of a member is treated 
as a dividend received. The effect of section 501(d) is to 
exempt the religious and apostolic associations or corporations 
which conduct communal activities (such as farming) from the 
Federal corporate-level income tax and the undistributed-
profits tax, provided that members claim their shares of the 
corporation's income on their own individual returns.
---------------------------------------------------------------------------
    \79\ Under section 501(d), the requirement of a ``common treasury'' 
or ``community treasury'' is satisfied when all of the income generated 
from property owned by the organization is placed into a common fund 
that is maintained by such organization and is used for the maintenance 
and support of its members, with all members having equal, undivided 
interests in this common fund, but no right to claim title to any part 
thereof. See Twin Oaks Community, Inc. v. Commissioner, 87 T.C. 1233, 
at 1254 (1986). See also Rev. Rul. 78-100, 1978-1 C.B. 162 (sec. 501(d) 
entity must be supported by internally operated business activities 
rather than merely being supported by wages of members who are engaged 
in outside employment).
---------------------------------------------------------------------------
    Section 6033 generally requires tax-exempt organizations to 
file annual information returns, and such information returns 
are available for public inspection under sections 6104(b) and 
6104(e), except that public disclosure is not required of the 
identity of contributors to an organization. Section 501(d) 
entities must include with their annual information return 
(Form 1065) a Schedule K-1 that identifies the members of the 
association or corporation and their ratable portions of net 
income and expenses.

                        Explanation of Provision

    The provision amends sections 6104(b) and 6104(e) to 
provide that public disclosure is not required of a Schedule K-
1 filed by a religious or apostolic organization described in 
section 501(d).

                             Effective Date

    The provision is effective on the date of enactment.

  C. Allow Deduction for Unused Employer Social Security Credit (sec. 
 6019 of the bill, sec. 13443 of the Omnibus Budget Reconciliation Act 
                   of 1993, and sec. 196 of the Code)

                              Present Law

    The general business credit (``GBC'') consists of various 
individual tax credits (including the employer social security 
credit of Code section 45B) allowed with respect to certain 
qualified expenditures and activities. In general, the various 
individual tax credits contain provisions that prohibit 
``double benefits,'' either by denying deductions in the case 
of expenditure-related credits or by requiring income 
inclusions in the case of activity-related credits. Unused 
credits may be carried back one year and carried forward 20 
years. Section 196 allows a deduction to the extent that 
certain portions of the GBC expire unused after the end of the 
carry forward period. Section 196 does not allow a deduction to 
the extent that the portion of the GBC that expires unused 
after the end of the carry forward period relates to the 
employer social security credit.

                        Explanation of Provision

    The provision allows a deduction to the extent that the 
portion of the GBC relating to the employer social security 
credit expires unused after the end of the carry forward 
period.

                             Effective Date

    The provision is effective as if included in the Omnibus 
Budget Reconciliation Act of 1993.

  D. Earned Income Credit Qualification Rules (sec. 6020 of the bill, 
  sec. 11111(a) of the Omnibus Budget Reconciliation Act of 1990, as 
amended by sec. 742 of the Uruguay Round Agreements Act and sec. 451(a) 
of the Personal Responsibility and Work Opportunity Reconciliation Act 
                   of 1996, and sec. 32 of the Code)

                              Present Law

In general

    In order to claim the earned income credit (``EIC''), an 
individual must be an eligible individual. To be an eligible 
individual, an individual must include a taxpayer 
identification number (``TIN'') for the taxpayer and the 
taxpayer's spouse and must either have a qualifying child or 
meet other requirements. In order to claim the EIC without a 
qualifying child, an individual must not be a dependent and 
must be over age 24 and under age 65.

Qualifying child

    A qualifying child must meet a relationship test, an age 
test, an identification test, and a residence test. Under the 
relationship and age tests, an individual is eligible for the 
EIC with respect to another person only if that other person: 
(1) is a son, daughter, or adopted child (or a descendent of a 
son, daughter, or adopted child); a stepson or stepdaughter; or 
a foster child of the taxpayer (a foster child is defined as a 
person whom the individual cares for as the individual's child; 
it is not necessary to have a placement through a foster care 
agency); and (2) is under the age of 19 at the close of the 
taxable year (or is under the age of 24 at the end of the 
taxable year and was a full-time student during the taxable 
year), or is permanently and totally disabled. Also, if the 
qualifying child is married at the close of the year, the 
individual may claim the EIC for that child only if the 
individual may also claim that child as a dependent.
    To satisfy the identification test, an individual must 
include on their tax return the name, age, and ``TIN'' of each 
qualifying child.
    The residence test requires that a qualifying child must 
have the same principal place of abode as the taxpayer for more 
than one-half of the taxable year (for the entire taxable year 
in the case of a foster child), and that this principal place 
of abode must be located in the United States. For purposes of 
determining whether a qualifying child meets the residence 
test, the principal place of abode shall be treated as in the 
United States for any period during which a member of the Armed 
Forces is stationed outside the United States while serving on 
extended active duty.

                        Explanation of Provision

    The bill clarifies that the identification requirement is a 
requirement for claiming the EIC, rather than an element of the 
definitions of ``eligible individual'' and ``qualifying 
child.''

                             Effective Date

    The provision is effective as if included in the originally 
enacted related legislation.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of Rule XXVI of the 
Standing Rules of the Senate, the following table is presented 
concerning the estimated budget effects of the bill as 
reported.





                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that three provisions (expansion of authority 
to award costs and certain fees at prevailing rate, civil 
damages with respect to unauthorized collection actions, 
elimination of interest rate differential on overlapping 
periods of interest on income tax overpayments and 
underpayments, and increase refund interest rate to 
individuals) involve outlay effects (budget authority) 
totalling $989 million for fiscal years 1998-2007.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the bill does not involve changes in tax 
expenditures.

            C. Consultation with Congressional Budget Office

    The statement from the Congressional Budget Office has not 
been received at the time of filing of this report.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of Rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of H.R. 2676 on March 31, 1998.

Motion to report the bill

    The bill (H.R. 2676) was ordered favorably reported, as 
amended by the Chairman's amendment in the nature of a 
substitute, by a roll call vote of 12 yeas and 0 nays (20-0, 
including proxy votes). The vote, with a quorum present, was as 
follows:
    Yeas.--Senators Roth, Chafee (proxy), Grassley, Hatch 
(proxy), D'Amato (proxy), Murkowski (proxy), Nickles, Gramm 
(proxy), Lott (proxy), Jeffords (proxy), Mack, Moynihan, 
Baucus, Rockefeller, Breaux, Conrad (proxy), Graham, Moseley-
Braun, Bryan, and Kerrey.
    Nays.--None.

Votes on other amendments

    (1) An amendment by Senator Grassley to add a 
representative of the organization that represents a 
substantial number of IRS employees to the IRS Oversight board 
was approved by a roll call vote of 12 yeas and 8 nays. The 
vote was as follows:
    Yeas.--Senators Grassley, D'Amato, Jeffords, Moynihan, 
Baucus, Rockefeller (proxy), Breaux, Conrad, Graham, Moseley-
Braun, Bryan, and Kerrey.
    Nays.--Senators Roth, Chafee, Hatch (proxy), Murkowski, 
Nickles, Gramm, Lott, and Mack.
    (2) An amendment by Senator Moynihan to include the 
Secretary of the Treasury on the IRS Oversight Board was 
approved by a roll call vote of 12 yeas and 8 nays. The vote 
was as follows:
    Yeas.--Senators Chafee, D'Amato, Jeffords, Moynihan, 
Baucus, Rockefeller (proxy), Breaux, Conrad, Graham, Moseley-
Braun, Bryan, and Kerrey.
    Nays.--Senators Roth, Grassley, Hatch (proxy), Murkowski, 
Nickles, Gramm, Lott, and Mack.
    (3) An amendment by Senator D'Amato to guarantee coverage 
of inpatient hospital care for breast cancer was defeated by a 
roll call vote of 8 yeas and 10 nays. (The Chairman ruled this 
amendment non-germane.) The vote was as follows:
    Yeas.--Senators Grassley, D'Amato, Murkowski, Moynihan, 
Breaux, Moseley-Braun, Bryan, and Kerrey.
    Nays.--Senators Roth, Chafee, Nickles, Gramm, Lott, 
Jeffords, Mack, Baucus, Conrad, and Graham.
    (4) An amendment by Senator Kerrey to substitute the 
language of the House-passed bill for the Chairman's Mark was 
defeated by a roll call vote of 8 yeas and 12 nays. The vote 
was as follows:
    Yeas.--Senators Moynihan, Baucus, Rockefeller (proxy), 
Breaux, Conrad, Moseley-Braun, Bryan, and Kerrey.
    Nays.--Senators Roth, Chafee (proxy), Grassley, Hatch, 
D'Amato (proxy), Murkowski, Nickles, Gramm, Lott (proxy), 
Jeffords (proxy), Mack, and Graham.
    (5) An amendment by Senator Grassley to authorize State tax 
agencies to participate in the Federal program of refund 
offsets was approved by a roll call vote of 14 yeas and 6 nays. 
The vote was as follows:
    Yeas.--Senators Chafee (proxy), Grassley, Hatch, D'Amato 
(proxy), Jeffords (proxy), Moynihan, Baucus, Rockefeller 
(proxy), Breaux, Conrad, Graham, Moseley-Braun, Bryan, and 
Kerrey.
    Nays.--Senators Roth, Murkowski, Nickles, Gramm, Lott 
(proxy), and Mack.
    (6) An amendment by Senator Conrad to strike the burden of 
proof provision of the Chairman's Mark was defeated by a roll 
call vote of 5 yeas and 15 nays. The vote was as follows:
    Yeas.--Senators Moynihan, Baucus, Rockefeller (proxy), 
Conrad, and Graham.
    Nays.--Senators Roth, Chafee (proxy), Grassley, Hatch, 
D'Amato (proxy), Murkowski (proxy), Nickles, Gramm, Lott 
(proxy), Jeffords (proxy), Mack, Breaux, Moseley-Braun, Bryan, 
and Kerrey.
    (7) An amendment by Senators Graham and Moynihan to 
implement a tobacco tax increase of 5 cents per pack of 
cigarettes and accelerate a 15-cents-per-pack increase, and 
also to reduce the period for collecting taxes from 10 to 6 
years, increase the refund claim period from 3 to 6 years, and 
to extend such periods to all taxes was defeated on a roll call 
vote of 8 yeas and 12 nays. The vote was as follows:
    Yeas.--Senators Moynihan, Baucus, Rockefeller, Conrad 
(proxy), Graham, Moseley-Braun, Bryan, and Kerrey.
    Nays.--Senators Roth, Chafee (proxy), Grassley, Hatch 
(proxy), D'Amato (proxy), Murkowski (proxy), Nickles, Gramm 
(proxy), Lott (proxy), Jeffords (proxy), Mack, and Breaux.
    (8) An amendment by Senator Rockefeller to modify the 
privilege of practitioner-client confidentiality provision in 
the Chairman's Mark was defeated by a roll call vote of 3 yeas 
and 17 nays. The vote was as follows:
    Yeas.--Senators Moynihan, Baucus, and Rockefeller.
    Nays.--Senators Roth, Chafee (proxy), Grassley, Hatch 
(proxy), D'Amato (proxy), Murkowski (proxy), Nickles, Gramm 
(proxy), Lott (proxy), Jeffords (proxy), Mack, Breaux, Conrad 
(proxy), Graham, Moseley-Braun, Bryan, and Kerrey.

                 V. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

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

Impact on individuals and businesses

    The bill as reported makes numerous changes designed to 
improve the management of the IRS, encourage electronic filing, 
protect taxpayer rights, improve Congressional oversight of the 
IRS, and provide necessary technical corrections to recent tax 
legislation.
    Title I of the bill provides for restructuring of the IRS 
to improve management accountability and to improve taxpayer 
service.
    Title II encourages electronic filing of tax and 
information returns, and requires a Treasury study of the 
feasibility of a return-free system for individuals.
    Title III provides for additional protection of taxpayer 
rights, including relief for innocent spouses, and revises 
certain interest and penalty provisions. Title III also 
requires studies of the administration of penalties and 
interest and confidentiality of tax return information.
    Title IV requires annual IRS reports to the Congressional 
tax committees on the sources of complexity in the Federal tax 
laws, and for the Joint Committee on Taxation to provide a 
``Tax Complexity Analysis'' on tax legislation that has 
widespread applicability to individuals or small businesses.
    Title V provides revenue offsets to the cost of the other 
provisions of the bill: (1) revises the deduction for vacation 
and severance pay (overruling Schmidt Baking); (2) modifies the 
foreign tax credit carryover rules; (3) clarifies and expands 
the mathematical error procedures; (4) freezes the 
grandfathered status of stapled REITs; (5) makes certain trade 
receivables ineligible for mark-to-market treatment; and (6) 
adds vaccines against rotavirus gastroenteritis to the list of 
taxable vaccines.
    Title VI makes necessary technical corrections to the 
Taxpayer Relief Act of 1997 and certain other recent tax 
legislation.

Impact on personal privacy and paperwork

    The provisions of the bill should not have any adverse 
impact on personal privacy. The bill modifies Code section 6103 
to allow the tax committees to obtain information from IRS 
employees regarding IRS employee and taxpayer abuse.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has reviewed the provisions of the bill as 
reported. In accordance with the requirements of Public Law 
104-4, the Committee has determined that the following 
provisions of the bill contain Federal private sector mandates.
          Repeal of Schmidt Baking with respect to the employer 
        deduction for vacation and severance pay (bill sec. 
        5001);
          Modification of the foreign tax credit carryover 
        rules (bill sec. 5002);
          Freezing of grandfathered status of stapled REITs 
        (bill sec. 5004);
          Certain trade receivables made ineligible for mark-
        to-market treatment (bill sec. 5005); and
          Adding vaccines against rotavirus gastroenteritis to 
        the list of taxable vaccines (bill sec. 5006).
    As indicated in the revenue table (III.A., above), these 
provisions are estimated to increase tax revenues by $6,449 
million in fiscal years 1998-2002 and $9,330 million in fiscal 
years 1998-2007, which are no greater than the aggregate 
estimated amounts that the private sector will be required to 
pay in order to comply with the Federal private sector mandates 
under the bill.
    These provisions will not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

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

    In the opinion of the Committee, in order to expedite the 
business of the Senate, it is necessary to dispense with the 
requirements of the Senate of paragraph 12 of Rule XXVI of the 
Standing Rules of the Senate (relating to the showing of 
changes in existing law made by the bill as reported by the 
Committee).

                                
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