[Senate Report 106-120]
[From the U.S. Government Publishing Office]
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106th Congress Report
1st Session SENATE 106-120
_______________________________________________________________________
TAXPAYER REFUND ACT OF 1999
__________
R E P O R T
of the
COMMITTEE ON FINANCE
UNITED STATES SENATE
to accompany
S. 1429
together with
MINORITY AND ADDITIONAL VIEWS
A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SECTION 104 OF THE
CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2000
July 23 (legislative day, July 26), 1999.--Ordered to be printed
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U.S. GOVERNMENT PRINTING OFFICE
58-113 WASHINGTON : 1999
C O N T E N T S
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Page
I. LEGISLATIVE BACKGROUND...................................... 1
II. EXPLANATION OF THE BILL..................................... 2
Title I. Broad-Based Tax Relief............................. 2
A. Reduction in the 15-Percent Regular Individual
Income Tax Rate; Increase in Maximum Taxable Income
for 15-Percent Rate Bracket (secs. 101-102)........ 2
Title II. Family Tax Relief Provisions...................... 3
A. Election to Calculate Combined Tax as Individuals
for a Married Couple Filing a Joint Return (sec.
201)............................................... 3
B. Marriage Penalty Relief Relating to the Earned
Income Credit (sec. 202)........................... 5
C. Expand the Exclusion From Income for Certain Foster
Care Payments (sec. 203)........................... 7
D. Increase and Expand the Dependent Care Credit (sec.
204)............................................... 8
E. Tax Credit for Employer-Provided Child Care
Facilities (sec. 205).............................. 9
F. Modify Individual Alternative Minimum Tax (sec. 206) 10
Title III. Retirement and Individual Savings Tax Relief
Provisions................................................ 13
A. Individual Savings Provisions (secs. 301-304)....... 13
1. Individual retirement arrangements (``IRAs'')
(secs. 301-302 and 304)........................ 13
2. Creation of individual development accounts
(sec. 303)..................................... 16
B. Expanding Coverage (secs. 311-319).................. 18
1. Option to treat elective deferrals as after-tax
contributions (sec. 311)....................... 18
2. Increase elective contribution limits (sec. 312) 20
3. Plan loans for subchapter S shareholders,
partners, and sole proprietors (sec. 313)...... 21
4. Elective deferrals not taken into account for
purposes of deduction limits (sec. 314)........ 23
5. Reduce PBGC premium for small and new plans
(secs. 315-316)................................ 24
6. Eliminate IRS user fees for requests regarding
new plans (sec. 317)........................... 25
7. SAFE annuities and trusts (sec. 318)............ 26
8. Modification of top-heavy rules (sec. 319)...... 28
C. Enhancing Fairness for Women (secs. 321-325)........ 32
1. Additional catch-up contributions (sec. 321).... 32
2. Equitable treatment for contributions of
employees to defined contribution plans (sec.
322)........................................... 34
3. Clarification of tax treatment of division of
section 457 plan benefits upon divorce (sec.
323)........................................... 36
4. Modification of safe harbor relief for hardship
withdrawals from 401(k) plans (sec. 324)....... 37
5. Faster vesting of employer matching
contributions (sec. 325)....................... 38
D. Increasing Portability for Participants (secs. 331-
339)............................................... 39
1. Rollovers of retirement plan and IRA
distributions (secs. 331-333 and 339).......... 39
2. Waiver of 60-day rule (sec. 334)................ 43
3. Treatment of forms of distribution (sec. 335)... 43
4. Rationalization of restrictions on distributions
(sec. 336)..................................... 45
5. Purchase of service credit under governmental
pension plans (sec. 337)....................... 46
6. Employers may disregard rollovers for purposes
of cash-out rules (sec. 338)................... 47
E. Strengthening Pension Security And Enforcement
(secs. 341-346).................................... 48
1. Phase in repeal of 150 percent of current
liability funding limit; deduction for
contributions to fund termination liability
(sec. 341)..................................... 48
2. Extension of PBGC missing participants program
(sec. 342)..................................... 50
3. Excise tax relief for sound pension funding
(sec. 343)..................................... 50
4. Notice of significant reduction in plan benefit
accruals (sec. 344)............................ 52
5. Investment of employee contributions in 401(k)
plans (sec. 345)............................... 56
6. Modifications to section 415 limits for
multiemployer plans (sec. 346)................. 57
F. Encouraging Retirement Education (secs. 351-352).... 58
1. Periodic pension benefit statements (sec. 351).. 58
2. Treatment of employer-provided retirement advice
(sec. 352)..................................... 59
G. Reducing Regulatory Burdens (secs. 361-370)......... 60
1. Flexibility in nondiscrimination and coverage
rules (sec. 361)............................... 60
2. Modification of timing of plan valuations (sec.
362)........................................... 61
3. Rules for substantial owner benefits in
terminated plans (sec. 363).................... 62
4. ESOP dividends may be reinvested without loss of
dividend deduction (sec. 364).................. 63
5. Notice and consent period regarding
distributions (sec. 365)....................... 64
6. Repeal transition rule relating to certain
highly compensated employees (sec. 366)........ 65
7. Employees of tax-exempt entities (sec. 367)..... 66
8. Extension to international organizations of
moratorium on application of certain
nondiscrimination rules applicable to State and
local government plans (sec. 368).............. 67
9. Annual report dissemination (sec. 369).......... 67
10. Clarification of exclusion for employer-
provided transit passes (sec. 370)............. 68
H. Provisions Relating to Plan Amendments (sec. 371)... 69
Title IV. Education Tax Relief.............................. 69
A. Eliminate Marriage Penalty and 60-Month Limit on
Student Loan Interest Deduction (sec. 401)......... 69
B. Allow Tax-Free Distributions From State and Private
Education Programs (sec. 402)...................... 71
C. Eliminate Tax on Awards Under the National Health
Service Corps Scholarship Program and F. Edward
Hebert Armed Forces Health Professions Scholarship
and Financial Assistance Program (sec. 403)........ 75
D. Exclusion for Employer-Provided Educational
Assistance (sec. 404).............................. 76
E. Liberalize Tax-Exempt Financing Rules for Public
School Construction (secs. 405-407)................ 77
Title V. Health Care Tax Relief Provisions.................. 82
A. Above-the-Line Deduction for Health Insurance
Expenses (sec. 501)................................ 82
B. Provisions Relating to Long-Term Care Insurance
(secs. 501-502).................................... 85
C. Additional Personal Exemption for Caretakers (sec.
503)............................................... 87
D. Add Certain Vaccines Against Streptococcus
Pneumoniae to the List of Taxable Vaccines (sec.
504)............................................... 89
Title VI. Small Business Tax Relief Provisions.............. 91
A. Accelerate 100-Percent Self-Employed Health
Insurance Deduction (sec. 601)..................... 91
B. Increase Section 179 Expensing (sec. 602)........... 92
C. Repeal of Temporary Federal Unemployment Surtax
(sec. 603)......................................... 93
D. Coordinate Farmer Income Averaging and the
Alternative Minimum Tax (sec. 604)................. 94
E. Farm and Ranch Risk Management Accounts (sec. 605).. 95
Title VII. Estate and Gift Tax Relief....................... 96
A. Reduce Estate, Gift, and Generation-Skipping
Transfer Taxes (secs. 701-702)..................... 96
B. Expand Estate Tax Rule for Conservation Easements
(sec. 711)......................................... 97
C. Increase Annual Gift Exclusion (sec. 721)........... 98
D. Simplification of Generation-Skipping Transfer
(``GST'') Tax (secs. 731-734)...................... 99
1. Retroactive allocation of the GST tax exemption
(sec. 731)..................................... 99
2. Severing of trusts holding property having an
inclusion ratio of greater than zero (sec. 732) 101
3. Modification of certain valuation rules (sec.
733)........................................... 102
4. Relief from late elections (sec. 734)........... 103
5. Substantial compliance (sec. 734)............... 103
Title VIII. Tax-Exempt Organization Provisions.............. 104
A. Provide Tax Exemption for Organizations Created by a
State to Provide Property and Casualty Insurance
Coverage for Property for Which Such Coverage Is
Otherwise Unavailable (sec. 801)................... 104
B. Modify Section 512(b)(13) (sec. 802)................ 108
C. Simplify Lobbying Expenditure Limitations (sec. 803) 109
D. Tax-Free Withdrawals From IRAs for Charitable
Purposes (sec. 804)................................ 111
E. Provide Exclusion for Mileage Reimbursements by
Charitable Organizations (sec. 805)................ 112
F. Charitable Contribution Deduction for Certain
Expenses in Support of Native Alaskan Subsistence
Whaling (sec. 806)................................. 114
G. Charitable Giving Provisions (secs. 807-809)........ 115
H. Modify Excess Business Holdings Rules for Publicly
Traded Stock (sec. 810)............................ 116
Title IX. International Tax Relief Provisions............... 119
A. Allocate Interest Expense on Worldwide Basis (sec.
901)............................................... 119
B. Look-Through Rules to Apply to Dividends from
Noncontrolled Section 902 Corporations (sec. 902).. 125
C. Subpart F Treatment of Pipeline Transportation
Income and Income From Transmission of High Voltage
Electricity (secs. 903-904)........................ 127
D. Prohibit Disclosure of APAs and APA Background Files
(sec. 905)......................................... 128
E. Exempt Certain Sales of Frequent-Flyer and Similar
Reduced-Fare Air Transportation Rights from
Aviation Excise Taxes (sec. 906)................... 133
F. Repeal of Limitation of Foreign Tax Credit under
Alternative Minimum Tax (sec. 907)................. 134
G. Treatment of Military Property of Foreign Sales
Corporations (sec. 908)............................ 136
Title X. Housing and Real Estate Tax Relief................. 137
A. Increase Low-Income Housing Tax Credit Per Capita
Amount (sec. 1001)................................. 137
B. Tax Credit for Renovating Historic Homes (sec. 1011) 139
C. Provisions Relating to REITs (secs. 1021-1026, 1031,
1041, 1051, 1061, and 1071)........................ 142
D. Increase State Volume Limits on Tax-Exempt Private
Activity Bonds (sec. 1081)......................... 147
E. Treatment of Leasehold Improvements (sec. 1091)..... 149
Title XI. Miscellaneous Provisions.......................... 151
A. Repeal Certain Excise Taxes on Rail Diesel Fuel and
Inland Waterway Barge Fuels (sec. 1101)............ 151
B. Tax Treatment of Alaska Native Settlement Trusts
(sec. 1102)........................................ 151
C. Allow Corporations To Take Certain Minimum Tax
Credits Against Minimum Tax (sec. 1103)............ 153
D. Allow Net Operating Losses From Oil and Gas
Properties To Be Carried Back for up to Five Years
(sec. 1104)........................................ 154
E. Election to Expense Geological and Geophysical
Expenditures (sec. 1105)........................... 155
F. Deduction for Delay Rental Payments (sec. 1106)..... 157
G. Simplify the Active Trade or Business Requirement
for Tax-Free Spin-Offs (sec. 1107)................. 158
H. Increase the Maximum Dollar Amount of Reforestation
Expenditures Eligible for Amortization and Credit
(sec. 1108)........................................ 160
I. Modify Excise Tax on Arrow Components and
Accessories (sec. 1109)............................ 162
J. Increase Joint Committee on Taxation Refund Review
Threshold to $2 Million (sec. 1110)................ 162
K. Modify the Definition of Rural Airport Eligible for
Reduced Air Passenger Ticket Tax Rate (sec. 1111).. 163
L. Dividends Paid by Cooperatives (sec. 1112).......... 164
M. Permit Consolidation of Life and Nonlife Insurance
Companies (sec. 1113).............................. 166
N. Modify Personal Holding Company ``Lending or Finance
Business'' Exception (sec. 1114)................... 167
O. Tax Credit for Modifications to Inter-City Buses
Required Under the Americans with Disabilities Act
of 1990 (sec. 1115)................................ 169
P. Increased Deduction for Business Meals While
Operating Under Department of Transportation Hours
of Service Limitations (sec. 1116)................. 170
Q. Authorize Limited Private Activity Tax-Exempt
Financing for Highway Construction (sec. 1117)..... 171
R. Extend Tax Credit for First-Time D.C. Homebuyers
(sec. 1118)........................................ 172
S. Expand the Zero-Percent Capital Gains Rate for DC
Zone Assets (sec. 1119)............................ 173
T. Establish a Seven-Year Recovery Period for Natural
Gas Gathering Lines (sec. 1120).................... 174
U. Reclassify Air Transportation on Certain Small
Seaplanes as Non-Commercial Aviation for Excise Tax
Purposes (sec. 1121)............................... 175
Title XII. Extension of Expiring Provisions................. 176
A. Extension of Research and Experimentation Credit and
Increase in the Rates for the Alternative
Incremental Research Credit (sec. 1201)............ 176
B. Extend Exceptions Under Subpart F for Active
Financing Income (sec. 1202)....................... 179
C. Extend Suspension of Net Income Limitation on
Percentage Depletion From Marginal Oil and Gas
Wells (sec. 1203).................................. 181
D. Extend the Work Opportunity Tax Credit (sec. 1204).. 182
E. Extend the Welfare-to-Work Tax Credit (sec. 1204)... 183
F. Extend and Modify Tax Credit for Electricity
Produced by Wind and Closed-Loop Biomass Facilities
(sec. 1205)........................................ 184
G. Extend Exemption From Diesel Dyeing Requirement for
Certain Areas in Alaska (sec. 1206)................ 185
H. Expensing of Environmental Remediation Expenditures
and Expansion of Qualifying Sites (sec. 1207)...... 186
Title XIII. Revenue Offset Provisions....................... 188
A. Modify Foreign Tax Credit Carryover Rules (sec.
1301).............................................. 188
B. Expand Reporting of Cancellation of Indebtedness
Income (sec. 1302)................................. 188
C. Increase Elective Withholding Rate for Nonperiodic
Distributions From Deferred Compensation Plans
(sec. 1303)........................................ 189
D. Extension of IRS User Fees (sec. 1304).............. 191
E. Treatment of Excess Pension Assets Used for Retiree
Health Benefits (sec. 1305)........................ 191
F. Clarify the Tax Treatment of Income and Losses on
Derivatives (sec. 1306)............................ 194
G. Loophole Closers (secs. 1311-1321).................. 196
1. Limit use of non-accrual experience method of
accounting to amounts to be received for
performance of qualified professional services
(sec. 1311).................................... 196
2. Impose limitation on prefunding of certain
employee benefits (sec. 1312).................. 198
3. Modify installment method and prohibit its use
by accrual method taxpayers (sec. 1313)........ 200
4. Limit conversion of character of income from
constructive ownership transactions (sec. 1314) 202
5. Denial of charitable contribution deduction for
transfers associated with split-dollar
insurance arrangements (sec. 1315)............. 206
6. Modify estimated tax rules for closely held REIT
dividends (sec. 1316).......................... 211
7. Prohibited allocations of stock in an ESOP of an
S corporation (sec. 1317)...................... 212
8. Modify anti-abuse rules related to assumption of
liabilities (sec. 1318)........................ 214
9. Require consistent treatment and provide basis
allocation rules for transfers of intangibles
in certain nonrecognition transactions (sec.
1319).......................................... 215
10. Modify treatment of closely-held REITs (sec.
1320).......................................... 216
11. Distributions by a partnership to a corporate
partner of stock in another corporation (sec.
1321).......................................... 219
Title XIV. Tax Technical Corrections........................ 221
Title XV. Compliance With Congressional Budget Act.......... 226
III. BUDGET EFFECTS OF THE BILL.................................. 227
A. Committee Estimates................................. 227
B. Budget Authority and Tax Expenditures............... 239
C. Consultation With the Congressional Budget Office... 239
IV. VOTES OF THE COMMITTEE...................................... 239
V. REGULATORY IMPACT AND OTHER MATTERS......................... 240
A. Regulatory Impact................................... 240
B. Unfunded Mandates Statement......................... 244
C. Tax Complexity Analysis............................. 245
VI. CHANGES TO EXISTING LAW MADE BY THE BILL AS REPORTED........ 254
VII. MINORITY VIEWS.............................................. 255
VII. ADDITIONAL VIEWS............................................ 282
106th Congress Report
1st Session SENATE 106-120
======================================================================
TAXPAYER REFUND ACT OF 1999
_______
July 23 (legislative day, July 26), 1999.--Ordered to be printed
_______
Mr. Roth, from the Committee on Finance, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 1429]
The Committee on Finance reported an original bill (S.
1429) to amend the Internal Revenue Code of 1986 to provide for
reconciliation pursuant to section 104 of the concurrent
resolution on the budget for fiscal year 2000, having
considered the same, reports favorably thereon and recommends
that the bill do pass.
I. LEGISLATIVE BACKGROUND
Committee markup
The Senate Committee on Finance marked up an original bill
(the ``Taxpayer Refund Act of 1999'') on July 20-21, 1999, and
ordered the bill favorably reported by a roll call vote of 13
yeas and 6 nays (13 yeas and 7 nays including a proxy nay) on
July 21, 1999. The Committee on Finance (the ``Committee'')
action on the bill was in response to the reconciliation
instructions contained in sections 105 and 211 of the
Concurrent Resolution on the Budget for Fiscal Year 2000 (H.
Con. Res. 68) for a net tax reduction of up to $792 billion for
fiscal years 2000-2009.
Committee hearings
The following tax-related Committee hearings were held
during the 106th Congress:
President's fiscal year 2000 budget and tax proposals
(February 2, 1999);
Increasing savings for retirement (February 24,
1999);
Education tax proposals (March 3, 1999);
International tax issues relating to globalization
(March 11, 1999);
Personal retirement accounts (March 16, 1999);
Complexity of the individual income tax (April 15,
1999); and
Pension reform proposals (June 30, 1999).
II. EXPLANATION OF BILL
TITLE I. BROAD-BASED TAX RELIEF
A. Reduction in the 15-percent Regular Individual Income Tax Rate;
Increase in Maximum Taxable Income for 15-Percent Rate Bracket
(secs. 101-102 of the bill and sec. 1 of the Code)
present law
Income tax rate structure
To determine regular income tax liability, a taxpayer
generally must apply the tax rate schedules (or the tax tables)
to his or her taxable income. The rate schedules are broken
into several ranges of income, known as income brackets, and
the marginal tax rate increases as a taxpayer's income
increases. The income bracket amounts are indexed for
inflation. Separate rate schedules apply based on an
individual's filing status. In order to limit multiple uses of
a graduated rate schedule within a family, the net unearned
income of a child under age 14 is taxed as if it were the
parent's income. For 1999, the individual regular income tax
rate schedules are shown below.
TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 1999
------------------------------------------------------------------------
If taxable income is: Then income tax equals
------------------------------------------------------------------------
Single individuals
$0-25,750................................. 15 percent of taxable
income.
$25,750-$62,450........................... $3,862.50, plus 28% of the
amount over $25,750.
$62,450-$130,250.......................... $14,138.50 plus 31% of the
amount over $62,450.
$130,250-$283,150......................... $35,156.50 plus 36% of the
amount over $130,250.
Over $283,150............................. $90,200.50 plus 39.6% of the
amount over $283,150.
Heads of households
$0-$34,550................................ 15 percent of taxable
income.
$34,550-$89,150........................... $5,182.50 plus 28% of the
amount over $34,550.
$89,150-$144,400.......................... $20,470.50 plus 31% of the
amount over $89,150.
$144,400-$283,150......................... $37,598 plus 36% of the
amount over $144,400.
Over $283,150............................. $87,548 plus 39.6% of the
amount over $283,150.
Married individuals filing joint returns
$0-$43,050................................ 15 percent of taxable
income.
$43,050-$104,050.......................... $6,457.50 plus 28% of the
amount over $43,050.
$104,050-$158,550......................... $23,537.50 plus 31% of the
amount over $104,050.
$158,550-$283,150......................... $40,432.50 plus 36% of the
amount over $158,550.
Over $283,150............................. $85,288.50 plus 39.6% of the
amount over $283,150.
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reasons for change
Under the budget resolution, the Committee is charged with
making recommendations with respect to tax reductions. The
Committee believes that it is important to meet these budget
reconciliation instructions in part by providing broad-based
tax relief that will benefit all Americans who are currently
paying Federal income tax. While there are many ways to
effectuate broad-based tax relief, the Committee adopts an
approach that lowers the 15-percent marginal income tax rate to
14-percent and widens the size of the 14-percent bracket
because it delivers across-the-board relief to all taxpayers
regardless of income or filing status. Further, the provision
will move approximately 4 million middle income Americans out
of the 28-percent marginal rate bracket and into the new 14-
percent bracket.
explanation of provision
The bill reduces the lowest individual regular income tax
rate from 15 percent to 14 percent. This rate reduction does
not apply to the capital gains tax rates.
The bill also phases in an increase in the size of the 14-
percent rate bracket. Specifically, the bill increases the size
of the otherwise applicable 14-percent rate bracket by $2,000
($4,000 for a married couple filing a joint return) in 2005 and
2006, and by $2,500 ($5,000 for a married couple filing a joint
return) in 2007 and thereafter. The $2,500/$5,000 amounts in
2007 and thereafter are the total increase and are not in
addition to the $2,000/$4,000 amounts in 2005 and 2006. These
amounts are indexed for inflation beginning in 2008.
effective date
The provision reducing the tax rate from 15 percent to 14
percent is effective for taxable years beginning after December
31, 2000. The provision increasing the size of the rate bracket
is effective for taxable years beginning after December 31,
2004.
TITLE II. FAMILY TAX RELIEF PROVISIONS
A. Election to Calculate Combined Tax as Individuals for a Married
Couple Filing a Joint Return
(sec. 201 of the bill and sec. 6013A)
present law
A married couple generally is treated as one tax unit that
must pay tax on the unit's total taxable income. Although
married couples may elect to file separate returns, the rate
schedules and provisions are structured so that filing separate
returns usually results in a higher tax than filing a joint
return. Other rate schedules apply to single persons and to
single heads of households.
A ``marriage penalty'' exists when the sum of the tax
liabilities of two unmarried individuals filing their own tax
returns (either single or head of household returns) is less
than their tax liability under a joint return (if the two
individuals were to marry). A ``marriage bonus'' exists when
the sum of the tax liabilities of the individuals is greater
than their combined tax liability under a joint return.
While the size of any marriage penalty or bonus under
present law depends upon the individuals' incomes, number of
dependents, and itemized deductions, as a general rule married
couples whose incomes are split more evenly than 70-30 suffer a
marriage penalty. Married couples whose incomes are largely
attributable to one spouse generally receive a marriage bonus.
Under present law, the size of the standard deduction and
the tax bracket breakpoints follow certain customary ratios
across filing statuses. The standard deduction and tax bracket
breakpoints for single filers are roughly 60 percent of those
for joint filers.1 With these ratios, unmarried
individuals have standard deductions whose sum exceeds the
standard deduction they would receive as a married couple
filing a joint return. Thus, their taxable income as joint
filers may exceed the sum of their taxable incomes as unmarried
individuals.
---------------------------------------------------------------------------
\1\ This is not true for the 39.6-percent rate. The beginning point
of this rate bracket is the same for all taxpayers regardless of filing
status.
---------------------------------------------------------------------------
reasons for change
The Committee believes that the Code should not penalize
marriage and two individuals should not see their total tax
liability increase simply because they get married. The
Committee understands that there are a variety of Code
provisions that create marriage penalties, and that there are
also a number of different ways to reduce or eliminate such
penalties. For example, one way to address the marriage penalty
would be to modify some or all of the specific provisions of
the Code that give rise to a marriage penalty, such as assorted
income-phaseout ranges. However, the Committee believes that a
comprehensive approach is preferable. It is both fairer and
more beneficial to all taxpayers, thus the provision allows
married taxpayers to elect to calculate their tax liability as
if they were single. This approach is already in use in some
states.
While the Committee understands that this approach may make
completion of the tax return more complicated for some
taxpayers, it has concluded that any increased complexity is
outweighed by the added fairness and tax relief provided by the
provision. The provision identifies and eliminates the marriage
penalty resulting from the income tax rate structure for an
electing taxpayer. The Joint Committee on Taxation estimates
that, in 2005, approximately 19 million joint returns will
experience a reduction in the marriage penalty as a result of
this provision.
explanation of provision
Under the bill, married taxpayers have the option to
calculate separate taxable income for each spouse and to be
taxed as two single individuals on the same return. The tax due
is calculated by applying the tax rates for single individuals
to the separate taxable incomes. Under the bill, both spouses
must elect to either use a standard deduction or to itemize
their deductions. Thus, one spouse is not permitted to itemize
deductions while the other spouse claims a standard deduction.
If a married couple elects to compute taxable income separately
and claim the standard deduction, the applicable standard
deduction for each spouse is the standard deduction for single
individuals. Under the bill, once tax liability is calculated
on a separate basis, all tax credits and payments of tax are
applied as if the couple is filing a joint return.
Income from the performance of services (e.g., wages,
salaries, and pensions) are treated as the income of the spouse
who performed the services. Income from property is divided
between the spouses in accordance with their respective
ownership rights in such property. Jointly owned assets are
divided evenly.
Deductions generally are allocated to the spouse treated as
having the income to which the deduction relates. Special rules
apply for certain deductions. The deduction for contributions
to an individual retirement arrangement are allocated to the
spouse for whom the contribution is made. The deduction for
alimony is allocated to the spouse who has the liability to pay
the alimony. The deduction for contributions to medical savings
accounts is allocated to the spouse with respect to whose
employment or self employment the account relates.
Each spouse is entitled to claim one personal exemption.
Exemptions for dependents are allocated based on each spouse's
relative income.
All credits are determined as if the spouses had filed a
joint return. The credit amounts are then applied against the
combined tax liability of the couple as calculated under this
provision.
For purposes of determining the alternative minimum tax
imposed by section 55, the tentative minimum tax shall be the
tax which would be computed as if the spouses had filed a joint
return, and the regular tax shall be the tax liability computed
under section 6013A.
The Secretary of the Treasury is directed to prescribe such
regulations as may be necessary or appropriate to carry out the
provision.
effective date
The provision is effective for taxable years beginning
after December 31, 2004.
B. Marriage Penalty Relief Relating to the Earned Income Credit
(sec. 202 of the bill and sec. 32 of the Code)
Present Law
Certain eligible low-income workers are entitled to claim a
refundable earned income credit (``EIC'') on their income tax
return. A refundable credit is a credit that not only reduces
an individual's tax liability but allows refunds to the
individual in excess of income tax liability. The amount of the
credit an eligible individual may claim depends upon whether
the individual has one, more than one, or no qualifying
children, and is determined by multiplying the credit rate by
the individual's earned income up to an earned income amount.
In the case of a married individual who files a joint return
with his or her spouse, the income for purposes of these tests
is the combined income of the couple. The maximum amount of the
credit is the product of the credit rate and the earned income
amount. The credit is phased out above certain income levels.
For individuals with earned income (or modified AGI, if
greater) in excess of the beginning of the phase-out range, the
maximum credit amount is reduced by the phase-out rate
multiplied by the earned income (or modified AGI, if greater)
in excess of the beginning of the phase-out range. For
individuals with earned income (or modified AGI, if greater) in
excess of the end of the phase-out range, no credit is allowed.
The parameters of the credit for 1999 are provided in the
following table.
EARNED INCOME CREDIT PARAMETERS (1999)
----------------------------------------------------------------------------------------------------------------
Two or more
qualifying One qualifying No qualifying
children child children
----------------------------------------------------------------------------------------------------------------
Credit rate (percent)........................................... 40.00 34.00 7.65
Earned income amount............................................ $9,540 $6,800 $4,530
Maximum credit.................................................. $3,816 $2,312 $347
Phase-out begins................................................ $12,460 $12,460 $5,670
Phase-out rate (percent)........................................ 21.06 15.98 7.65
Phase-out ends.................................................. $30,580 $26,928 $10,200
----------------------------------------------------------------------------------------------------------------
Reasons for Change
The Committee believes that the present-law EIC unfairly
penalizes some individuals by causing them to receive less EIC
when they marry than if they had not married. The Committee
believes that this unfairness in the tax Code should be
reduced.
Explanation of Provision
The bill increases the beginning point of the phase out of
the EIC for married couples filing a joint return by $2,000.
Because the rate of the phase out is not changed by the
provision, the end-point of the phase-out ranges is also
increased by $2,000. The effect of the increase in the
beginning point of the phase-out is to increase the EIC for
taxpayers in the phase-out range by an amount up to $2,000
times the phase-out rate. For example, for couples with two or
more qualifying children, the maximum increase in the EIC as a
result of the proposal would be $2,000 times 21.06 percent, or
$421.20. The provision also expands the universe of taxpayers
eligible for the EIC. Specifically, the $2,000 increase in the
end of the phase-out range makes taxpayers with earnings up to
$2,000 beyond the present-law phase-out range newly eligible
for the credit. Beginning in 2006, the $2,000 amount is indexed
for inflation.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2004.
C. Expand the Exclusion from Income for Certain Foster Care Payments
(sec. 203 of the bill and sec. 131 of the Code)
Present Law
Generally, a foster care provider may exclude qualified
foster care payments, (including difficulty of care payments)
from gross income if certain requirements are
satisfied.2 First, such payments must be paid to the
foster care providers by either (1) a State or political
subdivision of a State; or (2) a tax-exempt placement agency.
Second, the payments, including difficulty of care payments,
must be paid to the foster care provider for the care of a
``qualified foster individual'' in the foster care provider's
home. A qualified foster individual is an individual living in
a foster care family home in which the individual was placed
by: (1) an agency of the State or a political subdivision of a
State; or (2) a tax-exempt placement agency if such individual
was under the age of 19 at the time of placement. Third, the
exclusion of foster care payments generally applies to
qualified foster care payments for five or fewer foster care
individuals over the age of 19 in a foster home. In the case of
difficulty of care payments, the exclusion applies to payments
for ten or fewer foster care individuals under the age of 19 in
a foster home and to payments for five or fewer foster care
individuals at least age 19 in a foster home.
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\2\ A difficulty of care payment is a payment designated by the
person making such payment as compensation for providing the additional
care of a qualified foster care individual which is required by reason
of a physical, mental, or emotional handicap of such individual and
with respect to which the State has determined that there is a need for
additional compensation.
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Reasons for Change
The Committee recognizes that some States want to use both
taxable and tax-exempt organizations to improve the
administration of their foster care programs (e.g., out-
sourcing of the placement function of their foster care
program). This provision is intended to give the States more
flexibility in meeting the goals of foster care without
expanding the application of the exclusion to payments which
are not made under the State's foster care program.
Explanation of Provision
The bill makes two principal modifications to the exclusion
for qualified foster care payments. First, the bill expands the
list of persons eligible to make qualified foster care
payments. Therefore, the exclusion applies to qualified
payments made pursuant to a foster care program of a State or
local government which are paid by either: (1) a State or
political subdivision of a State; or (2) a qualified foster
care placement agency, whether taxable or tax-exempt. Second,
the bill expands the list of persons eligible to place foster
care individuals. Specifically, the bill allows placements by
either: (1) a State or a political subdivision of a State; or
(2) a qualified foster care placement agency. For these
purposes, a qualified foster care placement agency is defined
as any placement agency which is licensed or certified by: (1)
a State or political subdivision of a State; or (2) an entity
designated by a State or political subdivision thereof, for the
foster care program of such State or political subdivision to
make payments to providers of foster care.
The bill allows State and local governments to employ both
tax-exempt and taxable entities to administer their foster care
programs more efficiently; however, it does not extend the
exclusion to payments outside such foster care programs (e.g.,
payments to a foster care provider from friends or relatives of
foster care individual in its care).
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
D. Increase and Expand the Dependent Care Credit
(sec. 204 of the bill and sec. 21 of the Code)
Present Law
In general
A taxpayer who maintains a household which includes one or
more qualifying individuals may claim a nonrefundable credit
against income tax liability for up to 30 percent of a limited
amount of employment-related dependent care expenses. Eligible
employment-related expenses are limited to $2,400 if there is
one qualifying individual or $4,800 if there are two or more
qualifying individuals. Generally, a qualifying individual is a
dependent under the age of 13 or a physically or mentally
incapacitated dependent or spouse. No credit is allowed for any
qualifying individual unless a valid taxpayer identification
number (``TIN'') has been provided for that individual. A
taxpayer is treated as maintaining a household for a period if
the taxpayer (or the taxpayer's spouse, if married) provides
more than one-half the cost of maintaining the household for
that period. In the case of married taxpayers, the credit is
not available unless they file a joint return.
Employment-related dependent care expenses are expenses for
the care of a qualifying individual incurred to enable the
taxpayer to be gainfully employed, other than expenses incurred
for an overnight camp. For example, amounts paid for the
services of a housekeeper generally qualify if such services
are performed at least partly for the benefit of a qualifying
individual; amounts paid for a chauffeur or gardener do not
qualify.
Expenses that may be taken into account in computing the
credit generally may not exceed an individual's earned income
or, in the case of married taxpayers, the earned income of the
spouse with the lesser earnings. Thus, if one spouse has no
earned income, generally no credit is allowed.
The 30-percent credit rate is reduced, but not below 20
percent, by 1 percentage point for each $2,000 (or fraction
thereof) of adjusted gross income (``AGI'') above $10,000.
Interaction with employer-provided dependent care assistance
For purposes of the dependent care credit, the maximum
amounts of employment-related expenses ($2,400/$4,800) are
reduced to the extent that the taxpayer has received employer-
provided dependent care assistance that is excludable from
gross income (sec. 129). The exclusion for dependent care
assistance is limited to $5,000 per year and does not vary with
the number of children.
Reasons for Change
The Committee recognizes that the size of the present-law
dependent care credit does not reflect the true cost of
dependent care for many families. The Committee believes that
increasing the amount of the credit will help millions of
working American taxpayers better afford adequate childcare. In
addition, the Committee believes that, as the costs of
dependent care increase as a result of inflation, the size of
the credit should also be increased.
Explanation of Provision
The bill makes two changes to the dependent care tax
credit. First, the maximum credit percentage is increased from
30 percent to 50 percent for taxpayers with AGI of $30,000 or
less. The 50-percent credit rate is phased-down by one
percentage point for each $1,000 of AGI, or fraction thereof,
between $30,001 and $59,000. The credit percentage is 20
percent for taxpayers with AGI of $59,001 or greater. Second,
the maximum amount of eligible employment-related expenses
($2,400/$4,800) is indexed for inflation beginning in 2001.
The present-law reduction of the dependent care credit for
employer-provided dependent care assistance is not changed.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
E. Tax Credit for Employer-Provided Child Care Facilities
(sec. 205 of the bill and new sec. 45D of the Code)
Present Law
Generally, present law does not provide a tax credit to
employers for supporting child care or child care resource and
referral services.3 An employer, however, may be
able to claim such expenses as deductions for ordinary and
necessary business expenses. Alternatively, the employer may be
required to capitalize the expenses and claim depreciation
deductions over time.
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\3\ An employer may claim the welfare-to-work tax credit on the
eligible wages of certain long-term family assistance recipients. For
purposes of the welfare-to-work credit, eligible wages includes amounts
paid by the employer for dependent care assistance.
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Reasons for Change
The Committee believes that providing an incentive to
employers to provide child care services for their employees
will increase the quality and availability of child care
services, which is an important issue for working Americans.
Explanation of Provision
Employer tax credit for supporting employee child care
Under the bill, taxpayers receive a tax credit equal to 25
percent of qualified expenses for employee child care. These
expenses include costs incurred: (1) to acquire, construct,
rehabilitate or expand property that is to be used as part of
the taxpayer's qualified child care facility; (2) for the
operation of the taxpayer's qualified child care facility,
including the costs of training and continuing education for
employees of the child care facility; or (3) under a contract
with a qualified child care facility to provide child care
services to employees of the taxpayer. To be a qualified child
care facility, the principal use of the facility must be for
child care, and the facility must be duly licensed by the State
agency with jurisdiction over its operations. Also, if the
facility is owned or operated by the taxpayer, at least 30
percent of the children enrolled in the center (based on an
annual average or the enrollment measured at the beginning of
each month) must be children of the taxpayer's employees. If a
taxpayer opens a new facility, it must meet the 30-percent
employee enrollment requirement within two years of commencing
operations. If a new facility failed to meet this requirement,
the credit would be subject to recapture.
To qualify for the credit, the taxpayer must offer child
care services, either at its own facility or through third
parties, on a basis that does not discriminate in favor of
highly compensated employees.
Employer tax credit for child care resource and referral services
Under the bill, a taxpayer is entitled to a tax credit
equal to 10 percent of expenses incurred to provide employees
with child care resource and referral services.
Other rules
The maximum total credit that may be claimed by a taxpayer
under this provision can not exceed $150,000 per year. Any
amounts for which the taxpayer may otherwise claim a tax
deduction are reduced by the amount of these credits.
Similarly, if the credits are taken for expenses of acquiring,
constructing, rehabilitating, or expanding a facility, the
taxpayer's basis in the facility is reduced by the amount of
the credits.
Effective Date
The credits are effective for taxable years beginning after
December 31, 2000.
F. Modify Individual Alternative Minimum Tax
(sec. 206 of the bill and secs. 26 and 56 of the Code)
Present Law
In general
Present law imposes a minimum tax (``AMT'') on an
individual to the extent the taxpayer's minimum tax liability
exceeds his or her regular tax liability. The AMT is imposed on
individuals at rates of (1) 26 percent on the first $175,000 of
alternative minimum taxable income (``AMTI'') in excess of a
phased-out exemption amount and (2) 28 percent on the remaining
AMTI. The exemptions amounts are $45,000 in the case of married
individuals filing a joint return and surviving spouses;
$33,750 in the case of other unmarried individuals; and $22,500
in the case of married individuals filing a separate return.
These exemption amounts are phased-out by an amount equal to 25
percent of the amount that the individual's AMTI exceeds a
threshold amount. These threshold amounts are $150,000 in the
case of married individuals filing a joint return and surviving
spouses; $112,500 in the case of other unmarried individuals;
and $75,000 in the case of married individuals filing a
separate return, estates, and trusts. The exemption amounts,
the threshold phase-out amounts, and the $175,000 break-point
amount are not indexed for inflation. The lower capital gains
rates applicable to the regular tax apply for purposes of the
AMT.
AMTI is the taxpayer's taxable income increased by certain
preference items and adjusted by determining the tax treatment
of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
Preference items in computing AMTI
The minimum tax preference items are:
(1) The excess of the deduction for percentage depletion
over the adjusted basis of the property at the end of the
taxable year. This preference does not apply to percentage
depletion allowed with respect to oil and gas properties.
(2) The amount by which excess intangible drilling costs
arising in the taxable year exceed 65 percent of the net income
from oil, gas, and geothermal properties. This preference does
not apply to an independent producer to the extent the
preference would not reduce the producer's AMTI by more than 40
percent.
(3) Tax-exempt interest income on private activity bonds
(other than qualified 501(c)(3) bonds) issued after August 7,
1986.
(4) Accelerated depreciation or amortization on certain
property placed in service before January 1, 1987.
(5) Forty-two percent of the amount excluded from income
under section 1202 (relating to gains on the sale of certain
small business stock).
In addition, losses from any tax shelter, farm, or passive
activities are denied.4
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\4\ Given the passage of section 469 by the Tax Reform Act of 1986
(relating to the deductibility of losses from passive activities),
these provisions are largely ``deadwood.''
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Adjustments in computing AMTI
The adjustments that individuals must make in computing
AMTI are:
(1) Depreciation on property placed in service after 1986
and before January 1, 1999, must be computed by using the
generally longer class lives prescribed by the alternative
depreciation system of section 168(g) and either (a) the
straight-line method in the case of property subject to the
straight-line method under the regular tax or (b) the 150-
percent declining balance method in the case of other property.
Depreciation on property placed in service after December 31,
1998, is computed by using the regular tax recovery periods and
the AMT methods described in the previous sentence.
(2) Mining exploration and development costs must be
capitalized and amortized over a 10-year period.
(3) Taxable income from a long-term contract (other than a
home construction contract) must be computed using the
percentage of completion method of accounting.
(4) The amortization deduction allowed for pollution
control facilities placed in service before January 1, 1999
(generally determined using 60-month amortization for a portion
of the cost of the facility under the regular tax), must be
calculated under the alternative depreciation system
(generally, using longer class lives and the straight-line
method). The amortization deduction allowed for pollution
control facilities placed in service after December 31, 1998,
is calculated using the regular tax recovery periods and the
straight-line method.
(5) Miscellaneous itemized deductions are not allowed.
(6) Itemized deductions for State, local, and foreign real
property taxes, State and local personal property taxes, and
State, local, and foreign income, war profits, and excess
profits taxes are not allowed.
(7) Medical expenses are allowed only to the extent they
exceed 10 percent of the taxpayer's adjusted gross income
(AGI).
(8) Standard deductions and personal exemptions are not
allowed.
(9) The amount allowable as a deduction for circulation
expenditures must be capitalized and amortized over a 3-year
period.
(10) The amount allowable as a deduction for research and
experimental expenditures must be capitalized and amortized
over a 10-year period.5
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\5\ No adjustment is required if the taxpayer materially
participates in the activity that relates to the research and
experimental expenditures.
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(11) The regular tax rules relating to incentive stock
options do not apply.
Other rules
The combination of the taxpayer's net operating loss
carryover and foreign tax credits cannot reduce the taxpayer's
AMT liability by more than 90 percent of the amount determined
without these items.
The various nonrefundable credits allowed under the regular
tax generally are allowed only to the extent that the
individual's regular tax exceeds the tentative minimum tax. The
earned income credit and the child credit of those taxpayers
with three or more qualified children are refundable credits
and may offset the taxpayer's tentative minimum tax. However, a
taxpayer must reduce these refundable credits by the taxpayer's
AMT.6
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\6\ For 1998 only, the nonrefundable personal credits were not
limited by the tentative minimum tax, and the refundable child credit
was not reduced by the minimum tax.
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If an individual is subject to AMT in any year, the amount
of tax exceeding the taxpayer's regular tax liability is
allowed as a credit (the ``AMT credit'') in any subsequent
taxable year to the extent the taxpayer's regular tax liability
exceeds his or her tentative min-
imum tax in such subsequent year. For individuals, the AMT
credit is allowed only to the extent the taxpayer's AMT
liability is a result of adjustments that are timing in nature.
Most individual AMT adjustments relate to itemized deductions
and personal exemptions and are not timing in nature.
Reasons for Change
The Committee believes that the personal credits and
deductions for personal exemptions should not result in a
taxpayer having tax liability by reason of the minimum tax.
Explanation of Provision
The bill allows an individual to offset the entire regular
tax liability (without regard to the minimum tax) by the
personal nonrefundable credits, and repeals the provision
reducing the refundable child credit by the AMT.
The bill also allows the deduction for personal exemptions
in computing AMT.
Effective Dates
The provisions relating to the limit on personal credits
and the offset of the refundable child credit apply to taxable
years beginning after December 31, 1998.
The provision relating to the deduction for personal
exemptions applies to taxable years beginning after December
31, 2004.
TITLE III. RETIREMENT AND INDIVIDUAL SAVINGS TAX RELIEF PROVISIONS
A. Individual Savings Provisions
1. Individual retirement arrangements (``IRAs'') (secs. 301-302 and 304
of the bill and secs. 219, 408, and 408A of the Code)
In general
There are two general types of individual retirement
arrangements (``IRAs'') under present law: traditional IRAs, to
which both deductible and nondeductible contributions may be
made, and Roth IRAs. The Federal income tax rules regarding
each type of IRA (and IRA contribution) differ.
Traditional IRAs
Under present law, an individual may make deductible
contributions to an IRA up to the lesser of $2,000 or the
individual's compensation if neither the individual nor the
individual's spouse is an active participant in an employer-
sponsored retirement plan. In the case of a married couple,
deductible IRA contributions of up to $2,000 can be made for
each spouse (including, for example, a homemaker who does not
work outside the home), if the combined compensation of both
spouses is at least equal to the contributed amount. If the
individual (or the individual's spouse) is an active
participant in an employer-sponsored retirement plan, the
$2,000 deduction limit is phased out for taxpayers with
adjusted gross income (``AGI'') over certain levels for the
taxable year.
The AGI phase-out limits for taxpayers who are active
participants in employer-sponsored plans are as follows.
Single Taxpayers
Taxable years beginning in Phase-out range
1998.................................................... $30,000-40,000
1999.................................................... 31,000-41,000
2000.................................................... 32,000-42,000
2001.................................................... 33,000-43,000
2002.................................................... 34,000-44,000
2003.................................................... 40,000-50,000
2004.................................................... 45,000-55,000
2005 and thereafter..................................... 50,000-60,000
Joint Returns
Taxable years beginning in Phase-out range
1998.................................................... $50,000-60,000
1999.................................................... 51,000-61,000
2000.................................................... 52,000-62,000
2001.................................................... 53,000-63,000
2002.................................................... 54,000-64,000
2003.................................................... 60,000-70,000
2004.................................................... 65,000-75,000
2005.................................................... 70,000-80,000
2006.................................................... 75,000-85,000
2007 and thereafter..................................... 80,000-100,000
If the individual is not an active participant in an
employer-sponsored retirement plan, but the individual's spouse
is, the $2,000 deduction limit is phased out for taxpayers with
AGI between $150,000 and $160,000.
To the extent an individual cannot or does not make
deductible contributions to an IRA or contributions to a Roth
IRA, the individual may make nondeductible contributions to a
traditional IRA.
Amounts held in a traditional IRA are includible in income
when withdrawn (except to the extent the withdrawal is a return
of nondeductible contributions). Includible amounts withdrawn
prior to attainment of age 59\1/2\ are subject to an additional
10-percent early withdrawal tax, unless the withdrawal is due
to death or disability, is made in the form of certain periodic
payments, is used to pay medical expenses in excess of 7.5
percent of AGI, is used to purchase health insurance of an
unemployed individual, is used for education expenses, or is
used for first-time homebuyer expenses of up to $10,000.
Roth IRAs
Individuals with AGI below certain levels may make
nondeductible contributions to a Roth IRA. The maximum annual
contribution that may be made to a Roth IRA is the lesser of
$2,000 or the individual's compensation for the year. The
contribution limit is reduced to the extent an individual makes
contributions to any other IRA for the same taxable year. As
under the rules relating to IRAs generally, a contribution of
up to $2,000 for each spouse may be made to a Roth IRA provided
the combined compensation of the spouses is at least equal to
the contributed amount. The maximum annual contribution that
can be made to a Roth IRA is phased out for single individuals
with AGI between $95,000 and $110,000 and for joint filers with
AGI between $150,000 and $160,000.
Taxpayers with modified AGI of $100,000 or less generally
may convert a traditionalIRA into an Roth IRA. The amount
converted is includible in income as if a withdrawal had been made,
except that the 10-percent early withdrawal tax does not apply and, if
the conversion occurred in 1998, the income inclusion may be spread
ratably over 4 years. Married taxpayers who file separate returns
cannot convert a traditional IRA into a Roth IRA.
Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are not includible in income, nor
subject to the additional 10-percent tax on early withdrawals.
A qualified distribution is a distribution that (1) is made
after the 5-taxable year period beginning with the first
taxable year for which the individual made a contribution to a
Roth IRA, and (2) which is made after attainment of age 59\1/
2\, on account of death or disability, or is made for first-
time homebuyer expenses of up to $10,000.
Distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings, and subject to the 10-percent early
withdrawal tax (unless an exception applies).7 The
same exceptions to the early withdrawal tax that apply to IRAs
apply to Roth IRAs.
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\7\ Early distribution of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the 4-year
rule applicable to 1998 conversions.
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IRA investments
In general, IRAs may not invest in collectibles. Under one
exception to this rule, IRAs may invest in certain gold,
silver, and platinum coins and coins issued under the laws of
any State.
Reasons for Change
The Committee is concerned about the low national savings
rate, and that individuals may not be saving adequately for
retirement. Present law provides tax incentives for savings,
including the opportunity to make contributions to traditional
and Roth IRAs. However, deductible contributions to traditional
IRAs and Roth IRAs are not available to all Americans. The
Congress believes that IRAs should be available to more
individuals.
The present-law IRA contribution limit has not been
increased since 1981. The Committee believes that the limit
should be raised in order to allow greater savings
opportunities.
The Committee believes it is appropriate to expand the
types of coins in which IRAs may invest.
Explanation of Provision
Increase in annual contribution limits
The provision increases the annual contribution limit for
traditional IRAs and Roth IRAs in $1,000 annual increments,
beginning in 2001, until the limit reaches $5,000 in 2003.
Thereafter, the limit is indexed for inflation in $100
increments.
Increase in AGI limits for deductible IRA contributions
Under the provision, the AGI phase-out limits for active
participants in an employer- sponsored plan is increased
annually by $2,000 ($4,000 in the case of married taxpayers
filing a joint return) in 2008 and by $2,500 ($5,000 in the
case of married taxpayers filing a joint return) in 2009-2010.
After 2010, the income limits are indexed for inflation in
$1,000 increments. Thus, the phase-out limits are as follows
for taxable years beginning in 2008-2010.
Single Returns
Taxable years beginning in Phase-out range
2008.................................................... $52,000-62,000
2009.................................................... 54,500-64,500
2010.................................................... 57,000-67,000
Joint Returns
Taxable years beginning in Phase-out range
2008.................................................... $84,000-104,000
2009.................................................... 89,000-109,000
2010.................................................... 94,000-114,000
The present-law income phase-out range for an individual
who is not an active participant, but whose spouse is, remains
at $150,000 to $160,000.
AGI limits for Roth IRAs
The provision repeals the Roth IRA contribution AGI phase-
out limits. The provision also increases the AGI limit on
conversions of traditional IRAs to Roth IRAs to $1 million
($500,000 in the case of a married taxpayer filing a separate
return).
IRA investments in coins
The provision allows IRAs to invest in any coin certified
by a recognized grading service and traded on a nationally
recognized electronic network, or listed by a recognized
wholesale reporting service and which (1) is or was at any time
legal tender in the United States, or (2) issued under the laws
of any State. Such coins must be in the physical possession of
the IRA trustee or custodian.
Effective Date
The provision generally is effective for taxable years
beginning after December 31, 2000. The increase in the AGI
limits for deductible IRA contributions is effective for
taxable years beginning after December 31, 2007. The provision
increasing the AGI limit for conversions to Roth IRAs is
effective for taxable years beginning after December 31, 2002.
The provision relating to IRA investment in coins is effective
for taxable years beginning after December 31, 1999.
2. Creation of individual development accounts (sec. 303 of the bill
and new sec. 530A of the Code)
Present Law
There are no tax benefits to encourage financial
institutions to match savings of low-income individuals.
Reasons for Change
The Committee recognizes that the rate of private savings
in the United States is too low. In particular, many low-income
individuals either have inadequate savings or no savings at
all. The Committee believes that a tax-subsidized match by
financial institutions may help encourage more savings by low-
income working individuals. The program is intended to
encourage a pattern of individual savings and wealth
accumulation. Finally, the Committee believes that the program
will allow individuals to use their savings for three important
purposes: (1) to afford better educations; (2) to achieve home
ownership; and (3) to start their own businesses.
Explanation of Provision
In general
The bill creates individual development accounts (``IDAs'')
to which eligible individuals can contribute. In addition, the
bill provides a tax credit for certain matching contributions
made to an IDA by the financial institution maintaining the
IDA. Eligible individuals are individuals who are: (1) at least
18 years of age; (2) a citizen or legal resident of the United
States; and (3) a member of a household eligible for the earned
income credit, Temporary Assistance for Needy Families
(``TANF''), or with family gross income of 60 percent or less
of area median gross income and net worth of $10,000 or less.
Contributions to an IDA by eligible individuals
Only eligible individuals are allowed to contribute to an
IDA. Contributions to IDAs by individuals are not deductible,
and earnings on such contributions are includible in income.
The maximum contribution that can be made to an IDA for a
taxable year is the lesser of (1) $350 or (2) the individual's
taxable compensation for the year. A special rule would allow
contributions of up to $350 for each spouse in a married couple
if the total compensation of the spouses is at least equal to
the amount contributed.
Matching contributions
The bill provides a tax credit to financial institutions
that make matching contributions to IDAs of
individuals.8 The tax credit equals 85 percent of
matching contributions, rounded up to the nearest $10, up to a
maximum annual credit of $300 per eligible individual. The
credit is available in each year that a matching contribution
is made.
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\8\ Matching contributions (and earnings) are accounted for
separately from individual IDA contributions (and earnings).
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Matching contributions (and earnings thereon) are not
includible in the gross income of the eligible individual.
If an individual withdraws his or her own IDA contributions
(or earnings thereon) for a purpose other than a qualified
purpose, the matching contribution attributable to such
individual contribution is forfeited.9 Matching
contributions may be withdrawn only in a qualified purpose
distribution.
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\9\ The financial institution is to use forfeited amounts to make
other matching contributions. No credit is provided with respect to
such reallocated contributions.
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A qualified purpose distribution is a distribution (1) that
is made after the individual has completed an economic literacy
course, (2) that is made by the financial institution directly
to the person to whom the funds are to (or to another IDA) and
(3) is used for (a) certain educational expenses, (b) first-
time homebuyer expenses, and (c) business start-up expenses.
Effect on means-tested programs
Any amounts in the IDA are not to be taken into account for
certain Federal means-tested programs.
Effective Date
The provision is effective for contributions to IDAs and
matching contributions made with respect to such IDAs after
December 31, 2000, and before January 1, 2006.
B. Expanding Coverage
1. Option to treat elective deferrals as after-tax contributions (sec.
311 of the bill and new sec. 402A of the Code)
Present Law
A qualified cash or deferred arrangement (``section 401(k)
plan'') or a tax-sheltered annuity (``section 403(b) annuity'')
may permit a participant to elect to have the employer make
payments as contributions to the plan or to the participant
directly in cash. Contributions made to the plan at the
election of a participant are elective deferrals. Elective
deferrals must be nonforfeitable and are subject to an annual
dollar limitation (sec. 402(g)) and distribution restrictions.
In addition, elective deferrals under a section 401(k) plan are
subject to special nondiscrimination rules. Elective deferrals
(and earnings attributable thereto) are not includible in a
participant's gross income until distributed from the plan.
Individuals with adjusted gross income below certain levels
generally may make nondeductible contributions to a Roth IRA
and may convert a deductible or nondeductible IRA into a Roth
IRA. Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are not includible in income, nor
subject to the additional 10-percent tax on early withdrawals.
A qualified distribution is a distribution that (1) is made
after the 5-taxable year period beginning with the first
taxable year for which the individual made a contribution to a
Roth IRA, and (2) is made after attainment of age 59\1/2\, is
made on account of death or disability, or is a qualified
special purpose distribution (i.e., for first-time homebuyer
expenses of up to $10,000). A distribution from a Roth IRA that
is not a qualified distribution is includible in income to the
extent attributable to earnings, and is subject to the 10-
percent tax on early withdrawals (unless an exception
applies).10
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\10\ Early distributions of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the 4-year
rule applicable to 1998 conversions.
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Reasons for Change
The recently-enacted Roth IRA provisions have provided
individuals with another form of tax-favored retirement
savings. For a variety of reasons, some individuals may prefer
to save through a Roth IRA rather than a traditional deductible
IRA. The Committee believes that similar savings choices should
be available to participants in section 401(k) plans and tax-
sheltered annuities.
Explanation of Provision
A section 401(k) plan or a section 403(b) annuity may
include a ``qualified plus contribution program'' that permits
a participant to elect to have all or a portion of the
participant's elective deferrals under the plan treated as
designated plus contributions. Designated plus contributions
are elective deferrals that the participant designates as not
excludable from the participant's gross income.
The annual dollar limitation on a participant's designated
plus contributions is the section 402(g) annual limitation on
elective deferrals, reduced by the participant's elective
deferrals that the participant does not designate as designated
plus contributions. Contributions under the qualified plus
contribution program must satisfy the requirements of section
401(k) or section 403(b) (other than with respect to the
treatment of such contribution as not excludable from income).
Thus, for example, designated plus contributions are treated as
any other elective deferral for purposes of the
nonforfeitability requirements and distribution restrictions of
these sections. Under a section 401(k) plan, designated plus
contributions also are treated as any other elective deferral
for purposes of the special nondiscrimination requirements.
Additionally, designated plus contributions are at all times
subject to the requirements of section 401(a)(9) otherwise
applicable to any amounts held under a qualified plan.
The plan must establish a separate account, and maintain
separate recordkeeping, for a participant's designated plus
contributions (and earnings allocable thereto). A qualified
distribution from a participant's designated plus contributions
account is not includible in the participant's gross income. A
qualified distribution is a distribution that is made after the
end of a specified nonexclusion period and that is (1) made on
or after the date on which the participant attains age 59\1/2\,
(2) made to a beneficiary (or to the estate of the participant)
on or after the death of the participant, or (3) attributable
to the participant's being disabled.11 The
nonexclusion period is the 5-year-taxable period beginning with
the earlier of (1) the first taxable year for which the
participant made a designated plus contribution to any
designated plus contribution account established for the
participant under the plan, or (2) if the participant has made
a rollover contribution to the designated plus contribution
account that is the source of the distribution from a
designated plus contribution account established for the
participant under another plan, the first taxable year for
which the participant made a designated plus contribution to
the previously established account.
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\11\ A qualified special purpose distribution, as defined under the
rules relating to Roth IRAs, does not qualify as a tax-free
distribution from a designated plus contributions account.
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A distribution from a designated plus contributions account
that is a corrective distribution of an elective deferral (and
income allocable thereto) that exceeds the section 402(g)
annual limit on elective deferrals is not a qualified
distribution. Similarly, a distribution of a designated plus
contribution (and income allocable thereto) made to correct a
failure of a nondiscrimination test or any other requirement of
section 401(a) is not a qualified distribution.
A participant may roll over a distribution from a
designated plus contributions account only to another
designated plus contributions account or a Roth IRA of the
participant.
The Secretary of the Treasury is directed to require the
plan administrator of each section 401(k) plan or section
403(b) annuity that permits participants to make designated
pluscontributions to make such returns and reports regarding
designated plus contributions to the Secretary, plan participants and
beneficiaries, and other persons that the Secretary may designate.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
2. Increase elective contribution limits (sec. 312 of the bill and
secs. 402(g), 408(p), and 457 of the Code)
Present Law
Under present law, under certain salary reduction
arrangements, an employee may elect to have the employer make
payments as contributions to a plan on behalf of the employee,
or to the employee directly in cash. Contributions made at the
election of the employee are called elective deferrals.
The maximum annual amount of elective deferrals that an
individual may make to a qualified cash or deferred arrangement
(a ``section 401(k) plan''), a tax-sheltered annuity (``section
403(b) annuity'') or a salary reduction simplified employee
pension plan (``SEP'') is $10,000 (for 1999). The maximum
annual amount of elective deferrals that an individual may make
to a SIMPLE plan is $6,000. These limits are indexed for
inflation in $500 increments.
The maximum annual deferral under a deferred compensation
plan of a State or local government or a tax-exempt
organization (a ``section 457 plan'') is the lesser of (1)
$8,000 (for 1999) or (2) 33\1/3\ percent of compensation. The
$8,000 dollar limit is increased for inflation in $500
increments. Under a special catch-up rule, the section 457 plan
may provide that, for one or more of the participant's last 3
years before retirement, the otherwise applicable limit is
increased to the lesser of (1) $15,000 or (2) the sum of the
otherwise applicable limit for the year plus the amount by
which the limit applicable in preceding years of participation
exceeded the deferrals for that year.
Reasons for Change
The tax benefits provided under tax-favored retirement
plans are a departure from the normally applicable income tax
rules. The special tax benefits for such plans are generally
justified on the ground that they serve an important social
policy objective, i.e., the provision of retirement benefits to
a broad group of employees. The limits on deferrals, in
combination with the other limits on contributions, benefits,
and compensation that may be taken into account, serve to limit
the tax benefits associated with such plans. The level at which
to place such limits involves a balancing of different policy
objectives and a judgment as to what limits are most likely to
best further policy goals.
One of the factors that may influence the decision of an
employer, particularly a small employer, to adopt a plan is the
extent to which the owners of the business, the decision-
makers, or other highly compensated employees will benefit
under the plan. The Committee believes that increasing the
limits on deferrals will encourage employers to establish tax-
favored retirement plans for their employees.
The Committee understands that, in recent years, section
401(k) plans have become increasingly more prevalent. The
Committee believes it is important to increase the amount of
employee elective deferrals allowed under such plans, and other
plans that allow deferrals, to better enable plan participants
to save for their retirement.
Explanation of Provision
Beginning in 2001, the provision increases the dollar limit
on annual elective deferrals under section 401(k) plans,
section 403(b) annuities and salary reduction SEPs in $1,000
annual increments until the limits reach $15,000 in 2005.
Beginning in 2001, the provision increases the maximum annual
elective deferrals that may be made to a SIMPLE plan in $1,000
annual increments until the limit reaches $10,000 in 2004. The
$15,000 and $10,000 dollar limits are indexed in $500
increments, as under present law.
The provision increases the dollar limit on deferrals under
a section 457 plan to $9,000 in 2001, $10,000 in 2002, $11,000
in 2003, and $12,000 in 2004. After 2004, the limit is indexed
in $500 increments. The limit is twice the otherwise applicable
dollar limit in the three years prior to
retirement.12
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\12\ Another provision of the provision increases the 33\1/3\
percentage of compensation limit to 100 percent.
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Effective Date
The provision is effective for years beginning after
December 31, 2000, with a delayed effective date for plans
maintained pursuant to a collective bargaining agreement.
3. Plan loans for subchapter S shareholders, partners, and sole
proprietors (sec. 313 of the bill, sec. 4975 of the Code, and
secs. 407 and 408 of ERISA)
Present Law
The Internal Revenue Code prohibits certain transactions
(``prohibited transactions'') between a qualified plan and a
disqualified person in order to prevent persons with a close
relationship to the qualified plan from using that relationship
to the detriment of plan participants and beneficiaries.
13 Certain types of transactions are exempted from
the prohibited transaction rules, including loans from the plan
to plan participants, if certain requirements are satisfied. In
addition, the Department of Labor can grant an administrative
exemption from the prohibited transaction rules if she finds
the exemption is administratively feasible, in the interest of
the plan and plan participants and beneficiaries, and
protective of the rights of participants and beneficiaries of
the plan. Pursuant to this exemption process, the Secretary of
Labor grants exemptions both with respect to specific
transactions and classes of transactions.
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\13\ Title I of the Employee Retirement Income Security Act of
1974, as amended (``ERISA'') also contains prohibited transaction
rules. The Code and ERISA provisions are substantially similar,
although not identical.
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The statutory exemptions to the prohibited transaction
rules do not apply to certain transactions in which the plan
makes a loan to an owner-employee. 14 Loans to
participants other than owner-employees are permitted if loans
are available to all participants on a reasonably equivalent
basis, are not made available to highly compensated employees
in an amount greater than made available to other employees,
are made in accordance with specific provisions in the plan,
bear a reasonable rate of interest, and are adequately secured.
In addition, the Code places limits on the amount of loans and
repayment terms.
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\14\ Certain transactions involving a plan and Subchapter S
shareholders are permitted.
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For purposes of the prohibited transaction rules, an owner-
employee means (1) a sole proprietor, (2) a partner who owns
more than 10 percent of either the capital interest or the
profits interest in the partnership, (3) an employee or officer
of a Subchapter S corporation who owns more than the
corporation, and (4) the owner of an individual retirement
arrangement (``IRA''). The term owner-employee also includes
certain family members of an owner-employee and certain
corporations owned by an owner-employee.
Under the Internal Revenue Code, a two-tier excise tax is
imposed on disqualified persons who engage in a prohibited
transaction. The first level tax is equal to 15 percent of the
amount involved in the transaction. The second level tax is
imposed if the prohibited transaction is not corrected within a
certain period, and is equal to 100 percent of the amount
involved.
Reasons for Change
The Committee believes that the present-law prohibited
transaction rules regarding loans unfairly discriminate against
the owners of unincorporated businesses and subchapter S
corporations. For example, under present law, the sole
shareholder of a C corporation may take advantage of the
statutory exemption to the prohibited transaction rules for
loans, but an individual who does business as a sole proprietor
may not.
Explanation of Provision
The provision generally eliminates the special present-law
rules relating to plan loans made to an owner-employee. Thus,
the general statutory exemption applies to such transactions.
Present law applies with respect to IRAs.
Effective Date
The provision is effective with respect to loans entered
into after December 31, 2000.
4. Elective deferrals not taken into account for purposes of deduction
limits (sec. 314 of the bill and sec. 404 of the Code)
Present Law
Employer contributions to one or more qualified retirement
plans are deductible subject to certain limits. In general, the
deduction limit depends on the kind of plan.
In the case of a defined benefit pension plan or a money
purchase pension plan, the employer generally may deduct the
amount necessary to satisfy the minimum funding cost of the
plan for the year. If a defined benefit pension plan has more
than 100 participants, the maximum amount deductible is at
least equal to the plan's unfunded current liabilities.
In the case of a profit-sharing or stock bonus plan, the
employer generally may deduct an amount equal to 15 percent of
compensation of the employees covered by the plan for the year.
If an employer sponsors both a defined benefit pension plan
and a defined contribution plan that covers some of the same
employees (or a money purchase pension plan and another kind of
defined contribution plan), the total deduction for all plans
for a plan year generally is limited to the greater of (1) 25
percent of compensation or (2) the contribution necessary to
meet the minimum funding requirements of the defined benefit
pension plan for the year (or the amount of the plan's unfunded
current liabilities, in the case of a plan with more than 100
participants).
For purposes of the deduction limits, employee elective
deferral contributions to a section 401(k) plan are treated as
employer contributions and, thus, are subject to the generally
applicable deduction limits.
Subject to certain exceptions, nondeductible contributions
are subject to a 10-percent excise tax.
Reasons for Change
Subjecting elective deferrals to the normally applicable
deduction limits may cause employers to restrict the amount of
elective contributions an employee may make or to restrict
employer contributions to the plan, thereby reducing
participants' ultimate retirement benefits and their ability to
save adequately for retirement. The Committee believes that the
amount of elective deferrals otherwise allowable should not be
further limited through application of the deduction rules.
Explanation of Provision
Under the provision, elective deferral contributions are
not subject to the deduction limits, and the application of a
deduction limitation to any other employer contribution to a
qualified retirement plan does not take into account elective
deferral contributions.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
5. Reduce PBGC premiums for small and new plans (secs. 315-316 of the
bill and sec. 4006 of ERISA)
Present Law
Under present law, the Pension Benefit Guaranty Corporation
(``PBGC'') provides insurance protection for participants and
beneficiaries under certain defined benefit pension plans by
guaranteeing certain basic benefits under the plan in the event
the plan is terminated with insufficient assets to pay benefits
promised under the plan. The guaranteed benefits are funded in
part by premium payments from employers who sponsor defined
benefit plans. The amount of the required annual PBGC premium
for a single-employer plan is generally a flat rate premium of
$19 per participant and an additional variable rate premium
based on a charge of $9 per $1,000 of unfunded vested benefits.
Unfunded vested benefits under a plan generally means (1) the
unfunded current liability for vested benefits under the plan,
over (2) the value of the plan's assets, reduced by any credit
balance in the funding standard account. No variable rate
premium is imposed for a year if contributions to the plan were
at least equal to the full funding limit.
The PBGC guarantee is phased in ratably in the case of
plans that have been in effect for less than 5 years, and with
respect to benefit increases from a plan amendment that was in
effect for less than 5 years before termination of the plan.
Reasons for Change
The Committee believes that reducing the PBGC premiums for
new plans will help encourage the establishment of defined
benefit pension plans.
Explanation of Provision
Reduced flat-rate premiums for new plans of small employers
Under the provision, for the first five plan years of a new
single-employer plan of a small employer, the flat-rate PBGC
premium is $5 per plan participant.
A small employer is a contributing sponsor that, on the
first day of the plan year, has 100 or fewer employees. For
this purpose, all employees of the members of the controlled
group of the contributing sponsor are taken into account. In
the case of a plan to which more than one unrelated
contributing sponsor contributes, employees of all contributing
sponsors (and their controlled group members) are taken into
account in determining whether the plan is a plan of a small
employer.
A new plan means a defined benefit plan maintained by a
contributing sponsor if, during the 36-month period ending on
the date of adoption of the plan, such contributing sponsor (or
controlled group member or a predecessor of either) has not
established or maintained a plan subject to PBGC coverage with
respect to which benefits were accrued for substantially the
same employees as are in the new plan.
Reduced variable PBGC premium for new plans
The provision provides that the variable premium is phased
in for new defined benefit plans over a six-year period
starting with the plan's first plan year. The amount of the
variable premium is a percentage of the variable premium
otherwise due, as follows: 0 percent of the otherwise
applicable variable premium in the first plan year; 20 percent
in the second plan year; 40 percent in the third plan year; 60
percent in the fourth plan year; 80 percent in the fifth plan
year; and 100 percent in the sixth plan year (and thereafter).
A new defined benefit plan is defined as under the flat-
rate premium provision relating to new small employer plans.
Effective Date
The provision is effective for plans established after
December 31, 2000.
6. Eliminate IRS user fees for requests regarding new plans (sec. 317
of the bill)
Present Law
An employer that maintains a retirement plan for the
benefit of its employees may request from the Internal Revenue
Service (``IRS'') a determination as to whether the form of the
plan satisfies the requirements applicable to tax-qualified
plans (sec. 401(a)), as well as other rulings and opinions
concerning the plan. In order to obtain from the IRS a
determination letter on the qualified status of the plan, a
ruling or an opinion, the employer must pay a user fee. For
example, the user fee for a determination letter request may
range from $125 to $1,250, depending upon the scope of the
request and the type and format of the plan.15
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\15\ User fees are statutorily authorized; however, the IRS sets
the dollar amount of the fee applicable to any particular type of
request.
---------------------------------------------------------------------------
Reasons for Change
One of the factors affecting the decision of an employer to
adopt a plan is the level of administrative costs associated
with the plan. The Committee believes that reducing
administrative costs, such as IRS user fees, will help further
the establishment of qualified plans by employers.
Explanation of Provision
No user fee is required for any determination letter,
ruling, or opinion with respect to a new retirement plan. For
purposes of the provision, a new retirement plan is a plan
maintained by one or more employers that (1) have not made a
prior request for a determination letter, ruling, or opinion
with respect to the plan or any predecessor plan, and (2) have
not established or maintained a qualified plan with respect to
which contributions were made, or benefits accrued for service,
in the 3 most recent taxable years ending prior to the first
taxable year in which the request is made.
Effective Date
The provision is effective for requests made after December
31, 2000.
7. SAFE annuities and trusts (sec. 318 of the bill, new sec. 408B of
the Code, and secs. 101 and 4021 of ERISA)
Present Law
A small business may establish a simplified defined
contribution retirement plan called a savings incentive match
plan for employees (``SIMPLE'') retirement plan. An employer is
eligible to adopt a SIMPLE plan if the employer employs 100 or
fewer employees who received at least $5,000 in compensation
during the preceding year and does not maintain another
retirement plan.
A SIMPLE plan may be either an individual retirement
arrangement for each employee (``SIMPLE IRA'') or part of a
qualified cash or deferred arrangement (a ``SIMPLE 401(k)''). A
SIMPLE IRA is not subject to the nondiscrimination rules or
top-heavy rules generally applicable to qualified plans.
Similarly, a SIMPLE 401(k) is deemed to satisfy the special
nondiscrimination tests applicable to 401(k) plans and is not
subject to the top-heavy rules. The other qualified plan rules
apply to a SIMPLE 401(k), however.
SIMPLE plans are subject to special contribution rules.
Employees may elect during the 60-day period preceding a plan
year to make elective contributions under a SIMPLE plan of up
to $6,000 during the plan year. The $6,000 dollar limit is
adjusted for cost-of-living increases in $500 increments.
An employer that maintains a SIMPLE plan generally is
required to match each employee's elective contributions on a
dollar-for-dollar basis up to 3 percent of the employee's
compensation. As an alternative to a matching contribution for
any year, an employer may make a nonelective contribution on
behalf of each eligible employee equal to 2 percent of the
employee's compensation.
Under a SIMPLE IRA, the compensation limit does not apply
for purposes of the required employer matching contribution. If
the employer satisfies the contribution requirement by making a
nonelective contribution, however, the amount of compensation
taken into account for each participant to determine the amount
of the required employer contribution may not exceed the
compensation limit.
Under a SIMPLE 401(k), the compensation limit applies for
purposes of the matching contribution as well as the
nonelective contribution.
No contributions other than employee elective contributions
and required employer contributions may be made to a SIMPLE
plan. All contributions under a SIMPLE plan must be fully
vested.
Present law does not provide for a simplified defined
benefit plan similar to the SIMPLE plan.
Reasons for Change
The Committee believes that the availability of a
simplified defined benefit arrangement that does not involve
many of the administrative burdens of the present-law qualified
plan rules applicable to defined benefit plans will encourage
the adoption of defined benefit arrangements by small
businesses, thereby leading to increased pension coverage for
employees of such businesses.
Explanation of Provision
A small business may establish a simplified retirement plan
called the secure assets for employees (``SAFE'') plan. The
SAFE plan combines the features of a defined benefit plan and a
defined contribution plan.
Employer and employee eligibility and vesting
An employer is eligible to adopt a SAFE plan if the
employer employs 100 or fewer employees who received at least
$5,000 in compensation during the preceding year and does not
maintain another retirement plan other than a plan that
provides only for elective deferrals or matching contributions,
an eligible deferred compensation plan of a tax-exempt
organization or a State or local government (``section 457
plan''), or a collectively bargained plan.
Each employee whose compensation was at least $5,000 in any
2 preceding consecutive years and in the current year generally
is eligible to participate. All benefits under a SAFE plan are
fully vested at all times.
Benefits and funding
A SAFE plan provides a fully funded minimum defined
benefit. For each year of participation, a participant
generally accrues a minimum annual benefit at retirement equal
to 3 percent of the participant's compensation for the year.
The employer may elect to provide a benefit of 2 percent, 1
percent, or 0 percent of compensation for any year for all
participants if the employer notifies the participants of such
lower percentage within a reasonable period before the
beginning of the year. Benefits under a SAFE plan are subject
to the annual limitation on compensation that may be taken into
account under a qualified plan ($160,000 in 1999).
An employer may count up to 10 years of service performed
by a participant before the adoption of a SAFE plan (``prior
service year'') if the same number of prior service years is
available to all employees eligible to participate in the SAFE
plan for the first plan year. Prior service years is taken into
account by doubling the amount of the contribution the employer
would otherwise make for each participant with prior service
years, beginning with the first year the SAFE plan is in
effect. A participant's prior service years do not include any
years in which a participant was an active participant in any
defined benefit plan maintained by the employer or received
less than $5,000 in compensation from the employer.
Each year the employer is required to contribute to the
SAFE plan on behalf of each participant an amount sufficient to
provide the annual benefit accrued for the year payable at age
65, using specified actuarial assumptions (including an
interest rate not less than 3 percent and not greater than 5
percent per year). A SAFE plan may be funded either through an
individual retirement annuity for each employee (``SAFE
Annuity'') or through a trust (a ``SAFE Trust'').
Under a SAFE Trust, each participant has an account to
which actual investment returns are credited. If a
participant's account balance is less than the total of past
employer contributions credited with a specified interest rate
(not less than 3 percent and not greater than 5 percent per
year), the employer is required to make up the shortfall. If
the investment returns in a participant's account exceed the
specified interest rate, the participant is entitled to the
larger account balance. Permissible investments of a SAFE Trust
are securities that are readily tradable on an established
securities market and insurance company products that are
regulated by State law.
Under a SAFE Annuity, each year the employer is required to
contribute the amount necessary to purchase an annuity that
provides the benefit accrual for the year.
The required contributions to a SAFE plan are deductible
under the rules applicable to qualified defined benefit plans.
An excise tax applies if the employer fails to make the
required contribution for the year.
Benefits under a SAFE plan are not guaranteed by the
Pension Benefit Guaranty Corporation.
Distributions
A SAFE plan may provide for distributions at any time.
Distributions from a SAFE plan are subject to tax under the
present-law rules applicable to distributions from qualified
plans,except that a distribution prior to the participant's
attainment of age 59\1/2\ generally are subject to an additional tax
equal to 20 percent of the amount distributed.
A SAFE plan must provide for payment of benefits in the
form of a single life annuity payable at age 65 or any
actuarially equivalent form of benefit. A SAFE plan is not
subject to the joint and survivor annuity requirements
applicable to other defined benefit pension plans.
Nondiscrimination requirements and other rules
A SAFE plan is not subject to the nondiscrimination rules,
the top-heavy plan rules, or the limitations on benefits or
contributions applicable to qualified retirement plans.
Simplified reporting and disclosure requirements apply to SAFE
plans.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
8. Modification of top-heavy rules (sec. 319 of the bill and sec. 416
of the Code)
Present Law
In general
Under present law, additional qualification requirements
apply to plans that primarily benefit an employer's key
employees (``top-heavy plans''). These additional requirements
provide (1) more rapid vesting for plan participants who are
non-key employers and (2) minimum nonintegrated employer
contributions or benefits for plan participants who are non-key
employees.
Definition of top-heavy plan
In general, a top-heavy plan is a plan under which more
than 60 percent of the contributions or benefits are provided
to key employees. More precisely, a defined benefit plan is a
top-heavy plan if more than 60 percent of the cumulative
accrued benefits under the plan are for key employees. A
defined contribution plan is top heavy if the sum of the
account balances of key employees is more than 60 percent of
the total account balances under the plan. For each plan year,
the determination of top-heavy status generally is made as of
the last day of the preceding plan year (``the determination
date'').
For purposes of determining whether a plan is a top-heavy
plan, benefits derived both from employer and employee
contributions, including employee elective contributions, are
taken into account. In addition, the accrued benefit of a
participant in a defined benefit plan and the account balance
of a participant in a defined contribution plan includes any
amount distributed within the 5-year period ending on the
determination date.
An individual's accrued benefit or account balance is not
taken into account in determining whether a plan is top-heavy
if the individual has not performed services for the employer
during the 5-year period ending on the determination date.
In some cases, two or more plans of a single employer must
be aggregated for purposes of determining whether the group of
plans is top-heavy. The following plans must be aggregated: (1)
plans which cover a key employee (including collectively
bargained plans); and (2) any plan upon which a plan covering a
key employee depends for purposes of satisfying the Code's
nondiscrimination rules. The employer may be required to
include terminated plans in the required aggregation group. In
some circumstances, an employer may elect to aggregate plans
for purposes of determining whether they are top heavy.
SIMPLE plans are not subject to the top-heavy rules.
Definition of key employee
A key employee is an employee who, during the plan year
that ends on the determination date or any of the 4 preceding
plan years, is (1) an officer earning over one-half of the
defined benefit plan dollar limitation of section 415 ($65,000
for 1999), (2) a 5-percent owner of the employer, (3) a 1-
percent owner of the employer earning over $150,000, or (4) one
of the 10 employees earning more than the defined contribution
plan dollar limit ($30,000 for 1999) with the largest ownership
interests in the employer. A family ownership attribution rule
applies to the determination of 1-percent owner status, 5-
percent owner status, and largest ownership interests. Under
this attribution rule, an individual is treated as owning stock
owned by the individual's spouse, children, grandchildren, or
parents.
Minimum benefit for non-key employees
A minimum benefit generally must be provided to all non-key
employees in a top-heavy plan. In general, a top-heavy defined
benefit plan must provide a minimum benefit equal to the lesser
of (1) 2 percent of compensation multiplied by the employee's
years of service, or (2) 20 percent of compensation. A top-
heavy defined contribution plan must provide a minimum annual
contribution equal to the lesser of (1) 3 percent of
compensation, or (2) the percentage of compensation at which
contributions were made for key employees (including employee
elective contributions made by key employees and employer
matching contributions).
For purposes of the minimum benefit rules, only benefits
derived from employer contributions (other than amounts
employees have elected to defer) to the plan are taken into
account, and an employee's social security benefits are
disregarded (i.e., the minimum benefit is nonintegrated).
Employer matching contributions may be used to satisfy the
minimum contribution requirement; however, in such a case the
contributions are not treated as matching contributions for
purposes of applying the special nondiscrimination requirements
applicable to employee elective contributions and matching
contributions under sections 401(k) and (m). Thus, such
contributions would have to meet the general nondiscrimination
test of section401(a)(4).16
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\16\ Tres. Reg. sec. 1.416-1 Q&A M-19.
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Top-heavy vesting
Benefits under a top-heavy plan must vest at least as
rapidly as under one of the following schedules: (1) 3-year
cliff vesting, which provides for 100 percent vesting after 3
years of service; and (2)
2-6 year graduated vesting, which provides for 20 percent
vesting after 2 years of service, and 20 percent more each year
thereafter so that a participant is fully vested after 6 years
of service.17
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\17\ Benefits under a plan that is not top heavy must vest at least
as rapidly as under one of the following schedules: (1) 5-year cliff
vesting; and (2) 3-7 year graded vesting, which provides for 20 percent
vesting after 3 years and 20 percent more each year thereafter so that
a participant is fully vested after 7 years of service.
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Qualified cash or deferred arrangements
Under a qualified cash or deferred arrangement (a ``section
401(k) plan''), an employee may elect to have the employer make
payments as contributions to a qualified plan on behalf of the
employee, or to the employee directly in cash. Contributions
made at the election of the employee are called elective
deferrals. A special nondiscrimination test applies to elective
deferrals under cash or deferred arrangements, which compares
the elective deferrals of highly compensated employees with
elective deferrals of nonhighly compensated employees. (This
test is called the actual deferral percentage test or the
``ADP'' test). Employer matching contributions under qualified
defined contribution plans are also subject to a similar
nondiscrimination test. (This test is called the actual
contribution percentage test or the ``ACP'' test.)
Under a design-based safe harbor, a cash or deferred
arrangement is deemed to satisfy the ADP test if the plan
satisfies one of two contribution requirements and satisfies a
notice requirement. A plan satisfies the contribution
requirement under the safe harbor rule for qualified cash or
deferred arrangements if the employer either (1) satisfies a
matching contribution requirement or (2) makes a nonelective
contribution to a defined contribution plan of at least 3
percent of an employee's compensation on behalf of each
nonhighly compensated employee who is eligible to participate
in the arrangement without regard to the permitted disparity
rules (sec. 401(1)). A plan satisfies the matching contribution
requirement if, under the arrangement: (1) the employer makes a
matching contribution on behalf of each nonhighly compensated
employee that is equal to (a) 100 percent of the employee's
elective deferrals up to 3 percent of compensation and (b) 50
percent of the employee's elective deferrals from 3 to 5
percent of compensation; and (2), the rate of match with
respect to any elective contribution for highly compensated
employees is not greater than the rate of match for nonhighly
compensated employees. Matching contributions that satisfy the
design-based safe harbor for cash or deferred arrangements are
deemed to satisfy the ACP test. Certain additional matching
contributions are also deemed to satisfy the ACP test.
Reasons for Change
The top-heavy rules primarily affect the plans of small
employers. While the top-heavy rules were intended to provide
additional minimum benefits to rank-and-file employees, the
Committee is concerned that in some cases the top-heavy rules
may act as a deterrent to the establishment of a plan by a
small employer. The Committee believes that simplification of
the top-heavy rules will help alleviate the additional
administrative burdens the rules place on small employers. The
Committee also believes that, in applying the top-heavy minimum
benefit rules, the employer should receive credit for all
contributions the employer makes, including matching
contributions.
The Committee understands that some employers may have been
discouraged from adopting a safe harbor section 401(k) plan due
to concerns about the top-heavy rules. The Committee believes
that facilitating the adoption of such plans will broaden
coverage. Thus, the Committee believes it appropriate to
provide that such plans are not subject to the top-heavy rules.
Explanation of Provision
Definition of top-heavy plan
The provision provides that a plan consisting of a cash-or-
deferred arrangement that satisfies the design-based safe
harbor for such plans and matching contributions that satisfy
the safe harbor rule for such contributions is not a top-heavy
plan. Matching or nonelective contributions provided under such
a plan may be taken into account in satisfying the minimum
contribution requirements applicable to top-heavy
plans.18
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\18\ This provision is not intended to preclude the use of
nonelective contributions that are used to satisfy the safe harbor
rules from being used to satisfy other qualified retirement plan
nondiscrimination rules, including those involving cross-testing.
---------------------------------------------------------------------------
Definition of key employee
The family ownership attribution rule would no longer apply
in determining whether an individual is a 5-percent owner of
the employer.
Minimum benefit for non-key employees
Under the provision, matching contributions are taken into
account in determiningwhether the minimum benefit requirement
has been satisfied.19
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\19\ Thus, this provision overrides the provision in Treasury
regulations that, if matching contributions are used to satisfy the
minimum benefit requirement, then they are not treated as matching
contributions for purposes of the section 401(m) nondiscrimination
rules.
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Effective Date
The provision is effective for years beginning after
December 31, 2000.
C. Enhancing Fairness for Women
1. Additional catch-up contributions (sec. 321 of the bill and secs.
402(g), 408(p), and 457 of the Code)
Present Law 20
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\20\ The various dollar limits on contributions described below
increases under other provisions in the provision.
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Elective deferral limitations
Under present law, under certain salary reduction
arrangements, an employee may elect to have the employer make
payments as contributions to a plan on behalf of the employee,
or to the employee directly in cash. Contributions made at the
election of the employee are called elective deferrals.
The maximum annual amount of elective deferrals that an
individual may make to a qualified cash or deferred arrangement
(a ``401(k) plan''), a tax-sheltered annuity (``section 403(b)
annuity'') or a salary reduction simplified employee pension
plan (``SEP'') is $10,000 (for 1999). The maximum annual amount
of elective deferrals that an individual may make to a SIMPLE
plan is $6,000. These limits are indexed for inflation in $500
increments.
Section 457 plans
The maximum annual deferral under a deferred compensation
plan of a State or local government or a tax-exempt
organization (a ``section 457 plan'') is the lesser of (1)
$8,000 (for 1999) or (2) 33\1/3\ percent of compensation. The
$8,000 dollar limit is increased for inflation in $500
increments. Under a special catch-up rule, the section 457 plan
may provide that, for one or more of the participant's last 3
years before retirement, the otherwise applicable limit is
increased to the lesser of (1) $15,000 or (2) the sum of the
otherwise applicable limit for the year plus the amount by
which the limit applicable in preceding years of participation
exceeded the deferrals for that year.
IRAs 21
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\21\ For a more detailed description of the contribution limits for
IRAs, see the discussion of present law in part III.A., above.
---------------------------------------------------------------------------
Under present law, individuals may make contributions
annually of up to $2,000 to a traditional IRA or a Roth IRA.
The maximum deductible contribution to a traditional IRA is
phased out for active participants in an employer-sponsored
retirement plan with adjusted gross income above certain
levels. The ability to make contributions to a Roth IRA is also
phased out above certain income levels.
Reasons for Change
Although the Committee believes that individuals should be
saving for retirement throughout their working lives, as a
practical matter, many individuals simply do not focus on the
amount of retirement savings they need until they near
retirement. In addition, many individuals may have difficulty
saving more in earlier years, e.g., because an employee leaves
the workplace to care for a family. Some individuals may have a
greater ability to save as they near retirement.
The Committee believes that the pension laws should assist
individuals who are nearing retirement to save more for their
retirement.
Explanation of Provision
The provision provides that individuals who have attained
age 50 may make additional catch-up elective contributions to
employer-sponsored retirement plans and additional catch-up IRA
contributions.
In the case of employer-sponsored retirement plans, the
provision applies to elective deferrals under a section 401(k)
plan, section 403(b) annuity, SIMPLE, or section 457 plan.
Additional contributions may be made by an individual who has
attained age 50 before the end of the plan year and with
respect to whom no other elective deferrals may otherwise be
made to the plan for the year because of the application of any
limitation of the Code (e.g., the annual limit on elective
deferrals) or of the plan. Under the provision, the additional
amount of elective contributions that may be made by an
eligible individual participating in such a plan is the lesser
of (1) the applicable percent of the maximum dollar amount of
elective deferrals otherwise excludable from the gross income
of the participant for the year (under sec. 402(g)) or (2) the
participant's compensation for the year reduced by any other
elective deferrals of the participant for the
year.22 The applicable percent is 10 percent in
2001, and increases by 10 percentage points until the
applicable percent is 50 in 2005 and thereafter. The following
examples illustrate the application of the provision, after the
catch-up is fully phased in.
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\22\ In the case of section 457 plans, this catch-up rule does not
apply during the participant's last 3 years before retirement (in those
years, the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
Example 1: Employee A is a highly compensated
employee who is over 50 and who participates in a
section 401(k) plan sponsored by A's employer. The
maximum annual deferral limit (without regard to the
provision) is $10,000. After application of the special
nondiscrimination rules applicable to section 401(k)
plans, the maximum elective deferral A may make for the
year is $8,000. Under the provision, A is able to make
additional catch-up salary reduction contributions of
$5,000.
Example 2: Employee B, who is over 50, is a
participant in a section 401(k) plan. B's compensation
for the year is $30,000. The maximum annual deferral
limit (without regard to the provision) is $10,000.
Under the terms of the plan, the maximum permitted
deferral is 10 percent of compensation or, in B's case,
$3,000. Under the provision, B can contribute up to
$8,000 for the year ($3,000 under the normal operation
of the plan, and an additional $5,000 under the
provision).
Catch-up contributions made under the provision are not be
subject to any other contribution limits and are not taken into
account in applying other contribution limits. In addition,
such contributions are not subject to applicable
nondiscrimination rules.23
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\23\ Another provision in the bill provides that elective
contributions are deductible without regard to the otherwise applicable
deduction limits.
---------------------------------------------------------------------------
An employer may make matching contributions with respect to
catch-up contributions. Any such matching contributions are
subject to the normally applicable rules.
In the case of IRAs, the otherwise maximum contribution
limit (before application of the AGI phase-out limits) for an
individual who has attained age 50 before the end of the
taxable year is increased by 50 percent.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
2. Equitable treatment for contributions of employees to defined
contribution plans (sec. 322 of the bill and secs. 403(b), 415,
and 457 of the Code)
Present Law
Present law imposes limits on the contributions that may be
made to tax-favored retirement plans.
Defined contribution plans
In the case of a tax-qualified defined contribution plan,
the limit on annual additions that can be made to the plan on
behalf of an employee is the lesser of $30,000 (for 1999) or 25
percent of the employee's compensation (sec. 415(c)). Annual
additions include employer contributions, including
contributions made at the election of the employee (i.e.,
employee elective deferrals), after-tax employee contributions,
and any forfeitures allocated to the employee. For this
purpose, compensation means taxable compensation of the
employee, plus elective deferrals, and similar salary reduction
contributions.
Tax-sheltered annuities
In the case of a tax-sheltered annuity (a ``section 403(b)
annuity''), the annual contribution generally cannot exceed the
lesser of the exclusion allowance or the section 415(c) defined
contribution limit. The exclusion allowance for a year is equal
to 20 percent of the employee's includible compensation,
multiplied by the employee's years of service, minus excludable
contributions for prior years under qualified plans, tax-
sheltered annuities or section 457 plans of the employer.
In addition to this general rule, employees of nonprofit
educational institutions, hospitals, home health service
agencies, health and welfare service agencies, and churches may
elect application of one of several special rules that increase
the amount of the otherwise permitted contributions. The
election of a special rule is irrevocable; an employee may not
elect to have more than one special rule apply.
Under one special rule, in the year the employee separates
from service, the employee may elect to contribute up to the
exclusion allowance, without regard to the 25 percent of
compensation limit under section 415. Under this rule, the
exclusion allowance is determined by taking into account no
more than 10 years of service.
Under a second special rule, the employee may contribute up
to the lesser of: (1) the exclusion allowance; (2) 25 percent
of the participant's includible compensation; or (3) $15,000.
Under a third special rule, the employee may elect to
contribute up to the section 415(c) limit, without regard to
the exclusion allowance. If this option is elected, then
contributions to other plans of the employer are also taken
into account in applying the limit.
For purposes of determining the contribution limits
applicable to section 403(b) annuities, includible compensation
means the amount of compensation received from the employer for
the most recent period which may be counted as a year of
service under the exclusion allowance. In addition, includible
compensation includes elective deferrals and similar salary
reduction amounts.
Section 457 plans
Compensation deferred under an eligible deferred
compensation plan of a tax-exempt or State and local
governmental employer (a ``section 457 plan'') is not
includible in gross income until paid or made available. In
general, the maximum permitted annual deferral under such a
plan is the lesser of (1) $8,000 (in 1999) or (2) 33\1/3\
percent of compensation. The $8,000 limit is increased for
inflation in $500 increments.
Reasons for Change
The present-law rules that limit contributions to defined
contribution plans by a percentage of compensation reduce the
amount that non-highly paid workers can save for retirement.
The present-law limits may not allow such workers to accumulate
adequate retirement benefits, particularly if a defined
contribution plan is the only type of retirement plan
maintained by the employer.
Conforming the contribution limits for tax-sheltered
annuities to the limits applicable to retirement plans will
simplify the administration of the pension laws, and provide
more equitable treatment for participants in similar types of
plans.
Explanation of Provision
Increase in defined contribution plan limit
The provision increases the 25 percent of compensation
limitation on annual additions under a defined contribution
plan to 100 percent.
Conforming limits on tax-sheltered annuities
The provision repeals the exclusion allowance applicable to
contributions to tax-sheltered annuities. Thus, such annuities
are subject to the limits applicable to tax-qualified plans.
Section 457 plans
The provision increases the 33\1/3\ percent of compensation
limitation on deferrals under a section 457 plan to 100 percent
of compensation.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
3. Clarification of tax treatment of division of section 457 plan
benefits upon divorce (sec. 323 of the bill and secs. 414(p)
and 457 of the Code)
Present Law
Under present law, benefits provided under a qualified
retirement plan for a participant may not be assigned or
alienated to creditors of the participant, except in very
limited circumstances. One exception to the prohibition on
assignment or alienation rule is a qualified domestic relations
order (``QDRO''). A QDRO is a domestic relations order that
creates or recognizes a right of an alternate payee to any plan
benefit payable with respect to a participant, and that meets
certain procedural requirements.
Under present law, amounts distributed from a qualified
plan generally are taxable to the participant in the year of
distribution. However, if amounts are distributed to the spouse
(or former spouse) of the participant by reason of a QDRO, the
benefits are taxable to the spouse (or former spouse). Amounts
distributed pursuant to a QDRO to an alternate payee other than
the spouse (or former spouse) are taxable to the plan
participant.
Section 457 of the Internal Revenue Code provides rules for
deferral of compensation by an individual participating in an
eligible deferred compensation plan (``section 457 plan'') of a
tax-exempt or State and local government employer. The QDRO
rules do not apply to section 457 plans.
Reasons for Change
The Committee believes that the rules regarding qualified
domestic relations orders should apply to all types of
employer-sponsored retirement plans.
Explanation of Provision
The provision applies the taxation rules for qualified plan
distributions pursuant to a QDRO to distributions made pursuant
to a domestic relations order from a section 457 plan. In
addition, a section 457 plan is not treated as violating the
restrictions on distributions from such plans due to payments
to an alternate payee under a QDRO.
Effective Date
The provision is effective for transfers, distributions and
payments made after December 31, 2000.
4. Modification of safe harbor relief for hardship withdrawals from
401(k) plans (sec. 324 of the bill)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (a ``section 401(k) plan'') may not be
distributable prior to the occurrence of one or more specified
events. One event upon which distribution is permitted is the
financial hardship of the employee. Applicable Treasury
regulations 24 provide that a distribution is made
on account of hardship only if the distribution is made on
account of an immediate and heavy financial need of the
employee and is necessary to satisfy the heavy need.
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\24\ Treas. Reg. sec. 1.401(k)-1.
---------------------------------------------------------------------------
The Treasury regulations provide a safe harbor under which
a distribution may be deemed necessary to satisfy an immediate
and heavy financial need. One requirement of this safe harbor
is that the employee be prohibited from making elective
contributions and employee contributions to the plan and all
other plans maintained by the employer for at least 12 months
after receipt of the hardship distribution.
Reasons for Change
Although the Committee believes that it is appropriate to
restrict the circumstances in which an in-service distribution
from a 401(k) plan is permitted and to encourage participants
to take such distributions only when necessary to satisfy an
immediate and heavy financial need, the Committee is concerned
about the impact that a 12-month suspension of contributions
may have on the retirement savings of a participant who
experiences a hardship. The Committee believes that the
combination of a 6-month contribution suspension and the other
elements of the regulatory safe harbor will provide an adequate
incentive for a participant to seek sources of funds other than
his or her 401(k) plan account balance in order to satisfy
financial hardships.
Explanation of Provision
The Secretary of the Treasury is directed to revise the
applicable regulations to reduce from 12 months to 6 months the
period during which an employee must be prohibited from making
elective contributions and employee contributions in order for
a distribution to be deemed necessary to satisfy an immediate
and heavy financial need.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
5. Faster vesting of employer matching contributions (sec. 325 of the
bill and sec. 411 of the Code)
Present Law
Under present law, a plan is not a qualified plan unless a
participant's employer-provided benefit vests at least as
rapidly as under one of two alternative minimum vesting
schedules. A plan satisfies the first schedule if a participant
acquires a nonforfeitable right to 100 percent of the
participant's accrued benefit derived from employer
contributions upon the completion of 5 years of service. A plan
satisfies the second schedule if a participant has a
nonforfeitable right to at least 20 percent of the
participant's accrued benefit derived from employer
contributions after 3 years of service, 40 percent after 4
years of service, 60 percent after 5 years of service, 80
percent after 6 years of service, and 100 percent after 7 years
of service.25
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\25\ The minimum vesting requirements are also contained in Title I
of the Employee Retirement Income Security Act of 1974, as amended
(``ERISA'').
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Reasons for Change
The Committee understands that many employees, particularly
lower- and middle-income employees, do not take full advantage
of the retirement savings opportunities provided by their
employer's section 401(k) plan. The Committee believes that
providing faster vesting for matching contributions will make
section 401(k) plans more attractive for employees,
particularly lower- and middle-income employees, and will
encourage employees to save morefor their own retirement. In
addition, faster vesting for matching contributions will enable short-
service employees to accumulate greater retirement savings.
Explanation of Provision
The provision applies faster vesting schedules to employer
matching contributions. Under the provision, employer matching
contributions have to vest at least as rapidly as under one of
the following two alternative minimum vesting schedules. A plan
satisfies the first schedule if a participant acquires a
nonforfeitable right to 100 percent of employer matching
contributions upon the completion of 3 years of service. A plan
satisfies the second schedule if a participant has a
nonforfeitable right to 20 percent of employer matching
contributions for each year of service beginning with the
participant's second year of service and ending with 100
percent after 6 years of service.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000, with a delayed effective date for plans
maintained pursuant to a collective bargaining agreement. The
provision does not apply to any employee until the employee has
an hour of service after the effective date. In applying the
new vesting schedule, service before the effective date is
taken into account.
D. Increasing Portability for Participants
1. Rollovers of retirement plan and IRA distributions (secs. 331-333
and 339 of the bill and secs. 401, 402, 403(b), 408, 457, and
3405 of the Code)
Present Law
In general
Present law permits the rollover of funds from a tax-
favored retirement plan to another tax-favored retirement plan.
The rules that apply depend on the type of plan involved.
Similarly, the rules regarding the tax treatment of amounts
that are not rolled over depend on the type of plan involved.
Distributions from qualified plans
Under present law, an ``eligible rollover distribution''
from a tax-qualified employer-sponsored retirement plan may be
rolled over tax free to a traditional individual retirement
arrangement (``IRA'') 26 or another qualified
plan.27 An ``eligible rollover distribution'' means
any distribution to an employee of all or any portion of the
balance to the credit of the employee in a qualified plan,
except the term does not include (1) any distribution which is
one of a series of substantially equal periodic payments made
(a) for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and
the employee's designated beneficiary, or (b) for a specified
period of 10 years or more, (2) any distribution to the extent
such distribution is required under the minimum distribution
rules, and (3) certain hardship distributions. The maximum
amount that can be rolled over is the amount of the
distribution includible in income, i.e., after-tax employee
contributions cannot be rolled over. Qualified plans are not
required to accept rollovers.
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\26\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or
SIMPLE IRAs. All references to IRAs refers only to traditional IRAs.
\27\ An eligible rollover distribution may either be rolled over by
the distributee within 60 days of the date of the distribution or, as
described below, directly rolled over by the distributing plan.
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Distributions from tax-sheltered annuities
Eligible rollover distributions from a tax-sheltered
annuity (``section 403(b) annuity'') may be rolled over into an
IRA or another section 403(b) annuity. Distributions from a
section 403(b) annuity cannot be rolled over into a tax-
qualified plan. Section 403(b) annuities are not required to
accept rollovers.
IRA distributions
Distributions from a traditional IRA, other than minimum
required distributions, can be rolled over into another IRA. In
general, distributions from an IRA cannot be rolled over into a
qualified plan or section 403(b) annuity. An exception to this
rule applies in the case of so-called ``conduit IRAs.'' Under
the conduit IRA rule, amounts can be rolled from a qualified
plan into an IRA and then subsequently rolled back to another
qualified plan if the amounts in the IRA are attributable
solely to rollovers from a qualified plan. Similarly, an amount
may be rolled over from a section 403(b) annuity to an IRA and
subsequently rolled back into a section 403(b) annuity if the
amounts in the IRA are attributable solely to rollovers from a
section 403(b) annuity.
Distributions from section 457 plans
A ``section 457 plan'' is an eligible deferred compensation
plan of a State or local government or tax-exempt employer that
meets certain requirements. In some cases, different rules
apply under section 457 to governmental plans and plans of tax-
exempt employers. For example, governmental section 457 plans
are like qualified plans in that plan assets are required to be
held in a trust for the exclusive benefit of plan participants
and beneficiaries. In contrast, benefits under a section 457
plan of a tax-exempt employer are unfunded, like nonqualified
deferred compensation plans of private employers.
Section 457 benefits can be transferred to another section
457 plan. Distributions from a section 457 plan cannot be
rolled over to another section 457 plan, a qualified plan, a
section 403(b) annuity, or an IRA.
Rollovers by surviving spouses
A surviving spouse that receives an eligible rollover
distribution may roll over the distribution into an IRA, but
not a qualified plan or section 403(b) annuity.
Direct rollovers and withholding requirements
Qualified plans and section 403(b) annuities are required
to provide that a plan participant has the right to elect that
an eligible rollover distribution be directly rolled over to
another eligible retirement plan. If the plan participant does
not elect the direct rollover option, then withholding is
required on the distribution at a 20-percent rate.
Notice of eligible rollover distribution
The plan administrator of a qualified plan or a section
403(b) annuity is required to provide a written explanation of
rollover rules to individuals who receive a distribution
eligible for rollover. In general, the notice is to be provided
within a reasonable period of time before making the
distribution and is to include an explanation of (1) the
provisions under which the individual may have the distribution
directly rolled over to another eligible retirement plan, (2)
the provision that requires withholding if the distribution is
not directly rolled over, (3) the provision under which the
distribution may be rolled over within 60 days of receipt, and
(4) if applicable, certain other rules that may apply to the
distribution. The Treasury Department has provided more
specific guidance regarding timing and content of the notice.
Taxation of distributions
As is the case with the rollover rules, different rules
regarding taxation of benefits apply to different types of tax-
favored arrangements. In general, distributions from a
qualified plan, section 403(b) annuity, or IRA are includible
in income in the year received. In certain cases, distributions
from qualified plans are eligible for capital gains treatment
and averaging. These rules do not apply to distributions from
another type of plan. Distributions from a qualified plan, IRA,
and section 403(b) annuity generally are subject to an
additional 10-percent early withdrawal tax if made before age
59\1/2\. There are a number of exceptions to the early
withdrawal tax. Some of the exceptions apply to all three types
of plans, and others apply only to certain types of plans. For
example, the 10-percent early withdrawal tax does not apply to
IRA distributions for educational expenses, but does apply to
similar distributions from qualified plans and section 403(b)
annuities. Benefits under a section 457 plan are generally
includible in income when paid or made available. The 10-
percent early withdrawal tax does not apply to section 457
plans.
Reasons for Change
Present law encourages individuals who receive
distributions from qualified plans and similar arrangements to
save those distributions for retirement by facilitating tax-
free rollovers to an IRA or another qualified plan. The
Committee believes that expanding the rollover options for
individuals in employer-sponsored retirement plans and owners
of IRAs will provide further incentives for individuals to
continue to accumulate funds for retirement. The Committee
believes it appropriate to extend the same rollover rules to
governmental section 457 plans; like qualified plans, such
plans are required to hold plan assets in trust for employees.
Explanation of Provision
In general
The provision provides that eligible rollover distributions
from qualified retirement plans, section 403(b) annuities, and
governmental section 457 plans generally could be rolled over
to any of such plans or arrangements. 28 Similarly,
distributions from an IRA generally may be rolled over into a
qualified plan, section 403(b) annuity, or governmental section
457 plan. The direct rollover and withholding rules are
extended to distributions from a governmental section 457 plan,
and such plans are required to provide the written notification
regarding eligible rollover distributions. The rollover notice
(with respect to all plans) is required to include a
description of the provisions under which distributions from
the plan to which the distribution is rolled over may be
subject to restrictions and tax consequences different than
those applicable to distributions from the distributing plan.
Qualified plans, section 403(b) annuities, and section 457
plans are not required to accept rollovers.
---------------------------------------------------------------------------
\28\ Hardship distributions from governmental section 457 plans
would be considered eligible rollover distributions.
---------------------------------------------------------------------------
Some special rules apply in certain cases. A distribution
from a qualified plan is not eligible for capital gains or
averaging treatment if there was a rollover to the plan that
would not have been permitted under present law. Thus, in order
to preserve capital gains and averaging treatment for a
qualified plan distribution that is rolled over, the rollover
has to be made to a ``conduit IRA'' as under present law, and
then rolled back into a qualified plan. Amounts distributed
from a section 457 plan are subject to the early withdrawal tax
to the extent the distribution consists of amounts attributable
to rollovers from another type of plan. Section 457 plans are
required to separately account for such amounts.
The provision also provides that benefits in governmental
section 457 plans are includible in income when paid.
Rollover of after-tax contributions
The provision provides that employee after-tax
contributions may be rolled over into another qualified plan or
a traditional IRA. In the case of a rollover from a qualified
plan to another qualified plan, the rollover may be
accomplished only through a direct rollover. In addition, a
qualified plan may not accept rollovers of after-tax
contributions unless the plan provides separate accounting for
such contributions (and earnings thereon). After-tax
contributions (including nondeductible contributions to an IRA)
may not be rolled over from an IRA into a qualified plan, tax-
sheltered annuity, or section 457 plan.
In the case of a distribution from a traditional IRA that
is rolled over into an eligible rollover plan that is not an
IRA, the distribution is attributed first to amounts other than
after-tax contributions.
Expansion of spousal rollovers
The provision provides that surviving spouses may roll over
distributions to a qualified plan, section 403(b) annuity, or
governmental section 457 plan in which the spouse participates.
Treasury regulations
The Secretary is directed to prescribe rules necessary to
carry out the provisions. Such rules may include, for example,
reporting requirements and mechanisms to address mistakes
relating to rollovers. It is anticipated that the IRS will
develop forms to assist individuals who roll over after-tax
contributions to an IRA in keeping track of such contributions.
Such formscould, for example, expand Form 8606--Nondeductible
IRAs, to include information regarding after-tax contributions.
Effective Date
The provision is effective for distributions made after
December 31, 2000.
2. Waiver of 60-day rule (sec. 334 of the bill and secs. 402 and 408 of
the Code)
Present Law
Under present law, amounts received from an IRA or
qualified plan may be rolled over tax free if the rollover is
made within 60 days of the date of the distribution. The
Secretary does not have the authority to waive the 60-day
requirement.
Reasons for Change
The inability of the Secretary to waive the 60-day rollover
period can result in adverse tax consequences for individuals.
The Committee believes such harsh results are inappropriate and
that providing for waivers of the rule will help facilitate
rollovers.
Explanation of Provision
The provision provides that the Secretary may waive the 60-
day rollover period if the failure to waive such requirement
would be against equity or good conscience, including cases of
casualty, disaster, or other events beyond the reasonable
control of the individual subject to such requirement.
Effective Date
The provision applies to distributions made after December
31, 2000.
3. Treatment of forms of distribution (sec. 335 of the bill and sec.
411(d)(6) of the Code)
Present Law
An amendment of a qualified retirement plan may not
decrease the accrued benefit of a plan participant. An
amendment is treated as reducing an accrued benefit if, with
respect to benefits accrued before the amendment is adopted,
the amendment has the effect of either (1) eliminating or
reducing an early retirement benefit or a retirement-type
subsidy, or (2) except as provided by Treasury regulations,
eliminating an optional form of benefit (sec. 411(d)(6)).
29
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\29\ A similar provision is contained in Title I of ERISA.
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The prohibition against the elimination of an optional form
of benefit applies to plan mergers, spinoffs, transfers, and
transactions amending or having the effect of amending a plan
or plans to transfer plan benefits. For example, if Plan A, a
profit-sharing plan that provides for distribution of benefits
in annual installments over ten or twenty years, is merged with
Plan B, a profit-sharing plan that provides for distribution of
benefits in annual installments over life expectancy at the
time of retirement, the merged plan must preserve the ten- or
twenty-year installment option with respect to benefits accrued
under Plan A as of the date of the merger and the installments
over life expectancy with respect to benefits accrued under
Plan B as of the date of the merger. Similarly, for example, if
a participant's benefit under a defined contribution plan is
transferred to another defined contribution plan maintained by
the same or a different employer, the optional forms of benefit
available with respect to the participant's accrued benefit
under the transferor plan must be preserved. 30
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\30\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).
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Reasons for Change
The Committee understands that the application of the
prohibition against the elimination of any optional form of
benefit to plan mergers and transfers with respect to defined
contribution plans frequently results in complexity and
confusion, especially in the context of business acquisitions
and similar transactions. In addition, the Committee
understands that a defined contribution plan participant who is
entitled to receive a single sum distribution generally may
roll over such a distribution to an IRA and control the manner
of distribution from the IRA.
Explanation of Provision
A defined contribution plan to which benefits are
transferred is not treated as reducing a participant's or
beneficiary's accrued benefit even though it does not provide
all of the forms of distribution previously available under the
transferor plan if (1) the plan receives from another defined
contribution plan a direct transfer of the participant's or
beneficiary's benefit accrued under the transferor plan, or the
plan results from a merger or other transaction that has the
effect of a direct transfer (including consolidations of
benefits attributable to different employers within a multiple
employer plan), (2) the terms of both the transferor plan and
the transferee plan authorize the transfer, (3) the transfer
occurs pursuant to a voluntary election by the participant or
beneficiary that is made after the participant or beneficiary
received a notice describing the consequences of making the
election, (4) if the transferor plan provides for an annuity as
the normal form of distribution in accordance with the joint
and survivor annuity rules (sec. 417), the participant's spouse
(if any) consents to the transfer in a manner similar to the
consent required by section 417, and (5) the transferee plan
allows the participant or beneficiary to receive distribution
of his or her benefit under the transferee plan in the form of
a single sum distribution.
In addition, except to the extent provided by the Secretary
of the Treasury in regulations, a defined contribution plan is
not treated as reducing a participant's accrued benefit if (1)
a planamendment eliminates a form of distribution previously
available under the plan, (2) a single sum distribution is available to
the participant at the same time or times as the form of distribution
eliminated by the amendment, and (3) the single sum distribution is
based on the same or greater portion of the participant's accrued
benefit as the form of distribution eliminated by the amendment.
The Secretary is directed to issue, not later than December
31, 2001, final regulations under section 411(d)(6)
implementing the provision.
Furthermore, the provision authorizes the Secretary of the
Treasury to provide by regulations that the prohibitions
against eliminating or reducing an early retirement benefit, a
retirement-type subsidy, or an optional form of benefit not
apply to plan amendments that do not adversely affect the
rights of participants in a material manner but that do
eliminate or reduce early retirement benefits, retirement-type
subsidies, and optional forms of benefit that create
significant burdens and complexities for a plan and its
participants.
It is intended that the factors to be considered in
determining whether an amendment has a materially adverse
effect on a participant would include (1) all of the
participant's early retirement benefits, retirement-type
subsidies, and optional forms of benefits that are reduced or
eliminated by the amendment, (2) the extent to which early
retirement benefits, retirement-type subsidies, and optional
forms of benefit in effect with respect to a participant after
the amendment effective date provide rights that are comparable
to the rights that are reduced or eliminated by the plan
amendment, (3) the number of years before the participant
attains normal retirement age under the plan (or early
retirement age, as applicable), (4) the size of the
participant's benefit that is affected by the plan amendment,
in relation to the amount of the participant's compensation,
and (5) the number of years before the plan amendment is
effective.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
4. Rationalization of restrictions on distributions (sec. 336 of the
bill and secs. 401(k), 403(b), and 457 of the Code)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (``section 401(k) plan''), tax-sheltered annuity
(``section 403(b) annuity''), or an eligible deferred
compensation plan of a tax-exempt organization or State or
local government (``section 457 plan''), may not be
distributable prior to the occurrence of one or more specified
events. These permissible distributable events include
``separation from service.''
A separation from service occurs only upon a participant's
death, retirement, resignation or discharge, and not when the
employee continues on the same job for a different employer as
a result of the liquidation, merger, consolidation or other
similar corporate transaction. A severance from employment
occurs when a participant ceases to be employed by the employer
that maintains the plan. Under a so-called ``same desk rule,''
a participant's severance from employment does not necessarily
result in a separation from service.31
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\31\ Rev. Rul. 79-336, 1979-2 C.B. 187.
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In addition to separation from service and other events, a
section 401(k) plan that is maintained by a corporation may
permit distributions to certain employees who experience a
severance from employment with the corporation that maintains
the plan but does not experience a separation from service
because the employee continues on the same job for a different
employer as a result of a corporate transaction. If the
corporation disposes of substantially all of the assets used by
the corporation in a trade or business, a distributable event
occurs with respect to the accounts of the employees who
continue employment with the corporation that acquires the
assets. If the corporation disposes of its interest in a
subsidiary, a distributable event occurs with respect to the
accounts of the employees who continue employment with the
subsidiary.
Reasons for Change
The Committee believes that application of the ``same
desk'' rule is inappropriate because it hinders portability of
retirement benefits, creates confusion for employees, and
results in significant administrative burdens for employers
that engage in business acquisition transactions.
Explanation of Provision
The provision modifies the distribution restrictions
applicable to section 401(k) plans, section 403(b) annuities,
and section 457 plans to provide that distribution may occur
upon severance from employment rather than separation from
service. In addition, the provisions for distribution from a
section 401(k) plan based upon a corporation's disposition of
its assets or a subsidiary are repealed; this special rule is
no longer necessary under the provision.
Effective Date
The provision is effective for distributions after December
31, 2000. Thus, for example, the provision would apply to a
distribution after the effective date without regard to whether
the severance from employment upon which the distribution is
based occurs before or after the effective date.
5. Purchase of service credit under governmental pension plans (sec.
337 of the bill and secs. 403(b) and 457 of the Code)
Present Law
A qualified retirement plan maintained by a State or local
government employer may provide that a participant may make
after-tax employee contributions in order to purchase
permissive service credit, subject to certain limits (sec.
415). Permissive service credit means credit for a period of
service recognized by the governmental plan only if the
employee voluntarily contributes to the plan an amount (as
determined by the plan) that does not exceed the amount
necessary to fund the benefit attributable to the period of
service and that is in addition to the regular employee
contributions, if any, under the plan.
In the case of any repayment of contributions and earnings
to a governmental plan with respect to an amount previously
refunded upon a forfeiture of service credit under the plan (or
another plan maintained by a State or local government employer
within the same State), any such repayment is not taken into
account for purposes of the section 415 limits on contributions
and benefits. Also, service credit obtained as a result of such
a repayment is not considered permissive service credit for
purposes of the section 415 limits.
A participant may not use a rollover or direct transfer of
benefits from a tax-sheltered annuity (``section 403(b)
annuity'') or an eligible deferred compensation plan of a tax-
exempt organization of a State or local government (``section
457 plan'') to purchase permissive service credits or repay
contributions and earnings with respect to a forfeiture of
service credit.
Reasons for Change
The Committee understands that many employees work for
multiple State or local government employers during their
careers. The Committee believes that allowing such employees to
use their section 403(b) annuity and section 457 plan accounts
to purchase permissive service credits or make repayments with
respect to forfeitures of service credit will result in more
significant retirement benefits for employees who would not
otherwise be able to afford such credits or repayments.
Explanation of Provision
A participant in a State or local governmental plan is not
required to include in gross income a direct trustee-to-trustee
transfer to a governmental defined benefit plan from a section
403(b) annuity or a section 457 plan if the transferred amount
is used (1) to purchase permissive service credits under the
plan, or (2) to repay contributions and earnings with respect
to an amount previously refunded under a forfeiture of service
credit under the plan (or another plan maintained by a State or
local government employer within the same State).
Effective Date
The provision is effective for transfers after December 31,
2000.
6. Employers may disregard rollovers for purposes of cash-out rules
(sec. 338 of the bill and sec. 411(a)(11) of the Code)
Present Law
If a qualified retirement plan participant ceases to be
employed by the employer that maintains the plan, the plan may
distribute the participant's nonforfeitable accrued benefit
without the consent of the participant and, if applicable, the
participant's spouse, if the present value of the benefit does
not exceed $5,000. If such an involuntary distribution occurs
and the participant subsequently returns to employment covered
by the plan, then service taken into account in computing
benefits payable under the plan after the return need not
include service with respect to which a benefit was
involuntarily distributed unless the employee repays the
benefit.32
---------------------------------------------------------------------------
\32\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
Generally, a participant may roll over an involuntary
distribution from a qualified plan to an IRA or to another
qualified plan.33
---------------------------------------------------------------------------
\33\ Other provisions of the bill expand the kinds of plans to
which benefits may be rolled over.
---------------------------------------------------------------------------
Reasons for Change
The present-law cash-out rule reflects a balancing of
various policies. On the one hand is the desire to assist
individuals to save for retirement by making it easier to keep
retirement funds in tax-favored vehicles. On the other hand is
the recognition that keeping track of small account balances of
former employees creates administrative burdens for plans.
The Committee is concerned that, in some cases, the cash-
out rule may discourage plans from accepting rollovers because
the rollover will increase participants' benefits to above the
cash-out amount, and increase administrative burdens. The
Committee believes that disregarding rollovers for purposes of
the cash-out rule will further the intent of the cash-out rule
by removing a possible disincentive for plans to accept
rollovers.
Explanation of Provision
A plan is permitted to provide that the present value of a
participant's nonforfeitable accrued benefit is determined
without regard to the portion of such benefit that is
attributable to rollover contributions (and any earnings
allocable thereto).
Effective Date
The provision is effective for distributions after December
31, 2000.
E. Strengthening Pension Security And Enforcement
1. Phase in repeal of 150 percent of current liability funding limit;
deduction for contributions to fund termination liability
(secs. 341 of the bill and secs. 404(a)(1), 412(c)(7), and
4972(c) of the Code)
Present Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements designed to ensure that
pension plans have sufficient assets to pay benefits. A defined
benefit pension plan is funded using one of a number of
acceptable actuarial cost methods.
No contribution is required under the minimum funding rules
in excess of the full funding limit. The full funding limit is
generally defined as the excess, if any, of (1) the lesser of
(a) the accrued liability under the plan (including normal
cost) or (b) 155 percent of the plan's current liability, over
(2) the value of the plan's assets (sec.
412(c)(7)).34 In general, current liability is all
liabilities to plan participants and beneficiaries accrued to
date, whereas the accrued liability full funding limit is based
on projected benefits. The current liability full funding limit
is scheduled to increase as follows: 160 percent for plan years
beginning in 2001 or 2002, 165 percent for plan years beginning
in 2003 and 2004, and 170 percent for plan years beginning in
2005 and thereafter.35 In no event is a plan's full
funding limit less than 90 percent of the plan's current
liability over the value of the plan's assets.
---------------------------------------------------------------------------
\34\ The minimum funding requirements, including the full funding
limit, are also contained in title I of ERISA.
\35\ As originally enacted in the Pension Protection Act of 1997,
the current liability full funding limit was 150 percent of current
liability. The Taxpayer Relief Act of 1997 increased the current
liability full funding limit to 155 percent in 1999 and 2000, and
adopted the scheduled increases described in the text.
---------------------------------------------------------------------------
An employer sponsoring a defined benefit pension plan
generally may deduct amounts contributed to satisfy the minimum
funding standard for the plan year. Contributions in excess of
the full funding limit generally are not deductible. Under a
special rule, an employer that sponsors a defined benefit
pension plan (other than a multiemployer plan) which has more
than 100 participants for the plan year may deduct amounts
contributed of up to 100 percent of the plan's unfunded current
liability.
Reasons for Change
The Committee is concerned that the current liability full
funding limit may result in inadequate funding of pension plans
and thus jeopardize pension security. Also, the Committee
believes that the special deduction rule should be expanded to
give more plan sponsors incentives to adequately fund their
plans.
Explanation of Provision
Current liability full funding limit
The provision gradually increases and then repeals the
current liability full funding limit. The current liability
full funding limit is 160 percent of current liability for plan
years beginning in 2001, 165 percent for plan years beginning
in 2002, and 170 percent for plan years beginning in 2003. The
current liability full funding limit is repealed for plan years
beginning in 2004 and thereafter.
Deduction for contributions to fund termination liability
The special rule allowing a deduction for unfunded current
liability generally is extended to all defined benefit pension
plans, i.e., the provision applies to multiemployer plans and
plans with 100 or fewer participants. The special rule does not
apply to plans not covered by the PBGC termination insurance
program.36
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\36\ The PBGC termination insurance program does not cover plans of
professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
The provision also modifies the rule by providing that the
deduction is for up to 100 percent of unfunded termination
liability, determined as if the plan terminated at the end of
the plan year. In the case of a plan with less than 100
participants for the plan year, termination liability does not
include the liability attributable to benefit increases for
highly compensated employees resulting from a plan amendment
which was made or became effective, whichever is later, within
the last two years.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
2. Extension of PBGC missing participants program (sec. 342 of the bill
and secs. 206(f) and 4050 of ERISA)
Present Law
The plan administrator of a defined benefit pension plan
that is subject to Title IV of ERISA, is maintained by a single
employer, and terminates under a standard termination is
required to distribute the assets of the plan. With respect to
a participant whom the plan administrator cannot locate after a
diligent search, the plan administrator satisfies the
distribution requirement only by purchasing irrevocable
commitments from an insurer to provide all benefit liabilities
under the plan or transferring the participant's designated
benefit to the PensionBenefit Guaranty Corporation (``PBGC''),
which holds the benefit of the missing participant as trustee until the
PBGC locates the missing participant and distributes the benefit.
The PBGC missing participant program is not available to
multiemployer plans or defined contribution plans and other
plans not covered by Title IV of ERISA.
Reasons for Change
The Committee recognizes that no statutory provision or
formal regulatory guidance exists concerning an appropriate
method of handling missing participants in terminated
multiemployer plans. Therefore, sponsors of these plans face
uncertainty with respect to missing participants. The Committee
believes that it is appropriate to extend the established PBGC
missing participant program to these plans in order to reduce
uncertainty for plan sponsors and increase the likelihood that
missing participants will receive their retirement benefits.
Explanation of Provision
The PBGC is directed to prescribe for terminating
multiemployer plans rules similar to the present-law missing
participant rules applicable to terminating single employer
plans that are subject to Title IV of ERISA.
Effective Date
The provision is effective for distributions from
terminating plans that occur after the PBGC adopts final
regulations implementing the provision.
3. Excise tax relief for sound pension funding (sec. 343 of the bill
and sec. 4972 of the Code)
Present Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements designed to ensure that
pension plans have sufficient assets to pay benefits. A defined
benefit pension plan is funded using one of a number of
acceptable actuarial cost methods.
No contribution is required under the minimum funding rules
in excess of the full funding limit. The full funding limit is
generally defined as the excess, if any, of (1) the lesser of
(a) the accrued liability under the plan (including normal
cost) or (b) 155 percent of the plan's current liability, over
(2) the value of the plan's assets (sec. 412(c)(7)). In
general, current liability is all liabilities to plan
participants and beneficiaries accrued to date, whereas the
accrued liability full funding limit is based on projected
benefits. The current liability full funding limit is scheduled
to increase as follows: 160 percent for plan years beginning in
2001 or 2002, 165 percent for plan years beginning in 2003 and
2004, and 170 percent for plan years beginning in 2005 and
thereafter.37 In no event is a plan's full funding
limit less than 90 percent of the plan's current liability over
the value of the plan's assets.
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\37\ As originally enacted in the Pension Protection Act of 1997,
the current liability full funding limit was 150 percent of current
liability. The Taxpayer Relief Act of 1997 increased the current
liability full funding limit to 155 percent in 1999 and 2000, and
adopted the scheduled increases described in the text.
---------------------------------------------------------------------------
An employer sponsoring a defined benefit pension plan
generally may deduct amounts contributed to satisfy the minimum
funding standard for the plan year. Contributions in excess of
the full funding limit generally are not deductible. Under a
special rule, an employer that sponsors a defined benefit
pension plan (other than a multiemployer plan) which has more
than 100 participants for the plan year may deduct amounts
contributed of up to 100 percent of the plan's unfunded current
liability.
Present law also provides that contributions to defined
contribution plans are deductible, subject to certain
limitations.
Subject to certain exceptions, an employer that makes
nondeductible contributions to a plan is subject to an excise
tax equal to 10 percent of the amount of the nondeductible
contributions for the year. The 10-percent excise tax does not
apply to contributions to certain terminating defined benefit
plans. The 10-percent excise tax also does not apply to
contributions of up to 6 percent of compensation to a defined
contribution plan for employer matching and employee elective
deferrals.
Reasons for Change
The Committee believes that employers should be encouraged
to adequately fund their pension plans. Therefore, the
Committee does not believe that an excise tax should be imposed
on employer contributions that do not exceed the accrued
liability full funding limit.
Explanation of Provision
In determining the amount of nondeductible contributions,
the employer may elect not to take into account contributions
to a defined benefit pension plan except to the extent they
exceed the accrued liability full funding limit. Thus, if an
employer elects, contributions in excess of the current
liability full funding limit are not subject to the excise tax
on nondeductible contributions. An employer making such an
election for a year may not take advantage of the present-law
exceptions for certain terminating plans and certain
contributions to defined contribution plans.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
4. Notice of significant reduction in plan benefit accruals (sec. 344
of the bill, new sec. 4980F of the Code, and sec. 204(h) of
ERISA)
Present Law
Section 204(h) of Title I of ERISA provides that a defined
benefit pension plan or a money purchase pension plan may not
be amended so as to provide for a significant reduction in the
rate of future benefit accrual, unless, after adoption of the
plan amendment and not less than 15 days before the effective
date of the plan amendment, the plan administrator provides a
written notice (``section 204(h) notice''), setting forth the
plan amendment (or a summary of the amendment written in a
manner calculated to be understood by the average plan
participant) and its effective date. The plan administrator
must provide the section 204(h) notice to each plan
participant, each alternate payee under an applicable qualified
domestic relations order (``QDRO''), and each employee
organization representing participants in the plan. The
applicable Treasury regulations \38\ provide, however, that a
plan administrator need not provide the section 204(h) notice
to any participant or alternate payee whose rate of future
benefit accrual is reasonably expected not to be reduced by the
amendment, nor to an employee organization that does not
represent a participant to whom the section 204(h) notice must
be provided. In addition, the regulations provide that the rate
of future benefit accrual is determined without regard to
optional forms of benefit, early retirement benefits,
retirement-type subsidiaries, ancillary benefits, and certain
other rights and features.
---------------------------------------------------------------------------
\38\ Treas. Reg. sec. 1.411(d)-6.
---------------------------------------------------------------------------
A covered amendment generally will not become effective
with respect to any participants and alternate payees whose
rate of future benefit accrual is reasonably expected to be
reduced by the amendment but who do not receive a section
204(h) notice. An amendment will become effective with respect
to all participants and alternate payees to whom the section
204(h) notice was required to be provided if the plan
administrator (1) has made a good faith effort to comply with
the section 204(h) notice requirements, (2) has provided a
section 204(h) notice to each employee organization that
represents any participant to whom a section 204(h) notice was
required to be provided, (3) has failed to provide a section
204(h) notice to no more than a de minimis percentage of
participants and alternate payees to whom a section 204(h)
notice was required to be provided, and (4) promptly upon
discovering the oversight, provides a section 204(h) notice to
each omitted participant and alternate payee.
The Internal Revenue Code does not require any notice
concerning a plan amendment that provides for a significant
reduction in the rate of future benefit accrual.
Reasons for Change
The Committee is aware of recent significant publicity
concerning conversions of traditional defined benefit pension
plans to ``cash balance'' plans, with particular focus on the
impact such conversions have on affected workers. Legislation
has been introduced to address some of the issues relating to
such conversions.\39\
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\39\ See, e.g., S. 659, introduced by Senator Moynihan on March 18,
1999 (with companion legislation, H.R. 1176 introduced by Congressman
Weller, along with Congressmen Bentsen and Ney), and section 407 of
H.R. 1102 introduced by Congressman Portman and Congressman Cardin on
March 11, 1999. Also, see the Administration's conceptual proposal
released by Congressman Matsui (together with Congressman Gejdenson) on
July 8, 1999, and the Administration on July 13, 1999.
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The Committee believes that employees are entitled to
meaningful disclosure concerning plan amendments that may
result in reductions of future benefit accruals. The Committee
has determined that present law does not require employers to
provide such disclosure, particularly in cases where
traditional defined benefit plans are converted to cash balance
plans. The Committee also believes that any disclosure
requirements applicable to plan amendments should strike a
balance between providing meaningful disclosure and avoiding
the imposition of unnecessary administrative burdens on
employers, and that this balance should include the regulatory
process with an opportunity for input from affected parties.
Explanation of Provision
The provision adds to the Internal Revenue Code a
requirement that the plan administrator of a defined benefit
pension plan furnish a written notice concerning a plan
amendment that provides for a significant reduction in the rate
of future benefit accrual, including any elimination or
reduction of an early retirement benefit or retirement-type
subsidy.\40\ The notice must describe the plan amendment and
its effective date and provide sufficient information (as
defined in Treasury regulations) to allow participants to
understand how the amendment generally will affect different
classes of employees. The plan administrator is required to
provide the notice not less than 30 days before the effective
date of the plan amendment.
---------------------------------------------------------------------------
\40\ The provision also modifies the present-law notice requirement
contained in section 204(h) of Title I of ERISA to provide that an
applicable pension plan may not be amended to provide for a significant
reduction in the rate of future benefit accrual unless the plan
administrator complies with a notice requirement similar to the notice
requirement that the provision adds to the Internal Revenue Code.
---------------------------------------------------------------------------
The plan administrator must provide this generalized notice
to each participant and alternate payee to whom the amendment
applies, and to each employee organization representing such
individuals. The plan administrator is not required to provide
this notice to any participant who has less than 1 year of
participation in the plan or who is entitled to receive the
greater of the participant's accrued benefit under the amended
plan formula or under the formula as in effect immediately
prior to the amendment effective date.
If the amendment provides for a significant change in the
manner in which accruedbenefits are determined under the plan,
or requires an affected participant or affected alternate payee to
choose between 2 or more benefit formulas, the plan administrator is
required to provide an additional notice to each affected participant
and affected alternate payee within 6 months after the effective date
of the amendment. For purposes of the provision, an affected
participant or alternate payee generally is a participant or alternate
payee to whom the significant reduction in the rate of future benefit
accrual is reasonably expected to apply. A participant who has less
than 1 year of participation in the plan, or who is entitled to receive
the greater of the participant's accrued benefit under the amended plan
formula or under the formula as in effect immediately prior to the
amendment effective date, is not an affected participant.
An example of an amendment that provides for a significant
change in the manner in which accrued benefits are determined
is an amendment that replaces a benefit formula that defines a
participant's normal retirement benefit as a percentage of the
participant's final average compensation with a benefit formula
that defines a participant's normal retirement benefit in terms
of a hypothetical account credited with annual allocations of
contributions and interest. Examples of amendments that do not
provide for a significant change in the manner in which accrued
benefits are determined are (1) an amendment that reduces the
percentage of average compensation that the plan provides as an
annual benefit commencing at normal retirement age from 60
percent to 50 percent, and (2) an amendment that modifies the
definition of compensation used to determine average
compensation by providing for the exclusion of bonuses and
overtime.
The plan administrator is required to provide in this
additional notice (1) the individual's accrued benefit (and, if
the amendment adds the option of an immediate lump sum
distribution, the present value of the accrued benefit) as of
the amendment effective date, determined under the terms of the
plan in effect immediately before the effective date, (2) the
individual's accrued benefit as of the amendment effective
date, determined under the terms of the plan in effect on the
amendment effective date and without regard to any minimum
accrued benefit that may not be decreased by the amendment
(sec. 411(d)(6)), and (3) either (a) sufficient information (as
defined in Treasury regulations) for the individual to compute
his or her projected accrued benefit or to acquire information
necessary to compute such projected accrued benefit, or (b) a
determination of the individual's projected accrued benefit
with a disclosure of the assumptions (which must be reasonable
in the aggregate) used by the plan in determining the projected
accrued benefit. For purposes of this additional notice, an
individual's accrued benefit and projected accrued benefit is
computed as if the accrued benefit were in the form of a single
life annuity at normal retirement age, taking into account any
early retirement subsidy.
With respect to the description of the individual's accrued
benefit as of the amendment effective date, an example of
determining such benefit under the terms of the plan in effect
on the amendment effective date and without regard to the sec.
411(d)(6) protected benefit is a situation in which (1) an
amendment replaces a benefit formula that defines a
participant's normal retirement benefit as a percentage of the
participant's final average compensation with a benefit formula
that defines a participant's normal retirement benefit in terms
of a hypothetical account credited with annual allocations of
contributions and interest, (2) the amendment adds the option
of an immediate lump sum distribution, (3) the present value of
a participant's sec. 411(d)(6) protected benefit is $50,000,
and (4) the beginning balance of the participant's hypothetical
account balance under the terms of the plan in effect on the
amendment effective date is $25,000. In this example, the
required notice would inform the participant that, as of the
amendment effective date, the individual's accrued benefit
determined under the terms of the plan in effect immediately
before the effective date is $50,000, and the individual's
accrued benefit determined under the terms of the plan in
effect on the amendment effective date is $25,000.
With respect to a plan amendment that requires an affected
participant or affected alternate payee to choose between 2 or
more benefit formulas, the Secretary of the Treasury, after
consultation with the Secretary of Labor, is authorized to
require additional information to be provided in the notices
and to require either of the notices to be provided at a
different time. The Committee does not intend this
authorization to result in a modification of the present-law
fiduciary requirements under Title I of ERISA.
The provision generally imposes on a plan administrator
that fails to comply with the notice requirement an excise tax
equal to $100 per day per omitted participant and alternate
payee. For failures due to reasonable cause and not to willful
neglect, the total excise tax imposed during a taxable year of
the employer will not exceed $500,000. Furthermore, in the case
of a failure due to reasonable cause and not to willful
neglect, the Secretary of the Treasury is authorized to waive
the excise tax to the extent that the payment of the tax would
be excessive relative to the failure involved. An example of
facts and circumstances under which reasonable cause may exist
for a failure to comply with the notice requirement is a plan
administrator's inability to provide the required generalized
notice concerning a plan amendment if the amendment results
from a business merger or acquisition transaction and the
timing of the transaction prevents the plan administrator from
providing the notice at least 30 days prior to the effective
date of the amendment.
Effective Date
The provision is effective for plan amendments taking
effect on or after the date of enactment. The period for
providing any notice required under the provision will not end
before the last day of the 3-month period following the date of
enactment. Prior to the issuance of Treasury regulations, a
plan will be treated as meeting the requirements of the
provision if the plan makes a good faith effort to comply with
such requirements. Pending the issuance of regulations,
examples of good faith compliance in which the provision would
not require additional employee communications include: (1) A
plan amendment provides that participants may choose to have
their accrued benefits determined under the amended plan
formula or under the formula as in effect immediately prior to
the amendment effective date, and the plan administrator
provides participants with comparison information, including
clearly stated assumptions, relative to the amended and prior
formulas so that participants are able to make an informed
decision; (2) A plan administrator provides to participants
estimates of accrued benefits at various career stages,
determined under the amended plan formula and under the formula
as in effect immediately prior to the amendment effective date,
including clearly stated assumptions, and stated as annuities
and/or lump sums (without regard to section 417) as appropriate
under the plan provisions; (3) An employer informs certain
employees before they are hired that theemployer's current plan
benefit formula will be amended at a specified future date, and these
employees participate in the plan under the formula as in effect
immediately prior to the amendment until such specified future date
(good faith compliance would be relevant for these employees only).
5. Investment of employee contributions in 401(k) plans (sec. 345 of
the bill)
Present Law
The Employee Retirement Income Security Act of 1974, as
amended (``ERISA'') prohibits certain employee benefit plans
from acquiring securities or real property of the employer who
sponsors the plan if, after the acquisition, the fair market
value of such securities and property exceeds 10 percent of the
fair market value of plan assets. The 10-percent limitation
does not apply to any ``eligible individual account plans''
that specifically authorize such investments. Generally,
eligible individual account plans are defined contribution
plans, including plans containing a cash or deferred
arrangement (``401(k) plans'').
The term ``eligible individual account plan'' does not
include the portion of a plan that consists of elective
deferrals (and earnings on the elective deferrals) made under
section 401(k) if elective deferrals equal to more than 1
percent of any employee's eligible compensation are required to
be invested in employer securities and employer real property.
Eligible compensation is compensation that is eligible to be
deferred under the plan. The portion of the plan that consists
of elective deferrals (and earnings thereon) is still treated
as an individual account plan, and the 10-percent limitation
does not apply, as long as elective deferrals (and earnings
thereon) are not required to be invested in employer securities
or employer real property.
The rule excluding elective deferrals (and earnings
thereon) from the definition of individual account plan does
not apply if individual account plans are a small part of the
employer's retirement plans. In particular, that rule does not
apply to an individual account plan for a plan year if the
value of the assets of all individual account plans maintained
by the employer do not exceed 10 percent of the value of the
assets of all pension plans maintained by the employer
(determined as of the last day of the preceding plan year).
Multiemployer plans are not taken into account in determining
whether the value of the assets of all individual account plans
maintained by the employer exceed 10 percent of the value of
the assets of all pension plans maintained by the employer. The
rule excluding elective deferrals (and earnings thereon) from
the definition of individual account plan does not apply to an
employee stock ownership plan as defined in section 4975(e)(7)
of the Internal Revenue Code.
The rule excluding elective deferrals (and earnings
thereon) from the definition of individual account plan applies
to elective deferrals for plan years beginning after December
31, 1998 (and earnings thereon). It does not apply with respect
to earnings on elective deferrals for plan years beginning
before January 1, 1999.
Reasons for Change
The Committee believes that the effective date provided in
the Taxpayer Relief Act of 1997 with respect to the rule
excluding elective deferrals (and earnings thereon) from the
definition of individual account plan has produced unintended
results.
Explanation of Provision
The provision modifies the effective date of the rule
excluding certain elective deferrals (and earnings thereon)
from the definition of individual account plan by providing
that the rule does not apply to any elective deferral used to
acquire an interest in the income or gain from employer
securities or employer real property acquired (1) before
January 1, 1999, or (2) after such date pursuant to a written
contract which was binding on such date and at all times
thereafter.
Effective Date
The provision is effective as if included in the section of
the Taxpayer Relief Act of 1997 that contained the rule
excluding certain elective deferrals (and earnings thereon).
6. Modifications to section 415 limits for multiemployer plans (sec.
346 of the bill and sec. 415 of the Code)
Present Law
Under present law, limits apply to contributions and
benefits under qualified plans (sec. 415). The limits on
contributions and benefits under qualified plans are based on
the type of plan.
Under a defined benefit plan, the maximum annual benefit
payable at retirement is generally the lesser of (1) 100
percent of average compensation for the highest three years, or
(2) $130,000 (for 1999). The dollar limit is adjusted for cost-
of-living increases in $5,000 increments. The dollar limit is
reduced in the case of retirement before the social security
retirement age and increases in the case of retirement after
the social security retirement age.
A special rule applies to governmental defined benefit
plans. In the case of such plans, the defined benefit dollar
limit is reduced in the case of retirement before age 62 and
increased in the case of retirement after age 65. In addition,
there is a floor on early retirement benefits. Pursuant to this
floor, the minimum benefit payable at age 55 is $75,000.
In the case of a defined contribution plan, the limit on
annual is additions if the lesser of (1) 25 percent of
compensation 41 or (2) $30,000 (for 1999). In
applying the limits on contributions and benefits, plans of the
same employer are aggregated.
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\41\ Another provision increases this limit to 100 percent of
compensation.
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Reasons for Change
The Committee understands that, because pension benefits
under multiemployer plans are typically based upon factors
other than compensation, the section 415 benefit limits
frequently result in benefit reductions for employees in
industries in which wages vary annually.
Explanation of Provision
Under the provision, the 100 percent of compensation
defined benefit plan limit does not apply to multiemployer
plans. In addition, except in applying the defined benefit plan
dollar limitation, multiemployer plans are not aggregated with
other plans maintained by an employer contributing to the
multiemployer plan in applying the limits on contributions and
benefits.
The provision also applies the special rules for defined
benefit plans of governmental employers to multiemployer plans.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
F. Encouraging Retirement Education
1. Periodic pension benefit statements (sec. 351 of the bill and sec.
105 of ERISA)
Present Law
Title I of ERISA provides that a pension plan administrator
must furnish a benefit statement to any participant or
beneficiary who makes a written request for such a statement.
This statement must indicate, on the basis of the latest
available information, (1) the participant's or beneficiary's
total accrued benefit, and (2) the participant's or
beneficiary's vested accrued benefit or the earliest date on
which the accrued benefit will become vested. A participant or
beneficiary is not entitled to receive more than 1 benefit
statement during any 12-month period. The plan administrator
must furnish the benefit statement no later than 60 days after
receipt of the request or, if later, 120 days after the close
of the immediately preceding plan year.
In addition, the plan administrator must furnish a benefit
statement to each participant whose employment terminates or
who has a 1-year break in service. For purposes of this benefit
statement requirement, a ``1-year break in service'' is a
calendar year, plan year, or other 12-month period designated
by the plan during which the participant does not complete more
than 500 hours of service for the employer. A participant is
not entitled to receive more than 1 benefit statement with
respect to consecutive breaks in service. The plan
administrator must provide a benefit statement required upon
termination of employment or a break in service no later than
180 days after the end of the plan year in which the
termination of employment or break in service occurs.
Reasons for Change
The Committee believes that periodic disclosure concerning
the value of retirement benefits, especially the value of
benefits accumulating in a defined contribution plan account,
is necessary to increase employee awareness and appreciation of
the importance of retirement savings.
Explanation of Provision
A plan administrator of a defined contribution plan
generally must furnish a benefit statement to each participant
at least once annually and to a beneficiary upon written
request.
In addition to providing a benefit statement to a
beneficiary upon written request, the plan administrator of a
defined benefit plan generally must either (1) furnish a
benefit statement at least once every 3 years to each
participant who has a vested accrued benefit and who is
employed by the employer at the time the plan administrator
furnishes the benefit statements to participants, or (2)
annually furnish written, electronic, telephonic, or other
appropriate notice to each participant of the availability of
and the manner in which the participant may obtain the benefit
statement.
The plan administrator of a multiemployer plan or a
multiple employer plan is required to furnish a benefit
statement only upon written request of a participant or
beneficiary. 42
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\42\ A multiple employer plan is a plan that is maintained by 2 or
more unrelated employers but that is not maintained pursuant to a
collective-bargaining agreement (sec. 413(c)).
---------------------------------------------------------------------------
The plan administrator is required to write the benefit
statement in a manner calculated to be understood by the
average plan participant and is permitted to furnish the
statement in written, electronic, telephonic, or other
appropriate form.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000.
2. Treatment of employer-provided retirement advice (sec. 352 of the
bill and sec. 132 of the Code)
Present Law
Under present law, certain employer-provided fringe
benefits are excludable from gross income (sec. 132) and wages
for employment tax purposes. These excludable fringe benefits
include working condition fringe benefits and de minimis
fringes. In general, a working condition fringe benefit is any
property or services provided by an employer to an employee to
the extent that, if the employee paid for such property or
services, such payment would be allowable as a deduction as a
business expense. A de minimis fringe benefit is any property
or services provided by the employer the value of which, after
taking into account the frequency with which similar fringes
are provided, is so small as to make accounting for it
unreasonable or administratively impracticable.
In addition, if certain requirements are satisfied, up to
$5,250 annually of employer-provided educational assistance is
excludable from gross income (sec. 127) and wages. This
exclusion expires with respect to courses beginning after May
31, 2000. 43 Education not excludable under section
127 may be excludable as a working condition fringe.
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\43\ The exclusion does not apply with respect to graduate-level
courses.
---------------------------------------------------------------------------
There is no specific exclusion under present law for
employer-provided retirement planning services. However, such
services may be excludable as employer-provided educational
assistance or a fringe benefit.
Reasons for Change
In order to plan adequately for retirement, individuals
must anticipate retirement income needs and understand how
their retirement income goals can be achieved. Employer-
sponsored plans are a key part of retirement income planning.
The Committee believes that employers sponsoring retirement
plans should be encouraged to provide retirement planning
services for their employees in order to assist them in
preparing for retirement.
Explanation of Provision
Under the bill, qualified retirement planning services
provided to an employee and his or her spouse by an employer
maintaining a qualified plan are excludable from income and
wages. The exclusion does not apply with respect to highly
compensated employees unless the services are available on
substantially the same terms to each member of the group of
employees normally provided education and information regarding
the employer's qualified plan. The exclusion is intended to
allow employers to provide advice and information regarding
retirement planning. The exclusion is not limited to
information regarding the qualified plan, and, thus, for
example, applies to advice and information regarding retirement
income planning for an individual and his or her spouse and how
the employer's plan fits into the individual's overall
retirement income plan. On the other hand, the exclusion is not
intended to apply to services that may be related to retirement
planning, such as tax preparation, accounting, legal or
brokerage services.
Effective Date
The provision is effective with respect to taxable years
beginning after December 31, 2000.
G. Reducing Regulatory Burdens
1. Flexibility in nondiscrimination and coverage rules (sec. 361 of the
bill and secs. 401(a)(4) and 410 of the Code)
Present Law
A plan is not a qualified retirement plan if the
contributions or benefits provided under the plan discriminate
in favor of highly compensated employees (sec. 401(a)(4)). The
applicable Treasury regulations set forth the exclusive rules
for determining whether a plan satisfies the nondiscrimination
requirement. These regulations state that the form of the plan
and the effect of the plan in operation determine whether the
plan is nondiscriminatory and that intent is irrelevant. Prior
to 1994, a plan's compliance with the nondiscrimination rules
was based upon the facts and circumstances surrounding the
design and operation of the plan.
Similarly, a plan is not a qualified retirement plan if the
plan does not benefit a minimum number of employees (sec.
410(b)). A plan satisfies this minimum coverage requirement if
and only if it satisfies one of the tests specified in the
applicable Treasury regulations. Prior to 1989, a plan's
compliance with the coverage rules was based partially on the
facts and circumstances surrounding the design of the plan.
Reasons for Change
It has been brought to the attention of the Committee that
some plans are unable to satisfy the mechanical tests used to
determine compliance with the nondiscrimination and coverage
requirements solely as a result of relatively minor plan
provisions. The Committee believes that, in such cases, it may
be appropriate to expand the consideration of facts and
circumstances in the application of the mechanical tests.
Explanation of Provision
The Secretary of the Treasury is directed to provide by
regulation applicable to years beginning after December 31,
2000, that a plan is deemed to satisfy the nondiscrimination
requirements of section 401(a)(4) if the plan satisfies the
pre-1994 facts and circumstances test, satisfies the conditions
prescribed by the Secretary to appropriately limit the
availability of such test, and is submitted to the Secretary
for a determination of whether it satisfies such test (to the
extent provided by the Secretary).
Similarly, a plan complies with the minimum coverage
requirement of section 410(b) if the plan satisfies the pre-
1989 coverage rules, is submitted to the Secretary for a
determination of whether it satisfies the pre-1989 coverage
rules (to the extent provided by the Secretary), and satisfies
conditions prescribed by the Secretary by regulation that
appropriately limit the availability of the pre-1989 coverage
rules.
Effective Date
The provision is effective on the date of enactment.
2. Modification of timing of plan valuations (sec. 362 of the bill and
sec. 412 of the Code)
Present Law
Under present law, in the case of plans subject to the
minimum funding rules, a plan valuation is generally required
annually. The Secretary may require that a valuation be made
more frequently in particular cases.
Prior to the Retirement Protection Act of 1994, plan
valuations generally were required at least once every three
years.
Reasons for Change
While plan valuations are necessary to ensure adequate
funding of defined benefit pension plans, they also create
administrative burdens for employers. The Committee believes
that requiring valuations at least once every three years in
the case of well-funded plans strikes an appropriate balance
between funding concerns and employer concerns about plan
administrative costs.
Explanation of Provision
The provision allows an employer to elect to use the prior
year's plan valuation in certain cases. The election may be
made only with respect to a defined benefit plan with assets of
at least 125 percent of current liability (determined as of the
valuation date for the preceding year). If the prior year's
valuation is used, it must be adjusted, as provided in
regulations, to reflect significant differences in
participants. An election made under the provision may be
revoked only with the consent of the Secretary. In any event, a
plan valuation is required once every three years.
44
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\44\ As under present law, the Secretary may require that a
valuation be made more frequently in particular cases.
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Effective Date
The provision is effective for plan years beginning after
December 31, 2000.
3. Rules for substantial owner benefits in terminated plans (sec. 363
of the bill and secs. 4021, 4022, 4043 and 4044 of ERISA)
present law
Under present law, the Pension Benefit Guaranty Corporation
(``PBGC'') providesparticipants and beneficiaries in a defined
benefit pension plan with certain minimal guarantees as to the receipt
of benefits under the plan in case of plan termination. The employer
sponsoring the defined benefit pension plan is required to pay premiums
to the PBGC to provide insurance for the guaranteed benefits. In
general, the PBGC will guarantee all basic benefits which are payable
in periodic installments for the life (or lives) of the participant and
his or her beneficiaries and are non-forfeitable at the time of plan
termination. The amount of the guaranteed benefit is subject to certain
limitations. One limitation is that the plan (or an amendment to the
plan which increases benefits) must be in effect for 60 months before
termination for the PBGC to guarantee the full amount of basic benefits
for a plan participant, other than a substantial owner. In the case of
a substantial owner, the guaranteed basic benefit is phased in over 30
years beginning with participation in the plan. A substantial owner is
one who owns, directly or indirectly, more than 10 percent of the
voting stock of a corporation or all the stock of a corporation.
Special rules restricting the amount of benefit guaranteed and the
allocation of assets also apply to substantial owners.
Reasons for Change
The Committee believes that the present-law rules
concerning limitations on guaranteed benefits for substantial
owners are overly complicated and restrictive and thus may
discourage some small business owners from establishing defined
benefit pension plans.
Explanation of Provision
The provision provides that the 60 month phase-in of
guaranteed benefits applies to a substantial owner with less
than 50 percent ownership interest. For a substantial owner
with a 50 percent or more ownership interest (``majority
owner''), the phase-in depends on the number of years the plan
has been in effect. The majority owner's guaranteed benefit is
limited so that it may not be more than the amount phased in
over 60 months for other participants. The rules regarding
allocation of assets apply to substantial owners, other than
majority owners, in the same manner as other participants.
Effective Date
The provision is effective for plan terminations with
respect to which notices of intent to terminate are provided,
or for which proceedings for termination are instituted by the
PBGC after December 31, 2000.
4. ESOP dividends may be reinvested without loss of dividend deduction
(sec. 364 of the bill and sec. 404 of the Code)
Present Law
An employer is entitled to deduct certain dividends paid in
cash during the employer's taxable year with respect to stock
of the employer that is held by an employee stock ownership
plan (``ESOP''). The deduction is allowed with respect to
dividends that, in accordance with plan provisions, are (1)
paid in cash directly to the plan participants or their
beneficiaries, (2) paid to the plan and subsequently
distributed to the participants or beneficiaries in cash no
later than 90 days after the close of the plan year in which
the dividends are paid to the plan, or (3) used to make
payments on loans (including payments of interest as well as
principal) that were used to acquire the employer securities
(whether or not allocated to participants) with respect to
which the dividend is paid.
Reasons for Change
The Committee believes that it is appropriate to provide
incentives for the accumulation of retirement benefits and
expansion of employee ownership. The Committee has determined
that the present-law rules concerning the deduction of
dividends on employer stock held by an ESOP discourage
employers from permitting such dividends to be reinvested in
employer stock and accumulate for retirement purposes.
Explanation of Provision
In addition to the deductions permitted under present law
for dividends paid with respect to employer securities that are
held by an ESOP, an employer is entitled to deduct dividends
that, at the election of plan participants or their
beneficiaries, are (1) payable in cash directly to plan
participants or beneficiaries, (2) paid to the plan and
subsequently distributed to the participants or beneficiaries
in cash no later than 90 days after the close of the plan year
in which the dividends are paid to the plan, or (3) paid to the
plan and reinvested in qualifying employer securities.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
5. Notice and consent period regarding distributions (sec. 365 of the
bill and sec. 417 of the Code)
Present Law
Notice and consent requirements apply to certain
distributions from qualified retirement plans. These
requirements relate to the content and timing of information
that a plan must provide to a participant prior to a
distribution, and to whether the plan must obtain the
participant's consent and the consent of the participant's
spouse to the distribution. The nature and extent of the notice
and consent requirements applicable to a distribution depend
upon the value of the participant's vested accrued benefit and
whether the joint and survivor annuity requirements (sec. 417)
apply to the participant.45
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\45\ Similar provisions are contained in Title I of ERISA.
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If the present value of the participant's vested accrued
benefit exceeds $5,000, the plan may not distribute the
participant's benefit without the written consent of the
participant. The participant's consent to a distribution is not
valid unless the participant has received from the plan a
notice that contains a written explanation of (1) the material
features and the relative values of the optional forms of
benefit available under the plan, and (2) in certain cases, the
right, if any, to defer receipt of the distribution. In
addition, the plan must provide to the participant notice of
(1) the participant's right, if any, to have the distribution
directly transferred to another retirement plan or IRA, and (2)
the rules concerning the taxation of a distribution. If the
joint and survivor annuity requirements apply to the
participant, the plan must provide to the participant a written
explanation of (1) the terms and conditions of the qualified
joint and survivor annuity (``QJSA''), (2) the participant's
right to make, and the effect of, an election to waive the
QJSA, (3) the rights of the participant's spouse with respect
to a participant's waiver of the QJSA, and (4) the right to
make, and the effect of, a revocation of a waiver of the QJSA.
The plan generally must provide these 3 notices to the
participant no less than 30 and no more than 90 days before the
date distribution commences.
If the participant's vested accrued benefit does not exceed
$5,000, the terms of the plan may provide for distribution
without the participant's consent. The plan generally is
required, however, to provide to the participant a notice that
contains a written explanation
of (1) the participant's right, if any, to have the
distribution directly transferred to another retirement plan or
IRA, and (2) the rules concerning the taxation of a
distribution. The plan generally must provide this notice to
the participant no less than 30 and no more than 90 days before
the date distribution commences.
Reasons for Change
The Committee understands that an employee is not always
able to evaluate distribution alternatives, select the most
appropriate alternative, and notify the plan of the selection
within a 90-day period. The Committee believes that requiring a
plan to furnish multiple distribution notices to an employee
who does not make a distribution election within 90 days is
administratively burdensome. In addition, the Committee
believes that participants who are entitled to defer
distributions should be informed of the impact of a decision
not to defer distribution on the taxation and accumulation of
their retirement benefits.
Explanation of Provision
A qualified retirement plan is required to provide the
applicable distribution notice no less than 30 days and no more
than 12 months before the date distribution commences. The
Secretary of the Treasury is directed to modify the applicable
regulations to reflect the extension of the notice period to 12
months and to provide that the description of a participant's
right, if any, to defer receipt of a distribution shall also
describe the consequences of failing to defer such receipt.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
6. Repeal transition rule relating to certain highly compensated
employees (sec. 366 of the bill and sec. 1114(c)(4) of the Tax
Reform Act of 1986)
Present Law
Under present law, for purposes of the rules relating to
qualified plans, a highly compensated employee is generally
defined as an employee 46 who (1) was a 5-percent
owner of the employer at any time during the year or the
preceding year or (2) either (a) had compensation for the
preceding year in excess of $80,000 (for 1999) or (b) at the
election of the employer, had compensation in excess of $80,000
for the preceding year and was in the top 20 percent of
employees by compensation for such year.
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\46\ An employee includes a self-employed individual.
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Under a rule enacted in the Tax Reform Act of 1986, a
special definition of highly compensated employee applies for
purposes of the nondiscrimination rules relating to qualified
cash or deferred arrangements (``section 401(k) plans'') and
matching contributions. This special definition applies to an
employer incorporated on December 15, 1924, that meets certain
specific requirements.
Reasons for Change
The Committee believes that it is appropriate to repeal the
special definition of highly compensated employee in light of
the substantial modification of the general definition of
highly compensated employee in the Small Business Job
Protection Act of 1996.
Explanation of Provision
The provision repeals the special definition of highly
compensated employee under the Tax Reform Act of 1986. Thus,
the present-law definition applies.
Effective Date
The provision is effective for plan years beginning after
December 31, 1999.
7. Employees of tax-exempt entities (sec. 367 of the bill)
Present Law
The Tax Reform Act of 1986 provided that nongovernmental
tax-exempt employers were not permitted to maintain a qualified
cash or deferred arrangement (``section 401(k) plan''). This
prohibition was repealed, effective for years beginning after
December 31, 1996, by the SmallBusiness Job Protection Act of
1996.
Treasury regulations provide that, for purposes of
nondiscrimination testing under section 410(b), a section
401(k) plan or a section 401(m) plan that is provided under the
same general arrangement as the section 401(k) plan, the
employer may treat as excludable those employees of a tax-
exempt entity who could not participate in the arrangement due
to the prohibition on maintenance of a section 401(k) plan by
such entities. Such employees could be disregarded only if more
than 95 percent of the employees who could participate in the
section 401(k) plan benefit under the plan for the plan
year.47
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\47\ Treas. Reg. sec. 1.410(b)-6(g).
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Tax-exempt charitable organizations may maintain a tax-
sheltered annuity (a ``section 403(b) annuity'') that allows
employees to make salary reduction contributions.
Reasons for Change
The Committee believes that it is appropriate to modify the
special rule regarding the treatment of certain employees of a
tax-exempt organization as excludable for section 401(k) plan
nondiscrimination testing purposes in light of the provision of
the Small Business Job Protection Act of 1996 that permits such
organizations to maintain section 401(k) plans.
Explanation of Provision
The Treasury Department is directed to revise its
regulations under section 410(b) to provide that employees of a
tax-exempt charitable organization who are eligible to make
salary reduction contributions under a section 403(b) annuity
may be treated as excludable employees for purposes of testing
a section 401(k) plan, or a section 401(m) plan that is
provided under the same general arrangement as the section
401(k) plan of the employer if (1) no employee of such tax-
exempt entity is eligible to participate in the section 401(k)
or 401(m) plan and (2) more than 95 percent of the employees
who are not employees of the charitable employer are eligible
to participate in such section 401(k) plan or section 401(m)
plan.
The revised regulations will be effective for years
beginning after December 31, 1996.
Effective Date
The provision is effective on the date of enactment.
8. Extension to international organizations of moratorium on
application of certain nondiscrimination rules applicable to
State and local government plans (sec. 368 of the bill, sec.
1505 of the Taxpayer Relief Act of 1997, and secs. 401(a) and
401(k) of the Code)
Present Law
A qualified retirement plan maintained by a State or local
government is exempt from the rules concerning
nondiscrimination (sec. 401(a)(4)) and minimum participation
(sec. 401(a)(26)). A governmental plan maintained by an
international organization that is exempt from taxation by
reason of the International Organizations Immunities Act is not
exempt from the nondiscrimination and minimum participation
rules.
Reasons for Change
The Committee believes that application of the
nondiscrimination and minimum participation rules to plans
maintained by tax-exempt international organizations is
unnecessary and inappropriate in light of the unique
circumstances under which such plans and organizations operate.
Explanation of Provision
A governmental plan maintained by a tax-exempt
international organization is exempt from the nondiscrimination
and minimum participation rules.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000.
9. Annual report dissemination (sec. 369 of the bill and sec. 104 of
ERISA)
Present Law
Title I of ERISA generally requires the plan administrator
of each employee pension benefit plan and each employee welfare
benefit plan to file an annual report concerning the plan with
the Secretary of Labor within 7 months after the end of the
plan year. Within 9 months after the end of the plan year, the
plan administrator generally must provide to each participant,
and to each beneficiary receiving benefits under the plan, a
summary of the annual report filed with the Secretary of Labor
for the plan year.
Reasons for Change
The Committee believes that simplification of the summary
annual report requirement will reduce the burden and cost of
plan administration and disclosure, thereby encouraging more
employers to establish and maintain retirement plans, without
denying participants the opportunity to obtain information
concerning plan status and operation.
Explanation of Provision
Within 9 months after the end of each plan year, the plan
administrator is required to make available for examination a
summary of the annual report filed with the Secretary of Labor
for the plan year. In addition, the plan administrator is
required to furnish the summary to aparticipant, or to a
beneficiary receiving benefits under the plan, upon request.
Effective Date
The provision is effective for reports for years beginning
after December 31, 1998.
10. Clarification of exclusion for employer-provided transit passes
(sec. 370 of the bill and sec. 132 of the Code)
Present Law
Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income and
wages. Qualified transportation fringe benefits include
parking, transit passes, and vanpool benefits. Up to $175 per
month (for 1999) of employer-provided parking is excludable
from income and up to $65 (for 1999) per month of employer-
provided transit and vanpool benefits are excludable from
income.
Qualified transportation benefits generally include a cash
reimbursement by an employer to an employee. However, in the
case of transit passes, a cash reimbursement is considered a
qualified transportation fringe benefit only if a voucher or
similar item which may be exchanged only for a transit pass is
not readily available for direct distribution by the employer
to the employee.
No amount is includible in the gross income of an employee
merely because the employee is offered a choice between cash
and any qualified transportation benefit (or a choice among
such benefits).
Reasons for Change
The Committee believes that the present-law voucher rule
relating to transit benefits unduly restricts the use of cash
reimbursement for such benefits compared to other types of
qualified transportation benefits. In addition, the Committee
understands that some employers are concerned about the
administrative interpretation of the present-law rules, and may
be discouraged from pro-
viding such benefits because of the costs and administrative
burdens involved in obtaining vouchers or due to concerns that
the IRS will disqualify their reimbursement programs. The
Committee believes that transit benefits should not be subject
to more restrictive rules than other transportation fringe
benefits, and that the provision of transit benefits should be
encouraged.
Explanation of Provision
The provision repeals the rule providing that cash
reimbursements for transit benefits are excludable from income
only if a voucher or similar item which may be exchanged only
for a transit pass is not readily available for direct
distribution by the employer.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
H. Provisions Relating to Plan Amendments
(sec. 371 of the bill)
Present Law
Plan amendments to reflect amendments to the law generally
must be made by the time prescribed by law for filing the
income tax return of the employer for the employer's taxable
year in which the change in law occurs.
Reasons for Change
The Committee believes that employers should have adequate
time to amend their plans to reflect amendments to the law.
Explanation of Provision
Any amendments to a plan or annuity contract required to be
made by the provision are not required to be made before the
last day of the first plan year beginning on or after January
1, 2003. In the case of a governmental plan, the date for
amendments is extended to the first plan year beginning on or
after January 1, 2005.
Effective Date
The provision is effective on the date of enactment.
TITLE IV. EDUCATION TAX RELIEF
A. Eliminate Marriage Penalty and 60-Month Limit on Student Loan
Interest Deduction
(sec. 401 of the bill 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, subject to a maximum annual deduction limit
(sec. 221). 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. Required
payments of interest generally do not include nonmandatory
payments, such as interest payments made during a period of
loan forbearance. Months during which interest payments are not
required because 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 solely to pay for certain costs of
attendance (including room and board) of a student (who may be
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred) who is
enrolled in a degree program on at least a half-time basis at
(1) an accredited post-secondary educational institution
defined by reference to section 481 of the Higher Education Act
of 1965, or (2) an institution conducting an internship or
residency program leading to a degree or certificate from an
institution of higher education, a hospital, or a health care
facility conducting postgraduate training.
The maximum allowable deduction per taxpayer return is
$1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and
thereafter.48 The deduction is phased out ratably
for individual taxpayers with modified adjusted gross income of
$40,000-$55,000 and $60,000-$75,000 for joint returns. The
income ranges will be indexed for inflation after 2002.
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\48\ The maximum allowable deduction for 1998 was $1,000.
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Reasons for Change
The Committee believes that the income phaseouts for the
student loan interest deduction are too low and should be
raised. In addition, the Committee is concerned about the
inequity of the marriage penalty resulting from the phase-out
provisions of the student loan interest deduction. The
Committee believes that relief from the marriage penalty is
appropriate for individuals with education loan obligations in
order to assist in removing tax considerations from decisions
regarding marriage.
The Committee also understands that many students incur
considerable debt in the course of obtaining undergraduate and
graduate education. The Committee believes that it is
appropriate to expand the deduction for individuals who have
paid interest on qualified education loans by repealing the
limitation that the deduction is allowed only with respect to
interest paid during the first 60 months in which interest
payments are required. In addition, the repeal of the 60-month
limitation lessens complexity and administrative burdens for
taxpayers, lenders, loan servicing agencies, and the Internal
Revenue Service.
Explanation of Provision
The bill increases the beginning point of the income
phaseout for the student loan interest deduction for individual
taxpayers from $40,000 to $50,000. For taxpayers filing joint
returns, the bill increases the beginning point of the income
phaseout to twice the beginning point of the income phaseouts
applicable to single taxpayers. Thus, beginning in 2000, the
deduction will be phased out ratably for individual taxpayers
with modified adjusted gross income of $50,000-$65,000 and for
taxpayers filing joint returns with modified adjusted gross
income of $100,000-$115,000.
The bill also repeals both the limit on the number of
months during which interest paid on a qualified education loan
is deductible and the restriction that nonmandatory payments of
interest are not deductible.
Effective Date
The provision is effective generally for taxable years
ending after December 31, 1999. The provision repealing the 60-
month limit on deductible student loan interest is effective
for interest paid on qualified education loans after December
31, 1999, in taxable years ending after such date.
B. Allow Tax-free Distributions From State and Private Education
Programs
(sec. 402 of the bill 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 (a ``savings account
plan''). The term ``qualified higher education expenses''
generally has the same meaning as does the term for purposes of
education IRAs (as described above) and, thus, includes
expenses for tuition, fees, books, supplies, and equipment
required for the enrollment or attendance at an eligible
educational institution,49 as well as certain room
and board expenses for any period during which the student is
at least a half-time student.
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\49\ ``Eligible educational institutions'' are defined the same for
purposes of education IRAs (described in II.1., above) and qualified
State tuition programs.
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No amount is 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) are included in the beneficiary's gross income
(unless excludable under another Code section) to the extent
such amounts or the value of the educational benefits exceed
contributions made on behalf of the beneficiary, and (2)
amounts distributed to a contributor (e.g., when a parent
receives a refund) are included in the contributor's gross
income to the extent such amounts exceed contributions made on
behalf of the beneficiary.50
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\50\ 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.
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A qualified State tuition program is required to provide
that purchases or contributions only be made in
cash.51 Contributors and beneficiaries are not
allowed to directly or indirectly direct the investment of
contributions to the program (or earnings thereon). The program
is required to maintain a separate accounting for each
designated beneficiary. A specified individual must be
designated as the beneficiary at the commencement of
participation in a qualified State tuition program (i.e., when
contributions are first made to purchase an interest in such a
program), unless interests in such a program are purchased by a
State or local government or a tax-exempt charity described in
section 501(c)(3) as part of a scholarship program operated by
such government or charity under which beneficiaries to be
named in the future will receive such interests as
scholarships. A transfer of credits (or other amounts) from one
account benefitting one designated beneficiary to another
account benefitting a different beneficiary is considered a
distribution (as is 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--and any spouse of such persons or of the original
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.
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\51\ Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3)
provide special estate and gift tax rules for contributions made to,
and distributions made from, qualified State tuition programs and
education IRAs.
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To the extent that a distribution from a qualified State
tuition program is used to pay for qualified tuition and
related expenses (as defined in sec. 25A(f)(1)), the
distributee (or another taxpayer claiming the distributee as a
dependent) may claim the HOPE credit or Lifetime Learning
credit under section 25A with respect to such tuition and
related expenses (assuming that the other requirements for
claiming the HOPE credit or Lifetime Learning credit are
satisfied and the modified AGI phaseout for those credits does
not apply).
Reasons for Change
The Committee is concerned about the costs of higher
education and believes that families should be encouraged to
save for those expenses. Accordingly, the Committee has
determined that distributions from qualified tuition programs
should be exempt from Federal income tax to the extent that
such distributions are used to pay for qualified higher
education expenses of undergraduate or graduate students who
are attending institutions of higher education or certain
vocational schools. In addition, the Committee believes that
families would benefit from an expansion of the present-law
rules governing qualified tuition programs so as to permit
private educational institutions to maintain certain prepaid
tuition programs. The Committee also believes that additional
modifications are necessary to enhance the effectiveness of the
program.
Explanation of Provision
Qualified tuition program
The bill expands the definition of ``qualified tuition
program'' to include certain prepaid tuition programs
established and maintained by one or more eligible educational
institutions (which may be private institutions) that satisfy
the requirements under section 529 (other than the present-law
State sponsorship rule). In the case of a qualified tuition
program maintained by one or more private educational
institutions, persons will be able to purchase tuition credits
or certificates on behalf of a designated beneficiary (as
described in section 529(b)(1)(A)(i)), but will not be able to
make contributions to a savings account plan (described in
section 529(b)(1)(A)(ii)).
Exclusion from gross income
Under the bill, an exclusion from gross income is provided
for distributions made in taxable years beginning after
December 31, 1999, from qualified State tuition programs to the
extent that the distribution is used to pay for qualified
higher education expenses. This exclusion from gross income is
extended to distributions from qualified tuition programs
established and maintained by an entity other than a State or
agency or instrumentality thereof, for distributions made in
taxable years after December 31, 2003.
Coordination of education provisions
The bill also allows a taxpayer to claim a HOPE credit or
Lifetime Learning credit for a taxable year and to exclude from
gross income amounts distributed (both the principal and the
earnings portions) from a qualified tuition program and/or an
education individual retirement account on behalf of the same
student as long as the distributions are not used for the same
expenses for which a credit was claimed.52
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\52\ In determining the amount of a distribution that can be
excluded from income for a taxable year, a taxpayer's total higher
education expenses will be reduced first by the amount of such expenses
which were taken into account in determining the amount of any HOPE or
Lifetime Learning credit allowed to the taxpayer (or other person) with
respect to such expenses. After any reduction for expenses allocable to
the credits, taxpayers may determine how to allocate their qualified
education expenses among the various remaining education provisions
(including education individual retirement accounts and qualified
tuition programs) for which they are eligible; however, under no
circumstances, can the same expenses be allocated to more than one
provision. For example, suppose that in 2002, a college freshman
withdraws funds from both an education IRA and a qualified tuition
program. If the student is otherwise eligible, he or she may claim a
HOPE credit of $1,500 with respect to first $2,000 of tuition expense.
To the extent that the student's remaining educational expenses
constitute ``qualified higher education expenses'' and exceed the
amounts distributed from both the education IRA and the qualified
tuition program, the student may exclude from gross income the earnings
portions (and, as always, the principal portions) of both
distributions. Alternatively, if after allocating the first $2,000 of
tuition expense to the HOPE credit, the student's remaining educational
expenses do not exceed his or her total distributions from the
education IRA and qualified tuition program, the student will not be
able to exclude from gross income the entire earnings portions of both
distributions. In addition, the student may be liable for a penalty
imposed under the qualified tuition program or for additional tax
imposed on the excess amounts distributed from the education IRA, or
both. The student may allocate his or her educational expenses between
the distributions as the student determines appropriate, but may not
use the same expenses for both distributions, nor may he or she
``reuse'' the expenses that were taken into account in order to claim
the HOPE credit.
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Definition of qualified higher education expenses
Under the bill, the definition of ``qualified higher
education expenses'' is modified to mean: (1) tuition and fees
required for the enrollment or attendance of a designated
beneficiary at an eligible education institution; and (2)
expenses for books, supplies, and equipment incurred in
connection with such enrollment or attendance (but not in
excess of the allowance for books and supplies determined by
the educational institution for purposes of federal financial
assistance programs). The bill also provides that ``qualified
higher education expenses'' shall not include expenses for
education involving sports, games, or hobbies unless this
education is part of the student's degree program or is taken
to acquire or improve job skills of the individual. The bill
does not change the definition of ``qualified higher education
expenses'' with respect to expenses for room and board.
Rollovers for benefit of same beneficiary
The bill clarifies that a transfer of credits (or other
amounts) from one qualified tuition program for the benefit of
a designated beneficiary to another qualified tuition program
for the benefit of the same beneficiary will not be considered
a distribution for a maximum of one such transfer in each 1-
year period.
Member of family
The bill provides that, for purposes of tax-free rollovers
and changes of designated beneficiaries, a ``member of the
family'' includes first cousins of such beneficiary.
Effective Date
The provision permitting the establishment of qualified
tuition programs maintained by one or more private educational
institutions is effective for taxable years beginning after
December 31, 1999. The exclusion from gross income for certain
distributions from qualified State tuition programs under
section 529 is effective for distributions made in taxable
years beginning after December 31, 1999. In the case of a
qualified tuition program established and maintained by an
entity other than a State or agency or instrumentality thereof,
the provision allowing an exclusion from gross income for
certain distributions is effective for distributions made in
taxable years beginning after December 31, 2003. The provision
coordinating distributions from qualified tuition programs and
education individual retirement accounts with the HOPE and
Lifetime Learning credits is effective for distributions made
after December 31, 1999. The provision modifying the definition
of qualified higher education expenses is effective for amounts
paid for courses beginning after December 31, 1999. The
provisions allowing rollovers for the same beneficiary and
including first cousins as a member of the family is effective
for taxable years beginning after December 31, 1999.
C. Eliminate Tax on Awards Under National Health Service Corps
Scholarship Program and F. Edward Hebert Armed Forces Health
Professions Scholarship and Financial Assistance Program
(sec. 403 of the bill and sec. 117 of the Code)
Present Law
Section 117 excludes from gross income amounts received as
a qualified scholarship by an individual who is a candidate for
a degree and used for tuition and fees required for the
enrollment or attendance (or for fees, books, supplies, and
equipment required for courses of instruction) at a primary,
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to
scholarship amounts covering regular living expenses, such as
room and board. In addition to the exclusion for qualified
scholarships, section 117 provides an exclusion from gross
income for qualified tuition reductions for certain education
provided to employees (and their spouses and dependents) of
certain educational organizations.
Section 117(c) specifically provides that the exclusion for
qualified scholarships and qualified tuition reductions does
not apply to any amount received by a student that represents
payment for teaching, research, or other services by the
student required as a condition for receiving the scholarship
or tuition reduction.
The National Health Service Corps Scholarship Program (the
``NHSC Scholarship Program'') and the F. Edward Hebert Armed
Forces Health Professions Scholarship and Financial Assistance
Program (the ``Armed Forces Scholarship Program'') provide
education awards to participants on condition that the
participants provide certain services. In the case of the NHSC
Program, the recipient of the scholarship is obligated to
provide medical services in a geographic area (or to an
underserved population group or designated facility) identified
by the Public Health Service as having a shortage of health-
care professionals. In the case of the Armed Forces Scholarship
Program, the recipient of the scholarship is obligated to serve
a certain number of years in the military at an armed forces
medical facility. Because the recipients of scholarships in
both of these programs are required to perform services in
exchange for the education awards, the awards used to pay
higher education expenses are taxable income to the recipient.
Reasons for Change
The Committee believes that it is appropriate to provide
tax-free treatment for scholarships received by students under
the NHSC Scholarship Program and Armed Forces Scholarship
Program.
Explanation of Provision
The bill provides that amounts received by an individual
under the NHSC Scholarship Program or the Armed Forces
Scholarship Program are eligible for tax-free treatment as
qualified scholarships under section 117, without regard to any
service obligation by the recipient. As with other qualified
scholarships under section 117, the tax-free treatment does not
apply to amounts received by students for regular living
expenses, including room and board.
Effective Date
The provision is effective for education awards received
under the NHSC Scholarship Program and the Armed Forces
Scholarship Program after December 31, 1993.
D. Exclusion for Employer-Provided Educational Assistance
(sec. 404 of the bill and sec. 127 of the Code)
Present Law
Educational expenses paid by an employer for its employees
are generally deductible to the employer.
Employer-paid educational expenses are excludable from the
gross income and wages of an employee if provided under a
section 127 educational assistance plan or if the expenses
qualify as a working condition fringe benefit under section
132. Section 127 provides an exclusion of $5,250 annually for
employer-provided educational assistance. The exclusion does
not apply to graduate courses. The exclusion for employer-
provided educational assistance expires with respect to courses
beginning on or after June 1, 2000.
In order for the exclusion to apply, certain requirements
must be satisfied. The educational assistance must be provided
pursuant to a separate written plan of the employer. The
educational assistance program must not discriminate in favor
of highly compensated employees. In addition, not more than 5
percent of the amounts paid or incurred by the employer during
the year for educational assistance under a qualified
educational assistance plan can be provided for the class of
individuals consisting of more than 5-percent owners of the
employer (and their spouses and dependents).
Educational expenses that do not qualify for the section
127 exclusion may be excludable from income as a working
condition fringe benefit.53 In general, education
qualifies as a working condition fringe benefit if the employee
could have deducted the education expenses under section 162 if
the employee paid for the education. In general, education
expenses are deductible by an individual under section 162 if
the education (1) maintains or improves a skill required in a
trade or business currently engaged in by the taxpayer, or (2)
meets the express requirements of the taxpayer's employer,
applicable law or regulations imposed as a condition of
continued employment. However, education expenses are generally
not deductible if they relate to certain minimum educational
requirements or to education or training that enables a
taxpayer to begin working in a new trade or
business.54
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\53\ These rules also apply in the event that section 127 expires
and is not reinstated.
\54\ In the case of an employee, education expenses (if not
reimbursed by the employer) may be claimed as an itemized deduction
only if such expenses, along with other miscellaneous deductions,
exceed 2 percent of the taxpayer's AGI. The 2-percent floor limitation
is disregarded in determining whether an item is excludable as a
working condition fringe benefit.
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Reasons for Change
The Committee believes that the exclusion for employer-
provided educational assistance has enabled millions of workers
to advance their education and improve their job skills without
incurring additional taxes and a reduction in take-home pay. In
addition, the exclusion lessens the complexity of the tax laws.
Without the special exclusion, a worker receiving educational
assistance from his or her employer is subject to tax on the
assistance, unless the education is related to the worker's
current job. Because the determination of whether particular
educational assistance is job-related is based on the facts and
circumstances, it may be difficult to determine with certainty
whether the educational assistance is excludable from income.
This uncertainty may lead to disputes between taxpayers and the
Internal Revenue Service.
The Committee believes that reinstating the exclusion for
graduate-level employer-provided educational assistance will
enable more individuals to seek higher education. Such
education can increase individuals' job opportunities and help
make America more competitive in the global market place.
The past experience of allowing the exclusion to expire and
subsequently retroactively extending it has created burdens for
employers and employees. Employees may have difficulty planning
for their educational goals if they do not know whether their
tax bills will increase. For employers, the fits and starts of
the legislative history of the provision have caused severe
administrative problems. The Committee believes that
uncertainty about the exclusion's future may discourage some
employers from providing educational benefits.
Explanation of Provision
The provision makes the exclusion for employer-provided
educational assistance permanent. The provision also extends
the exclusion to graduate education, effective for courses
beginning on or after January 1, 2000.
Effective Date
The provision is generally effective on the date of
enactment. The exclusion with respect to graduate-level courses
is effective for courses beginning on or after January 1, 2000.
E. Liberalization of Tax-exempt Financing Rules for Public School
Construction
(secs. 405-407of the bill and secs. 103 and 148 of the Code)
Present Law
1. Tax-exempt bonds
In general
Interest on debt incurred by States or local governments is
excluded from income if the proceeds of the borrowing are used
to carry out governmental functions of those entities or the
debt is repaid with governmental funds (sec. 103). Like other
activities carried out and paid for by States and local
governments, the construction, renovation, and operation of
public schools is an activity eligible for financing with the
proceeds of tax-exempt bonds.
Interest on bonds that nominally are issued by States or
local governments, but the proceeds of which are used (directly
or indirectly) by a private person and payment of which is
derived from funds of such a private person is taxable unless
the purpose of the borrowing is approved specifically in the
Code or in a non-Code provision of a revenue Act. These bonds
are called ``private activity bonds.'' The term ``private
person'' includes the Federal Government and all other
individuals and entities other than States or local
governments.
Private activities eligible for financing with tax-exempt private
activity bonds
The Code includes several exceptions permitting States or
local governments to act as conduits providing tax-exempt
financing for private activities. Both capital expenditures and
limited working capital expenditures of charitable
organizations described in section 501(c)(3) of the Code--
including elementary, secondary, and post-secondary schools--
may be financed with tax-exempt private activity bonds
(``qualified 501(c)(3) bonds'').
States or local governments may issue tax-exempt ``exempt-
facility bonds'' to finance property for certain private
businesses. Businesses eligible for this financing include
transportation (airports, ports, local mass commuting, and high
speed intercity rail facilities); privately owned and/or
privately operated public works facilities (sewage, solid waste
disposal, local district heating or cooling, and hazardous
waste disposal facilities); privately-owned and/or operated
low-income rental housing; and certain private facilities for
the local furnishing of electricity or gas. A further provision
allows tax-exempt financing for ``environmental enhancements of
hydro-electric generating facilities.'' Tax-exempt financing is
authorized for capital expenditures for small manufacturing
facilities and land and equipment for first-time farmers
(``qualified small-issue bonds''), local redevelopment
activities (``qualified redevelopment bonds''), and eligible
empowerment zone and enterprise community businesses.
Finally, tax-exempt private activity bonds may be issued to
finance limited non-business purposes: student loans and
mortgage loans for owner-occupied housing (``qualified mortgage
bonds'' and ``qualified veterans' mortgage bonds'').
In most cases, the volume of tax-exempt private activity
bonds is restricted by aggregate annual limits imposed on bonds
issued by issuers within each State. These annual volume limits
equal $50 per resident of the State, or $150 million if
greater. The annual State private activity bond volume limits
are scheduled to increase to the greater of $75 per resident of
the State or $225 million in calendar year 2007. The increase
will be phased in ratably beginning in calendar year 2003. This
increase was enacted by the Tax and Trade Relief Extension Act
of 1998. Qualified 501(c)(3) bonds are among the tax-exempt
private activity bonds that are not subject to these volume
limits.
Private activity tax-exempt bonds may not be used to
finance schools owned or operated by private, for-profit
businesses.
Arbitrage restrictions on tax-exempt bonds
The Federal income tax does not apply to income of States
and local governments that is derived from the exercise of an
essential governmental function. To prevent these tax-exempt
entities from issuing more Federally subsidized tax-exempt
bonds than is necessary for the activity being financed or from
issuing such bonds earlier than necessary, the Code includes
arbitrage restrictions limiting the ability to profit from
investment of tax-exempt bond proceeds. In general, arbitrage
profits may be earned only during specified periods (e.g.,
defined ``temporary periods'') before funds are needed for the
purpose of the borrowing or on specified types of investments
(e.g., ``reasonably required reserve or replacement funds'').
Subject to limited exceptions, investment profits that are
earned during these periods or on such investments must be
rebated to the Federal Government.
The Code includes three exceptions applicable to education-
related bonds. First, issuers of all types of tax-exempt bonds
are not required to rebate arbitrage profits if all of the
proceeds of the bonds are spent for the purpose of the
borrowing within six months after issuance. In the case of
governmental bonds (including bonds to finance public schools)
the six-month expenditure exception is treated as satisfied if
at least 95 percent of the proceeds is spent within six months
and the remaining five percent is spent within 12 months after
the bonds are issued.
Second, in the case of bonds to finance certain
construction activities, including school construction and
renovation, the six-month period is extended to 24 months for
construction proceeds. Arbitrage profits earned on construction
proceeds are not required to be rebated if all such proceeds
(other than certain retainage amounts) are spent by the end of
the 24-month period and prescribed intermediate spending
percentages are satisfied.
Third, governmental bonds issued by ``small'' governments
are not subject to the rebate requirement. Small governments
are defined as general purpose governmental units that issue no
more than $5 million of tax-exempt governmental bonds in a
calendar year. The $5 million limit is increased to $10 million
if at least $5 million of the bonds are used to finance public
schools.
Restriction on Federal guarantees of tax-exempt bonds
Unlike interest on State or local government bonds,
interest on Federal debt (e.g., Treasury bills) is taxable.
Generally, interest on State and local government bonds that
are Federally guaranteed does not qualify for tax-exemption.
This restriction was enacted in 1984. The 1984 legislation
included exceptions for housing bonds and for certain other
Federal insurance programs that were in existence when the
restriction was enacted.
2. Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, certain
States and local governments are given the authority to issue
``qualified zone academy bonds.'' Under present law, a total of
$400 million of qualified zone academy bonds may be issued in
each of 1998 and 1999. The $400 million aggregate bond
authority is allocated each year to the States according to
their respective populations of individuals below the poverty
line. Each State, in turn, allocates the credit to qualified
zone academies within such State. A State may carry over any
unused allocation into subsequent years.
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 Treasury Department regulation at
110 percent of the applicable Federal rate for the month in
which the bond is issued) 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 amount is includible in gross income (as if
it were a taxable interest payment on the bond), and credit may
be claimed against regular income tax and alternative minimum
tax liability.
``Qualified zone academy bonds'' are defined as bonds
issued by a State or local government, provided that: (1) at
least 95 percent of the proceeds is used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy;'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zone or
a designated enterprise community, or (b) it is reasonably
expected that at least 35 percent of the students at the school
will be eligible for free or reduced-cost lunches under the
school lunch program established under the National School
Lunch Act.
Reasons for Change
The policy underlying the arbitrage rebate exception for
bonds of small governmental units is to reduce complexity for
these entities because they may not have in-house financial
staff to engage in the expenditure and investment tracking
necessary for rebate compliance. The exception further is
justified by the limited potential for arbitrage profits at
small issuance levels and limitation of the provision to
governmental bonds, which typically require voter approval
before issuance. The Committee believes that a limited increase
of $5 million per year for public school construction bonds
will more accurately conform this present-law exception to
current school construction costs.
Further, the Committee wishes to encourage public-private
partnerships to improve educational opportunities. To permit
public-private partnerships to reap the benefit of the implicit
subsidy to capital costs provided through tax-exempt financing,
the Committee determined that is appropriate to allow the
issuance of tax-exempt private activity bonds for public school
facilities.
Finally, the Committee believes it is appropriate to foster
public school construction by permitting the Federal Home Loan
Bank Board to satisfy its present-law community development
requirements in a more cost-effective manner--by guaranteeing
tax-exempt bonds for such construction.
Explanation of Provisions
1. Increase amount of governmental bonds that may be issued by
governments qualifying for the ``small governmental unit''
arbitrage rebate exception
The additional amount of governmental bonds for public
schools that small governmental units may issue without being
subject to the arbitrage rebate requirement is increased from
$5 million to $10 million. Thus, these governmental units may
issue up to $15 million of governmental bonds in a calendar
year provided that at least $10 million of the bonds are used
to finance public school construction expenditures.
2. Allow issuance of tax-exempt private activity bonds for public
school facilities
The private activities for which tax-exempt bonds may be
issued are expanded to include elementary and secondary public
school facilities which are owned by private, for-profit
corporations pursuant to public-private partnership agreements
with a State or local educational agency. The term school
facility includes school buildings and functionally related and
subordinate land (including stadiums or other athletic
facilities primarily used for school events) 55and
depreciable personal property used in the school facility. The
school facilities for which these bonds are issued must be
operated by a public educational agency as part of a system of
public schools.
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\55\ The present-law limit on the amount of the proceeds of a
private activity bond issue that may be used to finance land
acquisition does not apply to these bonds.
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A public-private partnership agreement is defined as an
arrangement pursuant to which the for-profit corporate party
constructs, rehabilitates, refurbishes or equips a school
facility. The agreement must provide that, at the end of the
contract term, ownership of the bond-financed property is
transferred to the public school agency party to the agreement
for no additional consideration.
Issuance of these bonds is subject to a separate annual
per-State volume limit equal to the greater of $10 per resident
($5 million, if greater) in lieu of the present-law State
private activity bond volume limits. As with the present-law
State private activity bond volume limits, States decide how to
allocate the bond authority to State and local government
agencies. Bond authority that is unused in the year in which it
arises may be carried forward for up to three years for public
school projects under rules similar to the carryforward rules
of the present-law private activity bond volume limits.
3. Permit limited Federal guarantees of school construction bonds by
the Federal Housing Finance Board
The Federal Housing Finance Board is permitted to authorize
the regional Federal Home Loan Banks in its system to guarantee
limited amounts of public school bonds. Eligible bonds are
governmental bonds with respect to which 95 percent or more of
the proceeds are used for public school construction. The
aggregate amount of bonds which may be guaranteed by all such
Banks pursuant to this provision is $500 million per year. The
provision only modifies the Internal Revenue Code; it does not
modify the relevant provisions of the United States Code which
govern activities of the Federal Housing Finance Board and the
Federal Home Loan Banks.
Effective Dates
These provisions relating arbitrage rebate requirements for
public school bonds are effective for bonds issued after
December 31, 1999.
The provision relating to guarantees of public school
construction bonds will become effective upon enactment (after
the date of enactment of the bill) of legislation authorizing
the Federal Housing Finance Board and Federal Home Loan Banks
to provide the guarantees permitted under the bill.
TITLE V. HEALTH CARE TAX RELIEF PROVISIONS
A. Above-the-Line Deduction for Health Insurance Expenses
(sec. 501 of the bill and new sec. 222 of the Code)
Present Law
Under present law, the tax treatment of health insurance
expenses depends on the individual's circumstances. Self-
employed individuals may deduct a portion of health insurance
expenses for the individual and his or her spouse and
dependents. The deductible percentage of health insurance
expenses of a self-employed individual is 60 percent in 1999
through 2001; 70 percent in 2002; and 100 percent in 2003 and
thereafter. The deduction for health insurance expenses of
self-employed individuals is not available for any month in
which the taxpayer is eligible to participate in a subsidized
health plan maintained by the employer of the taxpayer or the
taxpayer's spouse. The deduction applies to qualified long-term
care insurance premiums treated as medical expenses under the
itemized deduction for medical expenses, described below.
Employees can exclude from income 100 percent of employer-
provided health insurance.
Individuals who itemize deductions may deduct their health
insurance expenses only to the extent that the total medical
expenses of the individual exceed 7.5 percent of adjusted gross
income (sec. 213). Subject to certain dollar limitations,
premiums for qualified long-term care insurance are treated as
medical expenses for purposes of the itemized deduction for
medical expenses (sec. 213). The amount of qualified long-term
care insurance premiums that may be taken into account for 1999
is as follows: $210 in the case of an individual 40 years old
or less; $400 in the case of an individual who is more than 40
but not more than 50; $800 in the case of an individual who is
more than 50 but not more than 60; $2,120 in the case of an
individual who is more than 60 but not more than 70; and $2,660
in the case of an individual who is more than 70. These dollar
limits are indexed for inflation.
Reasons for Change
The Committee believes that the present-law inequities in
tax treatment of health insurance expenses should be reduced.
In addition, the Committee believes that providing an
additional incentive for the purchase of health insurance for
those who pay for most of their health insurance on an after-
tax basis will encourage uninsured individuals to purchase
health insurance for themselves and their families.
Explanation of Provision
The provision provides an above-the-line deduction for a
percentage of the amount paid during the year for insurance
which constitutes medical care (as defined under sec. 213,
other than long-term care insurance treated as medical care
under sec. 213) for the taxpayer and his orher spouse and
dependents.56 The deductible percentage is: 25 percent in
2001, 2002, and 2003; 50 percent in 2004 and 2005; and 100 percent in
2006 and thereafter.57
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\56\ The deduction only applies to health insurance that
constitutes medical care; it does not apply to medical expenses. The
deduction applies to self-insured arrangements (provided such
arrangements constitute insurance, e.g., there is appropriate risk-
shifting) and coverage under employer plans treated as insurance under
section 104. As described below, the bill provides a similar deduction
for qualified long-term care insurance expenses.
\57\ The deduction is not available with respect to any amounts
excludable from gross income, e.g., salary reduction contributions used
to purchase health insurance under a cafeteria plan.
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The deduction is not available to an individual for any
month in which the individual is covered under an employer-
sponsored health plan if at least 50 percent of the cost of the
coverage is paid or incurred by the employer.58 For
purposes of this rule, any amounts excludable from the gross
income of the employee under the exclusion for employer-
provided health coverage is treated as paid or incurred by the
employer; thus, for example, health insurance purchased by an
employee through a cafeteria plan with salary reduction amounts
is considered to be paid for by the employer.59
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\58\ This rule is applied separately with respect to qualified
long-term care insurance.
\59\ Excludable employer contributions to a health flexible
spending arrangement or medical savings account (including salary
reduction contributions) are also considered amounts paid by the
employer for health insurance that constitutes medical care. Salary
reduction contributions are not considered to be amounts paid by the
employee.
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Except as provided below, in determining whether the 50-
percent threshold is met, all health plans of the employer in
which the employee participates are treated as a single plan.
If the employer pays for less than 50 percent of the cost of
all health plans in which the individual participates, the
deduction is available only with respect to each plan with
respect to which the employer subsidy is less than 50 percent.
Cost is determined as under the health care continuation rules.
The deduction is not available with respect to insurance
providing coverage for accidents, disability, dental care,
vision care, or
a specific disease or making payments of a fixed amount per day
(or other period) on account of hospitalization. In addition,
insurance providing such coverage (and employer payments for
such coverage) are not taken into account for purposes of the
50-percent rule.
The following examples illustrate the application of the
50-percent rule.
Example 1: Employee A participates in an employer-sponsored
health plan. The annual cost for single coverage is $3,000, and
the annual additional cost for coverage for A's spouse and
dependents is $1,000. The employer pays 100 percent of the cost
of individual coverage, but does not pay any additional amount
for family coverage. A chooses family coverage. The total
amount the employer pays for the insurance is $3,000, which is
75 percent of the total cost of the coverage ($4,000). Thus,
the deduction is not available.
Example 2: Employee B participates in two employer-
sponsored health plans. One plan provides major medical
coverage. The cost of this plan is $2,000 per year. The
employer pays $one-half of the cost of this plan. The second
plan provides only dental insurance. The cost of the dental
plan is $300 per year, which is paid by the employee. In
determining whether B is entitled to the deduction, the dental
plan is disregarded. Thus, the total cost of the health plans
in which B participates is $2,000. The employer pays for 50
percent of this total cost. B may not deduct her share of the
premium for the major medical plan, nor the cost of the dental
insurance.
Example 3: Employee C participates in an employer-sponsored
health plan. The cost of the plan is $4,000. The employer pays
$1,000 of the cost of the plan directly, and Employee C pays
the remainder of the $3,000 cost of the plan by salary
reduction through a cafeteria plan. The $1,000 employer
contribution and the $3,000 salary reduction contributions are
all employer payments. Thus, the employer pays for the entire
cost of the plan, and the deduction is not available.
The deduction is not available to individuals enrolled in
Medicare, Medicaid, the Federal Employees Health Benefit
Program (``FEHBP''),60 Champus, VA, Indian Health
Service, or Children's Health Insurance programs. Thus, for
example, the deduction is not available with respect to Medigap
coverage, because such coverage is provided to individuals
enrolled in Medicare.
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\60\ This rule does not prevent individuals covered by the FEHBP
from deducting premiums for health care continuation coverage, provided
the requirements for the deduction are otherwise met.
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The provision authorizes the Secretary to prescribe rules
necessary to carry out the provision, including appropriate
reporting requirements for employers.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
B. Provisions Relating to Long-Term Care Insurance
(secs. 501 and 502 of the bill, new sec. 222 of the Code and secs. 106
and 125 of the Code)
Present Law
Tax treatment of health insurance and long-term care insurance
Under present law, the tax treatment of health insurance
expenses depends on the individual's circumstances. Self-
employed individuals may deduct a portion of health insurance
expenses for the individual and his or her spouse and
dependents. The deductible percentage of health insurance
expenses of a self-employed individual is 60 percent in 1999
through 2001; 70 percent in 2002; and 100 percent in 2003 and
thereafter. The deduction for health insurance expenses of
self-employed individuals is not available for any month in
which the taxpayer is eligible to participate in a subsidized
health plan maintained by the employer of the taxpayer or the
taxpayer's spouse. The deduction applies to qualified long-term
care insurance premiums treated as medical expenses under the
itemized deduction for medical expenses, described below.
Employees can exclude from income 100 percent of employer-
provided health insurance or qualified long-term care
insurance.
Individuals who itemize deductions may deduct their health
insurance expenses only to the extent that the total medical
expenses of the individual exceed 7.5 percent of adjusted gross
income (sec. 213). Subject to certain dollar limitations,
premiums for qualified long-term care insurance are treated as
medical expenses for purposes of the itemized deduction for
medical expenses (sec. 213). The amount of qualified long-term
care insurance premiums that may be taken into account for 1999
is as follows: $210 in the case of an individual 40 years old
or less; $400 in the case of an individual who is more than 40
but not more than 50; $800 in the case of an individual who is
more than 50 but not more than 60; $2,120 in the case of an
individual who is more than 60 but not more than 70; and $2,660
in the case of an individual who is more than 70. These dollar
limits are indexed for inflation.
Cafeteria plans
Under present law, compensation generally is includible in
gross income when actually or constructively received. An
amount is constructively received by an individual if it is
made available to the individual or the individual has an
election to receive such amount. Under one exception to the
general principle of constructive receipt, amounts are not
included in the gross income of a participant in a cafeteria
plan described in section 125 of the Code solely because the
participant may elect among cash and certain employer-provided
qualified benefits under the plan. This constructive receipt
exception is not available if the individual is permitted to
revoke a benefit election during a period of coverage in the
absence of a change in family status or certain other events.
In general, qualified benefits are certain specified
benefits that are excludable from an employee's gross income by
reason of a specific provision of the Code. Thus, employer-
provided accident or health coverage, group-term life insurance
coverage (whether or not subject to tax by reason of being in
excess of the dollar limit on the exclusion for such
insurance), and benefits under dependent care assistance
programs may be provided through a cafeteria plan. The
cafeteria plan exception from the principle of constructive
receipt generally also applies for employment tax (FICA and
FUTA) purposes.61
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\61\ Elective contributions under a qualified cash or deferred
arrangement that is part of a cafeteria plan are subject to employment
taxes.
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Long-term care insurance cannot be provided under a
cafeteria plan.
Flexible spending arrangements
A flexible spending arrangement (``FSA'') is a
reimbursement account or other arrangement under which an
employer pays or reimburses employees for medical expenses or
certain other nontaxable employer-provided benefits, such as
dependent care. An FSA may be part of a cafeteria plan and may
be funded through salary reduction. FSAs may also be provided
by an employer outside a cafeteria plan. FSAs are commonly
used, for example, to reimburse employees for medical expenses
not covered by insurance. Qualified long-term care services
cannot be provided through an FSA.
Reasons for Change
The Health Insurance Portability and Accountability Act of
1996 (``HIPAA'') included provisions providing favorable tax
treatment for qualified long-term care insurance. The Congress
enacted those provisions in order to provide an incentive for
individuals to take financial responsibility for their long-
term care needs. The Committee believes that further incentives
are appropriate for individuals to purchase their own qualified
long-term care insurance. The Committee also wishes to
facilitate the purchase of qualified long-term care insurance
through the workplace.
Explanation of Provision
Deduction for qualified long-term care insurance expenses
The provision provides an above-the-line deduction for a
percentage of the amount paid during the year for long-term
care insurance which constitutes medical care (as defined under
sec. 213) for the taxpayer and his or her spouse and
dependents.62 The deductible percentage is: 25
percent in 2001, 2002, and 2003; 50 percent in 2004 and 2005;
and 100 percent in 2006 and thereafter.63
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\62\ The deduction applies only to insurance that constitutes
medical care; it would not apply to long-term care insurance expenses.
The deduction would apply to self-insured arrangements (provided such
arrangements constitute insurance, e.g., there is appropriate risk-
shifting) and coverage under employer plans treated as insurance under
section 104. Another provision of the bill provides a similar deduction
for health insurance expenses.
\63\ The deduction is not available with respect to any amounts
excludable from gross income, e.g., salary reduction contributions used
to purchase qualified long-term care insurance under a cafeteria plan.
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The deduction is not available to an individual for any
month in which the individual is covered under an employer-
sponsored health plan if at least 50 percent of the cost of the
coverage is paid or incurred by the employer.64 For
purposes of this rule, any amounts excludable from the gross
income of the employee with respect to qualified long-term care
insurance are treated as paid or incurred by the employer. In
determining whether the 50-percent threshold is met, all plans
of the employer providing long-term care in which the employee
participates are treated as a single plan. If the employer pays
less than 50 percent of the cost of all long-term care plans in
which the individual participates, the deduction is available
only with respect to each plan with respect to which the
employer pays for less than 50 percent of the cost. Cost is
determined as under the health care continuation rules.
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\64\ This rule is applied separately with respect to health
insurance.
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The provision authorizes the Secretary to prescribe rules
necessary to carry out the provision, including appropriate
reporting requirements for employers.
Provision of long-term care in a cafeteria plan
The provision provides that qualified long-term care
insurance is a qualified benefit under a cafeteria plan, to the
extent that the insurance is treated as a medical expense under
the itemized deduction for medical expenses (i.e., to the
extent the qualified long-term care insurance does not exceed
the premium limitations under sec. 213). The provision also
provides that qualified long-term care services may be provided
under an FSA.65
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\65\ Excludable employer contributions to a flexible spending
arrangement or a cafeteria plan for qualified long-term care insurance
or services are considered an amount paid by the employer for long-term
care insurance.
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
C. Additional Personal Exemption for Caretakers
(sec. 503 of the bill and sec. 151 of the Code)
Present Law
Present law does not provide an additional personal
exemption based solely on the custodial care of parents or
grandparents. However, taxpayers with dependent parents
generally are able to claim a personal exemption for each of
these dependents, if they satisfy five tests: (1) a member of
household or relationship test; (2) a citizenship test; (3) a
joint return test; (4) a gross income test; and (5) a support
test. The taxpayer is also required to list each dependent's
tax identification number (the ``TIN'') on the tax return.
The total amount of personal exemptions is subtracted
(along with certain other items) from adjusted gross income
(``AGI'') in arriving at taxable income. The amount of each
personal exemption is $2,750 for 1999, and is adjusted annually
for inflation. For 1999, the total amount of the personal
exemptions is phased out for taxpayers with AGI in excess of
$126,600 for single taxpayers, $158,300 for heads of household,
and $189,950 for married couples filing joint returns. For
1999, the point at which a taxpayer's personal exemptions are
completely phased-out is $249,100 for single taxpayers,
$280,800 for heads of households, and $312,450 for married
couples filing joint returns.
Reasons for Change
Present law provides favorable tax treatment for long-term
care insurance and services, but does not provide similar tax
relief for in-home care. The Committee understands that in-home
care may be preferable in some cases, and that individuals who
care for family members with special needs incur additional
expenses. Thus, the Committee believes tax relief for in-home
care is appropriate.
Explanation of Provision
The bill provides taxpayers who maintain a household
including one or more ``qualified persons'' with an additional
personal exemption for each qualified person.
A ``qualified person'' is an individual who: (1) satisfies
a relationship test, (2) satisfies a residency test, (3)
satisfies an identification test, and (4) has been certified as
having long-term care needs. The individual satisfies the
relationship test if the individual was the father or mother
of: (a) the taxpayer, (b) the taxpayer's spouse, or (c) a
former spouse of the taxpayer. A stepfather, stepmother, and
ancestors of the father or mother are treated as a father or
mother for these purposes.
An individual satisfies the residency test if the
individual had the same principal place of abode as the
taxpayer for the taxpayer's entire taxable year.
An individual satisfies the identification test if the
individual's name and taxpayer identification number (``TIN'')
is included on the taxpayer's return for the taxable year.
In order to be a qualified individual, an individual must
be certified before the due date of the return for the taxable
year (without extensions) by a licensed physician as having
long-term care needs for period which is at least 180
consecutive days and a portion of which occurs within the
taxable year. The certification must be made no more than 39\1/
2\ months before the due date for the return (or within such
other period as the Secretary has prescribed).
Under the provision, an individual has long-term care needs
if the individual is unable to perform at least 2 activities of
daily living (``ADLs'') without substantial assistance from
another individual, due to a loss of functional capacity. As
with the present-law rules relating to long-term care, ADLs
are: (1) eating; (2) toileting; (3) transferring; (4) bathing;
(5) dressing; and (6) continence. Substantial assistance
includes hands-on assistance (that is, the physical assistance
of another person without which the individual is unable to
perform the ADL) and stand-by assistance (that is, the presence
of another person within arm's reach of the individual that is
necessary to prevent, by physical intervention, injury to the
individual when performing the ADL).
As an alternative to the 2-ADL test described above, an
individual is considered to have long-term care needs if he or
she (1) requires substantial supervision for at least 6 months
to be protected from threats to health and safety due to severe
cognitive impairment and (2) is unable for at least 6 months to
perform at least one or more ADLs or to engage in age
appropriate activities as determined under regulations
prescribed by the Secretary of the Treasury in consultation
with the Secretary of Health and Human Services.
The bill provides that a taxpayer is treated as maintaining
a household for any period only if over one-half of the cost of
maintaining the household for such period is furnished by such
taxpayer or, if such taxpayer is married, by such taxpayer and
the taxpayer's spouse. The bill also provides that taxpayers
who are married at the end of the taxable year must file a
joint return to receive the credit unless they lived apart from
their respective spouse for the last six months of the taxable
year and the individual claiming the credit (1) maintained as
his or her home a household for the qualified person for the
entire taxable year and (2) furnished over one-half of the cost
of maintaining that household in that taxable year. Finally,
the bill provides that a taxpayer legally separated from his or
her spouse under a decree of divorce or of separate maintenance
will not be considered married for purposes of this provision.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
D. Add Certain Vaccines Against Streptococcus Pneumoniae to the List of
Taxable Vaccines
(sec. 504 of the bill and secs. 4131 and 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
recommended for routine administration to children: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, HIB
(haemophilus influenza type B), hepatitis B, varicella (chicken
pox), and rotavirus gastroenteritis. 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
(``Vaccine Trust Fund'') to finance compensation awards under
the Federal Vaccine Injury Compensation Program for individuals
who suffer certain injuries following administration of the
taxable vaccines. 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 and physicians. 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
Streptococcus pneumoniae (often referred to as
pneumococcus) is a bacteria that can cause bacterial
meningitis, a brain or spinal cord infection, bacteremia, a
bloodstream infection, and otitis media (ear infection). The
Committee understands that each year in the United States,
pneumococcal disease accounts for an estimated 3,000 cases of
bacterial meningitis, 50,000 cases of bacteremia, 500,000 cases
of pneumonia, and 7 million cases of otitis media among all age
groups. The Committee understands that, while there currently
is a vaccine effective in preventing pneumococcal diseases in
adults, that vaccine, a polysaccaride vaccine, does not induce
an adequate immune response in young children and therefore
does not protect children against these diseases. The Committee
further understands that the Food and Drug Administration's
(the ``FDA'') is expected to approve a new, sugar protein
conjugate vaccine against the disease and the Centers for
Disease Control is expected to recommend this conjugate vaccine
for routine inoculation of children. The Committee believes
American children will benefit from wide use of this new
vaccine. The Committee believes that, by including the new
vaccine with those presently covered by the Vaccine Trust Fund,
greater application of the vaccine will be promoted. The
Committee, therefore, believes it is appropriate to add the
conjugate vaccine against streptococcus pneumoniae to the list
of taxable vaccines.
The Committee is aware that the Vaccine Trust Fund has a
current cash-flow surplus in excess of $1.3 billion
dollars.66 The Committee, therefore, feels it is
appropriate to reduce the rate of tax applied to all vaccines.
However, the Committee thinks it is prudent to gather more
detailed information on the operation of the Vaccine Injury
Compensation Program and likely future claims to assess the
adequacy of the Vaccine Trust Fund. Therefore, the Committee
finds it appropriate to direct the Comptroller General of the
United States to report on the operation and management of
expenditures from the Vaccine Trust Fund and to advise the
Committee on the adequacy of the Vaccine Trust Fund to meet
future claims under the Federal Vaccine Injury Compensation
Program.
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\66\ Joint Committee on Taxation, Schedule of Present Federal
Excise Taxes (as of January 1, 1999) (JCS-2-99), March 29, 1999, p. 48.
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Explanation of Provision
The bill adds any conjugate vaccine against streptococcus
pneumoniae to the list of taxable vaccines. The bill also
changes the effective date enacted in Public Law 105-277 and
certain other conforming amendments to expenditure purposes to
enable certain payments to be made from the Trust Fund.
The bill also reduces the rate of tax applicable to all
taxable vaccines from 75 cents per dose to 25 cents per dose
for sales of vaccines after December 31, 2004.
In addition, the bill directs the General Accounting Office
(``GAO'') to report to the House Committee on Ways and Means
and the Senate Committee on Finance on the operation and
management of expenditures from the Vaccine Trust Fund and to
advise the Committees on the adequacy of the Vaccine Trust Fund
to meet future claims under the Federal Vaccine Injury
Compensation Program.
Within its report, to the greatest extent possible, the
Committee would like to see a thorough statistical report of
the number of claims submitted annually, the number of claims
settled annually, and the value of settlements. The Committee
would like to learn about the statistical distribution of
settlements, including the mean and median values of
settlements, and the extent to which the value of settlements
varies with an injury attributed to an identifiable vaccine.
The Committee also would like to learn about the settlement
process, including a statistical distribution of the amount of
time required from the initial filing of a claim to a final
resolution.
The Code provides that certain administrative expenses may
be charged to the Vaccine Trust Fund. The Committee intends
that the GAO report include an analysis of the overhead and
administrative expenses charged to the Vaccine Trust Fund.
The GAO is directed to report its findings to the House
Committee on Ways and Means and the Senate Committee on Finance
within one year of the date of enactment.
Effective Date
The provision is effective for vaccine purchases beginning
on the day after the date on which the Centers for Disease
Control make final recommendation for routine administration of
conjugated streptococcus pneumonia vaccines to children. No
floor stocks tax is to be collected for amounts held for sale
on that date. For sales on or before the date on which the
Centers for Disease Control make final recommendation for
routine administration of conjugate streptococcus pneumonia
vaccines to children for which delivery is made after such
date, the delivery date is deemed to be the sale date. The
addition of conjugate streptococcus pneumoniae vaccines to the
list of taxable vaccines is contingent upon the inclusion in
this legislation of the modifications to Public Law 105-277.
The provision to reduce the rate of tax to 25 cents per
dose would be effective for sales after December 31, 2004. No
floor stocks refunds would be permitted for vaccines held on
December 31, 2004. For the purpose of determining the amount of
refund of tax on a vaccine returned to the manufacturer or
importer, for vaccines returned after August 31, 2004 and
before January 1, 2005, the amount of tax assumed to have been
paid on the initial purchase of the returned vaccine is not to
exceed $0.25 per dose.
TITLE VI. SMALL BUSINESS TAX RELIEF PROVISIONS
A. Accelerate 100-Percent Self-Employed Health Insurance Deduction
(sec. 601 of the bill and sec. 162(l) of the Code)
Present Law
Under present law, the tax treatment of health insurance
expenses depends on the individual's circumstances. Self-
employed individuals may deduct a portion of health insurance
expenses for the individual and his or her spouse and
dependents. The deductible percentage of health insurance
expenses of a self-employed individual is 60 percent in 1999
through 2001, 70 percent in 2002, and 100 percent in 2003 and
thereafter. The deduction for health insurance expenses of
self-employed individuals is not available for any month in
which the taxpayer is eligible to participate in a subsidized
health plan maintained by the employer of the taxpayer or the
taxpayer's spouse.
Employees can exclude from income 100 percent of employer-
provided health insurance.
Individuals who itemize deductions may deduct their health
insurance expenses only to the extent that the total medical
expenses of the individual exceed 7.5 percent of adjusted gross
income (sec. 213). Subject to certain dollar limitations,
premiums for qualified long-term care insurance are treated as
medical expenses for purposes of the itemized deduction for
medical expenses (sec. 213). The amount of qualified long-term
care insurance premiums that may be taken into account for 1999
are as follows: $210 in the case of an individual 40 years old
or less; $400 in the case of an individual who is over 40 but
not more than 50; $800 in the case of an individual who is more
than 50 but not more than 60; $2,120 in the case of an
individual who is more than 60 but not more than 70; and $2,660
in the case of an individual who is more than 70. These dollar
limits are indexed for inflation.
The self-employed health deduction also applies to
qualified long-term care insurance premiums treated as medical
care for purposes of the itemized deduction for medical
expenses.
Reasons for Change
The Committee believes it appropriate to eliminate the
disparate treatment of employer-provided health care and health
insurance expenses of self-employed individuals as soon as
possible.
Explanation of Provision
Beginning in 2000, the provision increases the deduction
for health insurance expenses (and qualified long-term care
insurance expenses) of self-employed individuals to 100
percent.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
B. Increase Section 179 Expensing
(sec. 602 of the bill and sec. 179 of the Code)
present law
Present law provides that, in lieu of depreciation, a
taxpayer with a sufficiently small amount of annual investment
may elect to deduct up to $19,000 (for taxable years beginning
in 1999) of the cost of qualifying property placed in service
for the taxable year (sec. 179). In general, qualifying
property is defined as depreciable tangible personal property
that is purchased for use in the active conduct of a trade or
business. The $19,000 amount is reduced (but not below zero) by
the amount by which the cost of qualifying property placed in
service during the taxable year exceeds $200,000. In addition,
the amount eligible to be expensed for a taxable year may not
exceed the taxable income for a taxable year that is derived
from the active conduct of a trade or business (determined
without regard to this provision). Any amount that is not
allowed as a deduction because of the taxable income limitation
may be carried forward to succeeding taxable years (subject to
similar limitations).
The $19,000 amount is increased to $25,000 for taxable
years beginning in 2003 and thereafter. The increase is phased
in as follows: for taxable years beginning in 2000, the amount
is $20,000; for taxable years beginning in 2001 or 2002, the
amount is $24,000; and for taxable years beginning in 2003 and
thereafter, the amount is $25,000.
reasons for change
The Committee believes that section 179 expensing provides
two important benefits for small business. First, it lowers the
cost of capital for tangible property used in a trade or
business. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In order to
increase the value of these benefits, the Committee bill
increases the amount allowed to be expensed under section 179
to $30,000.
explanation of provision
The provision provides that the maximum dollar amount that
may be deducted under section 179 is increased to $30,000 for
taxable years beginning in 2000 and thereafter, without the
present-law phase-in rule.
effective date
The provision is effective for taxable years beginning
after December 31, 1999.
C. Repeal of Temporary Federal Unemployment Surtax
(sec. 603 of the bill and sec. 3301 of the Code)
present law
The Federal Unemployment Tax Act (``FUTA'') imposes a 6.2-
percent gross tax rate on the first $7,000 paid annually by
covered employers to each employee. Employers in States with
programs approved by the Federal Government and with no
delinquent Federal loans may credit 5.4-percentage points
against the 6.2-percent tax rate, making the minimum, net
Federal unemployment tax rate 0.8 percent. Since all States
currently have approved programs, 0.8 percent is the Federal
tax rate that generally applies. This Federal revenue finances
administration of the unemployment system, half of the Federal-
State extended benefits program, and a Federal account for
State loans. The States use the revenue turned back to them by
the 5.4-percent credit to finance their regular State programs
and half of the Federal-State extended benefits program.
In 1976, Congress passed a temporary surtax of 0.2 percent
of taxable wages to be added to the permanent FUTA tax rate.
Thus, the current 0.8-percent FUTA tax rate has two components:
a permanent tax rate of 0.6 percent, and a temporary surtax
rate of 0.2 percent. The temporary surtax subsequently has been
extended through 2007.
reasons for change
Because current projections indicate that the overall
funding levels in the unemployment trust funds can be
maintained at adequate levels without the 0.2-percent surtax,
the Committee believes that the surtax should be repealed.
Also, the Committee believes that the repeal will reduce the
tax burden on businesses subject to the surtax.
explanation of provision
The bill repeals the temporary FUTA surtax after December
31, 2004.
effective date
The provision is effective for labor performed on or after
January 1, 2005.
D. Coordinate Farmer Income Averaging and the Alternative Minimum Tax
(sec. 604 of the bill and sec. 55 of the Code)
present law
An individual taxpayer may elect to compute his or her
current year tax liability by averaging, over the prior three-
year period, all or portion of his or her taxable income from
the trade or business of farming. The averaging election is not
coordinated with the alternative minimum tax. Thus, some
farmers may become subject to the alternative minimum tax
solely as a result of the averaging election.
reasons for change
The Committee believes that farmer income averaging should
be coordinated with the alternative minimum tax so that a
farmer's alternative minimum tax liability is not increased
solely because he or she elects income averaging.
explanation of provision
The provision coordinates farmer income averaging with the
alternative minimum tax. A farmer electing to average his or
her farm income will owe alternative minimum tax only to the
extent he or she would have owed alternative minimum tax had
averaging not been elected. This is achieved by excluding the
impact of the election to average farm income from the
calculation of both regular tax and tentative minimum tax,
solely for the purpose of determining alternative minimum tax.
effective date
The provision is effective for taxable years beginning
after December 31, 1999.
E. Farm and Ranch Risk Management Accounts
(sec. 605 of the bill and sec. 468C of the Code)
present law
There is no provision in present law allowing the elective
deferral of farm income.
reasons for change
The Committee believes that farmers should be encouraged to
set aside a portion of their earnings during good years to
provide for their support during those future years when they
may be less successful.
explanation of provision
The bill allows taxpayers engaged in an eligible farming
business to establish Farm and Ranch Risk Management (FARRM)
accounts. An eligible farming business is any trade or business
of farming in which the taxpayer actively participates,
including the operation of a nursery or sod farm or the raising
or harvesting of crop-bearing or ornamental trees.\67\
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\67\ An evergreen tree that is more than 6 years old when severed
from the roots (and thus eligible for captial gains treatment on
cutting) is not considered an ornamental tree for this purpose.
---------------------------------------------------------------------------
Contributions to a FARRM account are deductible and are
limited to 20 percent of the taxable income that is
attributable to the eligible farming business. The deduction is
to be taken into account in determining adjusted gross income
and will reduce income attributable to farming for all purposes
other than the determination of the 20 percent of eligible farm
income limitation on contributions to a FARRM account.
Contributions will be deemed to have been made on the last day
of the taxable year if made on or before the due date (without
regard to extensions) of the taxpayer's return for that year.
A FARRM account is taxed as a grantor trust and any
earnings are required to be distributed currently. Thus, any
income earned in the FARRM account is taxed currently to the
farmer who established the account.
Contributions to a FARRM account do not reduce earnings
from self-employment. Accordingly, distributions are not
included in self-employment income.
Amounts may remain on deposit in a FARRM account for five
years. Any amount that has not been distributed by the close of
the fourth year following the year of deposit is deemed to be
distributed and includible in the gross income of the account
owner. Distributions for the year are considered to first be
made from the earnings that are required to be distributed.
Additional amounts distributed for the year are considered to
be made from the oldest deposits.
A FARRM account may not be maintained by a taxpayer who has
ceased to engage in an eligible farming business. If the
taxpayer does not engage in an eligible farming business during
two consecutive taxable years, the balance in the FARRM account
is deemed to be distributed to the taxpayer on the last day of
such two year period.
If the taxpayer who established the FARRM account dies, and
the taxpayer's surviving spouse acquires the taxpayer's
interest in the FARRM account by reason of being designated as
the beneficiary of the account at the death of the taxpayer,
the surviving spouse will ``step into the shoes'' of the
deceased taxpayer with respect to the FARRM account. In other
cases, the account will cease to be a FARRM account on the date
of the taxpayer's death and the balance in the account will be
deemed distributed to the taxpayer on the date of death.
A FARRM account is a trust that is created or organized in
the United States for the exclusive benefit of the taxpayer who
establishes it. The trustee must be a bank or other person who
demonstrates to the satisfaction of the Secretary that it will
administer the trust in a manner consistent with the
requirements of the section. At all times, the assets of the
trust must consist entirely of cash and obligations which have
adequate stated interest (as defined in section 1274(c)(2)) and
which pay such adequate interest not less often than annually.
The trust must distribute all income currently, and its assets
may not be commingled except in a common trust fund or common
investment fund. Additional protections, including rules
preventing the trust from engaging in prohibited transactions
or from being pledged as security for a loan, are provided.
Penalties apply in the case of excess contributions and
failures to make required distributions.
effective date
The provision is effective for taxable years beginning
after December 31, 2000.
TITLE VII. ESTATE AND GIFT TAX RELIEF
A. Reduce Estate, Gift, and Generation-Skipping Transfer Taxes
(secs. 701-702 of the bill and secs. 2001 and 2010 of the Code)
present law
A gift tax is imposed on lifetime transfers and an estate
tax is imposed on transfers at death. The gift tax and the
estate tax are unified so that a single graduated rate schedule
applies to cumulative taxable transfers made by a taxpayer
during his or her lifetime and at death. The unified estate and
gift tax rates begin at 18 percent on the first $10,000 in
cumulative taxable transfers and reach 55 percent on cumulative
taxable transfers over $3 million. In addition, a 5-percent
surtax is imposed on cumulative taxable transfers between $10
million and the amount necessary to phase out the benefits of
the graduated rates.
A unified credit is available with respect to taxable
transfers by gift and at death. The unified credit amount
effectively exempts from tax a total of $650,000 in 1999,
$675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000
in 2004, $950,000 in 2005, and $1 million in 2006 and
thereafter.
A generation-skipping transfer (``GST'') tax generally is
imposed on transfers, either directly or through a trust or
similar arrangement, to a ``skip person'' (i.e., a beneficiary
in a generation more than one generation below that of the
transferor). Transfers subject to the GST tax include direct
skips, taxable terminations, and taxable distributions. The GST
tax is imposed at the top estate and gift tax rate (which,
under present law, is 55 percent) on cumulative generation-
skipping transfers in excess of $1 million (indexed beginning
in 1999).
reasons for change
The Committee believes that the estate, gift, and GST taxes
are unduly burdensome on all taxpayers. The Committee,
therefore, believes it is appropriate to lessen the estate,
gift, and GST tax burden on taxpayers.
explanation of provision
Beginning in 2001, the 5-percent surtax, which phases out
the graduated rates, and the rates in excess of 50 percent are
repealed. Beginning in 2004, the unified credit is replaced
with a unified exemption. Beginning in 2007, the unified
exemption amount is increased from $1 million to $1.5 million.
effective date
The 5-percent surtax and the rates in excess of 50 percent
are repealed for estates of decedents dying and gifts and
generation-skipping transfers made after December 31, 2000. The
unified credit is replaced with a unified exemption for estates
of decedents dying and gifts made after December 31, 2003. The
unified exemption amount is increased to $1.5 million for
estates of decedents dying and gifts made after December 31,
2006.
B. Expand Estate Tax Rule for Conservation Easements
(sec. 711 of the bill and sec. 2031 of the Code)
present law
An executor may elect to exclude from the taxable estate 40
percent of the value of any land subject to a qualified
conservation easement, up to a maximum exclusion of $100,000 in
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and
$500,000 in 2002 and thereafter (sec. 2031(c)). The exclusion
percentage is reduced by 2 percentage points for each
percentage point (or fraction thereof) by which the value of
the qualified conservation easement is less than 30 percent of
the value of the land (determined without regard to the value
of such easement and reduced by the value of any retained
development right).
A qualified conservation easement is one that meets the
following requirements: (1) the land is located within 25 miles
of a metropolitan area (as defined by the Office of Management
and Budget) or a national park or wilderness area, or within 10
miles of an Urban National Forest (as designated by the Forest
Service
of the U.S. Department of Agriculture); (2) the land has been
owned by the decedent or a member of the decedent's family at
all times during the three-year period ending on the date of
the decedent's death; and (3) a qualified conservation
contribution (within the meaning of sec. 170(h)) of a qualified
real property interest (as generally defined in sec.
170(h)(2)(C)) was granted by the decedent or a member of his or
her family. For purposes of the provision, preservation of a
historically important land area or a certified historic
structure does not qualify as a conservation purpose.
In order to qualify for the exclusion, a qualifying
easement must have been granted by the decedent, a member of
the decedent's family, the executor of the decedent's estate,
or the trustee of a trust holding the land, no later than the
date of the election. To the extent that the value of such land
is excluded from the taxable estate, the basis of such land
acquired at death is a carryover basis (i.e., the basis is not
stepped-up to its fair market value at death). Property
financed with acquisition indebtedness is eligible for this
provision only to the extent of the net equity in the property.
The exclusion from estate taxes does not extend to the value of
any development rights retained by the decedent or donor.
reasons for change
The Committee believes that expanding the availability of
qualified conservation easements will further ease existing
pressures to develop or sell environmentally significant land
in order to raise funds to pay estate taxes and would, thereby,
advance the preservation of such land. The Committee also
believes it appropriate to clarify the date for determining
easement compliance.
explanation of provision
The bill expands the availability of qualified conservation
easements by increasing from 25 to 50 miles the distance within
which the land must be situated from a metropolitan area,
national park, or wilderness area in order to be a qualified
conservation easement. The bill also clarifies that the date
for determining easement compliance is the date on which the
donation was made.
effective date
The provision clarifying the date for determining easement
compliance is effective for estates of decedents dying after
December 31, 1997. The provision expanding the distance rule is
effective for estates of decedents dying after December 31,
1999.
C. Increase Annual Gift Exclusion
(sec. 721 of the bill and sec. 2503 of the Code)
present law
An annual exclusion of $10,000 of transfers of present
interests in property is provided for each donee. If the non-
donor spouse consents to split the gift with the donor spouse,
the annual exclusion is $20,000 for each donee. Unlimited
transfers between spouses are permitted without imposition of a
gift tax. In the case of gifts made after 1998, the $10,000
amount is increased by a cost-of-living adjustment.
reasons for change
The gift tax annual exclusion was increased in 1981, from
$3,000 to $10,000 for each donee.68 Moreover,
notwithstanding the inflation adjustment provided for gifts
made in a calendar year after 1998,69 the Committee
finds that the benefit of the annual exclusion has eroded over
time. Thus, the Committee believes that the amount of the gift
tax annual exclusion should be increased.
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\68\ P.L. 97-34 (August 13, 1981).
\69\ Sec. 2503(b)(2); P.L. 105-34 (August 5, 1997).
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explanation of provision
The gift tax annual exclusion for each donee is increased
as follows: to $12,000 for 2001, to $13,500 for 2002, to
$15,000 for 2003, to $16,500 for 2004, to $18,000 for 2005, and
to $20,000 for 2006.
effective date
The annual gift tax exclusion is increased as follows: to
$12,000, for each donee, for gifts made after December 31,
2000, but before January 1, 2002; to $13,500 for gifts made
after December 31, 2001, but before January 1, 2003; to $15,000
for gifts made after December 31, 2002, but before January 1,
2004; to $16,500 for gifts made after December 31, 2003, but
before January 1, 2005; to $18,000 for gifts made after
December 31, 2004, but before January 1, 2006, and to $20,000
for gifts made after December 31, 2005, and thereafter.
D. Simplification of Generation-Skipping Transfer (``GST'') Tax
1. Retroactive allocation of the GST tax exemption (sec. 731 of the
bill and sec. 2632 of the Code)
present law
A GST tax generally is imposed on transfers, either
directly or through a trust or similar arrangement, to a ``skip
person'' (i.e., a beneficiary in a generation more than one
generation below that of the transferor). Transfers subject to
the GST tax include direct skips, taxable terminations, and
taxable distributions. An exemption of $1 million (indexed
beginning in 1999) is provided for each person making
generation-skipping transfers. The exemption may be allocated
by a transferor (or his or her executor) to transferred
property.
A direct skip is any transfer subject to estate or gift tax
of an interest in property to a skip person. A skip person may
be a natural person or certain trusts. All persons assigned to
the second or more remote generation below the transferor are
skip persons (e.g., grandchildren and great-grandchildren).
Trusts are skip persons if (1) all interests in the trust are
held by skip persons, or (2) no person holds an interest in the
trust and at no time after the transfer may a distribution
(including distributions and terminations) be made to a non-
skip person.
A taxable termination is a termination (by death, lapse of
time, release of power, or otherwise) of an interest in
property held in trust unless, immediately after such
termination, a non-skip person has an interest in the property,
or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the
trust to a skip person. A taxable distribution is a
distribution from a trust to a skip person (other than a
taxable termination or direct skip). If a transferor allocates
GST tax exemption to a trust prior to the taxable termination
or taxable distribution, GST tax may be avoided.
A transferor likely will not allocate GST tax exemption to
a trust that the transferor expects will benefit only non-skip
persons. However, if a taxable termination occurs because, for
example, the transferor's child unexpectedly dies such that the
trust terminates in favor of the transferor's grandchild, and
GST tax exemption had not been allocated to the trust, then GST
tax would be due even if the transferor had unused GST tax
exemption.
reasons for change
The Committee recognizes that when a transferor does not
expect a beneficiary in the second generation (e.g., the
transferor's child) to die before the termination of a trust,
the transferor likely will not allocate GST tax exemption to
the transfer to the trust. If a transferor knew, however, that
the transferor's child might predecease the transferor and that
there could be a taxable termination as a result thereof, the
transferor likely would have allocated GST tax exemption at the
time of the transfer to the trust. The Committee believes it is
appropriate to provide that when there is an unnatural order of
death (e.g., when a beneficiary in the second generation dies
before the first generation transferor), the transferor may
allocate GST taxexemption retroactively to the date of the
respective transfer to trust.
explanation of provision
The bill allows the retroactive allocation of GST exemption
when there is an unnatural order of death. Under the provision,
if a lineal descendant of the transferor predeceases the
transferor, then the transferor may allocate any unused GST
exemption to any previous transfer or transfers to the trust on
a chronological basis. The provision permits a transferor to
retroactively allocate GST exemption to a trust where a
beneficiary (a) is a non-skip person, (b) is a lineal
descendant of the transferor's grandparent or a grandparent of
the transferor's spouse, (c) is a generation younger than the
generation of the transferor, and (d) dies before the
transferor. Exemption is allocated under this rule
retroactively, and the applicable fraction and inclusion ratio
are determined based on the value of the property on the date
the property was transferred to a trust.
effective date
The provision applies to deaths of non-skip persons
occurring after the date of enactment.
2. Severing of trusts holding property having an inclusion ratio of
greater than zero (sec. 732 of the bill and sec. 2642 of the
Code)
present law
A generation-skipping transfer tax (``GST tax'') generally
is imposed on transfers, either directly or through a trust or
similar arrangement, to a ``skip person'' (i.e., a beneficiary
in a generation more than one generation below that of the
transferor). Transfers subject to the GST tax include direct
skips, taxable terminations, and taxable distributions. An
exemption of $1 million is provided for each person making
generation-skipping transfers. The exemption may be allocated
by a transferor (or his or her executor) to transferred
property.
If the value of transferred property exceeds the amount of
the GST exemption allocated to that property, then the GST tax
generally is determined by multiplying a flat tax rate equal to
the highest estate tax rate (which is currently 55 percent) by
the ``inclusion ratio'' and the value of the taxable property
at the time of the taxable event. The ``inclusion ratio'' is
the number one minus the ``applicable fraction.'' The
applicable fraction is a fraction calculated by dividing the
amount of the GST exemption allocated to the property by the
value of the property.
Under Treas. Reg. 26.2654-1(b), a trust may be severed into
two or more trusts (e.g., one with an inclusion ratio of zero
and one with an inclusion ratio of one) only if (1) the trust
is severed according to a direction in the governing instrument
or (2) the trust is severed pursuant to the trustee's
discretionary powers, but only if certain other conditions are
satisfied (e.g., the severance occurs or a reformation
proceeding begins before the estate tax return is due). Under
current Treasury regulations, however, a trustee cannot
establish inclusion ratios of zero and one by severing a trust
that is subject to the GST tax after the trust has been
created.
reasons for change
If a trust has an inclusion ratio between zero and one,
every distribution from the trust is subject to tax at a
reduced rate. Complexity in this regard can be reduced if a GST
trust is treated as two separate trusts for GST tax purposes-
one with an inclusion ratio of zero and one with an inclusion
ratio of one. This result can be achieved by drafting complex
documents in order to meet the specific requirements of
severance. The Committee believes it is appropriate to make the
rules regarding severance less burdensome and less complex.
explanation of provision
The bill allows a trust to be severed in a ``qualified
severance.'' A qualified severance is defined as the division
of a single trust and the creation of two or more trusts if (1)
the single trust was divided on a fractional basis, and (2) the
terms of the new trusts, in the aggregate, provide for the same
succession of interests of beneficiaries as are provided in the
original trust. If a trust has an inclusion ratio of greater
than zero and less than one, a severance is a qualified
severance only if the single trust is divided into two trusts,
one of which receives a fractional share of the total value of
all trust assets equal to the applicable fraction of the single
trust immediately before the severance. In such case, the trust
receiving such fractional share shall have an inclusion ratio
of zero and the other trust shall have an inclusion ratio of
one. Under the provision, a trustee may elect to sever a trust
in a qualified severance at any time.
effective date
The provision is effective for severances of trusts
occurring after the date of enactment.
3. Modification of certain valuation rules (sec. 733 of the bill and
sec. 2642 of the Code)
present law
Under present law, the inclusion ratio is determined using
gift tax values for allocations of GST tax exemption made on
timely filed gift tax returns. The inclusion ratio generally is
determined using estate tax values for allocations of GST tax
exemption made to transfers at death. Treas. Reg. 26.2642-5(b)
provides that, with respect to taxable terminations and taxable
distributions, the inclusion ratio becomes final on the later
of the period of assessment with respect to the first transfer
using the inclusion ratio or the period for assessing the
estate tax with respect to the transferor's estate.
reasons for change
The Committee believes it is appropriate to clarify the
valuation rules relating to timely and automatic allocations of
GST tax exemption.
explanation of provision
The bill provides that, in connection with timely and
automatic allocations of GST transfer tax, the value of the
property for purposes of determining the inclusion ratio shall
be its finally determined gift tax value or estate tax value
depending on the circumstances of the transfer. In the case of
an allocation deemed to be made at the conclusion of an estate
tax inclusion period, the value for purposes of determining the
inclusion ratio shall be its value at that time.
Effective Date
The provision is effective as though included in the
amendments made by section 1431 of the Tax Reform Act of 1986.
4. Relief from late elections (sec. 734 of the bill and sec. 2642 of
the Code)
Present Law
Under present law, an election to allocate GST tax
exemption to a specific transfer may be made at any time up to
the time for filing the transferor's estate tax return. If an
allocation is made on a gift tax return filed timely with
respect to the transfer to trust that is not a direct skip,
then the value on the date of transfer to the trust is used for
determining GST tax exemption allocation. However, if the
allocation relating to a such transfer is not made on a timely-
filed gift tax return, then the value on the date of allocation
must be used. There is no statutory provision allowing relief
for an inadvertent failure to make an election on a timely-
filed gift tax return to allocate GST tax exemption. Current
Treasury regulations may permit relief from failure to make an
election only if relief is requested, under certain
circumstances, within 6 months of the date of the failure.
Reasons for Change
The Committee believes it is appropriate for the Treasury
Secretary to grant extensions of time to make an election to
allocate GST tax exemption and to grant exceptions to the
statutory time requirement in appropriate circumstances, e.g.,
when the taxpayer intended to allocate GST tax exemption and
the failure to timely allocate GST tax exemption was
inadvertent.
Explanation of Provision
The bill authorizes and directs the Treasury Secretary to
grant extensions of time to make the election to allocate GST
tax exemption and to grant exceptions to the time requirement.
When such relief is granted, the value on the date of transfer
to a trust is used for determining GST tax exemption
allocation.
In determining whether to grant relief for late elections,
the Treasury Secretary is directed to consider all relevant
circumstances, including evidence of intent contained in the
trust instrument or instrument of transfer and such other
factors as the Treasury Secretary deems relevant. For purposes
of determining whether to grant relief, the time for making the
allocation (or election) is treated as if not expressly
prescribed by statute.
Effective Date
The provision to provide relief from late elections applies
to requests pending on, or filed after, the date of
enactment.70
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\70\ No implication is intended with respect to the application of
a rule of substantial compliance prior to enactment of this provision.
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5. Substantial compliance (sec. 734 of the bill and sec. 2642 of the
Code)
Present Law
Under present law, there is no statutory rule which
provides that substantial compliance with the statutory and
regulatory requirements for allocating GST tax exemption will
suffice to establish that GST tax exemption was allocated to a
particular transfer or trust.
Reasons for Change
The Committee recognizes that the rules and regulations
regarding the allocation of GST tax exemption are complex.
Thus, it is often difficult for taxpayers to comply with the
technical requirements for making a proper election to allocate
GST tax exemption. The Committee therefore believes it is
appropriate to provide that GST tax exemption will be allocated
when a taxpayer substantially complies with the rules and
regulations for allocating GST tax exemption.
Explanation of Provision
The bill provides that substantial compliance with the
statutory and regulatory requirements for allocating GST tax
exemption is sufficient to establish that GST tax exemption was
allocated to a particular transfer or a particular trust. In
determining whether there has been substantial compliance, all
relevant circumstances would be considered, including evidence
of intent contained in the trust instrument or instrument of
transfer and such other factors as the Treasury Secretary deems
appropriate.
Effective Date
The substantial compliance provisions are effective on the
date of enactment and apply to allocations made prior to such
date for purposes of determining the tax consequences of
generation-skipping transfers with respect to which the period
of time for filing claims for refund has not
expired.71
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\71\ No implication is intended with respect to the application of
a rule of substantial compliance prior to enactment of this provision.
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TITLE VIII. TAX-EXEMPT ORGANIZATION PROVISIONS
A. Provide Tax Exemption for Organizations Created by a State to
Provide Property and Casualty Insurance Coverage for Property for Which
Such Coverage Is Otherwise Unavailable
(sec. 801 of the bill and sec. 501(c)(28) of the Code)
Present Law
A life insurance company is subject to tax on its life
insurance company taxable income, which is its life insurance
income reduced by life insurance deductions (sec. 801).
Similarly, a property and casualty insurance company is subject
to tax on its taxable income, which is determined as the sum of
its underwriting income and investment income (as well as gains
and other income items) (sec. 831). Present law provides that
the term ``corporation'' includes an insurance company (sec.
7701(a)(3)).
In general, the Internal Revenue Service (``IRS'') takes
the position that organizations that provide insurance for
their members or other individuals are not considered to be
engaged in a tax-exempt activity. The IRS maintains that such
insurance activity is either (1) a regular business of a kind
ordinarily carried on for profit, or (2) an economy or
convenience in the conduct of members' businesses because it
relieves the members from obtaining insurance on an individual
basis.
Certain insurance risk pools have qualified for tax
exemption under Code section 501(c)(6). In general, these
organizations (1) assign any insurance policies and
administrative functions to their member organizations
(although they may reimburse their members for amounts paid and
expenses); (2) serve an important common business interest of
their members; and (3) must be membership organizations
financed, at least in part, by membership dues.
State insurance risk pools may also qualify for tax exempt
status under section 501(c)(4) as a social welfare organization
or under section 115 as serving an essential governmental
function of a State. In seeking qualification under section
501(c)(4), insurance organizations generally are constrained by
the restrictions on the provision of ``commercial-type
insurance'' contained in section 501(m). Section 115 generally
provides that gross income does not include income derived from
the exercise of any essential governmental function or accruing
to a State or any political subdivision thereof.
Certain specific provisions provide tax-exempt status to
organizations meeting statutory requirements.
Health coverage for high-risk individuals
Section 501(c)(26) provides tax-exempt status to any
membership organization that is established by a State
exclusively to provide coverage for medical care on a nonprofit
basis to certain high-risk individuals, provided certain
criteria are satisfied. The organization may provide coverage
for medical care either by issuing insurance itself or by
entering into an arrangement with a health maintenance
organization (``HMO'').
High-risk individuals eligible to receive medical care
coverage from the organization must be residents of the State
who, due to a pre-existing medical condition, are unable to
obtain health coverage for such condition through insurance or
an HMO, or are able to acquire such coverage only at a rate
that is substantially higher than the rate charged for such
coverage by the organization. The State must determine the
composition of membership in the organization. For example, a
State could mandate that all organizations that are subject to
insurance regulation by the State must be members of the
organization.
The provision further requires the State or members of the
organization to fund the liabilities of the organization to the
extent that premiums charged to eligible individuals are
insufficient to cover such liabilities. Finally, no part of the
net earnings of the organization can inure to the benefit of
any private shareholder or individual.
Workers' compensation reinsurance organizations
Section 501(c)(27)(A) provides tax-exempt status to any
membership organization that is established by a State before
June 1, 1996, exclusively to reimburse its members for workers'
compensation insurance losses, and that satisfies certain other
conditions. A State must require that the membership of the
organization consist of all persons who issue insurance
covering workers' compensation losses in such State, and all
persons and governmental entities who self-insure against such
losses. In addition, the organization must operate as a
nonprofit organization by returning surplus income to members
or to workers' compensation policyholders on a periodic basis
and by reducing initial premiums in anticipation of investment
income.
State workmen's compensation act companies
Section 501(c)(27)(B) provides tax-exempt status for any
organization that is created by State law, and organized and
operated exclusively to provide workmen's compensation
insurance and related coverage that is incidental to workmen's
compensation insurance, and that meets certain additional
requirements. The workmen's compensation insurance must be
required by State law, or be insurance with respect to which
State law provides significant disincentives if it is not
purchased by an employer (such as loss of exclusive remedy or
forfeiture of affirmative defenses such as contributory
negligence). The organization must provide workmen's
compensation to any employer in the State (for employees in the
State or temporarily assigned out-of-State) seeking such
insurance and meeting other reasonable requirements. The State
must either extend its full faith and credit to the initial
debt of the organization or provide the initial operating
capital of such organization. For this purpose, the initial
operating capital can be provided by providing the proceeds of
bonds issued by a State authority; the bonds may be repaid
through exercise of the State's taxing authority, for example.
For periods after the date of enactment, either the assets of
the organization must revert to the State upon dissolution, or
State law must not permit the dissolution of the organization
absent an act of the State legislature. Should dissolution of
the organization become permissible under applicable State law,
then therequirement that the assets of the organization revert
to the State upon dissolution applies. Finally, the majority of the
board of directors (or comparable oversight body) of the organization
must be appointed by an official of the executive branch of the State
or by the State legislature, or by both.
Reasons for Change
The Committee understands that certain types of insurance
to support governmental programs to prepare for or mitigate the
effects of natural catastrophic events (such as hurricanes) may
be limited or unavailable at reasonable rates in the authorized
insurance market in some States. The Committee believes it is
appropriate to provide tax-exempt status to certain types of
associations that provide property and casualty insurance for
property located within a State if the State has determined
that coverage in the authorized insurance market is in fact
limited or unavailable at reasonable rates.
Explanation of Provision
The provision provides tax-exempt status for any
association created before January 1, 1999, by State law and
organized and operated exclusively to provide property and
casualty insurance coverage for property located within the
State for which the State has determined that coverage in the
authorized insurance market is limited or unavailable at
reasonable rates, provided certain requirements are met.
Under the provision, no part of the net earnings of the
association may inure to the benefit of any private shareholder
or individual. Except as provided in the case of dissolution,
no part of the assets of the association may be used for, or
diverted to, any purpose other than: (1) to satisfy, in whole
or in part, the liability of the association for, or with
respect to, claims made on policies written by the association;
(2) to invest in investments authorized by applicable law; (3)
to pay reasonable and necessary administration expenses in
connection with the establishment and operation of the
association and the processing of claims against the
association (4) to make remittances pursuant to State law to be
used by the State to provide for the payment of claims on
policies written by the association, purchase reinsurance
covering losses under such policies, or to support governmental
programs to prepare for or mitigate the effects of natural
catastrophic events. The provision requires that the State law
governing the association permit the association to levy
assessments on insurance companies authorized to sell property
and casualty insurance in the State, or on property and
casualty insurance policyholders with insurable interests in
property located in the State to fund deficits of the
association, including the creation of reserves. The provision
requires that the plan of operation of the association be
subject to approval by the chief executive officer or other
official of the State, by the State legislature, or both. In
addition, the provision requires that the assets of the
association revert upon dissolution to the State, the State's
designee, or an entity designated by the State law governing
the association, or that State law not permit the dissolution
of the association.
The provision provides a special rule in the case of any
entity or fund created before January 1, 1999, pursuant to
State law and organized and operated exclusively to receive,
hold, and invest remittances from an association exempt from
tax under the provision, to make disbursements to pay claims on
insurance contracts issued by the association, and to make
disbursements to support governmental programs to prepare for
or mitigate the effects of natural catastrophic events. The
special rule provides that the entity or fund may elect to be
disregarded as a separate entity and be treated as part of the
association exempt from tax under the provision, from which it
receives such remittances. The election is required to be made
no later than 30 days following the date on which the
association is determined to be exempt from tax under the
provision, and would be effective as of the effective date of
that determination.
An organization described in the provision is treated as
having unrelated business taxable income (``UBIT'') in the
amount of its taxable income (computed as if the organization
were not exempt from tax under the proposal), if at the end of
the immediately preceding taxable year, the organization's net
equity exceeded 15 percent of the total coverage in force under
insurance contracts issued by the organization and outstanding
at the end of that preceding year.
Under the provision, no income or gain is recognized solely
as a result of the change in status to that of an association
exempt from tax under the provision.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999. No inference is intended as to the tax
status under present law of associations described in the
provision.
B. Modify Section 512(b)(13)
(sec. 802 of the bill and section 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 50 percent controlled by the parent tax-
exempt organization. In the case of a stock subsidiary,
``control'' means ownership by vote or value of more than 50
percent of the stock. In the case of a partnership or other
entity, control means ownership of more than 50 percent of the
profits, capital or beneficial interests. In addition, present
law applies the constructive ownership rules of section 318 for
purposes of section 512(b)(13). Thus, a parent exempt
organization is deemed to control any subsidiary in which it
holds more than 50 percent of the voting power or value,
directly (as in the case of a first-tier subsidiary) or
indirectly (as in the case of a second-tier subsidiary).
Under present law, interest, rent, annuity, or royalty
payments made by a controlled entity to a tax-exempt
organization are includible in the latter organization's UBI
and 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.
The Taxpayer Relief Act of 1997 (the ``1997 Act'') made
several modifications, as described above, to the control
requirement of section 512(b)(13). In order to provide
transitional relief, the changes made by the 1997 Act do not
apply to any payment received or accrued during the first two
taxable years beginning on or after the date of enactment of
the 1997 Act (August 5, 1997) 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).
Reasons for Change
The Committee believes that the present-law rule of section
512(b)(13) produces results that are arbitrary in certain cases
and that it is appropriate to use a fair market value standard
to determine the pricing structure for rents, royalties,
interest, and annuities paid by subsidiaries to their tax-
exempt parent organizations.
Explanation of Provision
The bill provides that the general rule of section
512(b)(13), which includes interest, rent, annuity, or royalty
payments made by a controlled entity to a tax-exempt
organization in the latter organization's UBI, applies only to
the portion of payments received in a taxable year that exceed
the amount of the specified payment which would have been paid
if such payment had been determined under the principles of
section 482. Thus, if a payment of rent by a controlled
subsidiary to its tax-exempt parent organization exceeds fair
market value, the excess amount of such payment over fair
market value (as determined in accordance with section 482) is
included in the parent organizations's UBI. The bill also
imposes an addition to tax of 20 percent of the excess amount
of any such payment.
The bill provides relief for payments under contracts
which, on the date of enactment of the proposal, are still
subject to the binding contract transition rule of the 1997
Act, but for which the transition rule would expire prior to
the effective date of the proposal, by extending the transition
rule until December 31, 1999.
Effective Date
The provision providing an exception from the general rule
of section 512(b)(13) for interest, rent, annuity, or royalty
payments from controlled subsidiaries that do not exceed fair
market value generally applies to payments received or accrued
after December 31, 1999.
C. Simplify Lobbying Expenditure Limitations
(sec. 803 of the bill and secs. 501(h) and 4911 of the Code)
Present Law
An organization does not qualify for tax-exempt status as a
charitable organization under section 501(c)(3) unless no
substantial part of its activities constitutes carrying on
propaganda or otherwise attempting to influence legislation
(commonly referred to as ``lobbying''). For purposes of
determining whether legislative activities are a substantial
part of a public charity's overall functions, a public charity
may elect either the ``substantial part'' test or the
``expenditure'' test.
The substantial part test uses a facts and circumstances
approach to measure the permissible level of legislative
activities. Because there is no statutory or regulatory
guidance, it is not clear whether the determination is based on
the organization's activities, its expenditures, or both.\72\
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\72\ A few cases provide some guidance on this issue. See
Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955); Christian
Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th
Cir. 1972), cert. denied, 414 U.S. 864 (1973); Haswell v. United
States, 500 F.2d 1133 (Ct. Cl. 1974)).
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As an alternative to the substantial part test, the
expenditure test permits public charities to elect to be
governed by specific expenditure limitations on their lobbying
activities under section 501(h). The expenditure test
establishes two expenditure limits: one restricts the total
amount of lobbying expenditures the public charity can make,
the other restricts grass roots lobbying expenditures as a
subset of total lobbying expenditures. A public charity's total
lobbying expenditures for a year are the sum of its
expenditures for direct lobbying and its expenditures for grass
roots lobbying.
Direct lobbying is defined as an attempt to influence
legislation through communication with a member or staff of a
legislative body or with any other government official or
employee who may participate in the formulation of legislation.
The communication will constitute direct lobbying only if such
communication ``refers to specific legislation'' and reflects a
view on such legislation (Treas. Reg. sec. 56.4911-
2(b)(1)(ii)). Grass roots lobbying is defined as an attempt to
influence legislation through a communication with members of
the public that seeks to affect their opinions about the
legislation (Treas. Reg. sec. 56.4911-2(b)(2)(i)). The
communication must refer to specific legislation, reflect a
view on the legislation, and encourage the recipient of the
communication to take action with respect to the legislation.
Under the expenditure test, a public charity will be denied
exemption under section 501(c)(3) because of lobbying
activities only if it normally either (1) makes total lobbying
expenditures in excess of the ``lobbying ceiling amount'' or
(2) makes grass roots expenditures in excess of the ``grass
roots ceiling amount'' (sec. 501(h)(1)). The lobbying ceiling
amount is 150 percent of the organization's ``lobbying
nontaxable amount'' and the grass roots ceiling amount is 150
percent of the ``grass roots nontaxable amount.'' The lobbying
nontaxable amount is the lesser of $1 million or an amount
determined as a percentage of an organization's exempt purpose
expenditures. The grass roots nontaxable amount is 25 percent
of the organization's lobbying nontaxable amount for that
taxable year. A public charity that has elected the expenditure
test and that exceeds either or both of these limitations is
subject to a 25 percent tax on the greater of the two excess
lobbying expenditures.
Reasons for Change
The Committee believes that the rules governing lobbying
expenditures by public charities should be simplified by
eliminating the separate expenditure limitation on grass roots
lobbying.
Explanation of Provision
The bill removes the separate percentage limitation on
grass roots lobbying expenditures. Consequently, public
charities are subject to an expenditure limitation only on
their total lobbying expenditures.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
D. Tax-Free Withdrawals From IRAs for Charitable Purposes
(sec. 804 of the bill and sec. 408(d) of the Code)
Present Law
Under present law, individuals may make deductible
contributions to a traditional individual retirement
arrangement (``IRA''). Amounts in an IRA are includible in
income when withdrawn (except to the extent the withdrawal
represents a return of after-tax contributions). Includible
amounts withdrawn before attainment of age 59\1/2\ are subject
to an additional 10-percent early withdrawal tax, unless an
exception applies.
Generally, a taxpayer who itemizes deductions may deduct
cash contributions to charity, as well as the fair market value
of contributions of property. The amount of the deduction
otherwise allowable for the taxable year with respect to a
charitable contribution may be reduced, depending on the type
of property contributed, the type of charitable organization to
which the property is contributed, and the income of the
taxpayer.
For donations of cash by individuals, total deductible
contributions to public charities may not exceed 50 percent of
a taxpayer's adjusted gross income (``AGI'') for a taxable
year. To the extent a taxpayer has not exceeded the 50-percent
limitation, contributions of cash to private foundations and
certain other nonprofit organizations and contributions of
capital gain property to public charities generally may be
deducted up to 30 percent of the taxpayer's AGI. If a taxpayer
makes a contribution in one year which exceeds the applicable
50-percent or 30-percent limitation, the excess amount of the
contribution may be carried over and deducted during the next
five taxable years.
In addition to the percentage limitations imposed
specifically on charitable contributions, present law imposes a
reduction on most itemized deductions, including charitable
contribution deductions, for taxpayers with adjusted gross
income in excess of a threshold amount, which is indexed
annually for inflation. The threshold amount for 1999 is
$126,600 ($63,300 for married individuals filing separate
returns). For those deductions that are subject to the limit,
the total amount of itemized deductions is reduced by 3 percent
of AGI over the threshold amount, but not by more than 80
percent of itemized deductions subject to the limit. The effect
of this reduction may be to limit a taxpayer's ability to
deduct some of his or her charitable contributions.
Reasons for Change
The Committee believes it appropriate to facilitate the
making of charitable contributions from IRAs.
Explanation of Provision
The provision provides an exclusion from gross income for
qualified charitable distributions from an IRA: (1) to a
charitable organization to which deductible contributions can
be made; (2) to a charitable remainder annuity trust or
charitable remainder unitrust; (3) to a pooled income fund (as
defined in sec. 642(c)(5)); or (4) for the issuance of a
charitable gift annuity. The exclusion applies with respect to
distributions described in (2), (3), or (4) only if no person
holds an income interest in the trust, fund, or annuity
attributable to such distributions other than the IRA owner,
his or her spouse, or a charitable organization.
In determining the character of distributions from a
charitable remainder annuity trust or a charitable remainder
unitrust to which a qualified charitable distribution from an
IRA was made, the charitable remainder trust is required to
treat as ordinary income the portion of the distribution from
the IRA to the trust which would have been includible in income
but for the provision, and as corpus any remaining portion of
the distribution. Similarly, in determining the amount
includible in gross income by reason of a payment from a
charitable gift annuity purchased with a qualified charitable
distribution from an IRA, the taxpayer is not permitted to
treat the portion of the distribution from the IRA used to
purchase the annuity as an investment in the annuity contract.
A qualified charitable distribution is any distribution
from an IRA which is made after age 70\1/2\, which qualifies as
a charitable contribution (within the meaning of sec. 170(c)),
and which is made directly to the charitable organization or to
a charitable remainder annuity trust, charitable remainder
unitrust, pooled income fund, or charitable gift annuity (as
described above).\73\ A taxpayer is not permitted to claim a
charitable contribution deduction for amounts transferred from
his or her IRA to charity or to a trust, fund, or annuity that,
because of the provision, are excluded from the taxpayer's
income.
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\73\ The Committee intends that, in the case of transfer to a
trust, fund, or annuity, the full amount distributed from an IRA will
meet the definition of a qualified charitable distribution if the
charitable organization's interest in the distribution would qualify as
a charitable contribution under section 170.
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Effective Date
The provision is effective with respect to distributions
after December 31, 2000.
E. Provide Exclusion for Mileage Reimbursements by Charitable
Organizations
(sec. 805 of the bill and new sec. 138A of the Code)
Present Law
In computing taxable income, individuals who do not elect
the standard deduction may claim itemized deductions, including
a deduction (subject to certain limitations) for charitable
contributions or gifts made during the taxable year to a
qualified charitable organization or governmental entity (sec.
170). Individuals who elect the standard deduction may not
claim a deduction for charitable contributions made during the
taxable year.
No charitable contribution deduction is allowed for a
contribution of services. However, unreimbursed expenditures
made incident to providing donated services to a qualified
charitable organization--such as out-of-pocket transportation
expenses necessarily incurred in performing donated services--
may constitute a deductible contribution (Treas. Reg. sec.
1.170A-1(g)).74 However, no charitable contribution
deduction is allowed for traveling expenses (including expenses
for meals and lodging) while away from home, whether paid
directly or by reimbursement, unless there is no significant
element of personal pleasure, recreation, or vacation in such
travel (sec. 170(j)). Moreover, a taxpayer may not deduct as a
charitable contribution out-of-pocket expenditures incurred on
behalf of a charity if such expenditures are made for the
purposes of influencing legislation (sec. 170(f)(6)).
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\74\ Treasury Regulation section 1.170A-1(g) allows taxpayers to
deduct only their own unreimbursed expenses incurred in performing
services for a qualified charitable organization, and not expenses
incident to a third party's performance of services. See Davis v.
United States, 495 U.S. 472 (1990).
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For purposes of computing the charitable contribution
deduction for the use of a passenger automobile (including
vans, pickups, and panel trucks) in connection with providing
donated services to a qualified charitable organization, the
standard mileage rate is 14 cents per mile (sec. 170(i)).
Volunteer drivers who are reimbursed for mileage expenses have
taxable income to the extent the reimbursement exceeds 14 cents
per mile.
Reasons for Change
The Committee believes that it is important to recognize
the valuable contributions made by volunteers to charitable
organizations by providing an exclusion from income up to the
applicable business rate for volunteers who receive
reimbursements for the costs of using their automobiles while
performing services for charitable organizations.
Explanation of Provision
Under the bill, reimbursement by an entity or organization
described in section 170(c) (including public charities and
private foundations) for the costs of using an automobile in
connection with providing donated services is excludable from
the gross income of the volunteer, provided that (1)
reimbursement does not exceed the rate prescribed for business
use, and (2) applicable recordkeeping requirements are
satisfied. The expenditures for which a volunteer is reimbursed
must be expenditures for which a deduction would otherwise be
allowable under section 170. The bill does not permit a
volunteer to exclude a reimbursement from income if the
volunteer claims a deduction or credit with respect to his or
her automobile transportation expenses incurred in connection
with providing donated services.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
F. Charitable Contribution Deduction for Certain Expenses in Support of
Native Alaskan Subsistence Whaling
(sec. 806 of the bill and sec. 170 of the Code)
Present Law
In computing taxable income, individuals who do not elect
the standard deduction may claim itemized deductions, including
a deduction (subject to certain limitations) for charitable
contributions or gifts made during the taxable year to a
qualified charitable organization or governmental entity (sec.
170). Individuals who elect the standard deduction may not
claim a deduction for charitable contributions made during the
taxable year.
No charitable contribution deduction is allowed for a
contribution of services. However, unreimbursed expenditures
made incident to the rendition of services to an organization,
contributions to which are deductible, may constitute a
deductible contribution (Treas. Reg. sec. 1.170A-1(g)).
Specifically, section 170(j) provides that no charitable
contribution deduction is allowed for traveling expenses
(including amounts expended for meals and lodging) while away
from home, whether paid directly or by reimbursement, unless
there is no significant element of personal pleasure,
recreation, or vacation in such travel.
Reasons for Change
The Committee believes it is appropriate to provide a
charitable contribution deduction up to $7,500 per year for
certain expenses incurred by individuals engaging in sanctioned
subsistence whaling activities.
Explanation of Provision
The bill allows individuals to claim a deduction under
section 170 not exceeding $7,500 per taxable year for certain
expenses incurred in carrying out sanctioned whaling
activities. The deduction is available only to an individual
who is recognized by the Alaska Eskimo Whaling Commission as a
whaling captain charged with the responsibility of maintaining
and carrying out sanctioned whaling activities. The deduction
is available for reasonable and necessary expenses paid by the
taxpayer during the taxable year for (1) the acquisition and
maintenance of whaling boats, weapons, and gear used in
sanctioned whaling activities, (2) the supplying of food for
the crew and other provisions for carrying out such activities,
and (3) storage and distribution of the catch from such
activities.
For purposes of the provision, the term ``sanctioned
whaling activities'' means subsistence bowhead whale hunting
activities conducted pursuant to the management plan of the
Alaska Eskimo Whaling Commission. No inference is intended
regarding the deductibility of any whaling expenses incurred in
a taxable year ending before January 1, 2000.
Effective Date
The provision is effective for taxable years ending after
December 31, 1999.
G. Charitable Giving Provisions
(secs. 807-809 of the bill and secs. 170 and 63 of the Code)
Present Law
Generally, a taxpayer who itemizes deductions may deduct
cash contributions to charity made within a taxable year
(generally, January 1-December 31 for calendar-year taxpayers),
as well as the fair market value of contributions of property.
The amount of the deduction otherwise allowable for the taxable
year with respect to a charitable contribution may be reduced,
depending on the type of property contributed, the type of
charitable organization to which the property is contributed,
and the income of the taxpayer. Taxpayers who do not itemize
their deductions are not permitted to claim charitable
contribution deductions.75
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\75\ Beginning in 1982, non-itemizers were allowed a deduction for
charitable contributions in addition to the standard deduction. The
maximum charitable contribution deduction for non-itemizers was $25 for
1982 and 1983, and $75 for 1984. For 1985, 50 percent of the amount
contributed was deductible, without a dollar cap. For 1986, the full
amount of contributions was deductible, subject to the limitations
generally applicable to charitable deductions under section 170.
Beginning in 1987, the charitable contribution deduction for non-
itemizers was no longer effective.
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For donations of cash by individuals, total deductible
contributions to public charities, private operating
foundations, and certain types of private non-operating
foundations may not exceed 50 percent of a taxpayer's
``contribution base,'' which is typically the taxpayer's
adjusted gross income (``AGI''), for a taxable year (sec.
170(b)(1)). To the extent a taxpayer has not exceeded the 50-
percent limitation, contributions of cash to private
foundations and certain other charitable organizations and
contributions of capital gain property to public charities
generally may be deducted up to 30 percent of the taxpayer's
contribution base. If a taxpayer makes a contribution in one
year which exceeds the applicable 50-percent or 30-percent
limitation, the excess amount of the contribution may be
carried over and deducted during the next five taxable years.
The maximum charitable contribution deduction that may be
claimed by a corporation for any one taxable year is limited to
10 percent of the corporation's taxable income for that year.
(sec. 170(b)(2)).
Reasons for Change
The Committee believes that it is appropriate to provide
additional incentives for individuals and corporations to make
contributions to charitable organizations.
Explanation of Provision
Deadline for contributions to low-income schools extended until return
filing date
The bill allows taxpayers to claim a charitable
contribution deduction for donations to public, private, and
parochial low-income elementary and secondary schools made
after the end of the taxable year and on or before the date for
filing the taxpayer's Federal income tax return. For example, a
calendar-year taxpayer may make a contribution to a qualifying
school on March 23, 2001, and claim a charitable contribution
deduction for that gift on his or her Federal income tax return
for the year 2000 filed on April 15, 2001.76 For
purposes of the provision, a low-income school is defined as
one where more than 50 percent of the students qualify for free
or reduced price lunches.
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\76\ The taxpayer will not be permitted to claim a deduction for
the same gift on his or her 2001 Federal income tax return filed in
2002.
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Charitable contribution deduction for non-itemizers
For 2000 and 2001, the bill allows taxpayers who do not
itemize their deductions to claim a deduction for charitable
contributions in addition to the standard deduction. The
deduction is limited to $50 for individual taxpayers and $100
for taxpayers filing joint returns.
Increase AGI percentage limits for individuals
The bill phases up the percentage limitations applicable to
charitable contributions of cash and capital gain property to
public charities and certain other charitable entities
(organizations and entities described in section 170(b)(1)(A))
by individuals. Beginning in 2002, the bill increases the 50-
percent and 30-percent limitations by 2 percent per year until
the limitations are equal to 60 percent and 30 percent,
respectively, in 2006. In 2007, the limitations are increased
to 70 percent and 50 percent, respectively.
Increase AGI percentage limits for corporations
The bill phases up the percentage limitation applicable to
charitable contributions by corporations. Beginning in 2002,
the bill increases the 10-percent limitation by 2 percent per
year until the limitation is equal to 20 percent in 2006.
effective date
The provision extending the deadline for contributions to
certain low-income schools would be effective for taxable years
beginning after December 31, 1999. The provision permitting
non-itemizers to claim a charitable contribution deduction is
effective for taxable years 2000 and 2001. The proposals
increasing the percentage limitations for individual and
corporate taxpayers are effective for taxable years beginning
after December 31, 2001.
H. Modify Excess Business Holdings Rules for Publicly Traded Stock
(sec. 810 of the bill and Code sec. 4943)
present law
Private foundations, which are charitable organizations
that do not qualify as public charities, are subject to certain
restrictions on their operations. Violations of these
restrictions may subject the foundation and, in some cases,
their foundation managers to excise taxes. One such restriction
prohibits a private foundation from owning more than specified
equity interests in business enterprises, including
corporations, partnerships, estates, or trusts (sec. 4943). A
private foundation, together with all disqualified persons,
generally may not hold more than 20 percent of a corporation's
voting stock, a partnership's profits interest, or similar
interest in a business enterprise.77 The limit
increases to 35 percent if effective control of the business is
in the hands of one or more persons who are not disqualified
persons. These rules do not apply if the foundation owns less
than 2 percent of a business, or if the business engages in
activities that are substantially related to the foundation's
charitable purpose.
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\77\ A disqualified person is a person (including an individual,
corporation, partnership, trust, or estate) that has a particularly
influential relationship with respect to a private foundation.
Disqualified persons include: (1) substantial contributors to a
foundation (e.g., the founder of a foundation); (2) foundation managers
(officers, directors, or trustees of a foundation, or an individual
having powers or responsibilities similar to these positions); (3)
persons who own more than a 20 percent interest in an entity
(corporation, partnership, trust, or other unincorporated enterprise)
that is a disqualified person with respect to a foundation; (4) family
members of persons described in (1), (2), and (3); (5) corporations,
partnerships, trusts, or estates that are more than 35 percent owned by
persons described in (1), (2), (3), and (4); (6) only for purposes of
the excess business holdings rules, certain private foundations; and
(7) only for purposes of the self-dealing rules of section 4943,
government officials at certain levels.
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If a foundation acquires business holdings other than by
purchase (i.e., by gift or bequest), and the holdings would
result in the foundation having excess business holdings, the
foundation effectively has five years to reduce those holdings
to permissible levels. In the case of an unusually large gift
or bequest, the initial five-year disposition period may be
extended by the Internal Revenue Service for an additional five
years if the foundation is able to demonstrate that it has made
diligent efforts to dispose of the excess holdings within the
initial five-year period and that disposition within that
period was not possible (except at a price substantially below
fair market value) because of the size and complexity or
diversity of the holdings.
The initial tax imposed on a foundation with excess
business holdings is 5 percent of the value of such holdings
during the taxable year. The amount of tax is computed with
respect to the greatest amount of excess business holdings
during the taxable year. If the foundation fails to divest
itself of the excess holdings within a certain period of time,
an additional tax equal to 200 percent of their value is
imposed on the excess business holdings remaining at the end of
the period.
Present law also prohibits transactions between private
foundations and disqualified persons by imposing excise taxes
when disqualified persons engage in acts of ``self-dealing''
with a private foundation (sec. 4941). Acts of self-dealing
include any direct or indirect: (1) sale, exchange, or leasing
of property between a private foundation and a disqualified
person, (2) lending of money or extensions of credit between a
private foundation and a disqualified person,78 (3)
furnishing of goods, services, or facilities between a private
foundation and a disqualified person,79 (4) payment
of compensation (or payment or reimbursement of expenses) by a
private foundation to a disqualified person,80 (5)
transfer to, or use by or for the benefit of, a disqualified
person of the income or assets of a private foundation, and (6)
agreement by a private foundation to make any payment of money
or other property to a government official. There is no
exception from the prohibition on acts of self-dealing for
inadvertent violations, and even transactions which arguably
may benefit the private foundation may be subject to tax as an
act of self-dealing. Thus, for example, a disqualified person
may not rent space to a private foundation at a rate that is
below the market.
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\78\ The lending of money to private foundation on an interest-free
basis where the loan proceeds are to be used exclusively for charitable
purposes is not an act of self-dealing.
\79\ A disqualified person may, however, furnish goods, services,
or facilities to a private foundation at no charge. In addition, it is
not an act of self-dealing for a private foundation to furnish goods,
services, or facilities to a disqualified person on a basis no more
favorable than available to the general public.
\80\ Payment by a private foundation of compensation to a
disqualified person (other than a government official) for personal
services which are reasonable and necessary to carrying out the exempt
purpose of the private foundation is not an act of self-dealing.
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Self-dealing excise taxes are imposed on a disqualified
person who has engaged in a self-dealing transaction, and on
any foundation manager who knowingly participates in the
transaction.81
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\81\ Except in the case of a government official, the excise tax is
imposed on a disqualified person even though the person had no
knowledge at the time of the act that it constituted self-dealing. In
the case of a government official, however, the tax may be imposed only
if the official participated in an act of self-dealing knowing that it
was such an act.
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reasons for change
The Committee believes it is appropriate to increase the
limit applicable to business holdings by a private foundation
in certain limited circumstances.
Explanation of Provision
The bill would provide an exception to the excess business
holdings rules of section 4943 in certain circumstances. Under
the bill, a private foundation and all disqualified persons are
permitted to own up to 49 percent of the voting stock and 49
percent in value of all outstanding shares of all classes of
stock in an incorporated business enterprise if the stock held
by the foundation and disqualified persons is publicly traded
stock for which market quotations are readily available.
The bill limits the extent to which disqualified persons
with respect to the foundation can engage in transactions with
up to 49-percent owned corporations. Disqualified persons are
not permitted to receive compensation from the corporation or
to engage in any act with the corporation that would constitute
self-dealing under section 4941 if the corporation were a
private foundation and the disqualified persons were
disqualified persons with respect to such corporation.
Disqualified persons may not own, in the aggregate, more than 2
percent of the voting stock and not more than 2 percent in
value of all outstanding shares of all classes of stock in such
corporation. Finally, an audit committee of the board of
directors (consisting of a majority of persons who are not
disqualified persons) of each corporation that is up to 49-
percent owned by a private foundation must certify in writing
to the foundation that the committee is not aware, after due
inquiry, that any disqualified person has received compensation
from the corporation or has engaged in an act of self-dealing
with the corporation. This certification must be filed by the
private foundation with its annual information return.
Effective Date
The provision is effective for foundations established by
bequest of decedents dying after December 31, 2006.
TITLE IX. INTERNATIONAL TAX RELIEF PROVISIONS
A. Allocate Interest Expense on Worldwide Basis
(sec. 901 of the bill and sec. 864 of the Code)
present law
In general
In order to compute the foreign tax credit limitation, a
taxpayer must determine the amount of taxable income from
foreign sources. Thus, the taxpayer must allocate and apportion
deductions between items of U.S.-source gross income, on the
one hand, and items of foreign-source gross income, on the
other. Generally, it is left to the Treasury to provide
detailed rules for the allocation and apportionment of
expenses.
In the case of interest expense, regulations generally are
based on the approach that money is fungible and that interest
expense is properly attributable to all business activities and
property of a taxpayer, regardless of any specific purpose for
incurring an obligation on which interest is paid. (Exceptions
to the fungibility concept are recognized or required, however,
in particular cases, some of which are described below.) The
Code provides that for interest allocation purposes all members
of an affiliated group of corporations generally are to be
treated as a single corporation (the so-called ``one-taxpayer
rule''), and that allocation must be made on the basis of
assets rather than gross income.
Affiliated group
In general
The term ``affiliated group'' in this context generally is
defined by reference to the rules for determining whether
corporations are eligible to file consolidated returns.
However, some groups of corporations are eligible to file
consolidated returns yet are not treated as affiliated for
interest allocation purposes, and other groups of corporations
are treated as affiliated for interest allocation purposes even
though they are not eligible to file consolidated returns.
Thus, under the one-taxpayer rule, the factors affecting the
allocation of interest expense of one corporation may affect
the sourcing of taxable income of another, related corporation
even if the two corporations do not elect to file, or are
ineligible to file, consolidated returns. (See, e.g., Treas.
Reg. sec. 1.861-11T(g).)
Definition of affiliated group--consolidated return rules
For consolidation purposes, the term ``affiliated group''
means one or more chains of includible corporations connected
through stock ownership with a common parent corporation which
is an includible corporation, but only if the common parent
owns directly at least 80 percent of the total voting power of
all classes of stock and at least 80 percent of the total value
of all outstanding stock of at least one other includible
corporation. In addition, for each such other includible
corporation (except the common parent), stock possessing at
least 80 percent of the total voting power of all classes of
its stock and at least 80 percent of the total value of all of
its outstanding stock must be directly owned by one or more
other includible corporations.
Generally the term ``includible corporation'' means any
domestic corporation except certain corporations exempt from
tax under section 501 (for example, corporations organized and
operated exclusively for charitable or educational purposes),
certain life insurance companies, corporations electing
application of the possession tax credit, regulated investment
companies, real estate investment trusts, and domestic
international sales corporations. A foreign corporation
generally is not an includible corporation.
Definition of affiliated group--special interest allocation
rules
Subject to exceptions, the consolidated return and interest
allocation definitions of affiliation generally are consistent
with each other. For example, both definitions exclude all
foreign corporations from the affiliated group. Thus, while
debt generally is considered fungible among the assets of a
group of domestic affiliated corporations, the same rule does
not apply as between the domestic and foreign members of a
group with the same degree of common control as the domestic
affiliated group.
The statutory definition of affiliation for purposes of
group-wide allocation of interest expenses expressly provides
for two exceptions from the definition of affiliation for
consolidation purposes, one of which contracts the affiliated
group and the other of which expands it.
Banks, savings institutions and other financial affiliates
Under the first-mentioned exception, the affiliated group
for interest allocation purposes generally excludes what are
referred to in the regulations as ``financial corporations''
(Treas. Reg. sec. 1.861-11T(d)(4)). These include any
corporation, otherwise a member of the affiliated group for
consolidation purposes, that is a financial institution
(described in section 581 or section 591), the business of
which is predominantly with persons other than related persons
or their customers, and which is required by State or Federal
law to be operated separately from any other entity which is
not a financial institution (sec. 864(e)(5)(C)). The category
of financial corporations also includes, to the extent provided
in regulations, bank holding companies, subsidiaries of banks
and bank holding companies, and savings institutions
predominantly engaged in the active conduct of a banking,
financing, or similar business (sec. 864(e)(5)(D)).
A financial corporation is not treated as a member of the
regular affiliated group for purposes of applying the one-
taxpayer rule to other nonfinancial members of that group.
Instead, all such financial corporations that would be so
affiliated are treated as a separate single corporation for
interest allocation purposes.
Section 936 corporations
Under the second exception referred to above, the
affiliated group for interest allocation purposes includes any
corporation that has elected the application of the possession
tax credit for the taxable year, if the corporation would be
excluded solely for this reason from the affiliated group as
defined for consolidation purposes (sec. 864(e)(5)(A)).
reasons for change
The present-law rules with respect to the allocation and
apportionment of interest expense, although largely left to
Treasury regulations, are generally based on the principle that
money is fungible and that interest expense is properly
attributable to all business activities and property of the
taxpayer, regardless of the specific purpose for which the debt
is incurred. The present-law rules, however, do not take into
account the interest expense of foreign affiliates.
Accordingly, the interest expense incurred by the domestic
members of an affiliated group is treated as funding all the
activities and assets of such group, including the assets and
activities of the group's foreign affiliates, notwithstanding
that the foreign affiliate may have directly incurred debt
itself to fund its own assets and activities.
The Committee believes that ignoring the interest expense
of foreign affiliates in the interest expense allocation and
apportionment formula can result in a disproportionate amount
of U.S. interest expense being allocated to foreign-source
income, which in turn could result in an inappropriate
reduction in the group's foreign tax credit limitation. To the
extent that the interest expense allocation rules are intended
to apply the principle of fungibility, the Committee believes
that the rules should take into account the interest expense
incurred by and assets owned by foreign affiliates. While
foreign affiliates' borrowings are not related to the amount of
the U.S. group's interest deduction, the Committee believes
that those borrowings may nonetheless bear on the proper
allocation of the U.S. group's interest expense for foreign tax
credit purposes.
The Committee believes that both domestic corporations and
foreign corporations which satisfy the 80-percent vote and
value standards of affiliation for consolidated return purposes
are sufficiently economically interrelated that treatment as a
single corporation for interest expense allocation purposes
provides an accurate measurement of their economic income.
Present law treats certain banks and bank holding companies
as a separate subgroup of the affiliated group to which the
interest expense allocation rules apply separately. This
separation recognizes that financial institutions may have debt
structures that are very different from the other, nonfinancial
members of an affiliated group. The Committee believes that the
same rationale applies to any corporations predominantly
engaged in banking, insurance, financing, and similar
businesses and not merely those entities regulated as U.S.
banks. The Committee therefore believes that affiliated groups
should be permitted to apply the interest expense allocation
rules separately with respect to a subgroup consisting of all
corporations predominantly engaged in such financial services
businesses.
explanation of provision
In general
The bill modifies the present-law interest expense
allocation rules (which generally apply for purposes of
computing the foreign tax credit limitations) by providing a
one-time election under which the taxable income of the
domestic members of an affiliated group from sources outside
the United States generally would be determined by allocating
and apportioning interest expense of the domestic members of a
worldwide affiliated group on a worldwide-group basis. The
election provides taxpayers with the option either to apply
fungibility principles on a worldwide basis or to continue to
apply present law. For purposes of the new elective rules based
on worldwide fungibility, the affiliated group is expanded to
include foreign corporations that satisfy the requirements for
affiliation but are excluded under section 1504(b)(3) (i.e.,
foreign corporations in which at least 80 percent of the total
vote and value of the stock of such corporations is owned by
one or more members of the affiliated group). In addition, if a
taxpayer elects to be governed by the new worldwide fungibility
principle, the bill provides an additional one-time election to
apply the worldwide fungibility principle to a separate
subgroup of the worldwide affiliated group consisting of all
members that are predominantly engaged in a financial services
business.
Worldwide affiliated group election
Under the bill, the common parent of an affiliated group
can make a one-time election to apply the present-law interest
expense allocation and apportionment rules under section 864(e)
by allocating and apportioning interest expense of the domestic
members of the worldwide affiliated group on a worldwide-group
basis. If an affiliated group makes this election, subject to
certain modifications and exceptions discussed below, the
taxable income of the domestic members of the worldwide
affiliated group from sources outside the United States is
determined by allocating and apportioning the interest expense
of those domestic members to foreign-source income in an amount
equal to the excess (if any) of (1) the worldwide affiliated
group's worldwide interest expense multiplied by the ratio
which the foreign assets of the worldwide affiliated group bear
to the total assets of the worldwide affiliated group, over (2)
the interest expense incurred by a foreign member of the group
to the extent that such interest would be allocated to foreign
sources if the provision's principles were applied separately
to the foreign members of the group.1
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\1\ Although the interest expense of a foreign subsidiary is taken
into account for purposes of allocating the interest expense of the
domestic members of the electing worldwide affiliated group for foreign
tax credit limitation purposes, the interest expense incurred by a
foreign subsidiary is not deductible on a U.S. return.
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For purposes of the new elective rules based on worldwide
fungibility, the worldwide affiliated group means all
corporations in an affiliated group (as that term is defined
under present law for interest expense allocation purposes)
2 as well as any foreign corporations that would be
members of such an affiliated group if section 1504(b)(3) did
not apply (i.e., in which at least 80 percent of the vote and
value of the stock of such corporations is owned by one or more
other corporations included in the affiliated group). In short,
the taxable income from sources outside the United States of
electing domestic group members generally is determined by
allocating and apportioning interest expense of the domestic
members of the worldwide affiliated group as if all of the
interest expense and assets of 80-percent or greater owned
domestic corporations (i.e., corporations that are part of the
affiliated group under present-law section 864(e)(5)(A) as
modified to include insurance companies) and 80-percent or
greater owned foreign corporations were attributable to a
single corporation.
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\2\ The bill expands the present-law definition of an affiliated
group for interest expense allocation purposes with respect to an
electing worldwide affiliated group to include certain insurance
companies that are generally excluded from an affiliated group under
section 1504(b)(2) (without regard to whether such companies are
covered by an election under section 1504(c)(2)). As is the case under
present law, the affiliated group includes section 936 corporations.
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The general rules under present law continue to apply to
the electing worldwide affiliated group as if it were an
affiliated group as defined under present law for interest
expense allocation purposes. Thus, among other things, the
allocation and apportionment of interest expense continues to
be made on the basis of assets (rather than gross income),
modified to include a foreign member's assets. In addition, as
is the case under present law, certain basis adjustments are
made with respect to the stock of nonaffiliated 10-percent
owned corporations. To the extent that foreign members are
included in the worldwide affiliated group, these basis
adjustments are not applicable.
The worldwide affiliated group election is to be made by
the common parent of the affiliated group. It must be made for
the first taxable year beginning after December 31, 2003 (the
effective date), in which a worldwide affiliated group exists
that includes at least one foreign corporation that meets the
requirements for inclusion in a worldwide affiliated group.
Once made, the election applies to the common parent and all
other members of the worldwide affiliated group for the taxable
year for which the election is made and all subsequent taxable
years.
Financial institution group election
The bill provides a ``financial institution group''
election that expands the bank group rules of present law (sec.
864(e)(5)(B)-(D)). At the election of the common parent of the
affiliated group that has made the election to apply the
worldwide affiliated group rules, those rules can be applied
separately to a subgroup of the worldwide affiliated group that
consists of (1) all corporations that are part of the present-
law bank group and (2) all ``financial corporations.'' For this
purpose, a corporation is a financial corporation if at least
80 percent of its gross income is ``financial services income''
(as described in section 904(d)(2)(C)(ii) and the regulations
thereunder) 3 that is derived from transactions with
unrelated persons.
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\3\ See Treas. Reg. sec. 1.904-4(e)(2).
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The financial institution group rules, if elected, apply to
all members of the worldwide affiliated group that are
financial corporations within the meaning of the provision. The
election must be made for the first taxable year beginning
after December 31, 2003, in which a worldwide affiliated group
includes a financial corporation that would qualify as part of
the expanded financial institution group (other than a
corporation that would qualify as part of the present-law bank
group). Once made, the election applies to the financial
institution group for the taxable year and all subsequent
taxable years.
It is intended that Treasury regulations, similar to those
that apply to the present-law bank group, would continue to
apply to treat the financial institution group as a segregated
group from the rest of the affiliated group.4 Thus,
the measurement of assets of the worldwide affiliated group
would exclude the stock of members included in the financial
institution group and, similarly, the financial institution
group would not take into account the stock of any lower-tier
corporation that is a member of the worldwide affiliated group
but not a member of the financial institution group.
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\4\ Temp. Treas. Reg. sec. 1.861-11T(d)(4).
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In addition, the bill provides anti-abuse rules under which
certain transfers from one member of a financial institution
group to a member of the worldwide affiliated group outside of
the financial institution group are treated as reducing the
amount of indebtedness of the separate financial institution
group. In this regard, if a member of an electing financial
institution group makes dividend or other distributions in a
taxable year to a member of the worldwide affiliated group
(other than a member of the financial institution group) that
exceed the greater of (1) its average annual dividend
(expressed as a percentage of current earnings and profits)
during the five preceding taxable years or (2) 25 percent of
its average annual earnings and profits for such five preceding
taxable years, or otherwise deals with any person in a manner
not clearly reflecting income (as determined under principles
similar to section 482), an amount of the financial institution
group's indebtedness equal to such excess is recharacterized as
indebtedness of the broader worldwide affiliated group
(excluding the financial institution group).
Regulatory authority
The bill grants the Treasury Secretary authority to
prescribe rules to carry out the purposes of the provision,
including rules (1) to address changes in members of an
affiliated group (including acquisitions or other business
combinations of affiliated groups in which one group has made
an election to apply the worldwide approach and the other group
applies present law); (2) to prevent assets and interest
expense from being taken into account more than once; and (3)
to provide for the direct allocation of interest expense in
circumstances where such allocation would be appropriate to
carry out the purposes of the provision, including, for
example, circumstances in which interest expense is incurred by
foreign corporations in order to circumvent the purposes of the
provision.
effective date
The provision is effective for taxable years beginning
after December 31, 2003 .
B. Look-Through Rules To Apply to Dividends From Noncontrolled Section
902 Corporations
(sec. 902 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
may be claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to offset
U.S. tax on U.S.-source income. Separate limitations are
applied to specific categories of income.
Special foreign tax credit limitations apply in the case of
dividends received from a foreign corporation in which the
taxpayer owns at least 10 percent of the stock by vote and
which is not a controlled foreign corporation (a so-called
``10/50 company''). 5 Dividends paid by a 10/50
company in taxable years beginning before January 1, 2003, are
subject to a separate foreign tax credit limitation for each
10/50 company. Dividends paid by a 10/50 company that is not a
passive foreign investment company in taxable years beginning
after December 31, 2002, out of earnings and profits
accumulated in taxable years beginning before January 1, 2003,
are subject to a single foreign tax credit limitation for all
10/50 companies (other than passive foreign investment
companies). Dividends paid by a 10/50 company that is a passive
foreign investment company out of earnings and profits
accumulated in taxable years beginning before January 1, 2003,
continue to be subject to a separate foreign tax credit
limitation for each such 10/50 company. Dividends paid by a 10/
50 company in taxable years beginning after December 31, 2002,
out of earnings and profits accumulated in taxable years after
December 31, 2002, are treated as income in a foreign tax
credit limitation category in proportion to the ratio of the
earnings and profits attributable to income in such foreign tax
credit limitation category to the total earnings and profits (a
so-called ``look-through'' approach). For these purposes,
distributions are treated as made from the most recently
accumulated earnings and profits. Regulatory authority is
granted to provide rules regarding the treatment of
distributions out of earnings and profits for periods prior to
the taxpayer's acquisition of such stock.
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\5\ A controlled foreign corporation in which the taxpayer owns at
least 10 percent of the stock by vote is treated as a 10/50 company
with respect to any distribution out of earnings and profits for
periods when it was not a controlled foreign corporation.
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reasons for change
In the Taxpayer Relief Act of 1997, the Congress provided
for a look-through regime to apply in characterizing dividends
from 10/50 companies for foreign tax credit limitation
purposes. The present-law rules that subject the dividends
received from each 10/50 company to a separate foreign tax
credit limitation impose a substantial record-keeping burden on
companies and have the additional negative effect of
discouraging minority-position joint ventures
abroad.6
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\6\ Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in 1997 (JCS-23-97), December 17, 1997, p. 302.
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The Committee believes that the present-law rules for
dividends from 10/50 companies will result in additional
complexity and compliance burdens. For instance, dividends paid
by a 10/50 company in taxable years beginning after December
31, 2002, will be subject to the concurrent application of both
the single-basket approach (for pre-2003 earnings and profits)
and the look-through approach (for post-2002 earnings and
profits).
The Committee believes that joint ventures can be an
efficient way for U.S. businesses to exploit their know-how and
technology in foreign markets. To the extent that the present-
law limitation is discouraging such joint ventures or altering
the structure of new ventures, the ability of U.S. businesses
to succeed abroad could be diminished. The Committee believes
that it is important to simplify the look-through approach
enacted in 1997.
explanation of provision
The bill simplifies the application of the foreign tax
credit limitation by applying the look-through approach to all
dividends paid by a 10/50 company, regardless of the year in
which the earnings and profits out of which the dividend is
paid were accumulated. The bill eliminates the single-basket
limitation approach for dividends from such companies for
foreign tax credit limitation purposes.
The bill provides a transition rule under which pre-
effective date foreign tax credits associated with a 10/50
company separate limitation category can be carried forward
into post-effective date years. Under the bill, look-through
principles similar to those applicable to post-effective date
dividends from a 10/50 company apply to determine the
appropriate foreign tax credit limitation category or
categories with respect to the foreign tax credit carryforward.
The bill also provides a default rule in cases in which
taxpayers are unable to obtain the necessary information to
apply the look-through rules with respect to dividends from a
10/50 company (or in which the income is not treated as falling
within one of certain enumerated limitation categories). In
such cases, the bill treats the dividend (or a portion thereof)
from such 10/50 company as a dividend that is not subject to
the look-through rules.
The bill provides the Treasury Secretary with authority to
prescribe regulations regarding the treatment of distributions
out of earnings and profits for periods prior to the taxpayer's
acquisition of the stock to which the distributions relate. The
regulations may address, for example, the treatment of pre-
acquisition earnings and profits and related foreign income
taxes of a 10/50 company, including distributions from a
controlled foreign corporation out of earnings and profits for
periods when it was not a controlled foreign corporation.
effective date
The provision is effective for taxable years beginning
after December 31, 2002.
C. Subpart F Treatment of Pipeline Transportation Income and Income
From Transmission of High Voltage Electricity
(secs. 903 and 904 of the bill and sec. 954 of the Code)
Present Law
Under the subpart F rules, U.S. 10-percent shareholders of
a controlled foreign corporation (``CFC'') are subject to U.S.
tax currently on their shares of certain income earned by the
foreign corporation, whether or not such income is distributed
to the shareholders (referred to as ``subpart F income'').
Subpart F income includes foreign base company income, which in
turn includes five categories of income: 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(a)).
Foreign base company services income includes income from
services performed (1) for or on behalf of a related party and
(2) outside the country of the CFC's incorporation (sec.
954(e)). Treasury regulations provide that the services of the
foreign corporation will be treated as performed for or on
behalf of the related party if, for example, a party related to
the foreign corporation furnishes substantial assistance to the
foreign corporation in connection with the provision of
services (Treas. Reg. sec. 1.954-4(b)(1)(iv)).
Foreign base company oil related income is income derived
outside the United States from the processing of minerals
extracted from oil or gas wells into their primary products;
the transportation, distribution, or sale of such minerals or
primary products; the disposition of assets used by the
taxpayer in a trade or business involving the foregoing; or the
performance of any related services. However, foreign base
company oil related income does not include income derived from
a source within a foreign country in connection with: (1) oil
or gas which was extracted from a well located in such foreign
country or, (2), oil, gas, or a primary product of oil or gas
which is sold by the CFC or a related person for use or
consumption within such foreign country or is loaded in such
country as fuel on a vessel or aircraft. An exclusion also is
provided for income of a CFC that is a small producer (i.e., a
corporation whose average daily oil and natural gas production,
including production by related corporations, is less than
1,000 barrels).
reasons for change
The subpart F rules generally apply to provide current U.S.
taxation of income that can be described as ``mobile,'' that
is, income for which the taxpayer might easily be able to
arrange that it be sourced to a low-tax foreign jurisdiction.
The Committee understands that, until recently, many countries
did not permit foreign corporations to own energy facilities
such as oil and gas pipelines, electric generating stations,
and high voltage electricity transmission lines. The Committee
observes that with the advent of deregulation policies abroad,
many U.S. corporations are actively considering the
construction and operation of oil and gas pipelines and high
voltage electricity transmission systems in foreign markets.
The Committee understands that such projects involve
substantial amounts of fixed capital investment, the income
from which does not represent the type of ``mobile'' income to
which the subpart F rules should apply.
explanation of provision
The bill exempts income derived in connection with the
performance of services which are directly related to the
transmission of high voltage electricity from the definition of
foreign base company services income. Thus, the income of a CFC
that owns a high voltage transmission line for the purpose of
providing electricity generated by a related party to a third
party outside the CFC's country of incorporation does not
constitute foreign base company services income. No inference
is intended as to the treatment of such income under present
law.
The bill also provides an additional exception to the
definition of foreign base company oil related income. Under
the bill, foreign base company oil related income does not
include income derived from a source within a foreign country
in connection with the pipeline transportation of oil or gas
within such foreign country. Thus, the exception applies
whether or not the CFC that owns the pipeline also owns any
interest in the oil or gas transported. In addition, the
exception applies to income earned from the transportation of
oil or gas by pipeline in a country in which the oil or gas was
neither extracted nor consumed within such foreign country.
effective date
The provision is effective for taxable years of CFCs
beginning after December 31, 2002, and taxable years of U.S.
shareholders with or within which such taxable years of CFCs
end.
D. Prohibit Disclosure of APAs and APA Background Files
(sec. 905 of the bill and secs. 6103 and 6110 of the Code)
present law
Section 6103
Under section 6103, returns and return information are
confidential and cannot be disclosed unless authorized by the
Internal Revenue Code.
The Code defines return information broadly. Return
information includes: a taxpayer's identity, the nature, source
or amount of income, payments, receipts, deductions,
exemptions, credits, assets, liabilities, net worth, tax
liability, tax withheld, deficiencies, overassessments, or tax
payments; whether the taxpayer's return was, is being, or will
be examined or subject to other investigation or processing; or
any other data, received by, recorded by, prepared by,
furnished to, or collected by the Secretary with respect to a
return or with respect to the determination of the existence,
or possible existence, of liability (or the amount thereof) of
any person under this title for any tax, penalty, interest,
fine, forfeiture, or other imposition, or offense.7
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\7\ Sec. 6103(b)(2)(A).
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Section 6110 and the Freedom of Information Act
With certain exceptions, section 6110 makes the text of any
written determination the IRS issues available for public
inspection. A written determination is any ruling,
determination letter, technical advice memorandum, or Chief
Counsel advice. Once the IRS makes the written determination
publicly available, the background file documents associated
with such written determination are available for public
inspection upon written request. The Code defines ``background
file documents'' as any written material submitted in support
of the request. Background file documents also include any
communications between the IRS and persons outside the IRS
concerning such written determination that occur before the IRS
issues the determination.
Before making them available for public inspection, section
6110 requires the IRS to delete specific categories of
sensitive information from the written determination and
background file documents.8 It also provides
judicial and administrative procedures to resolve disputes over
the scope of the information the IRS will disclose. In
addition, Congress has also wholly exempted certain matters
from section 6110's public disclosure requirements.9
Any part of a written determination or background file that is
not disclosed under section 6110 constitutes ``return
information.'' 10
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\8\ Sec. 6110(c) provides for the deletion of identifying
information, trade secrets, confidential commercial and financial
information and other material.
\9\ Sec. 6110(l).
\10\ Sec. 6103(b)(2)(B) (``The term `return information' means . .
. any part of any written determination or any background file document
relating to such written determination (as such terms are defined in
section 6110(b)) which is not open to public inspection under section
6110'').
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The Freedom of Information Act (FOIA) lists categories of
information that a federal agency must make available for
public inspection.11 It establishes a presumption
that agency records are accessible to the public. The FOIA,
however, also provides nine exemptions from public disclosure.
One of those exemptions is for matters specifically exempted
from disclosure by a statute other than the FOIA if the
exempting statute meets certain requirements.12
Section 6103 qualifies as an exempting statute under this FOIA
provision. Thus, returns and return information that section
6103 deems confidential are exempt from disclosure under the
FOIA.
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\11\ Unless published promptly and offered for sale, an agency must
provide for public inspection and copying: (1) final opinions as well
as orders made in the adjudication of cases; (2) statements of policy
and interpretations not published in the Federal Register; (3)
administrative staff manuals and instructions to staff that affect a
member of the public; and (4) agency records which have been or the
agency expects to be, the subject of repetitive FOIA requests. 5 U.S.C.
sec. 552(a)(2). An agency must also publish in the Federal Register:
the organizational structure of the agency and procedures for obtaining
information under the FOIA; statements describing the functions of the
agency and all formal and informal procedures; rules of procedure,
descriptions of forms and statements describing all papers, reports and
examinations; rules of general applicability and statements of general
policy; and amendments, revisions and repeals of the foregoing. 5
U.S.C. sec. 552(a)(1). All other agency records can be sought by FOIA
request; however, some records may be exempt from disclosure.
\12\ Exemption 3 of the FOIA provides that an agency is not
required to disclose matters that are:
``(3) specifically exempted from disclosure by statute (other than
section 552b of this title) provided that such statute (A) requires
that the matters be withheld from the public in such a manner as to
leave no discretion on the issue, or (B) establishes particular
criteria for withholding or refers to particular types of matters to be
withheld; . . .''. U.S.C. Sec. 552(b)(3).
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Section 6110 is the exclusive means for the public to view
IRS written determinations.\13\ If section 6110 covers the
written determination, then the public cannot use the FOIA to
obtain that determination.
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\13\ Sec. 6110(m).
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Advance Pricing Agreements
The Advanced Pricing Agreement (``APA'') program is an
alternative dispute resolution program conducted by the IRS,
which resolves international transfer pricing issues prior to
the filing of the corporate tax return. Specifically, an APA is
an advance agreement establishing an approved transfer pricing
methodology entered into among the taxpayer, the IRS, and a
foreign tax authority. The IRS and the foreign tax authority
generally agree to accept the results of such approved
methodology. Alternatively, an APA also may be negotiated
between just the taxpayer and the IRS; such an APA establishes
an approved transfer pricing methodology for U.S. tax purposes.
The APA program focuses on identifying the appropriate transfer
pricing methodology; it does not determine a taxpayer's tax
liability. Taxpayers voluntarily participate in the program.
To resolve the transfer pricing issues, the taxpayer
submits detailed and confidential financial information,
business plans and projections to the IRS for consideration.
Resolution involves an extensive analysis of the taxpayer's
functions and risks. Since its inception in 1991, the APA
program has resolved more than 180 APAs, and approximately 195
APA requests are pending.
Currently pending in the U.S. District Court for the
District of Columbia are three consolidated lawsuits asserting
that APAs are subject to public disclosure under either section
6110 or the FOIA.\14\ Prior to this litigation and since the
inception of the APA program, the IRS held the position that
APAs were confidential return information protected from
disclosure by section 6103.\15\ On January 11, 1999, the IRS
conceded that APAs are ``rulings'' and therefore are ``written
determinations'' for purposes of section 6110.\16\ Although the
court has not yet issued a ruling in the case, the IRS
announced its plan to publicly release both existing and future
APAs. The IRS then transmitted existing APAs to the respective
taxpayers with proposed deletions. It has received comments
from some of the affected taxpayers. Where appropriate, foreign
tax authorities have also received copies of the relevant APAs
for comment on the proposed deletions. No APAs have yet been
released to the public.
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\14\ BNA v. IRS, Nos. 96-376, 96-2820, and 96-1473 (D.D.C.). The
Bureau of National Affairs, Inc. (BNA) publishes matters of interest
for use by its subscribers. BNA contends that APAs are not return
information as they are prospective in application. Thus at the time
they are entered into they do not relate to ``the determination of the
existence, or possible existence, of liability or amount thereof . .
.''
\15\ The IRS contended that information received or generated as
part of the APA process pertains to a taxpayer's liability and
therefore was return information as defined in sec. 6103(b)(2)(A).
Thus, the information was subject to section 6103's restrictions on the
dissemination of returns and return information. Rev. Proc. 91-22, sec.
11, 1991-1 C.B. 526, 534 and Rev. Proc. 96-53, sec. 12, 1996-2 C.B.
375, 386.
\16\ IR 1999-05.
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Some taxpayers assert that the IRS erred in adopting the
position that APAs are subject to section 6110 public
disclosure. Several have sought to participate as amici in the
lawsuit to block the release of APAs. They are concerned that
release under section 6110 could expose them to expensive
litigation to defend the deletion of the confidential
information from their APAs. They are also concerned that the
section 6110 procedures are insufficient to protect the
confidentiality of their trade secrets and other financial and
commercial information.
Reasons for Change
The APA program has been a successful mechanism for
resolving transfer pricing issues, not only for future years,
but, in some instances, for prior open years as well
(rollbacks). It reduces protracted disputes and costly
litigation between taxpayers and the government. The program
involves not only taxpayers and the IRS, but also foreign
taxing authorities.
As part of the program, the taxpayer voluntarily provides
substantial, sensitive information to the IRS. The proprietary
information necessary to support a claim of comparability may
be among a company's most closely guarded trade secrets.
Similarly, information regarding production costs and customer
pricing may also be extremely sensitive information.
From the program's inception, the IRS has assured taxpayers
and foreign governments that the information received or
generated in the APA process would be protected as confidential
return information. Such assurances were based on published IRS
materials.
The APA process is based on taxpayers' cooperation and
voluntary disclosure to the IRS of sensitive information. The
continued confidentiality of this information is vital to the
APA program. Otherwise, the Committee believes that some
taxpayers may refuse to participate in this successful program,
causing a decline in its usefulness.
Congress must balance the need for confidentiality with the
general public's need for practical tax guidance. Some members
of the public have expressed concern that the APA program has
led to the development of a body of ``secret law,'' known only
to a few members of the tax profession. In addition, some
members of the public contend that taxpayers havereceived APAs
permitting the use of transfer pricing methodologies not contemplated
in the section 482 regulations. They also contend that APAs have
provided interpretations of law not available to taxpayers that do not
participate in the APA process. Such concerns could undermine the
public's confidence in the IRS's ability to fairly enforce the transfer
pricing rules. Thus, the provision requires the Department of the
Treasury to prepare and publish an annual report regarding APAs, which
will provide extensive information regarding the program, while
clarifying that existing and future APAs and related background
information continue to be confidential return information.
Explanation of Provision
The bill amends section 6103 to provide that APAs and
related background information are confidential return
information under section 6103. Related background information
is meant to include: the request for an APA, any material
submitted in support of the request, and any communication
(written or otherwise) prepared or received by the Secretary in
connection with an APA, regardless of when such communication
is prepared or received. Protection is not limited to
agreements actually executed; it includes material received and
generated in the APA process that does not result in an
executed agreement.
Further, APAs and related background information are not
``written determinations'' as that term is defined in section
6110. Therefore, the public inspection requirements of section
6110 do not apply to APAs and related background information. A
document's incorporation in a background file, however, is not
intended to be grounds for not disclosing an otherwise
disclosable document from a source other than a background
file.
The bill statutorily requires that the Treasury Department
prepare and publish an annual report on the status of APAs. The
annual report is to contain the following information:
Information about the structure, composition, and
operation of the APA program office;
A copy of each current model APA;
Statistics regarding the amount of time to complete
new and renewal APAs;
The number of APA applications filed during such
year;
The number of APAs executed to date and for the year;
The number of APA renewals issued to date and for the
year;
The number of pending APA requests;
The number of pending APA renewals;
The number of APAs executed and pending (including
renewals and renewal requests) that are unilateral,
bilateral and multilateral, respectively;
The number of APAs revoked or canceled, and the
number of withdrawals from the APA program, to date and
for the year;
The number of finalized new APAs and renewals by
industry; \17\ and
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\17\ This information was previously released in IRS Publication
3218, ``IRS Report on Application and Administration of I.R.C. Section
482.''
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General descriptions of:
the nature of the relationships between the related
organizations, trades, or businesses covered by APAs;
the related organizations, trades, or businesses
whose prices or results are tested to determine
compliance with the transfer pricing methodology
prescribed in the APA;
the covered transactions and the functions performed
and risks assumed by the related organizations, trades
or businesses involved;
methodologies used to evaluate tested parties and
transactions and the circumstances leading to the use
of those methodologies;
critical assumptions;
sources of comparables;
comparable selection criteria and the rationale used
in determining such criteria;
the nature of adjustments to comparables and/or
tested parties;
the nature of any range agreed to, including
information such as whether no range was used and why,
whether an inter-quartile range was used, or whether
there was a statistical narrowing of the comparables;
adjustment mechanisms provided to rectify results
that fall outside of the agreed upon APA range;
the various term lengths for APAs, including rollback
years, and the number of APAs with each such term
length;
the nature of documentation required; and
approaches for sharing of currency or other risks.
The first report is to cover the period January 1, 1991,
through the calendar year including the date of enactment. The
Treasury Department cannot include any information in the
report which would have been deleted under section 6110(c) if
the report were a written determination as defined in section
6110. Additionally, the report cannot include any information
which can be associated with or otherwise identify, directly or
indirectly, a particular taxpayer. The Secretary is expected to
obtain input from taxpayers to ensure proper protection of
taxpayer information and, if necessary, utilize its regulatory
authority to implement appropriate processes for obtaining this
input. For purposes of section 6103, the report requirement is
treated as part of Title 26.
The IRS user fee otherwise required to be paid for an APA
is increased by $500. The Secretary has the authority to make
appropriate reductions in such fee for small businesses.
While the bill statutorily requires an annual report, it is
not intended to discourage the Treasury Department from issuing
other forms of guidance, such as regulations or revenue
rulings, consistent with the confidentiality provisions of the
Code.
Effective Date
The provision is effective on the date of enactment;
accordingly, no APAs, regardless of whether executed before or
after enactment, or related background file documents can be
released to the public after the date of enactment. It requires
the Treasury Department to publish the first annual report no
later than March 30, 2000.
E. Exempt Certain Sales of Frequent-Flyer and Similar Reduced-Fare Air
Transportation Rights From Aviation Excise Taxes
(sec. 906 of the bill and sec. 4261 of the Code)
Present Law
An 7.5-percent excise tax is imposed on the sale by an air
transportation provider of the right to frequent-flyer or
similar reduced-fare air transportation. Like the aviation
excise taxes imposed on the purchase of actual air
transportation, this tax is imposed on all amounts paid for the
right to air transportation if the right can be used for
transportation to, from, or within the United States. In both
cases, tax is imposed without regard to whether the purchase
occurs within the United States or elsewhere. Further, subject
to an exception for rights actually used for purposes other
than air transportation (as determined under Treasury
Department regulations), the tax is imposed without regard to
whether the rights ultimately are used for travel (to, from, or
within United States or between two or more points in foreign
countries) or expire without use.
Reasons for Change
The Committee observes that present law requires the
Internal Revenue Service to collect air passenger
transportation excise taxes related to the right to so-called
``frequent flyer'' travel from both U.S. persons and foreign
persons with a nexus to the United States. The Committee is
concerned that, in practice, compliance and payment of the
excise tax will be greater among U.S. persons than among
foreign persons. Such an outcome could place U.S. persons who
market such frequent flyer programs at a disadvantage with
foreign persons who market similar programs when offering such
programs to foreign customers.
The current authority granted to the Treasury Department to
exempt certain awards does not permit an exemption unless the
rights actually are used for a purpose other than air
transportation (e.g., hotels or car rentals). Thus, under
present law, rights are taxable even if transportation for
which they ultimately are used has no nexus to the United
States. The Committee believes that it is appropriate to exempt
rights that are unlikely to have a nexus to the United States.
Explanation of Provision
The provision exempts from the 7.5-percent tax, air
transportation rights sold which are credited to accounts of
persons having a mailing address outside the United States.
Mailing addresses are those listed on the records of the
operator of the frequent-flyer or similar program.
Effective Date
The provision applies to air transportation rights sold
after December 31, 1999.
F. Repeal of Limitation of Foreign Tax Credit Under Alternative Minimum
Tax
(sec. 907 of the bill and sec. 59 of the Code)
present law
Under present law, taxpayers are subject to an alternative
minimum tax (``AMT''), which is payable, in addition to all
other tax liabilities, to the extent that it exceeds the
taxpayer's regular income tax liability. The tax is imposed at
a flat rate of 20 percent, in the case of corporate taxpayers,
on alternative minimum taxable income (``AMTI'') in excess of a
phased-out exemption amount. The maximum rate for noncorporate
taxpayers is 28 percent. AMTI is the taxpayer's taxable income
increased for certain tax preferences and adjusted by
determining the tax treatment of certain items in a manner
which negates the exclusion or deferral of income resulting
from the regular tax treatment of those items.
Taxpayers are permitted to reduce their AMT liability by an
AMT foreign tax credit. The AMT foreign tax credit for a
taxable year is determined under principles similar to those
used in computing the regular tax foreign tax credit, except
that (1) the numerator of the AMT foreign tax credit limitation
fraction is foreign source AMTI and (2) the denominator of that
fraction is total AMTI.18 Taxpayers may elect to use
as their AMT foreign tax credit limitation fraction the ratio
of foreign source regular taxable income to total AMTI (sec.
59(a)(4)).
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\18\ Similar to the regular tax foreign tax credit, the AMT foreign
tax credit is subject to the separate limitation categories set forth
in section 904(d). Under the AMT foreign tax credit, however, the
determination of whether any income is high taxed for purposes of the
high-tax-kick-out rules (sec. 904(d)(2)) is made on the basis of the
applicable AMT rate rather than the highest applicable rate of regular
tax.
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The AMT foreign tax credit for any taxable year generally
may not offset a taxpayer's entire pre-credit AMT. Rather, the
AMT foreign tax credit is limited to 90 percent of AMT computed
without an AMT net operating loss deduction, an AMT energy
preference deduction, or an AMT foreign tax credit. For
example, assume that a corporation has $10 million of AMTI from
foreign sources, has no AMT net operating loss or energy
preference deductions, and is subject to the AMT. In the
absence of the AMT foreign tax credit, the corporation's tax
liability would be $2 million. Accordingly, the AMT foreign tax
credit cannot be applied to reduce the taxpayer's tax liability
below $200,000. Any unused AMT foreign tax credit may be
carried back 2 years and carried forward 5 years for use
against AMT in those years under the principles of the foreign
tax credit carryback and carryforward rules set forth in
section 904(c).
reasons for change
The purpose of the foreign tax credit generally is to
eliminate the possibility of double taxation (once by the
foreign jurisdiction and again by the United States) on the
foreign source income of a U.S. person. The Committee believes,
however, that the 90-percent limitation on the AMT foreign tax
credit has the effect of double taxing such income for AMT
taxpayers. For example, if the taxpayer in the above example
had $10 million of AMTI from foreign sources (and no AMT net
operating loss or energy preference deductions) and was subject
to the AMT for six successive years, even with the carryforward
under present law, the taxpayer would lose $200,000 worth of
foreign tax credits and effectively would be double taxed on
such income. The Committee believes that the present-law 90-
percent limitation imposes inappropriate double taxation.
explanation of provision
The bill repeals the 90-percent limitation on the
utilization of the AMT foreign tax credit.
effective date
The provision is effective for taxable years beginning
after December 31, 2004.
G. Treatment of Military Property of Foreign Sales Corporations
(sec. 908 of the bill and sec. 923 of the Code)
present law
A portion of the foreign trade income of an eligible
foreign sales corporation (``FSC'') is exempt from federal
income tax. Foreign trade income is defined as the gross income
of a FSC that is attributable to foreign trading gross
receipts. In general, the term ``foreign trading gross
receipts'' means the gross receipts of a FSC from the sale or
lease of export property, services related and subsidiary to
the sale or lease of export property, engineering or
architectural services for construction projects located
outside the United States, and certain managerial services for
an unrelated FSC or DISC.
Section 923(a)(5) contains a special limitation relating to
the export of military property. Under regulations prescribed
by the Treasury Secretary, the portion of a FSC's foreign
trading gross receipts from the disposition of, or services
relating to, military property that may be treated as exempt
foreign trade income is limited to 50 percent of the amount
that would otherwise be so treated. For this purpose, the term
``military property'' means any property that is an arm,
ammunition, or implement of war designated in the munitions
list published pursuant to federal law.19 Under this
provision, the export of military property through a FSC is
accorded one-half the tax benefit that is accorded to exports
of non-military property.
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\19\ Section 923(a)(5) defines ``military property'' by reference
to section 995(b)(3)(B), which contains a technical error. Section
995(b)(3)(B) references the Military Security Act of 1954. The proper
reference should have been to the Mutual Security Act of 1954, which
subsequently was superceded by the International Security Assistance
and Arms Export Control Act of 1976. Current Treasury regulations
provide the correct reference for purposes of defining ``military
property.''
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reasons for change
The Committee finds the present-law rule limiting the tax
benefit available for the export of property through a FSC to
one half of that otherwise available in the case of the export
of military property to be an inappropriate limitation. The
Committee believes that exporters of military property should
be treated no differently under the FSC rules than exporters of
other products.
explanation of provision
The bill repeals the special FSC limitation relating to the
export of military property, thus providing exports of military
property through a FSC with the same treatment currently
provided exports of non-military property.
effective date
The provision is effective for taxable years beginning
after December 31, 2004.
TITLE X. HOUSING AND REAL ESTATE TAX RELIEF
A. Increase Low-Income Housing Tax Credit Per Capita Amount
(sec. 1001 of the bill and sec. 42 of the Code)
present law
In general, a maximum 70-percent present value tax credit,
claimed over a 10-year period is allowed for the cost of rental
housing occupied by tenants having incomes below specified
levels. The credit percentage for newly constructed or
substantially rehabilitated housing that is not Federally
subsidized is adjusted monthly by the Internal Revenue Service
so that the 10 annual installments have a present value of 70
percent of the total qualified expenditures. The credit
percentage for new substantially rehabilitated housing that is
Federally subsidized and for existing housing that is
substantially rehabilitated is calculated to have a present
value of 30 percent of total qualified expenditures.
To claim low-income housing credits, project owners must
receive an allocation of credit from a State or local housing
credit agency. However, no allocation is required for buildings
at least 50 percent financed with the proceeds of tax-exempt
bonds that received an allocation pursuant to the private
activity bond volume limitation of Code section 146. Such
projects must, however, satisfy the requirements for allocation
under the State's qualified allocation plan and meet other
requirements.
A building generally must be placed in service during the
calendar year in which it receives an credit allocation.
However, a housing credit agency can make a binding commitment,
not later than the year in which the building is placed in
service, to allocate a specified credit dollar amount to such
building beginning in a specified later year. In addition, a
project can receive a ``carryover allocation'' if the
taxpayer's basis in the project as of the close of the calendar
year the allocation is made is more than 10 percent of the
taxpayer's reasonably expected basis in the project, and the
building is placed in service not later than the close of the
second calendar year following the calendar year in which the
allocation is made. For purposes of the 10-percent test, basis
means the taxpayer's adjusted basis in land and depreciable
real property, whether or not these amounts are includible in
eligible basis. Finally, an allocation of credit for increases
in qualified basis may occur in years subsequent to the year
the project is placed in service.
Authority to allocate credits remains at the State (as
opposed to local) government level unless State law provides
otherwise.20 Generally, credits may be allocated
only from volume authority arising during the calendar year in
which the building is placed in service, except in the case of:
(1) credits claimed on additions to qualified basis; (2)
credits allocated in a later year pursuant to an earlier
binding commitment made no later than the year in which the
building is placed in service; and (3) carryover allocations.
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\20\ For example, constitutional home rule cities in Illinois are
guaranteed their proportionate share of the $1.25 amount, based on
their population relative to that of the State as a whole.
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Each State annually receives low-income housing credit
authority equal to $1.25 per State resident for allocation to
qualified low-income projects.21 In addition to this
$1.25 per resident amount, each State's ``housing credit
ceiling'' includes the following amounts: (1) the unused State
housing credit ceiling (if any) of such State for the preceding
calendar year; 22 (2) the amount of the State
housing credit ceiling (if any) returned in the calendar year;
23 and (3) the amount of the national pool (if any)
allocated to such State by the Treasury Department.
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\21\ A State's population, for these purposes, is the most recent
estimate of the State's population released by the Bureau of the Census
before the beginning of the year to which the limitation applies. Also,
for these purposes, the District of Columbia and the U.S. possessions
(i.e., Puerto Rico, the Virgin Islands, Guam, the Northern Marianas and
American Samoa) are treated as States.
\22\ The unused State housing credit ceiling is the amount (if
positive) of the previous year's annual credit limitation plus credit
returns less the credit actually allocated in that year.
\23\ Credit returns are the sum of any amounts allocated to
projects within a State which fail to become a qualified low-income
housing project within the allowable time period plus any amounts
allocated to a project within a State under an allocation which is
canceled by mutual consent of the housing credit agency and the
allocation recipient.
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The national pool consists of States' unused housing credit
carryovers. For each State, the unused housing credit carryover
for a calendar year consists of the excess (if any) of the
unused State housing credit ceiling for such year over the
excess (if any) of the aggregate housing credit dollar amount
allocated for such year over the sum of $1.25 per resident and
the credit returns for such year. The amounts in the national
pool are allocated only to a State which, with respect to the
previous calendar year allocated its entire housing credit
ceiling for the preceding calendar year, and requested a share
in the national pool not later than May 1, of the calendar
year. The national pool allocation to qualified States is made
on a pro rata basis equivalent to the fraction that a State's
population enjoys relative to the total population of all
qualified States for that year.
The present-law stacking rule provides that a State is
treated as using its annual allocation of credit authority
($1.25 per State resident) and any returns during the calendar
year followed by any unused credits carried forward from the
preceding year's credit ceiling and finally any applicable
allocations from the National pool.
reasons for change
The Committee believes that the credit acts as a stimulus
for low-income housing. However, it believes that the $1.25
credit cap, which has remained the same since 1986, needs to be
adjusted for the increased costs of producing such housing.
Also, the Committee believes that the creation of a State floor
will work better than a simple per-capita rule for States with
small populations. It believes that the expansion of the credit
cap will allow the construction and substantial rehabilitation
of more affordable rental housing for low-income individuals in
the future.
explanation of provision
The bill makes several changes to the low-income housing
credit. First, the $1.25 per capita cap for each State modified
so that small population State are given a minimum of $2
million of annual credit cap. Second, the $1.25 per capita
element of the credit cap is increased to $1.75 per capita.
This increase is phased-in by increasing the credit cap by 10
cents per capita each year for five years. Therefore the credit
cap will be: $1.35 per capita or $2 million, whichever is
greater, in calendar year 2001; $1.45 per capita or $2 million,
whichever is greater, in calendar 2002; $1.55 per capita or $2
million, whichever is greater, in calendar year 2003; $1.65 per
capita or $2 million, whichever is greater, in calendar year
2004; and $1.75 per capita or $2 million, whichever is greater,
in calendar year 2005 and thereafter. Third, the stacking rule
is modified so that each State is treated as using its
allocation of the unused State housing credit ceiling (if any)
from the preceding calendar year before the current year's
allocation of credit (including any credits returned to the
State) and then finally any National pool allocations.
effective date
The provision is effective for calendar years beginning
after December 31, 2000.
B. Tax Credit for Renovating Historic Homes
(section 1011 of the bill and new section 25B of the Code)
Present Law
Present law provides an income tax credit for certain
expenditures incurred in rehabilitating certified historic
structures and certain nonresidential buildings placed in
service before 1936 (Code sec. 47). The amount of the credit is
determined by multiplying the applicable rehabilitation
percentage by the basis of the property that is attributable to
qualified rehabilitation expenditures. The applicable
rehabilitation percentage is 20 percent for certified historic
structures and 10 percent for qualified rehabilitated buildings
(other than certified historic structures) that were originally
placed in service before 1936.
A qualified rehabilitated building is a nonresidential
building eligible for the 10-percent credit only if the
building is substantially rehabilitated and a specific portion
of the existing structure of the building is retained in place
upon completion of the rehabilitation. A residential or
nonresidential building is eligible for the 20-percent credit
that applies to certified historic structures only if the
building is substantially rehabilitated (as determined under
the eligibility rules for the 10-percent credit). In addition,
the building must be listed in the National Register or the
building must be located in a registered historic district and
must be certified by the Secretary of the Interior as being of
historical significance to the district.
Reasons for Change
The Committee believes that part of the existing housing
stock embodies America's history and heritage. Unfortunately,
part of this housing stock is in decay and with the decay in
the housing stock there is a concomitant deterioration in
neighborhoods and communities that were once a vibrant part of
the American landscape. The Committee believes that the goals
of historic preservation, community revitalization, and home
ownership can be pursued concurrently. The Committee believes
that a tax incentive can be part of the policy to help large
cites and small towns rebuild their core neighborhoods and
strengthen their economic, social, and natural environments.
Moreover, the Committee believes that a tax incentive will help
families relocate to and remain in older communities,
capitalize on historic resources, attract reinvestment in older
areas, strengthen the tax base of older communities, and,
thereby, help to control deterioration and sprawl, and to
reinvigorate the life of many communities.
Explanation of Provision
The bill permits a taxpayer to claim a 20-percent credit
for qualified rehabilitation expenditures made with respect to
a qualified historic home which the taxpayer subsequently
occupies as his or her principal residence for at least five
years. The total credit which could be claimed by the taxpayer
is limited to $20,000 ($10,000 in the case of married taxpayer
filing a separate return) with respect to any qualified
historic home. 24
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\24\ The Committee intends that a taxpayer may claim the tax credit
for qualified rehabilitation expenses with respect to his or her
principal residence more than once, but that the total credit claimed
with respect to any structure by that taxpayer is limited to $20,000
($10,000 in the case of married taxpayer filing a separate return).
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The bill applies to (1) structures listed in the National
Register; (2) structures located in a registered national,
State, or local historic district, and certified by the
Secretary of the Interior as being of historic significance to
the district, but only if the median income of the historic
district is less than twice the State median income;
25 (3) any structure designated as being of historic
significance under a State or local statute, if such statute is
certified by the Secretary of the Interior as achieving the
purpose of preserving and rehabilitating buildings of historic
significance.
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\25\ For this purpose, an historic district will be deemed to have
an income greater than or equal to twice the State median income if the
median income of any census tract that intersects the area defining the
historic district has a median income greater than or equal to twice
the State median income.
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For this purpose, a building generally is considered
substantially rehabilitated if the qualified rehabilitation
expenditures incurred during a 24-month measuring period exceed
the greater of (1) the adjusted basis of the building as of the
later of the first day of the 24-month period or the beginning
of the taxpayer's holding period for the building, or (2)
$5,000. In the case of structures in empowerment zones, in
enterprise communities, in a census tract in which 70 percent
of families have income which is 80 percent or less of the
State median family income, and areas of chronic distress as
designated by the State and approved by the Secretary of
Housing and Urban Development only the $5,000 expenditure
requirement applies. In addition, for all structures, at least
5 percent of the rehabilitation expenditures have to be
allocable to the exterior of the structure.
To qualify for the credit, the rehabilitation must be
certified by a State or local government subject to conditions
specified by the Secretary of the Interior.
The credit may be claimed in one of three ways. First, if
the taxpayer directly incurs the qualifying expenditures in
rehabilitation of his or her principal residence, the taxpayer
may claim the tax credit on his or her return.
Second, the taxpayer may claim the credit on his or her
return if the taxpayer is the first purchaser of a structure on
which qualified rehabilitation expenditures have been made. In
this case, the taxpayer must be the first purchaser of the
structure after the date the rehabilitation is completed and
the purchase must occur within five years after the date the
rehabilitation is completed. The structure must, within a
reasonable period, become the principal residence of the
taxpayer. No credit with respect to the qualified
rehabilitation expenditures may have been allowed to the seller
of the structure. The Committee intends that the seller furnish
the taxpayer with such information as the Secretary determines
is necessary to determine the amount of allowable credit.
Third, the taxpayer may elect to receive an historic
rehabilitation mortgage credit certificate. An historic
rehabilitation mortgage credit certificate is a certificate
stating the value of the credit that would be allowable to the
taxpayer for qualified historic rehabilitation expenditures.
The taxpayer may transfer the historic rehabilitation mortgage
credit certificate to a lending institution in connection with
a loan that is to be secured by the structure on which the
qualified rehabilitation expenditures were incurred. In
exchange for the rehabilitation mortgage credit certificate,
the lending institution provides the taxpayer with a loan, the
rate of interest on which is less than that for which the
taxpayer otherwise would have qualified. The reduction in
interest on the loan must be such that the present value of the
difference between interest payments over the term on the loan
received by the taxpayer and the interest payments over the
term of the loan for which the taxpayer otherwise would have
qualified is substantially equivalent to the value stated on
the historic rehabilitation mortgage credit certificate. For
the purpose of determining the present value of the difference
in interest payments, the discount rate shall be determined
under principles similar to section 42(b)(2)(C)(ii), except
that 65 percent is substituted for 72 percent.
In the case of structures located in empowerment zones, in
enterprise communities, in a census tract in which 70 percent
of families have income which is 80 percent or less of the
State median family income, and areas of chronic distress as
designated by the State and approved by the Secretary of
Housing and Urban Development, the taxpayer may elect that the
loan be satisfied by principal payments less than those that
would otherwise be required such that the present value of the
reduced principal payments over the term of the loan be
substantially equivalent to the value stated on the historic
rehabilitation mortgage credit certificate. 26 The
lending institution that enters into the exchange with the
taxpayer may claim the credit amount against its regular income
tax liability. Reductions in interest payments and reductions
in principal payments resulting from a qualified exchange of a
rehabilitation mortgage credit certificate would not be taxable
income to the taxpayer.
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\26\ The taxpayer could elect to receive the benefit of the value
of the rehabilitation mortgage credit certificate by a combination of
reduced interest payments and reduced principal payments.
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If a taxpayer ceases to maintain the structure as his or
her personal residence within five years from the date of the
rehabilitation, the credit is recaptured on a pro rata basis.
In the case of a taxpayer who elected to receive and exchange a
rehabilitation mortgage credit certificate with a lending
institution, any recapture liability would be paid by the
taxpayer.
effective date
The provision is effective for expenditures paid or
incurred beginning after December 31, 1999.
C. Provisions Relating to REITs
(secs. 1021-1026, 1031, 1041, 1051, 1061 and 1071 of the bill and secs.
852, 856, and 857 of the Code)
Present Law
Real estate investment trust (``REITs'') are treated, in
substance, as pass-through entities under present law. Pass-
through status is achieved by allowing the REIT a deduction for
dividends paid to its shareholders. REITs are restricted to
investing in passive investments primarily in real estate and
securities. Specifically, a REIT is required to receive at
least 95 percent of its income from real property rents and
from securities. Amounts received as impermissible ``tenant
services income'' are not treated as rents from real property.
In general, such amounts are for services rendered to tenants
that are not ``customarily furnished'' in connection with the
rental of real property. Special rules permit amounts to be
received from certain ``foreclosure property,'' treated as such
for 3 years after the property is acquired by the REIT in
foreclosure after a default (or imminent default) on a lease of
such property or on indebtedness which such property secured.
A REIT is not treated as providing services that produce
impermissible tenant services income if such services are
provided by an independent contractor from whom the REIT does
not derive or receive any income. An independent contractor is
defined as a person who does not own, directly or indirectly,
more than 35 percent of the shares of the REIT. Also, no more
than 35 percent of the total shares of stock of an independent
contractor (or of the interests in assets or net profits, if
not a corporation) can be owned directly or indirectly by
persons owning 35 percent or more of the interests in the REIT.
A REIT is limited in the amount that it can own in other
corporations. Specifically, a REIT cannot own securities (other
than Government securities and certain real estate assets) in
an amount greater than 25 percent of the value of REIT assets.
In addition, it cannot own securities of any one issuer
representing more than 5 percent of the total value of REIT
assets or more than 10 percent of the voting securities of any
corporate issuer. Under an exception to this rule, a REIT can
own 100 percent of the stock of a corporation, but in that case
the income and assets of such corporation are treated as income
and assets of the REIT. Securities for purposes of these rules
are defined by reference to the Investment Company Act of 1940.
27
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\27\ 15 U.S.C. 80a-1 and following.
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A REIT is generally required to distribute 95 percent of
its income before the end of its taxable year, as deductible
dividends paid to shareholders. This rule is similar to a rule
for regulated investment companies (``RICs'') that requires
distribution of 90 percent of income. Both REITS and RICs can
make certain ``deficiency dividends'' after the close of the
taxable year, and have these treated as made before the end of
the year. The regulations applicable to REITS state that a
distribution will be treated as a ``deficiency dividend'' and
thus as made before the end of the prior taxable year, only to
the extent the earnings and profits for that year exceed the
amount of distributions actually made during the taxable year.
A REIT that has been or has combined with a C corporation
will be disqualified if, as of the end of its taxable year, it
has accumulated earnings and profits from a non-REIT year. A
similar rule applies to regulated investment companies
(``RICs''). In the case of a REIT, any distribution made in
order to comply with this requirement is treated a being first
from pre-REIT accumulated earnings and profits. RICs do not
have a similar ordering rule.
In the case of a RIC, under a provision entitled
``procedures similar to deficiency dividend procedures'', any
distribution made within a specified period after determination
that the investment company did not qualify as a RIC for the
taxable year will, ``for purposes of applying [the earnings and
profits rule that forbids a RIC to have non-RIC earnings and
profits] to subsequent taxable years'', be treated as applying
to the RIC for the non-RIC year. The REIT rules do not specify
any particular separate treatment of distributions made after
the end of the taxable year for purposes of the earnings and
profits rule. Treasury regulations under the REIT provisions
state that ``distribution procedures similar to those . . . for
regulated investment companies apply to non-REIT earnings and
profits of a real estate investment trust.''
Reasons for Change
The Committee believes that a 10-percent value, as well as
a 10-percent vote test, is appropriate to test the permitted
relationship of a REIT to the entities in which it invests. The
Committee is concerned that a REIT may invest in an entity in
which it owns virtually all the value (e.g., through preferred
stock) while owning a small amount of the vote. The remainder
of the voting power might be held by persons related to the
REIT such as its officers, directors, or employees. The REIT
might effectively be the beneficiary of virtually all the
earnings of the entity, through its preferred stock ownership.
Also, the REIT might hold significant debt in the entity. If
the entity is a corporation, this might significantly reduce
the corporate tax that the corporation might pay. If the entity
is a partnership engaged in activities that would generate
nonqualified income for the REIT if done directly, the REIT
might use a significant debt investment in the partnership to
reduce the amount of nonqualified income it would report from
the partnership while still receiving a significant income
stream through the debt.
The Committee believes, however, that certain types of
activities that are related to the REIT's real estate
investments should be permitted to be performed under the
control of the REIT, through the establishment of a ``taxable
REIT subsidiary''. One such type of activity is the provision
of certain tenant services that might not be considered
customary simply because they are relatively new or ``cutting-
edge'' services that the REIT wishes to have provided in order
to retain the competitive value of its properties. The
Committee believes it will be simplifying for the REIT to be
able to use the taxable REIT subsidiary, so that any
uncertainty whether a particular service will be considered
``customary'' would not affect the REIT's qualification as a
REIT. Another type of activity is the performance of real
estate management and operation, generally for third parties. A
REIT may have developed expertise in such activities with
respect to its own properties, and suchexpertise could
efficiently be made available to third parties.
The Committee believes it is desirable to obtain
information regarding the extent of use of the new taxable REIT
subsidiaries and the amount of corporate Federal income tax
that such subsidiaries are paying.
The Committee also believes that a number of other
simplifying changes are desirable, including allowing limited
operation of health care facilities after a lease terminates;
simplifying the determination whether an entity is an
independent contractor; and modifying and conforming certain
RIC and REIT distribution rules.
Explanation of Provision
Taxable REIT subsidiaries
Under the provision, a REIT generally cannot own more than
10 percent of the total value of securities of a single issuer,
in addition to the present law limit of the REIT's ownership to
no more than 10 percent of the outstanding voting securities of
a single issuer.
For purposes of the new 10-percent value test, securities
are defined to exclude safe harbor debt owned by a REIT (as
defined for purposes of sec. 1361(c)(5)(B)(i) and (ii)) if the
obligor on the debt is an individual. Such debt would also
generally be excluded if the REIT (and any taxable REIT
subsidiary of such REIT) owns no other securities of a non-
individual issuer. In the case of a REIT that owns securities
of a partnership, safe harbor debt is excluded from the
definition of securities only if the REIT owns at least 20-
percent or more of the profits interest in the partnership. The
purpose of the partnership rule requiring a 20 percent profits
interest is to assure that if the partnership produces income
that would be disqualified income to the REIT, the REIT will be
treated as receiving a significant portion of that income
directly, even though it may also derive qualified interest
income through its safe harbor debt interest.
An exception to the limitations on ownership of securities
of a single issuer applies in the case of a ``taxable REIT
subsidiary'' that meets certain requirements. To qualify as a
taxable REIT subsidiary, both the REIT and the subsidiary
corporation must join in an election. In addition, any
corporation (other than a REIT or a qualified REIT subsidiary
under section 856(i) that does not properly elect with the REIT
to be a taxable REIT subsidiary) of which a taxable REIT
subsidiary owns, directly or indirectly, more than 35 percent
of the vote or value is automatically treated as a taxable REIT
subsidiary. Securities (as defined in the Investment Company
Act of 1940) of taxable REIT subsidiaries could not exceed 25
percent of the total value of a REIT's assets.
A taxable REIT subsidiary can engage in certain business
activities that under present law could disqualify the REIT
because, but for the proposal, the taxable REIT subsidiary's
activities and relationship with the REIT could prevent certain
income from qualifying as rents from real property.
Specifically, the subsidiary can provide services to tenants of
REIT property (even if such services were not considered
services customarily furnished in connection with the rental of
real property), and can manage or operate properties, generally
for third parties, without causing amounts received or accrued
directly or indirectly by REIT for such activities to fail to
be treated as rents from real property.
However, the subsidiary cannot directly or indirectly
operate or manage a lodging or healthcare facility.
Nevertheless, it can lease a qualified lodging facility (e.g.,
a hotel) from the REIT (provided no gambling revenues were
derived by the hotel or on its premises); and the rents paid
are treated as rents from real property so long as the lodging
facility was operated by an independent contractor for a fee.
The subsidiary can bear all expenses of operating the facility
and receive all the net revenues, minus the independent
contractor's fee.
For purposes of the rule that an independent contractor may
operate a qualified lodging facility, an independent contractor
will qualify so long as, at the time it enters into the
management agreement with the taxable REIT subsidiary, it is
actively engaged in the trade or business of operating
qualified lodging facilities for any person who is not related
to the REIT or the taxable REIT subsidiary. The REIT may
receive income from such an independent contractor with respect
to certain pre-existing leases.
Also, the subsidiary generally cannot not provide to any
person rights to any brand name under which hotels or
healthcare facilities are operated. An exception applies to
rights provided to an independent contractor to operate or
manage a lodging facility, if the rights are held by the
subsidiary as licensee or franchisee, and the lodging facility
is owned by the subsidiary or leased to it by the REIT.
Interest paid by a taxable REIT subsidiary to the related
REIT is subject to the earnings stripping rules of section
163(j). Thus the taxable REIT subsidiary cannot deduct interest
in any year that would exceed 50 percent of the subsidiary's
adjusted gross income.
If any amount of interest, rent, or other deductions of the
taxable REIT subsidiary for amounts paid to the REIT is
determined to be other than at arm's length (``redetermined''
items), an excise tax of 100 percent is imposed on the portion
that was excessive. ``Safe harbors'' are provided for certain
rental payments where the amounts are de minimis, there is
specified evidence that charges to unrelated parties are
substantially comparable, certain charges for services from the
taxable REIT subsidiary are separately stated, or the
subsidiary's gross income from the service is not less than 150
percent of the subsidiary's direct cost in furnishing the
service.
In determining whether rents are arm's length rents, the
fact that such rents do not meet the requirements of the
specified safe harbors shall not be taken into account. In
addition, rent received by a REIT shall not fail to qualify as
rents from real property by reason of the fact that all or any
portion of such rent is redetermined for purposes of the excise
tax.
The Commissioner of Internal Revenue is to conduct a study
to determine how many taxable REIT subsidiaries are in
existence and the aggregate amount of taxes paid by such
subsidiaries. The Commissioner shall submit a report to the
Congress describing the results of such study.
Health Care REITS
The provision permits a REIT to own and operate a health
care facility for at least two years, and treat it as permitted
``foreclosure'' property, if the facility is acquired by the
termination or expiration of a lease of the property.
Extensions of the 2 year period can be granted.
Conformity with regulated investment company rules
Under the provision, the REIT distribution requirements are
modified to conform to the rules for regulated investment
companies. Specifically, a REIT is required to distribute only
90 percent, rather than 95 percent, of its income.
Definition of independent contractor
If any class of stock of the REIT or the person being
tested as an independent contractor is regularly traded on an
established securities market, only persons who directly or
indirectly own 5 percent or more of such class of stock shall
be counted in determining whether the 35 percent ownership
limitations have been exceeded.
Modification of earnings and profits rules for RICs and REITS
The rule allowing a RIC to make a distribution after a
determination that it had failed RIC status, and thus meet the
requirement of no non-RIC earnings and profits in subsequent
years, is modified to clarify that, when the reason for the
determination is that the RIC had non-RIC earnings and profits
in the initial year, the procedure would apply to permit RIC
qualification in the initial year to which such determination
applied, in addition to subsequent years.
The RIC earnings and profits rules are also modified to
provide an ordering rule similar to the REIT rule, treating a
distribution to meet the requirements of no non-RIC earnings
and profits as coming first from the earliest earnings and
profits accumulated in any year for which the RIC did not
qualify as a RIC. In addition, the REIT deficiency dividend
rules are modified to apply the same earnings and profits
ordering rule to such dividends as other REIT dividends.
Effective Date
The provision is generally effective for taxable years
beginning after December 31, 2000. The provision with respect
to modification of earnings and profits rules is effective for
distributions after December 31, 2000.
In the case of the provisions relating to permitted
ownership of securities of an issuer, special transition rules
apply. The new rules forbidding a REIT to own more than 10
percent of the value of securities of a single issuer do not
apply to a REIT with respect to securities held directly or
indirectly by such REIT on July 12, 1999, or acquired pursuant
to the terms of written binding contract in effect on that date
and at all times thereafter until the acquisition. Also,
securities received in a tax-free exchange or reorganization,
with respect to or in exchange for such grandfathered
securities would be grandfathered. This transition ceases to
apply to securities of a corporation as of the first day after
July 12, 1999 on which such corporation engages in a
substantial new line of business, or acquires any substantial
asset, other than pursuant to a binding contract in effect on
such date and at all times thereafter, or in a reorganization
or transaction in which gain or loss is not recognized by
reason of section 1031 or 1033 of the Code. If a corporation
makes an election to become a taxable REIT subsidiary,
effective before January 1, 2004 and at a time when the REIT's
ownership is grandfathered under these rules, the election is
treated as a reorganization under section 368(a)(1)(A) of the
Code.
D. Increase State Volume Limits on Tax-Exempt Private Activity Bonds
(sec. 1081 of the bill and sec. 146 of the Code)
Present Law
Interest on bonds issued by States and local governments is
excluded from income if the proceeds of the bonds are used to
finance activities conducted and paid for by the governmental
units (sec. 103). Interest on bonds issued by these
governmental units to finance activities carried out and paid
for by private persons (``private activity bonds'') is taxable
unless the activities are specified in the Internal Revenue
Code. Private activity bonds on which interest may be tax-
exempt include bonds for privately operated transportation
facilities (airports, docks and wharves, mass transit, and high
speed rail facilities), privately owned and/or provided
municipal services (water, sewer, solid waste disposal, and
certain electric and heating facilities), economic development
(small manufacturing facilities and redevelopment in
economically depressed areas), and certain social programs
(low-income rental housing,
qualified mortgage bonds, student loan bonds, and exempt
activities of charitable organizations described in sec.
501(c)(3)).
The volume of tax-exempt private activity bonds that States
and local governments may issue for most of these purposes in
each calendar year is limited by State-wide volume limits. The
current annual volume limits are $50 per resident of the State
or $150 million if greater. The volume limits do not apply to
private activity bonds to finance airports, docks and wharves,
certain governmentally owned, but privately operated solid
waste disposal facilities, certain high speed rail facilities,
and to certain types of private activity tax-exempt bonds that
are subject to other limits on their volume (qualified
veterans' mortgage bonds and certain ``new'' empowerment zone
and enterprise community bonds).
The current annual volume limits that apply to private
activity tax-exempt bonds increase to $75 per resident of each
State or $225 million, if greater, beginning in calendar year
2007. The increase is, ratably phased in, beginning with $55
per capita or $165 million, if greater, in calendar year 2003.
Reasons for Change
The Committee has determined that an adjustment to the
annual State private activity bond volume limits to levels
comparable to the dollar limits that first applied after
enactment of the Tax Reform Act of 1986 is appropriate. Such an
adjustment will assist States in meeting infrastructure needs
and encouraging economic development and will facilitate
continuation of privatization efforts regarding municipal
services such as solid waste disposal, water, and sewer
services without reversing the general policy of limiting the
use of this Federal subsidy for conduit borrowing in
transactions that distort market choice and efficiency.
Explanation of Provision
The bill increases the present-law annual State private
activity bond volume limits to $75 per resident of each State
or $225 million (if greater) beginning in calendar year 2005.
The increase is phased-in as follows, beginning in calendar
year 2001:
Calendar Year Volume Limit
2001...................................... $55 per resident ($165 million if greater)
2002...................................... $60 per resident ($180 million if greater)
2003...................................... $65 per resident ($195 million if greater)
2004...................................... $70 per resident ($210 million if greater)
Effective Date
The volume limit increases are effective beginning in
calendar year 2001 and will be fully effective in calendar year
2005 and thereafter.
E. Treatment of Leasehold Improvements
(sec. 1091 of the bill and sec. 168 of the Code)
Present Law
Depreciation of leasehold improvements
Depreciation allowances for property used in a trade or
business generally are determined under the modified
Accelerated Cost Recovery System (``MACRS'') of section 168.
Depreciation allowances for improvements made on leased
property are determined under MACRS, even if the MACRS recovery
period assigned to the property is longer than the term of the
lease (sec. 168(i)(8)).28 This rule applies
regardless whether the lessor or lessee places the leasehold
improvements in service.29 If a leasehold
improvement constitutes an addition or improvement to
nonresidential real property already placed in service, the
improvement is depreciated using the straight-line method over
a 39-year recovery period, beginning in the month the addition
or improvement was placed in service (secs. 168(b)(3), (c)(1),
(d)(2), and (i)(6)).30
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\28\ The Tax Reform Act of 1986 modified the Accelerated Cost
Recovery System (``ACRS'') to institute MACRS. Prior to the adoption of
ACRS by the Economic Recovery Act of 1981, taxpayers were allowed to
depreciate the various components of a building as separate assets with
separate useful lives. The use of component depreciation was repealed
upon the adoption of ACRS. The Tax Reform Act of 1986 also denied the
use of component depreciation under MACRS.
\29\ Former Code sections 168(f)(6) and 178 provided that in
certain circumstances, a lessee could recover the cost of leasehold
improvements made over the remaining term of the lease. These
provisions were repealed by the Tax Reform Act of 1986.
\30\ If the improvement is characterized as tangible personal
property, ACRS or MACRS depreciation is calculated using the shorter
recovery periods and accelerated methods applicable to such property.
The determination of whether certain improvements are characterized as
tangible personal property or as nonresidential real property often
depends on whether or not the improvements constitute a ``structural
component'' of a building (as defined by Treas. Reg. sec. 1.48-
1(e)(1)). See, for example, Metro National Corp., 52 TCM 1440 (1987);
King Radio Corp., 486 F.2d 1091 (10th Cir., 1973); Mallinckrodt, Inc.,
778 F.2d 402 (8th Cir., 1985) (with respect various leasehold
improvements).
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Treatment of dispositions of leasehold improvements
A lessor of leased property that disposes of a leasehold
improvement which was made by the lessor for the lessee of the
property may take the adjusted basis of the improvement into
account for purposes of determining gain or loss if the
improvement is irrevocably disposed of or abandoned by the
lessor at the termination of the lease.31 This rule
conforms the treatment of lessors and lessees with respect to
leasehold improvements disposed of at the end of a term of
lease. For purposes of applying this rule, it is expected that
a lessor must be able to separately account for the adjusted
basis of the leasehold improvement that is irrevocably disposed
of or abandoned. This rule does not apply to the extent section
280B applies to the demolition of a structure, a portion of
which may include leasehold improvements.32
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\31\ The conference report describing this provision mistakenly
states that the provision applies to improvements that are irrevocably
disposed of or abandoned by the lessee (rather than the lessor) at the
termination of the lease.
\32\ Under present law, section 280B denies a deduction for any
loss sustained on the demolition of any structure.
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Reasons for Change
The Committee believes that costs that relate to the
leasing of property should not be recovered beyond the term of
the lease to the extent the costs do not provide a future
benefit beyond that term. Although lease terms differ, the
Committee believes that lease terms for commercial real estate
typically are shorter than the present-law 39-year recovery
period. In the interests of simplicity and administrability, a
uniform period for recovery of leasehold improvements is
desirable. The Committee bill therefore shortens the recovery
period for leasehold improvements to 15 years.
Explanation of Provision
The provision provides that 15-year property for purposes
of the depreciation rules of section 168 includes qualified
leasehold improvement property. The straight line method is
required to be used with respect to qualified leasehold
improvement property.
Qualified leasehold improvement property is any improvement
to an interior portion of a building that is nonresidential
real property, provided certain requirements are met. The
improvement must be made under or pursuant to a lease either by
the lessee (or sublessee) of that portion of the building, or
by the lessor of that portion of the building. That portion of
the building is to be occupied exclusively by the lessee (or
any sublessee). The original use of the qualified leasehold
improvement property must begin with the lessee, and must begin
after December 31, 2000. The improvement must be placed in
service more than three years after the date the building was
first placed in service.
Qualified leasehold improvement property does not include
any improvement for which the expenditure is attributable to
the enlargement of the building, any elevator or escalator, any
structural component benefitting a common area, or the internal
structural framework of the building.
No special rule is specified for the class life of
qualified leasehold improvement property. Therefore, the
general rule that the class life for nonresidential real and
residential rental property is 40 years applies.
For purposes of the provision, a commitment to enter into a
lease is treated as a lease, and the parties to the commitment
are treated as lessor and lessee, provided the lease is in
effect at the time the qualified leasehold improvement property
is placed in service. A lease between related persons is not
considered a lease for this purpose.
Effective Date
The provision is effective for qualified leasehold
improvement property placed in service after December 31, 2002.
TITLE XI. MISCELLANEOUS PROVISIONS
A. Repeal Certain Excise Taxes on Rail Diesel Fuel and Inland Waterway
Barge Fuels
(sec. 1101 of the bill and secs. 4041 and 4042 of the Code)
present law
Under present law, diesel fuel used in trains is subject to
a 4.3-cents-per-gallon General Fund excise tax. Similarly,
fuels used in barges operating on the designated inland
waterways system is subject to a 4.3-cents-per-gallon General
Fund excise tax. In both cases, the 4.3-cents-per-gallon excise
tax rates are permanent.
reasons for change
The Committee notes that in 1993 the Congress enacted the
present-law 4.3-cents-per-gallon excise tax as a motor fuels
tax on almost all motor fuel uses with the receipts payable to
the General Fund. Since that time, the Congress has diverted
the 4.3-cents-per-gallon excise tax for most uses to specified
trust funds which provide benefits for those motor fuel users
who ultimately bear the burden of these taxes. As a result, the
Committee finds that generally only rail and barge operators
remain as motor fuel users subject to the 4.3-cents-per-gallon
excise tax who receive no benefits from a dedicated trust fund
as a result of their tax burden. The Committee observes that
rail and barge operators compete with other transportation
service providers who benefit from expenditures paid from
dedicated trust funds. The Committee concluded that it is
inequitable and distortive of transportation decisions to
continue to impose the 4.3-cents-per-gallon excise tax on
diesel fuel used in trains and barges.
explanation of provision
The 4.3-cents-per-gallon General Fund excise tax rates on
diesel fuel used in trains and fuels used in barges operating
on the designated inland waterways system is repealed. (Upon
repeal of the 4.3-cents-per-gallon General Fund tax on diesel
fuel used in trains, the Leaking Underground Storage Tank
excise tax automatically expires.)
effective dates
The provision is effective after September 30, 2000.
B. Tax Treatment of Alaska Native Settlement Trusts
(sec. 1102 of the bill and sec. 501 of the Code)
present law
An Alaska Native Settlement Corporation (``ANC'') may
establish a Settlement Trust (``Trust'') under section 39 of
the Alaska Native Claims Settlement Act (``ANCSA'')
33 and transfer money or other property to such
Trust for the benefit of beneficiaries who constitute all or a
class of the shareholders of the ANC, to promote the health,
education and welfare of the beneficiaries and preserve the
heritage and culture of Alaska Natives.
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\33\ 43 U.S.C. 1601 et seq.
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With certain exceptions, once an ANC has made a conveyance
to a Trust, the assets conveyed shall not be subject to
attachment, distraint, or sale or execution of judgement,
except with respect to the lawful debts and obligations of the
Trust.
The Internal Revenue Service has indicated that
contributions to a Trust constitute distributions to the
beneficiary-shareholders at the time of the contribution and
are treated as dividends to the extent of earnings and profits
as provided under section 301 of the Code. The Trust and its
beneficiaries are taxed according to the rules of Subchapter J
of the Code.
reasons for change
The Committee believes that contributions to a Trust by an
ANC should not be taxed as distributions to beneficiary-
shareholders at the time of the contribution. In addition, the
Committee believes that a Trust that is making substantial
distributions should be permitted to accumulate a portion of
its annual income without tax at the Trust level in order to
preserve more funds for the ultimate purposes of the Trust.
In order to eliminate controversy over issues such as
whether a particular contribution to or distribution from the
Trust would have been a dividend, a return of capital, or
capital gain, and to simplify reporting to beneficiaries, the
Committee believes that it is appropriate to tax all
distributions to beneficiaries at ordinary income rates and to
permit simplified reporting of such distributions.
It is not intended that persons other than those presently
qualified to be shareholders of an ANC should ever be able to
become shareholders of the ANC or to become beneficiaries of
the Trust. Should such conditions occur, the benefits provided
will cease, and the Trust will be subject to an excise tax.
explanation of provision
An Alaska Native Corporation may establish a Trust under
section 39 of ANCSA and if the Trust makes an election for its
first taxable year ending after December 31, 1999, no amount
will be includible in the gross income of a beneficiary of such
Trust by reason of a contribution to the Trust. In addition,
unless the Trust fails to meet all the requirements of the
provision, the Trust will be permitted to accumulate up to 45
percent of its income each year without tax to the Trust or the
beneficiaries on that income.
The earnings and profits of the ANC would not be reduced by
the amount of a contribution to the Trust. However, the ANC
earnings and profits would be reduced (up to the amount of the
contribution) as distributions are thereafter made by the Trust
that would exceed the Trust's total undistributed net income
for all prior years during which an election is in effect plus
the Trust's distributable net income for the current year,
computed under Subchapter J.
An electing Trust must distribute at least 55 percent of
its adjusted taxable income for the year. If the Trust fails to
meet this distribution requirement, tax at trust rates is
imposed on the amount of the failure.
Every distribution by the Trust to beneficiaries would be
taxable as ordinary income to the beneficiaries. Reporting to
beneficiaries for the future could be made on form 1099 rather
than on form K-1. Distributions to beneficiaries would be
subject to withholding to the extent such distributions, on an
annualized basis, exceed the sum of the standard deduction and
the personal exemption.
Certain additional restrictions apply. If a beneficial
interest in the Trust may be sold or exchanged to a person in a
manner that would not be permitted under ANCSA if the interests
were Settlement Common Stock (generally, to a person other than
an Alaska Native), then all assets of the Trust that have not
been distributed at the end of the taxable year of the Trust
become subject to an excise tax; thereafter all amounts
retained that were subject to that tax are treated as corpus
under subchapter J. Also, if the shares of the ANC may be sold
or exchanged to a person in such a manner, the Trust may
continue in existence without an excise tax only if no new
contributions are made to the Trust and the beneficial
interests in the Trust cannot be sold or exchanged in such a
manner.
Apart from these rules, the Trust and its beneficiaries
would be taxed according to the provisions of subchapter J of
the Code.
effective date
The provision is effective for taxable years of Settlement
Trusts ending after December 31, 1999, and contributions to
such Trusts after that date.
C. Allow Corporations To Take Certain Minimum Tax Credits Against
Minimum Tax
(sec. 1103 of the bill and sec. 53 of the Code)
present law
Present law imposes an alternative minimum tax (``AMT'') on
a corporation to the extent its tentative minimum tax exceeds
its regular tax liability.
If a corporation is subject to the AMT in one year, it is
allowed a credit (``AMT credit'') in a future year in the
amount of the AMT imposed. The AMT credit is allowed only to
the extent that the regular tax exceeds the tentative minimum
tax in a subsequent year. The credit carryforward period is
unlimited.
reasons for change
The Committee believes that corporations with long-term AMT
credits should be allowed to use those credits, the value of
which has substantially diminished under present law by the
passage of time.
explanation of provision
The bill allows a corporation with long-term AMT credits to
use the AMT credit to offset a portion of its tentative minimum
tax. The portion so allowed is the least of: (1) the amount of
the corporation's long-term minimum tax credit; (2) 50 percent
of the corporation's tentative minimum tax; or (3) the amount
by which the corporation's tentative minimum tax exceeds its
regular tax for the taxable year.
Under the bill, an AMT credit is a long-term AMT credit if
the credit is attributable to the adjusted net minimum tax of
the corporation for a taxable year that began after 1986 and
ended before the fifth taxable year immediately preceding the
taxable year for which the determination is being made. In
determining the amount of its long-term AMT credit, a
corporation will be deemed to use its AMT credit in the order
of the taxable years in which the adjusted net minimum tax was
imposed, whether such usage is (or was) under the present-law
regular tax or under the bill. Thus, for example, a calendar
year corporation's long-term AMT credit for 2004 will be its
adjusted net minimum tax for taxable years after 1986 and
before 1999, reduced by the amount of the AMT credit used
before 2004.
effective date
The provision applies to taxable years beginning after
December 31, 2003.
D. Allow Net Operating Losses From Oil and Gas Properties To Be Carried
Back for Up to Five Years
(sec. 1104 of the bill and sec. 172 of the Code)
present law
A net operating loss (``NOL'') generally is the amount by
which business deductions of a taxpayer exceed business gross
income. In general, an NOL may be carried back two years and
carried forward 20 years to offset taxable income in such
years.34 A carryback of an NOL results in the refund
of Federal income tax for the carryback year. A carryforward of
an NOL reduces Federal income tax for the carryforward year.
Special NOL carryback rules apply to (1) casualty and theft
losses of individual taxpayers, (2) Presidentially declared
disasters for taxpayers engaged in a farming business or a
small business, (3) real estate investment trusts, (4)
specified liability losses, (5) excess interest losses, and (6)
farm losses.
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\34\ A taxpayer could elect to forgo the carryback of an NOL.
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reasons for change
The Committee notes that oil is, and will continue to be,
vital to the American economy. Low oil prices have created
substantial economic hardship in the oil industry and
particularly in those communities where the majority of jobs
are related to the oil and gas industry. The Committee is
concerned that the current economic hardship in the industry
could lead to business failures and job losses. Many of these
businesses are cash starved. While current operations are
unprofitable, many of these businesses have been taxpayers in
the past. The Committee finds it appropriate to allow current
net operating losses in the oil and gas industry to be carried
back to earlier, more profitable, years. This will improve the
current cash position of many such businesses and help them
weather this current economic storm.
explanation of provision
The bill provides a special five-year carryback for certain
eligible oil and gas losses. The carryforward period remains 20
years. An ``eligible oil and gas loss'' is defined as the
lesser of (1) the amount which would be the taxpayer's NOL for
the taxable year if only income and deductions attributable to
operating mineral interests in oil and gas wells were taken
into account, or (2) the amount of such net operating loss for
such taxable year. In calculating the amount of a taxpayer's
NOL carrybacks, the portion of the NOL that is attributable to
an eligible oil and gas loss is treated as a separate NOL and
taken into account after the remaining portion of the NOL for
the taxable year.
effective date
The provision applies to NOLs arising in taxable years
beginning after December 31, 1998.
E. Election To Expense Geogological and Geophysical Expenditures
(sec. 1105 of the bill and sec. 263 of the Code)
present law
In general
Under present law, current deductions are not allowed for
any amount paid for new buildings or for permanent improvements
or betterments made to increase the value of any property or
estate (sec. 263(a)). Treasury Department regulations define
capital amounts to include amounts paid or incurred (1) to add
to the value, or substantially prolong the useful life, of
property owned by the taxpayer or (2) to adapt property to a
new or different use.35
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\35\ Treas. Reg. sec. 1.263(a)-(1)(b).
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The proper income tax treatment of geological and
geophysical costs (``G&G costs'') associated with oil and gas
production has been the subject of a number of court decisions
and administrative rulings. G&G costs are incurred by the
taxpayer for the purpose of obtaining and accumulating data
that will serve as a basis for the acquisition and retention of
oil or gas properties by taxpayers exploring for the minerals.
Courts have ruled that such costs are capital in nature and are
not deductible as ordinary and necessary business
expenses.36 Accordingly, the costs attributable to
such exploration are allocable to the cost of the property
acquired or retained.37 The term ``property''
includes an economic interest in a tract or parcel of land
notwithstanding that a mineral deposit has not been established
or proven at the time the costs are incurred.
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\36\ See, e.g., Schermerhorn Oil Corporation, 46 B.T.A. 151 (1942).
\37\ By contrast, section 617 of the Code permits a taxpayer to
elect to deduct certain expenditures incurred for the purpose of
ascertaining the existence, location, extent, or quality of any deposit
of ore or other mineral (but not oil and gas). These deductions are
subject to recapture if the mine with respect to which the expenditures
were incurred reaches the producing stage.
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Revenue ruling 77-188
In Revenue Ruling 77-188 38 (hereinafter
referred to as the ``1977 ruling''), the Internal Revenue
Service (``IRS'') provided guidance regarding the proper tax
treatment of G&G costs. The ruling describes a typical
geological and geophysical exploration program as containing
the following elements:
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\38\ ca b120sr.0961977-1 C.B. 76.
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It is customary in the search for mineral producing
properties for a taxpayer to conduct an exploration program in
one or more identifiable project areas. Each project area
encompasses a territory that the taxpayer determines can be
explored advantageously in a single integrated operation. This
determination is made after analyzing certain variables such as
the size and topography of the project area to be explored, the
existing information available with respect to the project area
and nearby areas, and the quantity of equipment, the number of
personnel, and the amount of money available to conduct a
reasonable exploration program over the project area.
The taxpayer selects a specific project area from which
geological and geophysical data are desired and conducts a
reconnaissance-type survey utilizing various geological and
geophysical exploration techniques that are designed to yield
data that will afford a basis for identifying specific
geological features with sufficient mineral potential to merit
further exploration.
Each separable, noncontiguous portion of the original
project area in which such a specific geological feature is
identified is a separate ``area of interest.'' The original
project area is subdivided into as many small projects as there
are areas of interest located and identified within the
original project area. If the circumstances permit a detailed
exploratory survey to be conducted without an initial
reconnaissance-type survey, the project area and the area of
interest will be coextensive.
The taxpayer seeks to further define the geological
features identified by the prior reconnaissance-type surveys by
additional, more detailed, exploratory surveys conducted with
respect to each area of interest. For this purpose, the
taxpayer engages in more intensive geological and geophysical
exploration employing methods that are designed to yield
sufficiently accurate sub-surface data to afford a basis for a
decision to acquire or retain properties within or adjacent to
a particular area of interest or to abandon the entire area of
interest as unworthy of development by mine or well.
The 1977 ruling provides that if, on the basis of data
obtained from the preliminary geological and geophysical
exploration operations, only one area of interest is located
and identified within the original project area, then the
entire expenditure for those exploratory operations is to be
allocated to that one area of interest and thus capitalized
into the depletable basis of that area of interest. On the
other hand, if two or more areas of interest are located and
identified within the original project area, the entire
expenditure for the exploratory operations is to be allocated
equally among the various areas of interest.
The 1977 ruling further provides that if, on the basis of
data obtained from a detailed survey that does not relate
exclusively to any particular property within a particular area
of interest, an oil or gas property is acquired or retained
within or adjacent to that area of interest, the entire G&G
exploration expenditures, including those incurred prior to the
identification of the particular area of interest but allocated
thereto, are to be allocated to the property as a capital cost
under section 263(a).
If, however, from the data obtained by the exploratory
operations no areas of interest are located and identified by
the taxpayer within the original project area, then the 1977
ruling states that the entire amount of the G&G costs related
to the exploration is deductible as a loss under section 165
for the taxable year in which that particular project area is
abandoned as a potential source of mineral production.
reasons for change
The Committee believes that substantial simplification for
taxpayers, significant gains in taxpayer compliance, and
reductions in administrative cost can be obtained by allowing
all geological and geophysical costs can be deducted currently,
regardless of the taxpayer's determination of the suitability
of the site or sites examined for future production.
explanation of provision
The bill allows geological and geophysical costs incurred
in connection with oil and gas exploration in the United States
to be deducted currently.
effective date
The provision is effective for G&G costs incurred in
taxable years beginning after December 31, 1999.
F. Deduction for Delay Rental Payments
(sec. 1106 of the bill and sec. 263A of the Code)
Present Law
Present law generally requires costs associated with
inventory and property held for resale to be capitalized rather
than currently deducted as they are incurred (sec. 263). Oil
and gas producers typically contract for mineral production in
exchange for royalty payments. If mineral production is
delayed, these contracts provide for ``delay rental payments''
as a condition of their extension. The Treasury Department has
taken the position that the uniform capitalization rules of
section 263A require delay rental payments to be capitalized.
Reasons for Change
In essence, a delay rental payment is a substitute, both in
the eyes of the payor and the payee, for a royalty payment that
would have been made had the property been brought into
production. The Committee notes that a royalty payment is
deductible currently and, therefore, believes that delay rental
payments also should be deductible currently.
Explanation of Provision
The bill allows delay rental payments to be deducted
currently.
Effective Date
The provision applies to delay rental payments incurred in
taxable years beginning after December 31, 1999.
No inference is intended from the prospective effective
date of this provision as to the proper treatment of pre-
effective date delay rental payments.
G. Simplify the Active Trade or Business Requirement for Tax-Free Spin-
Offs
(sec. 1107 of the bill and sec. 355 of the Code)
Present Law
A corporation generally is required to recognize gain on
the distribution of property (including stock of a subsidiary)
to its shareholders as if such property had been sold for its
fair market value. An exception to this rule is where the
distribution of the stock of a controlled corporation satisfies
the requirements of section 355. Among the requirements that
must be satisfied in order to qualify for tax-free treatment
under section 355 is that, immediately after the distribution,
both the distributing corporation and the controlled
corporation must be engaged in the active conduct of a trade or
business (sec. 355(b)(1)).39 For this purpose, a
corporation is engaged in the active conduct of a trade or
business only if (1) the corporation is directly engaged in the
active conduct of a trade or business, or (2) if the
corporation is not directly engaged in an active trade or
business, then substantially all of its assets consist of stock
and securities of a corporation it controls that is engaged in
the active conduct of a trade or business (sec. 355(b)(2)(A)).
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\39\ If immediately before the distribution, the distributing
corporation had no assets other than stock or securities in the
controlled corporations, then each of the controlled corporations must
be engaged immediately after the distribution in the active conduct of
a trade or business.
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In determining whether a corporation satisfies the active
trade or business requirement, the Internal Revenue Service's
position for advance ruling purposes is that the value of the
gross assets of the trade or business being relied on must
constitute at least five percent of the total fair market value
of the gross assets of the corporation directly conducting the
trade or business.40 However, if the corporation is
not directly engaged in an active trade or business, then the
``substantially all'' test requires that at least 90 percent of
the value of the corporation's gross assets consist of stock
and securities of a controlled corporation that is engaged in
the active conduct of a trade or business.41
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\40\ Rev. Proc. 99-3, sec. 4.01(33), 1999-1 I.R.B. 111.
\41\ Rev. Proc. 86-41, sec. 4.03(4), 1986-2 C.B. 716; Rev. Proc.
77-37, sec. 3.04, 1977-2 C.B. 568.
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Reasons for Change
The Committee believes that the active trade or business
requirement should apply on a limited affiliated group basis.
The present law distinction between an operating company and a
holding company serves little purpose with respect to
corporations that are in the same affiliated group. It is not
uncommon for a holding company, in contemplation of a tax-free
spin-off, to undergo a series of internal restructurings (e.g.,
by merging or liquidating subsidiaries or contributing assets
downstream) which serve little economic purpose other than to
satisfy the active trade or business test. The Committee
believes that corporations should not be forced to undergo such
restructurings simply to satisfy the active trade or business
test. Moreover, applying the active trade or business on an
affiliated group basis is consistent with the treatment
accorded to affiliated groups for other purposes of sec.
355(b)(2).42 However, the Committee believes that
treating the entire affiliated group as a single corporation
for this purpose would permit corporations to effectuate a
section 355 transaction with respect to stock of a subsidiary
that is not engaged in the active conduct of a trade or
business. A more appropriate method is to apply the test by
focusing on the distributing corporation, the controlled
corporation, and those corporations that are in the same
ownership chain as the distributing and controlled
corporations.
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\42\ All distributee corporations which are members of the same
affiliated group are treated as one distributee corporation for
purposes of determining acquisition of control of a corporation under
sec. 355(b)(2)(D).
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Explanation of Provision
The provision simplifies the active trade or business
requirement by eliminating the ``substantially all'' test, and
instead, applying the active trade or business requirement on
an affiliated group basis. In applying the active trade or
business test to an affiliated group, each separate affiliated
group (immediately after the distribution) must satisfy the
requirement. For the distributing corporation, the separate
affiliated group consists of the distributing corporation as
the common parent and all corporations connected with the
distributing corporation through stock ownership described in
section 1504(a)(1)(B) (regardless of whether the corporations
are includible corporations under section 1504(b)). The
separate affiliated group for a controlled corporation is
determined in a similar manner (with the controlled corporation
as the common parent).
The following examples illustrate the application of this
provision. In each example, assume that P Corp. has owned 100
percent of the stock of X Corp. and Y Corp. for more than five
years (and X and Y are each engaged in the active conduct of a
trade or business). X Corp. also owns 100 percent of the stock
of Z Corp. that is not engaged in a trade or business. P is a
holding company with no assets other than the stock of X and Y.
X, Y and Z are each worth $100.
Example 1: P does a spin-off of Y. The spin-off
satisfies the active trade or business requirement. Y,
as a stand-alone corporation, satisfies the active
trade or business test. Similarly, the P-X-Z separate
affiliated group satisfies the test, because 50 percent
of the group's assets ($100 of $200) are used in the
active conduct of a trade or business.
Example 2: P does a spin-off of X and Z. The spin-off
satisfies the active trade or business requirement. The
X-Z separate affiliated group satisfies the test,
because 50 percent of the group's value ($100 of $200)
reflect assets that are used in the active conduct of a
trade or business. Similarly, the P-Y separate
affiliated group satisfies the test, because 100
percent of the group's assets are used in the active
conduct of a trade or business.
Example 3: X does a spin-off of Z (resulting in X, Y
and Z being first-tier subsidiaries of P). The spin-off
does not satisfy the active trade or business
requirement because X, as a stand-alone corporation,
does not satisfy the requirement.
Effective Date
The provision is effective for distributions after the date
of enactment. Transition relief is provided for any
distribution that is (1) made pursuant to an agreement which is
binding on the date of enactment and at all times thereafter;
(2) described in a ruling request submitted to the Internal
Revenue Service on or before such date; or (3) described on or
before such date in a public announcement or in a filing with
the Securities and Exchange Commission. A corporation can make
an irrevocable election to have the transition relief not apply
(so that the provision would apply to all distributions after
the date of enactment).
H. Increase the Maximum Dollar Amount of Reforestation Expenditures
Eligible for Amortization and Credit
(sec. 1108 of the bill and secs. 48 and 194 of the Code)
Present Law
Amortization of reforestation costs (sec. 194)
A taxpayer may elect to amortize up to $10,000 ($5,000 in
the case of a separate return by a married individual) of
qualifying reforestation expenditures incurred during the
taxable year with respect to qualifying timber property.
Amortization is taken over 84 months (7 years) and is subject
to a mandatory half-year convention.43 In the case
of an individual, the amortization deduction is allowed in
determining adjusted gross income (an above-the-line deduction)
rather than as an itemized deduction. The amount eligible for
amortization has not been increased since the election was
added to the Code in 1980.44
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\43\ Under the half-year convention, all reforestation expenditures
are considered to be incurred on the first day of the first month of
the second half of the taxable year. Thus, an amortization deduction
equal to 6/84 of the expenditures for the year is allowed in the first
and eighth years and an amortization deduction equal to 1/7 (12/84) of
such expenditures is allowed in the second through seventh years.
\44\ Sec. 301(a) of the Multiemployer Pension Plan Amendments Act
of 1980.
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Qualifying reforestation expenditures are the direct costs
a taxpayer incurs in connection with the forestation or
reforestation of a site by planting or seeding, and include
costs for the preparation of the site, the cost of the seed or
seedlings, and the cost of the labor and tools (including
depreciation of long lived assets such as tractors and other
machines) used in the reforestation activity. Qualifying
reforestation expenditures do not include expenditures that
would otherwise be deductible and do not include costs for
which the taxpayer has been reimbursed under a governmental
cost sharing program, unless the amount of the reimbursement is
also included in the taxpayer's gross income.
Qualifying timber property includes any woodlot or other
site that is located in the United States that will contain
trees in significant commercial quantities and that is held by
the taxpayer for the planting, cultivating, caring for, and
cutting of trees for sale or use in the commercial production
of timber products. The regulations require that the site
consist of at least one acre that is devoted to such
activities.45 A taxpayer may hold qualifying timber
property in fee or by lease. Where the property is held by one
person for life with the remainder to another person, the life
tenant is considered the owner of the property for this
purpose.
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\45\ Treas. Reg. sec. 1.194-3(a).
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Reforestation amortization is subject to recapture as
ordinary income on sale of qualifying timber property within 10
years of the year in which the qualifying reforestation
expenditures were incurred.46
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\46\ Sec. 1245(b)(7); Treas. Reg. sec. 1.194-1(c).
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Reforestation tax credit (sec. 48(b))
A tax credit is allowed equal to 10 percent of the
reforestation expenditures incurred during the year that are
properly elected to be amortized. An amount allowed as a credit
is subject to recapture if the qualifying timber property to
which the expenditure relates is disposed of within 5 years.
Reasons for Change
The Committee believes that it is appropriate to increase
the amount eligible for amortization and the credit to reflect
the increased costs of reforestation. In light of the current
financial difficulties in the timber industry, the Committee
also believes that it is appropriate to temporarily allow
amortization of reforestation expenditures without limit.
Explanation of Provision
The provision increases the amount of reforestation
expenditures eligible for 7-year amortization and the
reforestation credit from $10,000 to $25,000 per taxable year
(from $5,000 to $12,500 in the case of a separate return by a
married individual).
For taxable years beginning in 2000 through 2003, the
provision removes the limitation on the amount eligible for 7-
year amortization.
effective date
The provision is effective for expenditures paid or
incurred in taxable years beginning after December 31, 1999.
For taxable years beginning in 2000 through 2003, the amount of
reforestation expenditures eligible for the credit is limited
to $25,000 and no limit applies to the amount eligible for 7-
year amortization. For taxable years beginning after 2003, the
amount of reforestation expenditures eligible for 7-year
amortization and for the credit is limited to $25,000.
I. Modify Excise Tax on Arrow Components and Accessories
(sec. 1109 of the bill and sec. 4161 of the Code)
Present Law
An 12.4 percent excise tax is imposed on the sale by a
manufacturer or importer of any shaft, point, nock, or vane
designed for use as part of an arrow which (1) is over 18
inches long, or (2) is designed for use with a taxable bow (if
shorter than 18 inches). An 11-percent tax is imposed on
certain bows and on certain accessories for taxable bows and
arrows.
Reasons for Change
The Committee believes that modifications must be made to
the present-law tax on arrows and points to better reflect
current design and practice in the manufacture of arrows and
points.
Explanation of Provision
The bill makes two modifications to the excise tax on
arrows and arrow accessories. First, the amendment extends the
12.4-percent tax on arrow components to inserts and outserts
designed for use with taxable arrows. Inserts and outserts are
defined as articles used to attach a point to an arrow shaft.
Second, the amendment reclassifies ``broadheads,'' or arrow
points designed for hunting fish or large animals, as arrow
accessories subject to the 11-percent tax rather than arrow
points subject to the 12.4-percent tax (as under present law).
Effective Date
The provision applies to sales by manufacturers beginning
on the first day of the first calendar quarter that begins more
than 30 days after the bill's enactment.
J. Increase Joint Committee on Taxation Refund Review Threshold to $2
Million
(sec. 1110 of the bill and sec. 6405 of the Code)
Present Law
No refund or credit in excess of $1,000,000 of any income
tax, estate or gift tax, or certain other specified taxes, may
be made until 30 days after the date a report on the refund is
provided to the Joint Committee on Taxation (sec. 6405). A
report is also required in the case of certain tentative
refunds. Additionally, the staff of the Joint Committee on
Taxation conducts post-audit reviews of large deficiency cases
and other select issues.
Reasons for Change
The Committee believes that it is appropriate to increase
the refund review threshold, which has been set at $1,000,000
since 1990. Increasing it will accelerate the issuance of
refunds between $1,000,000 and $2,000,000 to the taxpayers
involved. In addition, this increase will free up significant
resources of both the Internal Revenue Service and the staff of
the Joint Committee on Taxation, without materially impairing
the ability to monitor problems in the administration of the
tax laws.
Explanation of Provision
The provision increases the threshold above which refunds
must be submitted to the Joint Committee on Taxation for review
from $1,000,000 to $2,000,000. The staff of the Joint Committee
on Taxation would continue to exercise its existing statutory
authority to conduct a program of expanded post-audit reviews
of large deficiency cases and other select issues, and the IRS
is expected to cooperate fully in this expanded program.
Effective Date
The provision is effective on the date of enactment, except
that the higher threshold does not apply to a refund or credit
with respect to which a report was made before the date of
enactment.
K. Modify the Definition of Rural Airport Eligible for Reduced Air
Passenger Ticket Tax Rate
(sec. 1111 of the bill and sec. 4261 of the Code)
Present Law
Air passenger transportation is subject to an excise tax
equal to 8 percent of the amount paid plus $2 per flight
segment. After September 30, 1999, the ad valorem portion of
this tax will decrease to 7.5 percent and the flight segment
portion will increase to $2.25. Additional increases in the
flight segment tax are scheduled until that rate equals $3 per
flight segment (with indexing of the $3 amount one year after
it is reached).
Flight segments to or from qualified rural airports are
eligible for a reduced air passenger tax of 7.5 percent, with
no segment tax being imposed on those segments. A qualified
rural airport is defined as an airport that enplaned fewer than
100,000 passengers in the second preceding calendar year and
either (1) is not located within 75 miles of a larger airport
not qualified for the reduced tax rate or (2) was receiving
essential air service subsidy payments as of August 5, 1997.
Reasons for Change
The Committee notes that the present-law definition of
``rural airports'' generally encompasses those airports that do
not offer potential customers a viable alternative to a larger
airport from which a ticket would subject the purchaser to the
flight segment tax in addition to the ad valorem tax. The
Committee observes that airports located on islands with no
direct access by road from the mainland also would not offer
potential customers a viable alternative to a larger airport,
even if the island airport is within 75 miles of the larger
airport.
Explanation of Provision
The definition of qualified rural airport is expanded to
include otherwise qualified airports that are located within 75
miles of a larger airport not qualified for the reduced tax
rate if those airports are not connected by road to the larger
airport (e.g., an airport on an island not connected by bridge
to the mainland).
Effective Date
The provision is effective for amounts paid after December
31, 1999, for air transportation beginning after that date.
L. Dividends Paid by Cooperatives
(sec. 1112 of the bill and sec. 1388(a) of the Code)
Present Law
In general
Cooperatives, including tax-exempt farmers' cooperatives,
and their members are subject to special tax rules under
subchapter T of the Code (sec. 1381 et seq.). In general, these
provisions operate to treat the cooperative more like a conduit
than a separate taxable business enterprise. In general,
subchapter T applies to tax-exempt farmers' cooperatives
(described in sec. 521(b)) or any other corporation operating
on a cooperative basis (except mutual savings banks, insurance
companies, other tax-exempt organizations, and certain
utilities).
For Federal income tax purposes, a cooperative generally
computes its income as if it were a taxable corporation, with
one important exception--the cooperative may deduct from its
taxable income patronage dividends paid. In general, patronage
dividends are the profits of the cooperative that are rebated
to its patrons pursuant to a preexisting obligation of the
cooperative to do so. The rebate must be made in some equitable
fashion on the basis of the quantity or value of business done
with the cooperative. Except for tax-exempt farmers'
cooperatives, cooperatives are permitted to deduct patronage
dividends only to the extent of net income derived from
transactions with its members. The availability of these
deductions for the cooperative has the effect of allowing the
cooperative to be treated like a conduit with respect to
profits derived from transactions with members.
Definition of patronage dividends
Treasury regulations provide that the term patronage
dividends are amounts paid to patrons (1) on the basis of the
quantity or value of business done with or for its patrons, (2)
under a valid enforceable written obligation to the patron to
pay such amount, which obligation existed before the
cooperative received such amounts, and (3) which is determined
by reference to the net earnings of the cooperative from
business done with or for its patrons. Treas. Reg. sec. 1.1388-
1(a).
Treatment of dividends paid by cooperative (the ``dividend allocation
rule'')
Those Treasury Regulations also provide that ``net earnings
. . . shall be reduced by dividends paid on capital stock or
other proprietary capital interests.'' Treas. Reg. sec. 1.1388-
1(a). The effect of this rule is to reduce the amount of
earnings that the cooperative can treat as patronage earnings
which, consequently, reduces the amount that cooperative can
deduct as patronage dividends. The dividend allocation rule of
the Treasury Regulations initially was applied by the courts
where the organizational documents of the cooperative provided
that the dividends could be paid from both patronage and
nonpatronage earnings, but later was applied in all cases.
47
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\47\ The rule was first adopted in cases where dividends paid by a
cooperative came from earnings from both patronage and nonpatronage
business (see A.R.R. 6697, C.B. III-1, 287 (payment of dividends from
reserve funded from a portion of all earnings); Mississippi Chemical
Corp. v. U.S., 197 F. Supp. 490 (S.D. Miss., 1961)(``common stock
dividends are to be paid first from profits on non-stockholder business
and only the deficiency, if any, may be deducted from margins on
stockholder patronage''), aff'd, 326 F.2d 569 (5th Cir. 1964)), but the
dividend allocation rule also was extended by courts, and eventually
through regulations and rulings issued by the Internal Revenue Service,
to apply also to cases where dividends on capital stock could be paid
only from earnings from nonpatronage business (Valparaiso Grain &
Lumber Company v. Commissioner, 44 B.T.A. 125 (1941)(``bylaws provide
for payment of fixed dividends on capital stock before any
distributions of patronage rebates can be made''); Rev. Rul. 68-228,
68-2 C.B. 385).
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Reasons for Change
The Committee believes that the dividend allocation rule
should not apply to the extent that the cooperative's
organizational documents provide that capital stock dividends
do not reduce the amounts owed to patrons as patronage
dividends. To the extent that capital stock dividends are in
addition to amounts paid under the cooperative's organizational
documents to patrons as patronage dividends, the Committee
believes that those capital stock dividends are not being paid
from earnings from nonpatronage business.
In addition, the Committee believes cooperatives should be
able to raise needed equity capital by issuance of capital
stock without dividends paid on that capital stock causing
taxation of the cooperative on a portion of its patronage
income.
Explanation of Provision
Under the provision, patronage-sourced income is not
reduced to the extent that the organizational documents
(articles of incorporation, bylaws, or contract with patrons)
provide that dividends on capital stock (or other proprietary
capital interests) are ``in addition'' to amounts otherwise
payable as patronage dividends.
Effective Date
The provision is effective for distributions made in
taxable years beginning after the date of enactment.
M. Permit Consolidation of Life and Nonlife Insurance Companies
(sec. 1113 of the bill and secs. 1504(b)(2) and 1504(c) of the Code)
Present Law
Under present law, an affiliated group of corporations
means one or more chains of includible corporations connected
through stock ownership with a common parent corporation (sec.
1504(a)(1)). The stock ownership requirement consists of an 80-
percent voting and value test. In general, an affiliated group
of corporations may file a consolidated tax return for Federal
income tax purposes.
Life insurance companies (subject to tax under section 801)
generally are not treated as includible corporations, and
therefore may not be included in a consolidated return of an
affiliated group including nonlife-insurance companies, unless
the common parent of the group elects to treat the life
insurance companies as includible corporations (sec.
1504(c)(2)).
Under the election to treat life insurance companies as
includible corporations of an affiliated group, two special 5-
year limitation rules apply. The first 5-year rule provides
that a life insurance company may not be treated as an
includible corporation until it has been a member of the group
for the 5 taxable years immediately preceding the taxable year
for which the consolidated return is filed (sec. 1504(c)(2)).
The second 5-year rule provides that any net operating loss of
a nonlife-insurance member of the group may not offset the
taxable income of a life insurance member for any of the first
5 years the life and nonlife-insurance corporations have been
members of the same affiliated group (sec. 1503(c)(2)). This
rule applies to nonlife losses for the current taxable year or
as a carryover or carryback.
A separate 35-percent limitation also applies under the
election to treat life insurance companies as includible
corporations of an affiliated group (sec. 1503(c)(1)). This
rule provides that if the non-life-insurance members of the
group have a net operating loss, then the amount of the loss
that is not absorbed by carrybacks against the nonlife-
insurance members' income may offset the life insurance
members' income only to the extent of the lesser of: (1) 35
percent of the amount of the loss; or (2) 35 percent of the
life insurance members' taxable income. The unused portion of
the loss is available as a carryover and is added to
subsequent-year losses, subject to the same 35-percent
limitation.
Reasons for Change
The committee understands that the five-year limitation
rule under the election to treat life insurance companies as
includible corporations gives rise to considerable complexity
in application. The Committee believes that desirable
simplification of the tax law can be achieved by repeal of the
five-year limitation on consolidation.
Explanation of Provision
The provision repeals the 5-year limitation rule relating
to consolidation under the election to treat life insurance
companies as includible corporations of an affiliated group.
The provision also repeals the rule that a life insurance
corporation is not an includible corporation unless the common
parent makes an election to treat life insurance companies as
includible corporations. Thus, under the provision, a life
insurance company is treated as an includible corporation
starting with the first taxable year for which it becomes a
member of the affiliated group and otherwise meets the
definition of an includible corporation. However, as under
present law, any net operating loss of a nonlife-insurance
member of the group may not offset the taxable income of a life
insurance member for any of the first five years the life and
nonlife- insurance corporations have been members of the same
affiliated group. The provision retains the 35-percent
limitation of present law with respect to any life insurance
company that is an includible corporation of an affiliated
group.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
To the extent that a consolidated net operating loss is
created or increased by the provision, the loss may not be
carried back to a taxable year beginning before January 1,
2001. In addition, no affiliated group terminates solely by
reason of the provision. The provision waives the 5-year
waiting period for reconsolidation under section 1504(a)(3), in
the case of any corporation that was previously an includible
corporation, but was subsequently deemed not to be an
includible corporation as a result of becoming a subsidiary of
a corporation that was not an includible corporation by reason
of the 5-year rule of section 1504(c)(2) (providing that a life
insurance company may not be treated as an includible
corporation until it has been a member of the group for the 5
taxable years immediately preceding the taxable year for which
the consolidated return is filed).
N. Modify Personal Holding Company ``Lending or Finance Business''
Exception
(sec. 1114 of the bill and sec. 542 of the Code)
Present Law
Personal holding companies (PHC's) are subject to a 39.6%
tax on undistributed PHC income. This tax can be avoided by
distributing the income to shareholders, who then pay
shareholder level tax. PHC's are closely held companies with at
least 60% ``personal holding company income'' (PHCI). This is
generally passive income, including interest, dividends, and
rents. Certain rent is excluded from the definition, if rent is
at least 50 percent of the adjusted ordinary gross income of
the company and other undistributed PHCI does not exceed 10
percent of the adjusted ordinary gross income.
In the case of a group of corporations filing a
consolidated return, with certain exceptions, the application
of the PHC tax to the group and any member thereof is generally
determined on the basis of consolidated income and consolidated
PHCI. If any member of the group is excluded from the
definition of a PHC under certain provisions (including one for
certain lending or finance businesses), then each other member
of the group is tested separately for PHC status.
A special rule of present law excludes a lending or finance
business from the definition of a PHC if certain requirements
are met. At least 60% of its income must come from the active
conduct of a lending or finance business, and no more than 20%
of its adjusted gross income may be from certain other PHCI. A
lending or finance business does not include a business of
making loans longer than 144 months (12 years). Also, the
deductions attributable to this active lending or finance
business (but not including interest expense) must be at least
5 percent of income over $500,000 (plus 15 percent of income
under that amount).
Reasons for Change
The Committee believes that present law does not adequately
account for the fact that lending and leasing can be similar
financing activities, and that these activities can be active
businesses even though they may not meet all the present law
requirements for exclusion from PHC status.
The Committee is also concerned that in the context of an
affiliated group filing a consolidated return, the present-law
rule requiring 60 percent of the income of such a company to be
from a lending or finance business can prevent qualification of
a member of the group merely because other members of the group
receive substantial income from other active businesses (if
such other income exceeds 40 percent of the group's total
income).
Explanation of Provision
The provision modifies the personal holding company
exclusion for lending or finance companies to provide that, in
determining whether a member of an affiliated group (as defined
in section 1504(a)(1)) filing a consolidated return is a
lending or finance company, only corporations engaged in a
lending or finance business are taken into account, and all
such companies are aggregated for purposes of this
determination. The effect of this rule is to treat a
corporation as a lending or finance company if all companies
engaged in a lending or finance business in the affiliated
group, in the aggregate, satisfy the requirements of the
exclusion.
The provision also repeals the business expense requirement
and the limitation on the maturity of loans made by a lending
or finance business.
The provision also broadens the definition of a lending or
finance business to include providing financial or investment
advisory services, as well as engaging in leasing, including
entering into leases and/or purchasing. servicing, and/or
disposing of leases and leased assets.
Rents that are not derived from the active and regular
conduct of a lending or finance business would continue to be
treated under the present law personal holding company income
rules.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
O. Tax Credit for Modifications to Inter-City Buses Required Under the
Americans With Disabilities Act of 1990
(sec. 1115 of the bill and sec. 44 of the Code
Present Law
Present law provides a tax credit (``the disabled access
credit'') for eligible access expenditures paid or incurred by
an eligible small business so that such business may comply
with the Americans with Disabilities Act of 1990, (the
``ADA''). The amount of the credit for any taxable year is
equal to 50 percent of the eligible access expenditures for the
taxable year that exceed $250 but do not exceed $10,250.
Therefore the maximum annual credit is $5,000. An eligible
small business is defined for any taxable year as a person that
had gross receipts for the preceding taxable year that did not
exceed $1 million or had no more than 30 full-time employees
during the preceding taxable year.
Eligible access expenditures are defined as amounts paid or
incurred by an eligible small business for the purpose of
enabling such eligible small business to comply with applicable
requirements of the ADA, as in effect on the date of enactment
of the credit. Eligible access expenditures generally include
amounts paid or incurred (1) for the purpose of removing
architectural, communication, physical, or transportation
barriers which prevent a business from being accessible to, or
usable by, individuals with disabilities; (2) to provide
qualified interpreters or other effective methods of making
aurally delivered materials available to individuals with
hearing impairments; (3) to provide qualified readers, taped
texts, hearing impairments; (3) to provide qualified readers,
taped texts and other effective methods of making visually
delivered materials available to individuals with visual
impairments; (4) to acquire or modify equipment or devices for
individuals with disabilities; or (5) to provide other similar
services, modifications, materials, or equipment. The
expenditures must be reasonable and necessary to accomplish
these purposes.
The disabled access credit is a general business credit and
is subject to the present-law limitations on the amount of the
general business credit that may be used for any taxable year.
However, the portion of the unused business credit for any
taxable year that is attributable to the disabled access credit
may not to be carried back to any taxable year ending before
the date of enactment of the credit.
Reasons for Change
The Committee believes that the costs of compliance with
the ADA creates too heavy a burden on taxpayers in the case of
certain inter-city buses. Therefore the Committee believes that
the disabled access credit should be expanded to mitigate the
burden of these taxpayers.
Explanation of Provision
The bill extends the disabled access credit to a business
without regard to the eligible small business limitation
generally applicable under the credit for the cost of making
certain inter-city buses comply with the ADA under the
Department of Transportation's (``DOT's'') final rule making on
September 28, 1998, (49 CFR Part 37). Specifically, the
definition of eligible access expenditure under the credit is
expanded to include the incremental capital cost paid or
incurred by the taxpayer so that certain inter-city buses
satisfy the DOT's rule making under the ADA. For purposes of
this provision, the allowable credit is 50 percent of the
eligible access expenditures, per bus, for the taxable year
that exceed $250 but do not exceed $30,250. Therefore the
maximum credit is $15,000, per bus. The otherwise allowable
eligible access expenditures are reduced by any Federal or
State grant monies received by the taxpayer to subsidize such
expenditures relating to such inter-city buses. For these
purposes, inter-city buses are buses eligible for the reduced
diesel fuel tax rate of 7.4 cents per gallon.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999 and before January 1, 2012.
Individuals subject to the hours of service limitations of
the Department of Transportation are frequently forced to eat
meals away from home in circumstances where their choice is
limited. The Committee believes that it is appropriate to
accelerate by one year the full 80 percent deduction for the
cost of food and beverages consumed while away from home on
business by these individuals.
explanation of provision
The bill accelerates the full 80 percent deduction to
taxable years beginning after 2006.
effective date
The provision is effective for taxable years beginning
after 2006.
P. Increased Deduction for Business Meals While Operating Under
Department of Transportation Hours of Service Limitations
(sec. 1116 of the bill and sec. 274 of the Code)
Present Law
Ordinary and necessary business expenses, as well as
expenses incurred for the production of income, are generally
deductible, subject to a number of restrictions and
limitations. Generally, the amount allowable as a deduction for
food and beverage is limited to 50 percent of the otherwise
deductible amount. Exceptions to the 50 percent rule are
provided for food and beverages provided to crew members of
certain vessels and offshore oil or gas platforms or drilling
rigs.
The 1997 Act increased to 80 percent the deductible
percentage of the cost of food and beverages consumed while
away from home by an individual during, or incident to, a
period of duty subject to the hours of service limitations of
the Department of Transportation.
Individuals subject to the hours of service limitations of
the Department of Transportation include:
(1) certain air transportation employees such as
pilots, crew, dispatchers, mechanics, and control tower
operators pursuant to Federal Aviation Administration
regulations,
(2) interstate truck operators and interstate bus
drivers pursuant to Department of Transportation
regulations,
(3) certain railroad employees such as engineers,
conductors, train crews, dispatchers and control
operations personnel pursuant to Federal Railroad
Administration regulations, and
(4) certain merchant mariners pursuant to Coast Guard
regulations.
The increase in the deductible percentage is phased in
according to the following schedule.
Taxable years beginning in Deductible percentage
1998, 1999........................................................ 55
2000, 2001........................................................ 60
2002, 2003........................................................ 65
2004, 2005........................................................ 70
2006, 2007........................................................ 75
2008 and thereafter............................................... 80
Reasons for Change
Individuals subject to the hours of service limitations of
the Department of Transportation are frequently forced to eat
meals away from home in circumstances where their choice is
limited. The Committee believes that it is appropriate to
accelerate by one year the full 80 percent deduction for the
cost of food and beverages consumed while away from home on
business by these individuals.
Explanation of Provision
The bill accelerates the full 80 percent deduction to
taxable years beginning after 2006.
Effective Date
The provision is effective for taxable years beginning
after 2006.
Q. Authorize Limited Private Activity Tax-Exempt Financing for Highway
Construction
(sec. 1117 of the bill)
Present Law
Present law exempts interest on State or local government
bonds from the regular income tax if the proceeds of the bonds
are used to finance governmental activities of those units and
the bonds are repaid with governmental revenues. Interest on
bonds issued by States or local governments acting as conduits
to provide financing for private persons is taxable unless a
specific exception is provided in the Code. No such exception
is provided for bonds issued to provide conduit financing for
privately constructed and/or privately operated highways (e.g.,
toll roads).
Reasons for Change
The Committee believes it is important to provide increased
flexibility for tax-exempt financing of a limited number of
public-private partnerships in the construction and operation
of transportation infrastructure as provided under the
Transportation Equity Act for the 21st Century.
Explanation of Provision
The bill authorizes issuance of up to $15 billion of
private activity tax-exempt bonds to finance the construction
of up the 15 private highway pilot projects made eligible for
other special assistance under the Transportation Equity Act
for the 21st Century. Bonds for these projects generally will
be subject to all Code provisions governing issuance of tax-
exempt private activity bonds except (1) the annual State
volume limits (sec. 146) and (2) no proceeds of these bonds may
be used to finance land.
Effective Date
The provision applies to bonds issued after December 31,
1999.
R. Extend Tax Credit for First-Time D.C. Homebuyers
(sec. 1118 of the bill and sec. 1400C of the Code)
Present Law
First-time homebuyers of a principal residence in the
District of Columbia are eligible for a nonrefundable tax
credit of up to $5,000 of the amount of the purchase price. The
$5,000 maximum credit applies both to individuals and married
couples. Married individuals filing separately can claim a
maximum credit of $2,500 each. The credit phases out for
individual taxpayers with adjusted gross income between $70,000
and $90,000 ($110,000-$130,000 for joint filers). For purposes
of eligibility, ``first-time homebuyer'' means any individual
if such individual did not have a present ownership interest in
a principal residence in the District of Columbia in the one
year period ending on the date of the purchase of the residence
to which the credit applies. The credit is scheduled to expire
for residences purchased after December 31, 2000.
Reasons for Change
The D.C. first-time homebuyer credit is designed to
encourage eligible homebuyers to buy in the District of
Columbia so as to stabilize or increase its population and
improve its tax base. Recently, the District of Columbia has
been experiencing an increase in home sales. Although it is
difficult to know to what extent the D.C. homebuyer credit may
have been a factor in the increase, the Committee believes that
the enactment of the first-time homebuyer credit in 1997 has
contributed to the increase and should be extended.
The Committee is concerned that the present-law phase-out
range for joint filers is disadvantageous to married couples
filing a joint return because the phase-out range for joint
filers is less than twice that for individuals. The Committee
believes that this disparity should be eliminated.
Explanation of Provision
The D.C. first-time homebuyer tax credit is extended for 1
year, through December 31, 2001. In addition, the phase-out
range for married individuals filing a joint return is
increased so that it is twice that of individuals. Thus, under
the provision, the credit phases out for joint filers with
adjusted gross income between $140,000 and $180,000.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1999.
S. Expand the Zero-Percent Capital Gains Rate for DC Zone Assets
(sec. 1119 of the bill and sec. 1400B of the Code)
present law
Present law provides a zero-percent capital gains rate for
capital gains from the sale of certain qualified DC Zone assets
held for more than five years. In general, a ``DC Zone asset''
means stock or partnership interests held in, or tangible
assets held by, a DC Zone business. A DC Zone business
generally refers to certain enterprise zone businesses within
the DC Zone.48 For purposes of the zero-percent
capital gains rate, the D.C. Zone is defined to include all
census tracts within the District of Columbia where the poverty
rate is not less than 10 percent as determined on the basis of
the 1990 Census (sec. 1400B(d)).
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\48\ For purposes of the zero-percent capital gains rate, a DC Zone
business is defined by reference to the definition of an enterprise
zone business in section 1397B, except that (1) the requirement that 35
percent of the employees of the business must be residents of the DC
Zone does not apply, and (2) the DC zone business must derive at least
80 percent (as opposed to 50 percent) of its total gross income from
the active conduct of a qualified business within the DC Zone (sec.
1400B(c)).
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reasons for change
The Committee believes that the zero-percent capital gains
rate is an effective incentive to encourage economic
development in the District of Columbia. Limiting the benefits
of the zero percent rate to particular census tracts hampers
the effectiveness of the benefit and creates disparities in the
tax treatment of similar investments located in adjacent census
tracts. The Committee believes that economic development should
be encouraged throughout the District.
explanation of provision
The provision eliminates the 10-percent poverty rate
limitation for purposes of the zero-percent capital gains rate.
Thus, the zero-percent capital gains rate applies to capital
gains from the sale of assets held more than five years
attributable to certain qualifying businesses located in the
District of Columbia.
effective date
The provision is effective for DC Zone business stock and
partnership interests originally issued after, and DC Zone
business property assets originally acquired by the taxpayer
after, December 31, 1999.
T. Establish a Seven-year Recovery Period for Natural Gas Gathering
Lines
(sec. 1120 of the bill and sec. 168 of the Code)
present law
The applicable recovery period for assets placed in service
under the Modified Accelerated Cost Recovery System is based on
the ``class life of the property.'' The class lives of assets
placed in service after 1986 are set forth in Revenue Procedure
87-56.49
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\49\ 1987-2 C.B. 674.
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Revenue Procedure 87-56 includes two asset classes that
could describe natural gas gathering lines owned by
nonproducers of natural gas. Asset class 13.2, describing
assets used in the exploration for and production of petroleum
and natural gas deposits, provides a class life of 14 years and
a depreciation recovery period of seven years. Asset class
46.0, describing pipeline transportation, provides a class life
of 22 years and a recovery period of 15 years. The uncertainty
regarding the appropriate recovery period has resulted in
litigation between taxpayers and the IRS. Recently, the 10th
Circuit Court of Appeals held that natural gas gathering lines
owned by nonproducers fall within the scope of Asset class 13.2
(i.e., seven-year recovery period).50
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\50\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999),
rev'g 109 T.C. 416 (1997). See also True v. United States, 97-2 U.S.
Tax Cas. (CCH) par. 50,946 (D. Wyo. 1997) (same).
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reasons for change
The Committee believes that the appropriate recovery period
for natural gas gathering lines is seven years. This is
consistent with the historical treatment of such property.
explanation of provision
The provision establishes a statutory seven-year recovery
period for all natural gas gathering lines. For this purpose, a
natural gas gathering line is defined to include pipe,
equipment, and appurtenances that is (1) determined to be a
gathering line by the Federal Energy Regulatory Commission, or
(2) used to deliver natural gas from the wellhead or a common
point to the point at which such gas first reaches (a) a gas
processing plant, (b) an interconnection with an interstate
transmission line, (c) an interconnection with an intrastate
transmission line, or (d) a direct interconnection with a local
distribution company, a gas storage facility, or an industrial
consumer.
effective date
The provision is effective for property placed in service
on or after the date of enactment. No inference is intended as
to the proper treatment of such property placed in service
before the date of enactment.
U. Reclassify Air Transportation on Certain Small Seaplanes as Non-
Commercial Aviation for Excise Tax Purposes
(sec. 1121 of the amendment and sec. 4261 of the Code)
present law
Commercial air passenger transportation is subject to an
excise tax equal to 8 percent of the amount paid plus $2 per
flight segment. After September 30, 1999, the ad valorem
portion of this tax will decrease to 7.5 percent and the flight
segment portion will increase to $2.25. Additional increases in
the flight segment tax are scheduled until that rate equals $3
per flight segment (with indexing of the $3 amount one year
after it is reached). In addition, fuel used in commercial
aviation is subject to a 4.3-cents-per-gallon excise tax on
fuels used in the aircraft.
In lieu of the ticket taxes imposed on commercial air
passenger transportation, non-commercial transportation is
subject to excise taxes on the fuels used in the aircraft. Non-
commercial air transportation is defined as transportation
which is not for hire. The fuels excise tax rates are 19.3
cents per gallon (aviation gasoline) and 21.8 cents per gallon
(jet fuel).
Revenues from all of these excise taxes are deposited in
the Airport and Airway Trust Fund to finance Federal Aviation
Administration programs.
reasons for change
The Committee observes that seaplanes do not make as full
utilization of FAA services as do planes that offer passenger
service out of traditional airports. The Committee, therefore,
believes it is appropriate to exempt such service from the air
passenger excise taxes and instead impose only the fuels excise
taxes.
explanation of provision
The provision re-classifies passenger transportation for
hire on certain small seaplanes as non-commercial aviation. As
such, the transportation will be subject to the full 19.3
cents-per-gallon and 21.8-cents-per-gallon excise taxes rather
than the passenger ticket tax. Transportation is eligible for
this provision only it occurs on seaplanes (planes that both
take off from and land on water) and that have a maximum
certificated takeoff weight of 6,000 pounds or less with
respect to any flight segment.
effective date
The provision is effective for transportation beginning
after December 31, 1999.
TITLE XII. EXTENSION OF EXPIRING PROVISIONS
A. Extension of Research and Experimentation Credit and Increase in the
Rates for the Alternative Incremental Research Credit
(sec. 1201 of the bill and sec. 41 of the Code)
present law
General rule
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenditures for a taxable year exceeded its base amount for
that year. The research tax credit expired and generally does
not apply to amounts paid or incurred after June 30, 1999.
A 20-percent research tax credit also applied to the excess
of (1) 100 percent of corporate cash expenditures (including
grants or contributions) paid for basic research conducted by
universities (and certain nonprofit scientific research
organizations) over (2) the sum of (a) the greater of two
minimum basic research floors plus (b) an amount reflecting any
decrease in nonresearch giving to universities by the
corporation as compared to such giving during a fixed-base
period, as adjusted for inflation. This separate credit
computation is commonly referred to as the ``university basic
research credit'' (see sec. 41(e)).
Computation of allowable credit
Except for certain university basic research payments made
by corporations, the research tax credit applies only to the
extent that the taxpayer's qualified research expenditures for
the current taxable year exceed its base amount. The base
amount for the current year generally is computed by
multiplying the taxpayer's ``fixed-base percentage'' by the
average amount of the taxpayer's gross receipts for the four
preceding years. If a taxpayer both incurred qualified research
expenditures and had gross receipts during each of at least
three years from 1984 through 1988, then its ``fixed-base
percentage'' is the ratio that its total qualified research
expenditures for the 1984-1988 period bears to its total gross
receipts for that period (subject to a maximum ratio of .16).
All other taxpayers (so-called ``start-up firms'') are assigned
a fixed-base percentage of 3 percent.51
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\51\ A special rule is designed to gradually recompute a start-up
firm's fixed-base percentage based on its actual research experience.
Under this special rule, a start-up firm will be assigned a fixed-base
percentage of 3 percent for each of its first five taxable years after
1993 in which it incurs qualified research expenditures. In the event
that the research credit is extended beyond the scheduled expiration
date, a start-up firm's fixed-based percentage for its sixth through
tenth taxable years after 1993 in which it incurs qualified research
expenditures will be a phased-in ratio based on its actual research
experience. For all subsequent taxable years, the taxpayer's fixed-
based percentage will be its actual ratio of qualified research
expenditures to gross receipts for any five years selected by the
taxpayer from its fifth through tenth taxable years after 1993 (sec.
41(c)(3)(B)).
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In computing the credit, a taxpayer's base amount may not
be less than 50 percent of its current-year qualified research
expenditures.
Alternative incremental research credit regime
Taxpayers are allowed to elect an alternative incremental
research credit regime. If a taxpayer elects to be subject to
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 1.65 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of 1 percent
(i.e., the base amount equals 1 percent of the taxpayer's
average gross receipts for the four preceding years) but do not
exceed a base amount computed by using a fixed-base percentage
of 1.5 percent. A credit rate of 2.2 percent applies to the
extent that a taxpayer's current-year research expenses exceed
a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a
fixed-base percentage of 2 percent. A credit rate of 2.75
percent applies to the extent that a taxpayer's current-year
research expenses exceed a base amount computed by using a
fixed-base percentage of 2 percent. An election to be subject
to this alternative incremental credit regime applies to the
taxable year in which the election is made and all subsequent
years (in the event that the credit subsequently is extended by
Congress) unless revoked with the consent of the Secretary of
the Treasury.
Eligible expenditures
Qualified research expenditures eligible for the research
tax credit consist of: (1) ``in-house'' expenses of the
taxpayer for wages and supplies attributable to qualified
research; (2) certain time-sharing costs for computer use in
qualified research; and (3) 65 percent of amounts paid by the
taxpayer for qualified research conducted on the taxpayer's
behalf (so-called ``contract research expenses'').52
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\52\ Under a special rule, 75 percent of amounts paid to a research
consortium for qualified research is treated as qualified research
expenses eligible for the research credit (rather than 65 percent under
the general rule under sec. 41(b)(3) governing contract research
expenses) if (1) such research consortium is a tax-exempt organization
that is described in section 501(c)(3) (other than a private
foundation) or section 501(c)(6) and is organized and operated
primarily to conduct scientific research, and (2) such qualified
research is conducted by the consortium on behalf of the taxpayer and
one or more persons not related to the taxpayer.
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To be eligible for the credit, the research must not only
satisfy the requirements of present-law section 174 but must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended
to be useful in the development of a new or improved business
component of the taxpayer, and must involve a process of
experimentation related to functional aspects, performance,
reliability, or quality of a business component.
Expenditures attributable to research that is conducted
outside the United States do not enter into the credit
computation. In addition, the credit is not available for
research in the social sciences, arts, or humanities, nor is it
available for research to the extent funded by any grant,
contract, or otherwise by another person (or governmental
entity).
Relation to deduction
Deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year. Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed (sec. 280C(c)(3)).
reasons for change
The Committee believes that increasing technological
knowledge ultimately will lead to new and better products
produced at lower costs. New and better products and lower
production costs are the genesis of economic growth. In
addition, the Committee believes that the repeated scenario of
temporary lapses followed by reinstatement of the credit create
uncertainty for taxpayers, uncertainty that inhibits investment
in research initiatives. For this reason, the Committee
believes it is important to extend permanently the research and
experimentation tax credit.
In addition, the Committee believes the alternative
incremental credit enacted in 1996 should be strengthened. The
alternative incremental research credit was enacted to respond
to the changing economic circumstances of many taxpayers which
invest heavily in research. However, the Committee believes
that under current law, the alternative incremental research
credit provides less of a research incentive than does the
regular research and experimentation tax credit. Therefore, the
Committee believes it is appropriate to increase the rate of
the alternative incremental research credit.
explanation of provision
The bill permanently extends the research tax credit.
In addition, the bill increases the credit rate applicable
under the alternative incremental research credit one
percentage point per step, that is from 1.65 percent to 2.65
percent when a taxpayer's current-year research expenses exceed
a base amount of 1 percent but do not exceed a base amount of
1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's
current-year research expenses exceed a base amount of 1.5
percent but do not exceed a base amount of 2 percent; and from
2.75 percent to 3.75 percent when a taxpayer's current-year
research expenses exceed a base amount of 2 percent.
effective date
The extension of the research credit is effective for
qualified research expenditures paid or incurred after June 30,
1999. The increase in the credit rate under the alternative
incremental research credit is effective for taxable years
beginning after June 30, 1999.
B. Extend Exceptions under Subpart F for Active Financing Income
(sec. 1202 of the bill and secs. 953 and 954 of the Code)
present law
Under the subpart F rules, 10-percent U.S. shareholders of
a controlled foreign corporation (``CFC'') are subject to U.S.
tax currently on certain income earned by the CFC, whether or
not such income is distributed to the shareholders. The income
subject to current inclusion under the subpart F rules
includes, among other things, foreign personal holding company
income and insurance income. In addition, 10-percent U.S.
shareholders of a CFC are subject to current inclusion with
respect to their shares of the CFC's foreign base company
services income (i.e., income derived from services performed
for a related person outside the country in which the CFC is
organized).
Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and REMICs; (3) net gains from
commodities transactions; (4) net gains from foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; and (7) payments in
lieu of dividends.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other-country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income (Prop.
Treas. Reg. sec. 1.953-1(a)).
Temporary exceptions from foreign personal holding company
income, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, or in the conduct of an insurance business
(so-called ``active financing income''). These exceptions are
applicable only for taxable years beginning in
1999.53
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\53\ Temporary exceptions from the subpart F provisions for certain
active financing income applied only for taxable years beginning in
1998. Those exceptions were extended and modified as part of the
present-law provision.
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With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to
qualify for the exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Moreover, the exceptions apply to
income derived from certain cross border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of insurance, in addition to a temporary
exception from foreign personal holding company income for
certain income of a qualifying insurance company with respect
to risks located within the CFC's country of creation or
organization, certain temporary exceptions from insurance
income and from foreign personal holding company income apply
for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met.
reasons for change
In the Taxpayer Relief Act of 1997, one-year temporary
exceptions from foreign personal holding company income were
enacted 54 for income from the active conduct of an
insurance, banking, financing, or similar business. In the Tax
and Trade Relief Extension Act of 1998 (the ``1998 Act''),
55 the Congress extended the temporary exceptions
for an additional year, with certain modifications designed to
treat various types of businesses with active financing income
more similarly to each other than did the 1997 provision. The
Committee believes that it is appropriate to extend the
temporary exceptions, as modified in the 1998 Act, for five
years.
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\54\ The President canceled this provision in 1997 pursuant to the
Line Item Veto Act. On June 25, 1998, the U.S. Supreme Court held that
the cancellation procedures set forth in the Line Item Veto Act are
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 (June
25, 1998).
\55\ Division J of H.R. 4328, the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999.
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explanation of provision
The bill extends for five years the present-law temporary
exceptions from subpart F foreign personal holding company
income, foreign base company services income, and insurance
income for certain income that is derived in the active conduct
of a banking, financing, or similar business, or in the conduct
of an insurance business.
effective date
The provision is effective for taxable years of a foreign
corporation beginning after December 31, 1999, and before
January 1, 2005, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporation end.
C. Extend Suspension of Net Income Limitation on Percentage Depletion
From Marginal Oil and Gas Wells
(sec. 1203 of the bill and sec. 613A of the Code)
present law
The Code permits taxpayers to recover their investments in
oil and gas wells through depletion deductions. In the case of
certain taxpayers, the deductions may be determined using the
percentage depletion method. The percentage depletion deduction
is calculated as a percentage of the gross income from
producing any property. Among the limitations that apply in
calculating percentage depletion deductions is a restriction
that, for oil and gas properties, the amount deducted may not
exceed 100 percent of the net income from that property in any
year (sec. 613(a)).
Special percentage depletion rules apply to oil and gas
production from ``marginal properties'' (sec. 613A(c)(6)).
Marginal production is defined as domestic crude oil and
natural gas production from stripper well property or from
property substantially all of the production from which during
the calendar year is heavy oil. Stripper well property is
property from which the average daily production is 15 barrel
equivalents or less, determined by dividing the average daily
production of domestic crude oil and domestic natural gas from
producing wells on the property for the calendar year by the
number of wells. Heavy oil is domestic crude oil with a
weighted average gravity of 20 degrees API or less (corrected
to 60 degrees Farenheit). Under one such special rule, the 100-
percent-of-net-income limitation does not apply to domestic oil
and gas production from marginal properties during taxable
years beginning after December 31, 1997, and before January 1,
2000.
reasons for change
The Committee notes that oil is, and will continue to be,
vital to the American economy. The Committee observes that low
oil prices have created substantial economic hardship in the
oil industry and particularly in those communities where the
majority of jobs are related to the oil and gas industry. The
current economic hardship in the industry could lead to
business failures and job losses. The Committee finds it
appropriate to extend the present-law rule suspending the 100-
percent-of-net-income limitation with respect to oil and gas
production from marginal wells. The Committee believes that by
reducing current taxable income, less cash will have to be
devoted to income tax payments, and the current cash position
of many such businesses will improve, helping them weather this
current economic storm.
explanation of provision
The bill extends the present-law rule suspending the 100-
percent-of-net-income limitation with respect to oil and gas
production from marginal wells to include taxable years
beginning after December 31, 1999, and before January 1, 2005.
effective date
The provision is effective for taxable years beginning
after December 31, 1999.
D. Extend the Work Opportunity Tax Credit
(sec. 1204 of the bill and sec. 51 of the Code)
present law
The work opportunity tax credit (``WOTC'') is available on
an elective basis for employers hiring individuals from one or
more of eight targeted groups. The credit generally is equal to
a percentage of qualified wages. The credit percentage is 25
percent for employment of at least 120 hours but less than 400
hours and 40 percent for employment of 400 hours or more.
Qualified wages consist of wages attributable to service
rendered by a member of a targeted group during the one-year
period beginning with the day the individual begins work for
the employer.
Generally, no more than $6,000 of wages during the first
year of employment is permitted to be taken into account with
respect to any individual. Thus, the maximum credit per
individual is $2,400. With respect to qualified summer youth
employees, the maximum credit is 40 percent of up to $3,000 of
qualified first-year wages, for a maximum credit of $1,200. The
credit is only effective for wages paid to, or incurred with
respect to, qualified individuals who began work for the
employer before July 1, 1999.
The employer's deduction for wages is reduced by the amount
of the credit.
reasons for change
The Committee believes the preliminary experience of the
WOTC is promising as an incentive for employers to hire
individuals who are under-skilled, undereducated, or who
generally may be less desirable (e.g., lacking in work
experience) to employers. A temporary extension of this credit
will allow the Congress and the Treasury and Labor Departments
to continue to monitor the effectiveness of the credit.
explanation of provision
The bill extends the WOTC for 5 years (through July 1,
2004).
effective date
Generally, the provision is effective for wages paid to, or
incurred with respect to, qualified individuals who begin work
for the employer on or after July 1, 1999, and before July 1,
2004.
E. Extend the Welfare-to-Work Tax Credit
(sec. 1204 of the bill and sec. 51A of the Code)
present law
The Code provides a tax credit to employers on the first
$20,000 of eligible wages paid to qualified long-term family
assistance (``TANF'') recipients during the first two years of
employment. The credit is 35 percent of the first $10,000 of
eligible wages in the first year of employment and 50 percent
of the first $10,000 of eligible wages in the second year of
employment. The maximum credit is $8,500 per qualified
employee.
Qualified long-term family assistance recipients are: (1)
members of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2)
members of a family that has received family assistance for a
total of at least 18 months (whether or not consecutive) after
August 5, 1997 (the date of enactment of this credit) if they
are hired within 2 years after the date that the 18-month total
is reached; and (3) members of a family who are no longer
eligible for family assistance because of either Federal or
State time limits, if they are hired within 2 years after the
Federal or State time limits made the family ineligible for
family assistance.
Eligible wages include cash wages paid to an employee plus
amounts paid by the employer for the following: (1) educational
assistance excludable under a section 127 program (or that
would be excludable but for the expiration of sec. 127); (2)
health plan coverage for the employee, but not more than the
applicable premium defined under section 4980B(f)(4); and (3)
dependent care assistance excludable under section 129.
The welfare to work credit is effective for wages paid or
incurred to a qualified individual who begins work for an
employer on or after January 1, 1998, and before June 30, 1999.
reasons for change
The Committee believes that the credit should be
temporarily extended to provide the Congress and the Treasury
and Labor Departments a better opportunity to assess the
operation and effectiveness of the credit in meeting its goals.
When enacted in the Taxpayer Relief Act of 1997, the goals of
the welfare-to-work credit were: (1) to provide an incentive to
hire long-term welfare recipients; (2) to promote the
transition from welfare to work by increasing access to
employment; and (3) to encourage employers to provide these
individuals with training, health coverage, dependent care and
ultimately better job attachment.
explanation of provision
The bill extends the welfare-to-work credit for five years,
so that the credit is available for eligible individuals who
begin work for an employer before July 1, 2004.
effective date
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after July 1, 1999, and before July 1, 2004.
F. Extend and Modify Tax Credit for Electricity Produced by Wind and
Closed-Loop Biomass Facilities
(sec. 1205 of the bill and sec. 45 of the Code)
present law
An income tax credit is allowed for the production of
electricity from either qualified wind energy or qualified
``closed-loop'' biomass facilities (sec. 45).
The credit applies to electricity produced by a qualified
wind energy facility placed in service after December 31, 1993,
and before July 1, 1999, and to electricity produced by a
qualified closed-loop biomass facility placed in service after
December 31, 1992, and before July 1, 1999. The credit is
allowable for production during the 10-year period after a
facility is originally placed in service.
Closed-loop biomass is the use of plant matter, where the
plants are grown for the sole purpose of being used to generate
electricity. It does not include the use of waste materials
(including, but not limited to, scrap wood, manure, and
municipal or agricultural waste). The credit also is not
available to taxpayers who use standing timber to produce
electricity. In order to claim the credit, a taxpayer must own
the facility and sell the electricity produced by the facility
to an unrelated party.
The credit for electricity produced from wind or closed-
loop biomass is a component of the general business credit
(sec. 28(b)(1)). This credit, when combined with all other
components of the general business credit, generally may not
exceed for any taxable year the excess of the taxpayer's net
income tax over the greater of (1) 25 percent of net regular
tax liability above $25,000 or (2) the tentative minimum tax.
An unused general business credit generally may be carried back
three taxable years and carried forward 15 taxable years (sec.
39).
reasons for change
The Committee believes that the credit provided under
section 45 has been important to the development of
environmentally friendly, renewable wind power and that
extending the placed in service date will increase the further
development of wind resources.
The Committee observes, however, that there is organic
waste that is disposed of in an uncontrolled manner or burned
in the open. Such organic waste can be a fuel source which, if
utilized, can promote a cleaner environment. The Committee
further observes that landfills produce methane as entombed
garbage decays. Methane can be a valuable fuel but, if
permitted to dissipate into the atmosphere, it may create
environmental damage. The Committee believes that providing a
credit to utilize these organic fuel sources can help produce
needed electricity while providing environmental benefits for
communities and the nation.
explanation of provision
The present-law tax credit for electricity produced by wind
and closed-loop biomass is extended for five years, for
facilities placed in service after June 30, 1999, and before
July 1, 2004. The provision also modifies the tax credit to
include electricity produced from poultry litter, for
facilities placed in service after December 31, 1999, and
before July 1, 2004. The credit for electricity produced from
poultry litter is available to the lessor/operator of a
qualified facility that is owned by a governmental entity.
Poultry litter is to include the wood shavings, straw, rice
hulls, and other bedding material for the disposition of
poultry manure from birds raised for sale. The credit further
is expanded to include electricity produced from landfill gas
by the owner of the gas collection facility, for electricity
produced from facilities placed in service after December 31,
1999 and before June 30, 2004.
Finally, the credit is expanded to include electricity
produced from certain other biomass (in addition to closed-loop
biomass and poultry waste). This additional biomass is defined
as solid, nonhazardous, cellulose waste material which is
segregated from other waste materials and which is derived from
forest resources, but not including old-growth timber. The term
also includes urban sources such as waste pallets, crates,
manufacturing and construction wood waste, and tree trimmings,
or agricultural sources (including grain, orchard tree crops,
vineyard legumes, sugar, and other crop by-products or
residues. The term does not include unsegregated municipal
solid waste or paper that commonly is recycled. In the case of
this additional biomass, the credit applies to electricity
produced after December 31, 1999 from facilities that are
placed in service before January 1, 2003 (including facilities
placed in service before the date of enactment of this
provision). The credit is allowed for production attributable
to biomass produced at facilities that are co-fired with coal.
effective date
The extension of the tax credit for electricity produced
from wind and closed-loop biomass is effective for facilities
placed in service after June 30, 1999. The modification to
include electricity produced from poultry litter and landfill
gas is effective for facilities placed in service after
December 31, 1999. The modification to include other types of
biomass is effective for facilities placed in service before
January 1, 2003, but no credits may be claimed for production
before January 1, 2000.
G. Extend Exemption From Diesel Dyeing Requirement for Certain Areas in
Alaska
(sec. 1206 of the bill and sec. 4082 of the Code)
present law
An excise tax totaling 24.4 cents per gallon is imposed on
diesel fuel. The diesel fuel tax is imposed on removal of the
fuel from a pipeline or barge terminal facility (i.e., at the
``terminal rack''). Present law provides that tax is imposed on
all diesel fuel removed from terminal facilities unless the
fuel is destined for a nontaxable use and is indelibly dyed
pursuant to Treasury Department regulations.
In general, the diesel fuel tax does not apply to non-
transportation uses of the fuel. Off-highway business uses are
included within this non-transportation use exemption. This
exemption includes use on a farm for farming purposes and as
fuel powering off-highway equipment (e.g., oil drilling
equipment). Use as heating oil also is exempt. (Most fuel
commonly referred to as heating oil is diesel fuel.) The tax
also does not apply to fuel used by State and local
governments, to exported fuels, and to fuels used in commercial
shipping. Fuel used by intercity buses and trains is partially
exempt from the diesel fuel tax.
A similar dyeing regime exists for diesel fuel under the
Clean Air Act. That Act prohibits the use on highways of diesel
fuel with a sulphur content exceeding prescribed levels. This
``high sulphur'' diesel fuel is required to be dyed by the EPA.
The State of Alaska generally is exempt from the Clean Air
Act dyeing regime for a period established by the U.S.
Environmental Protection Agency (urban areas) or permanently
(remote areas). Diesel fuel used in Alaska is exempt from the
excise tax dyeing requirements for periods when the EPA
requirements do not apply.
reasons for change
Unlike most other States, Alaska's vast undeveloped expanse
results in substantial amounts of motor fuels being used ``off
road.'' Such use of fuels are exempt from tax and generally is
required to be dyed. Dyed fuel requires separate holding tanks.
However, with the large proportion of exempt use that occurs in
Alaska and with a dispersed population, the Committee believes
that maintaining the fuel dyeing regime in Alaska imposes too
large a burden on too many fuel distributors and an inordinate
administrative burden on the Internal Revenue Service in
comparison to the general benefits of the fuel dyeing regime.
explanation of provision
The bill makes the excise tax exemption for Alaska urban
areas permanent (i.e., independent of the EPA rules).
effective date
The provision is effective on the date of enactment.
H. Expensing of Environmental Remediation Expenditures and Expansion of
Qualifying Sites
(sec. 1207 of the bill and sec. 198 of the Code)
present law
Taxpayers can elect to treat certain environmental
remediation expenditures that would otherwise be chargeable to
capital account as deductible in the year paid or incurred
(sec. 198). The deduction applies for both regular and
alternative minimum tax purposes. The expenditure must be
incurred in connection with the abatement or control of
hazardous substances at a qualified contaminated site.
A ``qualified contaminated site'' generally is any property
that (1) is held for use in a trade or business, for the
production of income, or as inventory; (2) is certified by the
appropriate State environmental agency to be located within a
targeted area; and (3) contains (or potentially contains) a
hazardous substance (so-called ``brownfields''). Targeted areas
are defined as: (1) empowerment zones and enterprise
communities as designated under present law; (2) sites
announced before February, 1997, as being subject to one of the
76 Environmental Protection Agency (``EPA'') Brownfields
Pilots; (3) any population census tract with a poverty rate of
20 percent or more; and (4) certain industrial and commercial
areas that are adjacent to tracts described in (3) above.
However, sites that are identified on the national priorities
list under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 cannot qualify as
targeted areas.
Eligible expenditures are those paid or incurred before
January 1, 2001.
reasons for change
The Committee would like to see more so-called
``brownfield'' sites brought back into productive use in the
economy. Cleaning up such sites mitigates potential harms to
public health and can help revitalize affected communities. The
Committee seeks to encourage the clean up of contaminated
sites. To achieve this goal, the Committee believes it is
necessary to make two modifications to present law. First, it
is necessary to expand the set of brownfield sites that may
claim the tax benefits of expensing beyond the relatively
narrow class of sites identified in the Taxpayer Relief Act of
1997. Second, it is necessary to permit taxpayers more time to
avail themselves of the tax benefits of expensing.
explanation of provision
The bill extends the expiration date for eligible
expenditures to include those paid or incurred before July 1,
2004.
In addition, the bill eliminates the targeted area
requirement, thereby, expanding eligible sites to include any
site containing (or potentially containing) a hazardous
substance that is certified by the appropriate State
environmental agency, but not those sites that are identified
on the national priorities list under the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980.
effective date
The provision to extend the expiration date is effective
upon the date of enactment. The provision to expand the class
of eligible sites is effective for expenditures paid or
incurred after December 31, 1999.
TITLE XIII. REVENUE OFFSET PROVISIONS
A. Modify Foreign Tax Credit Carryover Rules
(sec. 1301 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 beginning after December 31, 1999.
B. Expand Reporting of Cancellation of Indebtedness Income
(sec. 1302 of the bill and sec. 6050P of the Code)
Present Law
Under section 61(a)(12), a taxpayer's gross income includes
income from the discharge of indebtedness. Section 6050P
requires ``applicable entities'' to file information returns
with the Internal Revenue Service (IRS) regarding any discharge
of indebtedness of $600 or more.
The information return must set forth the name, address,
and taxpayer identification number of the person whose debt was
discharged, the amount of debt discharged, the date on which
the debt was discharged, and any other information that the IRS
requires to be provided. The information return must be filed
in the manner and at the time specified by the IRS. The same
information also must be provided to the person whose debt is
discharged by January 31 of the year following the discharge.
``Applicable entities'' include: (1) the Federal Deposit
Insurance Corporation (FDIC), the Resolution Trust Corporation
(RTC), the National Credit Union Administration, and any
successor or subunit of any of them; (2) any financial
institution (as described in sec. 581 (relating to banks) or
sec. 591(a) (relating to savings institutions)); (3) any credit
union; (4) any corporation that is a direct or indirect
subsidiary of an entity described in (2) or (3) which, by
virtue of being affiliated with such entity, is subject to
supervision and examination by a Federal or State agency
regulating such entities; and (5) an executive, judicial, or
legislative agency (as defined in 31 U.S.C. sec. 3701(a)(4)).
Failures to file correct information returns with the IRS
or to furnish statements to taxpayers with respect to these
discharges of indebtedness are subject to the same general
penalty that is imposed with respect to failures to provide
other types of information returns. Accordingly, the penalty
for failure to furnish statements to taxpayers is generally $50
per failure, subject to a maximum of $100,000 for any calendar
year. These penalties are not applicable if the failure is due
to reasonable cause and not to willful neglect.
Reasons for Change
The Committee believes that it is appropriate to treat
discharges of indebtedness that are made by similar entities in
a similar manner. Accordingly, the Committee believes that it
is appropriate to extend the scope of this information
reporting provision to include indebtedness discharged by any
organization a significant trade or business of which is the
lending of money (such as finance companies and credit card
companies whether or not affiliated with financial
institutions).
Explanation of Provision
The bill requires information reporting on indebtedness
discharged by any organization a significant trade or business
of which is the lending of money (such as finance companies and
credit card companies whether or not affiliated with financial
institutions).
Effective Date
The provision is effective with respect to discharges of
indebtedness after December 31, 1999.
C. Increase Elective Withholding Rate for Nonperiodic Distributions
From Deferred Compensation Plans
(sec. 1303 of the bill and sec. 3405 of the Code)
Present Law
Present law provides that income tax withholding is
required on designated distributions from employer compensation
plans (whether or not such plans are tax qualified), individual
retirement arrangements (``IRAs''), and commercial annuities
unless the payee elects not to have withholding apply. A
designated distribution does not include any payment (1) that
is wages, (2) the portion of which it is reasonable to believe
is not includible in gross income,56 (3) that is
subject to withholding of tax on nonresident aliens and foreign
corporations (or would be subject to such withholding but for a
tax treaty), or (4) that is a dividend paid on certain employer
securities (as defined in sec. 404(k)(2)).
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\56\ All IRA distributions are treated as if includible in income
for purposes of this rule. A technical correction contained in the bill
modifies this rule in the case of Roth IRAs.
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Tax is generally withheld on the taxable portion of any
periodic payment as if the payment is wages to the payee. A
periodic payment is a designated distribution that is an
annuity or similar periodic payment.
In the case of a nonperiodic distribution, tax generally is
withheld at a flat 10-percent rate unless the payee makes an
election not to have withholding apply. A nonperiodic
distribution is any distribution that is not a periodic
distribution. Under current administrative rules, an individual
receiving a nonperiodic distribution can designate an amount to
be withheld in addition to the 10-percent otherwise required to
be withheld.
Under present law, in the case of a nonperiodic
distribution that is an eligible rollover distribution, tax is
withheld at a 20-percent rate unless the payee elects to have
the distribution rolled directly over to an eligible retirement
plan (i.e., an IRA, a qualified plan (sec. 401(a)) that is a
defined contribution plan permitting direct deposits of
rollover contributions, or a qualified annuity plan (sec.
403(a)). In general, an eligible rollover distribution includes
any distribution to an employee of all or any portion of the
balance to the credit of the employee in a qualified plan or
qualified annuity plan. An eligible rollover distribution does
not include any distribution that is part of a series of
substantially equal periodic payments made (1) for the life (or
life expectancy) of the employee or for the joint lives (or
joint life expectancies) of the employee and the employee's
designated beneficiary, or (2) over a specified period of 10
years or more. An eligible rollover distribution also does not
include any distribution required under the minimum
distribution rules of section 401(a)(9), hardship distributions
from section 401(k) plans, or the portion of a distribution
that is not includible in income. The payee of an eligible
rollover distribution can only elect not to have withholding
apply by making the direct rollover election.
Reasons for Change
The present-law 10-percent withholding rate is lower than
the lowest income tax rate. Increasing the withholding rate to
the lowest income tax rate makes it more likely that
individuals who want withholding will have the correct amount
of tax withheld.
Explanation of Provision
Under the bill, the withholding rate for nonperiodic
distributions would be increased from 10 percent to 15 percent.
As under present law, unless the distribution is an eligible
rollover distribution, the payee could elect not to have
withholding apply. The bill does not modify the 20-percent
withholding rate that applies to any distribution that is an
eligible rollover distribution.
Effective Date
The provision is effective for distributions made after
December 31, 2000.
D. Extension of IRS User Fees
(sec. 1304 of the bill and new sec. 7527 of the Code)
Present Law
The IRS provides written responses to questions of
individuals, corporations, and organizations relating to their
tax status or the effects of particular transactions for tax
purposes. The IRS generally charges a fee for requests for a
letter ruling, determination letter, opinion letter, or other
similar ruling or determination. Public Law 104-117
57 extended the statutory authorization for these
user fees 58 through September 30, 2003.
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\57\ An Act to provide that members of the Armed Forces performing
services for the peacekeeping efforts in Bosnia and Herzegovina,
Croatia, and Macedonia shall be entitled to tax benefits in the same
manner as if such services were performed in a combat zone, and for
other purposes (March 20, 1996).
\58\ These user fees were originally enacted in section 10511 of
the Revenue Act of 1987 (Public Law 100-203, December 22, 1987).
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Reasons for Change
The Committee believes that it is appropriate to extend the
statutory authorization for these user fees for an additional
six years.
Explanation of Provision
The bill extends the statutory authorization for these user
fees through September 30, 2009. The bill also moves the
statutory authorization for these fees into the Internal
Revenue Code.
Effective Date
The provision, including moving the statutory authorization
for these fees into the Code and repealing the off-Code
statutory authorization for these fees, is effective for
requests made after the date of enactment.
E. Treatment of Excess Pension Assets Used for Retiree Health Benefits
(sec. 1305 of the bill, sec. 420 of the Code, and secs. 101, 403, and
408 of ERISA)
Present Law
Defined benefit pension plan assets generally may not
revert to an employer prior to the termination of the plan and
the satisfaction of all plan liabilities. A reversion prior to
plan termination may constitute a prohibited transaction and
may result in disqualification of the plan. Certain limitations
and procedural requirements apply to a reversion upon plan
termination. Any assets that revert to the employer upon plan
termination are includible in the gross income of the employer
and subject to an excise tax. The excise tax rate, which may be
as high as 50 percent of the reversion, varies depending upon
whether or not the employer maintains a replacement plan or
makes certain benefit increases. Upon plan termination, the
accrued benefits of all plan participants are required to be
100-percent vested.
A pension plan may provide medical benefits to retired
employees through a section 401(h) account that is a part of
such plan. A qualified transfer of excess assets of a defined
benefit pension plan (other than a multiemployer plan) into a
section 401(h) account that is a part of such plan does not
result in plan disqualification and is not treated as a
reversion to the employer or a prohibited transaction.
Therefore, the transferred assets are not includible in the
gross income of the employer and are not subject to the excise
tax on reversions.
Qualified transfers are subject to amount and frequency
limitations, use requirements, deduction limitations, vesting
requirements and minimum benefit requirements. Excess assets
transferred in a qualified transfer may not exceed the amount
reasonably estimated to be the amount that the employer will
pay out of such account during the taxable year of the transfer
for qualified current retiree health liabilities. No more than
one qualified transfer with respect to any plan may occur in
any taxable year.
The transferred assets (and any income thereon) must be
used to pay qualified current retiree health liabilities
(either directly or through reimbursement) for the taxable year
of the transfer. Transferred amounts generally must benefit all
pension plan participants, other than key employees, who are
entitled upon retirement to receive retiree medical benefits
through the section 401(h) account. Retiree health benefits of
key employees may not be paid (directly or indirectly) out of
transferred assets. Amounts not used to pay qualified current
retiree health liabilities for the taxable year of the transfer
are to be returned at the end of the taxable year to the
general assets of the plan. These amounts are not includible in
the gross income of the employer, but are treated as an
employer reversion and are subject to a 20-percent excise tax.
No deduction is allowed for (1) a qualified transfer of
excess pension assets into a section 401(h) account, (2) the
payment of qualified current retiree health liabilities out of
transferred assets (and any income thereon) or (3) a return of
amounts not used to pay qualified current retiree health
liabilities to the general assets of the pension plan.
In order for the transfer to be qualified, accrued
retirement benefits under the pension plan generally must be
100-percent vested as if the plan terminated immediately before
the transfer.
The minimum benefit requirement requires each group health
plan under which applicable health benefits are provided to
provide substantially the same level of applicable health
benefits for the taxable year of the transfer and the following
4 taxable years. The level of benefits that must be maintained
is based on benefits provided in the year immediately preceding
the taxable year of the transfer. Applicable health benefits
are health benefits or coverage that are provided to (1)
retirees who, immediately before the transfer, are entitled to
receive such benefits upon retirement and who are entitled to
pension benefits under the plan and (2) the spouses and
dependents of such retirees.
The provision permitting a qualified transfer of excess
pension assets to pay qualified current retiree health
liabilities expires for taxable years beginning after December
31, 2000.59
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\59\ Title I of the Employee Retirement Income Security Act of
1974, as amended (``ERISA''), provides that plan participants, the
Secretaries of the Treasury and the Department of Labor, the plan
administrator, and each employee organization representing plan
participants must be notified 60 days before a qualified transfer of
excess assets to a retiree health benefits account occurs (ERISA sec.
103(e)). ERISA also provides that a qualified transfer is not a
prohibited transaction under ERISA (ERISA sec. 408(b)(13)) or a
prohibited reversion of assets to the employer (ERISA sec. 403(c)(1)).
For purposes of these provisions, a qualified transfer is generally
defined as a transfer pursuant to section 420 of the Internal Revenue
Code, as in effect on January 1, 1995.
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Reasons for Change
The Committee believes that it is appropriate to provide a
temporary extension of the present-law rule permitting an
employer to make a qualified transfer of excess pension assets
to a section 401(h) account for retiree health benefits as long
as the security of employees' pension benefits is not
threatened by the transfer. In light of the increasing cost of
retiree health benefits, the Committee also believes that it is
appropriate to replace the minimum benefit requirement
applicable to qualified transfers under present law with a
minimum cost requirement.
Explanation of Provision
The present-law provision permitting qualified transfers of
excess defined benefit pension plan assets to provide retiree
health benefits under a section 401(h) account is extended
through September 30, 2009. In addition, the present-law
minimum benefit requirement is replaced by the minimum cost
requirement that applied to qualified transfers before December
9, 1994, to section 401(h) accounts. Therefore, each group
health plan or arrangement under which applicable health
benefits are provided is required to provide a minimum dollar
level of retiree health expenditures for the taxable year of
the transfer and the following 4 taxable years. The minimum
dollar level is the higher of the applicable employer costs for
each of the 2 taxable years immediately preceding the taxable
year of the transfer. The applicable employer cost for a
taxable year is determined by dividing the employer's qualified
current retiree health liabilities by the number of individuals
to whom coverage for applicable health benefits was provided
during the taxable year.
Effective Date
The provision is effective with respect to qualified
transfers of excess defined benefit pension plan assets to
section 401(h) accounts after December 31, 2000, and before
October 1, 2009. The modification of the minimum benefit
requirement is effective with respect to transfers after the
date of enactment. An employer is permitted to satisfy the
minimum benefit requirement with respect to a qualified
transfer that occurs on or after the date of enactment during
the portion of the cost maintenance period of such transfer
that overlaps the benefit maintenance period of a qualified
transfer that occurs before the date of enactment. For example,
suppose an employer (with a calendar year taxable year) made a
qualified transfer in 1998. The minimum benefit requirement
must be satisfied for calendar years 1998, 1999, 2000, 2001,
and 2002. Suppose the employer also makes a qualified transfer
in 2000. Then, the employer is permitted to satisfy the minimum
benefit requirement in 2000, 2001, and 2002, and is required to
satisfy the minimum cost requirement in 2003 and 2004.
F. Clarify the Tax Treatment of Income and Losses on Derivatives
(sec. 1306 of the bill and sec. 1221 of the Code)
Present Law
Capital gain treatment applies to gain on the sale or
exchange of a capital asset. Capital assets include property
other than (1) stock in trade or other types of assets
includible in inventory, (2) property used in a trade or
business that is real property or property subject to
depreciation, (3) accounts or notes receivable acquired in the
ordinary course of a trade or business, (4) certain copyrights
(or similar property), and (5) U.S. government publications.
Gain or loss on such assets generally is treated as ordinary,
rather than capital, gain or loss. Certain other Code sections
also treat gains or losses as ordinary. For example, the gains
or losses of securities dealers or certain electing commodities
dealers or electing traders in securities or commodities that
are subject to ``mark-to-market'' accounting are treated as
ordinary (sec. 475).
Under case law in a number of Federal courts prior to 1988,
business hedges generally were treated as giving rise to
ordinary, rather than capital, gain or loss. In 1988, the U.S.
Supreme Court rejected this interpretation in Arkansas Best v.
Commissioner which, relying on the statutory definition of a
capital asset described above, held that a loss realized on a
sale of stock was capital even though the stock was purchased
for a business, rather than an investment,
purpose.60
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\60\ 485 U.S. 212 (1988).
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Treasury regulations (which were finalized in 1994) require
ordinary character treatment for most business hedges and
provide timing rules requiring that gains or losses on hedging
transactions be taken into account in a manner that matches the
income or loss from the hedged item or items. The regulations
apply to hedges that meet a standard of ``risk reduction'' with
respect to ordinary property held (or to be held) or certain
liabilities incurred (or to be incurred) by the taxpayer and
that meet certain identification and other requirements (Treas.
reg. sec. 1.1221-2).
Reasons for Change
Absent an election by a commodities derivatives dealer to
be treated the same as a dealer in securities under section
475, the character of the gains and losses with respect to
commodities derivative financial instruments entered into by
such a dealer may be unclear. The Committee is concerned that
this uncertainty (i.e., the potential for capital treatment of
the commodities derivatives financial instruments) could
inhibit commodities derivatives dealers from entering into
transactions with respect to commodities derivative financial
instruments that qualify as ``hedging transactions'' within the
meaning of the Treasury regulations under section 1221. The
Committee believes that commodities derivatives financial
instruments are integrally related to the ordinary course of
the trade or business of commodities derivatives dealers and,
therefore, such assets should be treated as ordinary assets.
The Committee further believes that ordinary character
treatment is proper for business hedges with respect to
ordinary property. The Committee believes that the approach
taken in the Treasury regulations with respect to the character
of hedging transactions generally should be codified as an
appropriate interpretation of present law. The Treasury
regulations, however, model the definition of a hedging
transaction after the present-law definition contained in
section 1256, which generally requires that a hedging
transaction ``reduces'' a taxpayer's risk. The Committee
believes that a ``risk management'' standard better describes
modern business hedging practices that should be accorded
ordinary character treatment.61
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\61\ The Committee believes that the Treasury regulations
appropriately interpret ``risk reduction'' flexibly within the
constraints of present law. For example, the regulations recognize that
certain transactions that economically convert an interest rate or
price from a fixed rate or price to a floating rate or price may
qualify as hedging transactions (Treas. Reg. sec. 1.1221-
2(c)(1)(ii)(B)). Similarly, the regulations provide hedging treatment
for certain written call options, hedges of aggregate risk, ``dynamic
hedges'' (under which a taxpayer can more frequently manage or adjust
its exposure to identified risk), partial hedges, ``recycled'' hedges
(using a position entered into to hedge one asset or liability to hedge
another asset or liability), and hedges of aggregate risk (Treas. Reg.
sec. 1.1221-2(c)). The Committee believes that (depending on the facts)
treatment of such transactions as hedging transactions is appropriate
and that it also is appropriate to modernize the definition of a
hedging transaction by providing risk management as the standard.
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In adopting a risk management standard, however, the
Committee does not intend that speculative transactions or
other transactions not entered into in the normal course of a
taxpayer's trade or business should qualify for ordinary
character treatment, and risk management should not be
interpreted so broadly as to cover such transactions. In
addition, to minimize whipsaw potential, the Committee believes
that it is essential for hedging transactions to be properly
identified by the taxpayer when the hedging transaction is
entered into.
Finally, because hedging status under present law is
dependent upon the ordinary character of the property being
hedged, an issue arises with respect to hedges of certain
supplies, sales of which could give rise to capital gain, but
which are generally consumed in the ordinary course of a
taxpayer's trade or business and that would give rise to
ordinary deductions. For purposes of defining a hedging
transaction, Treasury regulations treat such supplies as
ordinary property.62 The Committee believes that it
is appropriate to confirm this treatment by specifying that
such supplies are ordinary assets.
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\62\ Treas. Reg. sec. 1.1221-2(c)(5)(ii).
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Explanation of Provision
The bill adds three categories to the list of assets the
gain or loss on which is treated as ordinary (sec. 1221). The
new categories are: (1) commodities derivative financial
instruments entered into by derivatives dealers; (2) hedging
transactions; and (3) supplies of a type regularly consumed by
the taxpayer in the ordinary course of a taxpayer's trade or
business.
For this purpose, a commodities derivatives dealer is any
person that regularly offers to enter into, assume, offset,
assign or terminate positions in commodities derivative
financial instruments with customers in the ordinary course of
a trade or business. A commodities derivative financial
instrument means a contract or financial instrument with
respect to commodities, the value or settlement price of which
is calculated by reference to any combination of a fixed rate,
price, or amount, or a variable rate, price, or amount, which
is based on current, objectively determinable financial or
economic information. This includes swaps, caps, floors,
options, futures contracts, forward contracts, and similar
financial instruments with respect to commodities. It does not
include shares of stock in a corporation; a beneficial interest
in a partnership or trust; a note, bond, debenture, or other
evidence of indebtedness; or a contract to which section 1256
applies.
In defining a hedging transaction, the provision generally
codifies the approach taken by the Treasury regulations, but
modifies the rules. The ``risk reduction'' standard of the
regulations is broadened to ``risk management'' with respect to
ordinary property held (or to be held) or certain liabilities
incurred (or to be incurred). In addition, the Treasury
Secretary is granted authority to treat transactions that
manage other risks as hedging transactions. As under the
present-law Treasury regulations, the transaction must be
identified as a hedge of specified property. It is intended
that this be the exclusive means through which the gains or
losses with respect to a hedging transaction are treated as
ordinary. Authority is provided for Treasury regulations that
would address improperly identified or non-identified hedging
transactions. The Treasury Secretary is also given authority to
apply these rules to related parties.
Effective Date
The provision is effective for any instrument held,
acquired or entered into, any transaction entered into, and
supplies held or acquired on or after the date of enactment.
G. Loophole Closers
1. Limit use of non-accrual experience method of accounting to amounts
to be received for performance of qualified professional services (sec.
1311 of the bill and sec. 448 of the Code)
Present Law
An accrual method taxpayer generally must recognize income
when all the events have occurred that fix the right to receive
the income and the amount of the income can be determined with
reasonable accuracy. An accrual method taxpayer may deduct the
amount of any receivable that was previously included in income
that becomes worthless during the year.
Accrual method taxpayers are not required to include in
income amounts to be received for the performance of services
which, on the basis of experience, will not be collected (the
``non-accrual experience method''). The availability of this
method is conditioned on the taxpayer not charging interest or
a penalty for failure to timely pay the amount charged.
A cash method taxpayer is not required to include an amount
in income until it is received. A taxpayer generally may not
use the cash method if purchase, production, or sale of
merchandise is an income producing factor. Such taxpayers
generally are required to keep inventories and use an accrual
method of accounting. In addition, corporations (and
partnerships with corporate partners) generally may not use the
cash method of accounting if their average annual gross
receipts exceed $5 million. An exception to this $5 million
rule is provided for qualified personal service corporations. A
qualified personal service corporation is a corporation (1)
substantially all of whose activities involve the performance
of services in the fields of health, law, engineering,
architecture, accounting, actuarial science, performing arts or
consulting and (2) substantially all of the stock of which is
owned by current or former employees performing such services,
their estates or heirs. Qualified personal service corporations
are allowed to use the cash method without regard to whether
their average annual gross receipts exceed $5 million.
Reasons for Change
The Committee understands that the use of the non-accrual
experience method provides the equivalent of a bad debt
reserve, which generally is not available to taxpayers using
the accrual method of accounting. The Committee believes that
accrual method taxpayers should be treated similarly, unless
there is a strong indication that different treatment is
necessary to clearly reflect income or to address a particular
competitive situation.
The Committee understands that accrual basis providers of
qualified personal services (services in the fields of health,
law, engineering, architecture, accounting, actuarial science,
performing arts or consulting) compete on a regular basis with
competitors using the cash method of accounting. The Committee
believes that this competitive situation justifies the
continued availability of the non-accrual experience method
with respect to amounts due to be received for the performance
of qualified personal services. The Committee believes that it
is important to avoid the disparity of treatment between
competing cash and accrual method providers of qualified
personal services that could result if the non-accrual
experience method were eliminated with regard to amounts to be
received for such services.
Explanation of Provision
The bill provides that the non-accrual experience method
will be available only for amounts to be received for the
performance of qualified personal services. Amounts to be
received for the performance of all other services will be
subject to the general rule regarding inclusion in income.
Qualified personal services are personal services in the fields
of health, law, engineering, architecture, accounting,
actuarial science, performing arts or consulting. As under
present law, the availability of the method is conditioned on
the taxpayer not charging interest or a penalty for failure to
timely pay the amount.
Effective Date
The provision is effective for taxable years ending after
the date of enactment. Any change in the taxpayer's method of
accounting necessitated as a result of the proposal will be
treated as a voluntary change initiated by the taxpayer with
the consent of the Secretary of the Treasury. Any required
section 481(a) adjustment is to be taken into account over a
period not to exceed four years under principles consistent
with those in Rev. Proc. 98-60.63
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\63\ 1998-51 I.R.B. 16.
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2. Impose limitation on prefunding of certain employee benefits (sec.
1312 of the bill and secs. 419A and 4976 of the Code)
Present Law
Under present law, contributions to a welfare benefit fund
generally are deductible when paid, but only to the extent
permitted under the rules of Code sections 419 and 419A. The
amount of an employer's deduction in any year for contributions
to a welfare benefit fund cannot exceed the fund's qualified
cost for the year. The term qualified cost means the sum of (1)
the amount that would be deductible for benefits provided
during the year if the employer paid them directly and was on
the cash method of accounting, and (2) within limits, the
amount of any addition to a qualified asset account for the
year. A qualified asset account includes any account consisting
of assets set aside for the payment of disability benefits,
medical benefits, supplemental unemployment compensation or
severance pay benefits, or life insurance benefits. The account
limit for a qualified asset account for a taxable year is
generally the amount reasonably and actuarially necessary to
fund claims incurred but unpaid (as of the close of the taxable
year) for benefits with respect to which the account is
maintained and the administrative costs incurred with respect
to those claims. Specific additional reserves are allowed for
future provision of post-retirement medical and life insurance
benefits.
The present-law deduction limits for contributions to
welfare benefit funds do not apply in the case of certain 10-
or-more employer plans. A plan is a 10-or-more employer plan if
(1) more than one employer contributes to it, (2) no employer
is normally required to contribute more than 10 percent of the
total contributions under the plan by all employers, and (3)
the plan does not maintain experience-rating arrangements with
respect to individual employers.
If any portion of a welfare benefit fund reverts to the
benefit of an employer that maintains the fund, an excise tax
equal to 100 percent of the reversion is imposed on the
employer.
Reasons for Change
The Committee understands that the exception to the welfare
benefit fund deduction limits for 10-or-more employer plans has
been utilized to fund retirement-type benefits and avoid the
dollar limitations and other rules applicable to qualified
retirement plans and the deduction timing rules applicable to
nonqualified deferred compensation arrangements. Congress
intended the exception to apply to a multiple employer welfare
benefit plan under which the relationship of a participating
employer to the plan is similar to the relationship of an
insured to an insurer, and did not intend the exception to
apply if the liability of any employer under the plan is
determined on the basis of experience rating, which can create,
in effect, a single-employer plan within a 10-or-more-employer
arrangement. It is difficult to identify whether experience
rating is occurring with respect to the provision of some
benefits, such as severance pay and certain death benefits,
because of the complexity of the benefit arrangements.
Therefore, the Committee believes that it is appropriate to
limit the benefits for which the 10-or-more employer exception
is available.
Explanation of Provision
Under the provision, the present-law exception to the
deduction limit for 10-or-more employer plans is limited to
plans that provide only medical benefits, disability benefits,
and qualifying group-term life insurance benefits to plan
beneficiaries. The Committee intends that group-term life
insurance benefits do not fail to be qualifying group-term life
insurance benefits solely as a result of the inclusion of de
minimis ancillary benefits, as described in Treasury
regulations. For purposes of this provision, qualifying group-
term life insurance benefits do not include any arrangements
that permit a plan beneficiary to directly or indirectly access
all or part of the account value of any life insurance
contract, whether through a policy loan, a partial or complete
surrender of the policy, or otherwise. It is intended that
qualifying group-term life insurance benefits do not include
any arrangement whereby a plan beneficiary may receive a policy
without a stated account value that has the potential to give
rise to an account value whether through the exchange of such
policy for another policy that would have an account value or
otherwise. The 10-or-more employer plan exception is no longer
available with respect to plans that provide supplemental
unemployment compensation, severance pay, or life insurance
(other than qualifying group-term life insurance) benefits.
Thus, the generally applicable deduction limits (sections 419
and 419A) apply to plans providing these benefits.
In addition, if any portion of a welfare benefit fund
attributable to contributions that are deductible pursuant to
the 10-or-more employer exception (and earnings thereon) is
used for a purpose other than for providing medical benefits,
disability benefits, or qualifying group-term life insurance
benefits to plan beneficiaries, such portion is treated as
reverting to the benefit of the employers maintaining the fund
and is subject to the imposition of the 100-percent excise tax.
Thus, for example, cash payments to employees upon termination
of the fund, and loans or other distributions to the employee
or employer, would be treated as giving rise to a reversion
that is subject to the excise tax.
Under the provision, no inference is intended with respect
to the validity of any 10-or-more employer arrangement under
the provisions of present law.
Effective Date
The provision is effective with respect to contributions
paid or accrued on or after June 9, 1999, in taxable years
ending after such date.
3. Modify installment method and prohibit its use by accrual method
taxpayers (sec. 1313 of the bill and sections 453 and 453A of the Code)
Present Law
An accrual method taxpayer is generally required to
recognize income when all the events have occurred that fix the
right to the receipt of the income and the amount of the income
can be determined with reasonable accuracy. The installment
method of accounting provides an exception to this general
principle of income recognition by allowing a taxpayer to defer
the recognition of income from the disposition of certain
property until payment is received. Sales to customers in the
ordinary course of business are not eligible for the
installment method, except for sales of property that is used
or produced in the trade or business of farming and sales of
timeshares and residential lots if an election to pay interest
under section 453(l)(2)(B)) is made.
A pledge rule provides that if an installment obligation is
pledged as security for any indebtedness, the net proceeds
64 of such indebtedness are treated as a payment on
the obligation, triggering the recognition of income. Actual
payments received on the installment obligation subsequent to
the receipt of the loan proceeds are not taken into account
until such subsequent payments exceed the loan proceeds that
were treated as payments. The pledge rule does not apply to
sales of property used or produced in the trade or business of
farming, to sales of timeshares and residential lots where the
taxpayer elects to pay interest under section 453(l)(2)(B), or
to dispositions where the sales price does not exceed $150,000.
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\64\ The net proceeds equal the gross loan proceeds less the direct
expenses of obtaining the loan.
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An additional rule requires the payment of interest on the
deferred tax that is attributable to most large installment
sales.
Reasons for Change
The Committee believes that the installment method is
inconsistent with the use of the accrual method of accounting
and should not be allowed in situations where the disposition
of property would otherwise be reported using the accrual
method. The Committee is concerned that the continued use of
the installment method in such situations would allow a
deferral of gain that is inconsistent with the requirement of
the accrual method that income be reported in the period it is
earned, rather than the period it is received.
The Committee also believes that the installment method,
where its use is appropriate, should not serve to defer the
recognition of gain beyond the time when funds are received.
Accordingly, the Committee believes that proceeds of a loan
should be treated in the same manner as a payment on an
installment obligation if the loan is dependent on the
existence of the installment obligation, such as where the loan
is secured by the installment obligation or can be satisfied by
the delivery of the installment obligation.
Explanation of Provision
Prohibition on the use of the installment method for accrual method
dispositions
The provision generally prohibits the use of the
installment method of accounting for dispositions of property
that would otherwise be reported for Federal income tax
purposes using an accrual method of accounting. The provision
does not change present law regarding the availability of the
installment method for dispositions of property used or
produced in the trade or business of farming. The provision
also does not change present law regarding the availability of
the installment method for dispositions of timeshares or
residential lots if the taxpayer elects to pay interest under
section 453(l).
The provision does not change the ability of a cash method
taxpayer to use the installment method. For example, a cash
method individual owns all of the stock of a closely held
accrual method corporation. This individual sells his stock for
cash, a ten year note, and a percentage of the gross revenues
of the company for next ten years. The provision would not
change the ability of this individual to use the installment
method in reporting the gain on the sale of the stock.
Modifications to the pledge rule
The provision modifies the pledge rule to provide that
entering into any arrangement that gives the taxpayer the right
to satisfy an obligation with an installment note will be
treated in the same manner as the direct pledge of the
installment note. For example, a taxpayer disposes of property
for an installment note. The disposition is properly reported
using the installment method. The taxpayer only recognizes gain
as it receives the deferred payment. However, were the taxpayer
to pledge the installment note as security for a loan, it would
be required to treat the proceeds of such loan as a payment on
the installment note, and recognize the appropriate amount of
gain. Under the provision, the taxpayer would also be required
to treat the proceeds of a loan as payment on the installment
note to the extent the taxpayer had the right to ``put'' or
repay the loan by transferring the installment note to the
taxpayer's creditor. Other arrangements that have a similar
effect would be treated in the same manner.
The modification of the pledge rule applies only to
installment sales where the pledge rule of present law applies.
Accordingly, the provision does not apply to installment method
sales made by a dealer in timeshares and residential lots where
the taxpayer elects to pay interest under section 453(l)(2)(B),
to sales of property used or produced in the trade or business
of farming, or to dispositions where the sales price does not
exceed $150,000, since such sales are not subject to the pledge
rule under present law.
Effective Date
The provision is effective for sales or other dispositions
entered into on or after the date of enactment.
4. Limit conversion of character of Income from constructive ownership
transactions (sec. 1314 of the bill and new sec. 1260 of the
Code)
present law
The maximum individual income tax rate on ordinary income
and short-term capital gain is 39.6 percent, while the maximum
individual income tax rate on long-term capital gain generally
is 20 percent. Long-term capital gain means gain from the sale
or exchange of a capital asset held more than one year. For
this purpose, gain from the termination of a right with respect
to property which would be a capital asset in the hands of the
taxpayer is treated as capital gain.65
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\65\ Section 1234A, as amended by the Taxpayer Relief Act of 1997.
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A pass-thru entity (such as a partnership) generally is not
subject to Federal income tax. Rather, each owner includes its
share of a pass-thru entity's income, gain, loss, deduction or
credit in its taxable income. Generally, the character of the
item is determined at the entity level and flows through to the
owners. Thus, for example, the treatment of an item of income
by a partnership as ordinary income, short-term capital gain,
or long-term capital gain retains its character when reported
by each of the partners.
Investors may enter into forward contracts, notional
principal contracts, and other similar arrangements with
respect to property that provides the investor with the same or
similar economic benefits as owning the property directly but
with potentially different tax consequences (as to the
character and timing of any gain).
reasons for change
The Committee is concerned with the use of derivative
contracts by taxpayers in arrangements that are primarily
designed to convert what otherwise would be ordinary income and
short-term capital gain into long-term capital gain. Of
particular concern are derivative contracts with respect to
partnerships and other pass-thru entities. The use of such
derivative contracts results in the taxpayer being taxed in a
more favorable manner than had the taxpayer actually acquired
an ownership interest in the entity. The current rules designed
to prevent the conversion of ordinary income into capital gain
(sec. 1258) only apply to transactions where the taxpayer's
expected return is attributable solely to the time value of the
taxpayer's net investment.
One example of a conversion transaction involving a
derivative contract is when a taxpayer enters into an
arrangement with a securities dealer 66 whereby the
dealer agrees to pay the taxpayer any appreciation with respect
to a notional investment in a hedge fund. In return, the
taxpayer agrees to pay the securities dealer any depreciation
in the value of the notional investment. The arrangement lasts
for more than one year. The taxpayer is substantially in the
same economic position as if he or she owned the interest in
the hedge fund. However, the taxpayer may treat any
appreciation resulting from the contractual arrangement as
long-term capital gain. Moreover, any tax attributable to such
gain is deferred until the arrangement is terminated.
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\66\ Assuming the securities dealer purchases the financial asset,
the dealer would mark both the financial asset and the contractual
arrangement to market under Code sec. 475, and the economic (and tax)
consequences of the two positions would offset each other.
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explanation of provision
The provision limits the amount of long-term capital gain a
taxpayer could recognize from certain derivative contracts
(``constructive ownership transaction'') with respect to
certain financial assets. The amount of long-term capital gain
is limited to the amount of such gain the taxpayer would have
had if the taxpayer held the asset directly during the term of
the derivative contract. Any gain in excess of this amount is
treated as ordinary income. An interest charge is imposed on
the amount of gain that is treated as ordinary income. The bill
does not alter the tax treatment of the long-term capital gain
that is not treated as ordinary income.
A taxpayer is treated as having entered into a constructive
ownership transaction if the taxpayer (1) holds a long position
under a notional principal contract with respect to the
financial asset, (2) enters into a forward contract to acquire
the financial asset, (3) is the holder of a call option, and
the grantor of a put option, with respect to a financial asset,
and the options have substantially equal strike prices and
substantially contemporaneous maturity dates, or (4) to the
extent provided in regulations, enters into one or more
transactions, or acquires one or more other positions, that
have substantially the same effect as any of the transactions
described.
The Committee anticipates that Treasury regulations, when
issued, will provide specific standards for determining when
other types of financial transactions, like those specified in
the provision, have substantially the same effect of
replicating the economic benefits of direct ownership of a
financial asset without a significant change in the risk-reward
profile with respect to the underlying
transaction.67
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\67\ It is not expected that leverage in a constructive ownership
transaction would change the risk-reward profile with respect to the
underlying transaction.
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A ``financial asset'' is defined as (1) any equity interest
in a pass-thru entity, and (2) to the extent provided in
regulations, any debt instrument and any stock in a corporation
that is not a pass-thru entity. A ``pass-thru entity'' refers
to (1) a regulated investment company, (2) a real estate
investment trust, (3) a real estate mortgage investment
conduit, (4) an S corporation, (5) a partnership, (6) a trust,
(7) a common trust fund, (8) a passive foreign investment
company,68 (9) a foreign personal holding company,
and (10) a foreign investment company.
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\68\ For this purpose, a passive foreign investment company
includes an investment company that is also a controlled foreign
corporation.
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The amount of recharacterized gain is calculated as the
excess of the amount of long-term capital gain the taxpayer
would have had absent this provision over the ``net underlying
long- term capital gain'' attributable to the financial asset.
The net underlying long-term capital gain is the amount of net
capital gain the taxpayer would have realized if it had
acquired the financial asset for its fair market value on the
date the constructive ownership transaction was opened and sold
the financial asset on the date the transaction was closed
(only taking into account gains and losses that would have
resulted from a deemed ownership of the financial
asset).69 The long-term capital gains rate on the
net underlying long-term capital gain is determined by
reference to the individual capital gains rates in section
1(h).
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\69\ A taxpayer must establish the amount of the net underlying
long-term capital gain with clear and convincing evidence; otherwise,
the amount is deemed to be zero. To the extent that the economic
positions of the taxpayer and the counterparty do not equally offset
each other, the amount of the net underlying long-term capital gain may
be difficult to establish.
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Example 1: On January 1, 2000, Taxpayer enters into a
three-year notional principal contract (a constructive
ownership transaction) with a securities dealer whereby, on the
settlement date, the dealer agrees to pay Taxpayer the amount
of any increase in the notional value of an interest in an
investment partnership (the financial asset). After three
years, the value of the notional principal contract increased
by $200,000, of which $150,000 is attributable to ordinary
income and net short-term capital gain ($50,000 is attributable
to net long-term capital gains). The amount of the net
underlying long-term capital gains is $50,000, and the amount
of gain that is recharacterized as ordinary income is $150,000
(the excess of $200,000 of long-term gain over the $50,000 of
net underlying long-term capital gain).
An interest charge is imposed on the underpayment of tax
for each year that the constructive ownership transaction was
open. The interest charge is the amount of interest that would
be imposed under section 6601 had the recharacterized gain been
included in the taxpayer's gross income during the term of the
constructive ownership transaction. The recharacterized gain is
treated as having accrued such that the gain in each successive
year is equal to the gain in the prior year increased by a
constant growth rate 70 during the term of the
constructive ownership transaction.
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\70\ The accrual rate is the applicable Federal rate on the day the
transaction closed.
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Example 2: Same facts as in example 1, and assume the
applicable Federal rate on December 31, 2002, is six percent.
For purposes of calculating the interest charge, Taxpayer must
allocate the $150,000 of recharacterized ordinary income to the
three year-term of the constructive ownership transaction as
follows: $47,116.47 is allocated to year 2000, $49,943.46 is
allocated to year 2001, and $52,940.07 is allocated to year
2002.71
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\71\ In general this allocation of gain is determined by the
following formula. Let Y be the total amount of recharacterized gain.
Let Gi be the amount of recharacterized gain allocated to
year i. Let r be the applicable Federal rate. Assume the term of the
constructive ownership transaction is n years. Then,
n
(1) Y = <3-ln-grk-S>Gi , and
i=1
(2) Gi+1 = Gi (1+r).
Substituting equation (2) into equation (1) produces equation (3)
below.
n-1
(3) Y = G1<3-ln-grk-S>(1+r)i.
i=0
For a given term, n, a given applicable Federal rate, r, and a
given recharactgerized gain, Y, equation (3) can be used to determine
the income allocated to the first year and equation (2) can be used to
allocate income to subsequent years.
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A taxpayer is treated as holding a long position under a
notional principal contract with respect to a financial asset
if the person (1) has the right to be paid (or receive credit
for) all or substantially all of the investment yield
(including appreciation) on the financial asset for a specified
period, and (2) is obligated to reimburse (or provide credit)
for all or substantially all of any decline in the value of the
financial asset. A forward contract is a contract to acquire in
the future (or provide or receive credit for the future value
of) any financial asset.
If the constructive ownership transaction is closed by
reason of taking delivery of the underlying financial asset,
the taxpayer is treated as having sold the contracts, options,
or other positions that are part of the transaction for its
fair market value on the closing date. However, the amount of
gain that is recognized as a result of having taken delivery is
limited to the amount of gain that is treated as ordinary
income by reason of this provision (with appropriate basis
adjustments for such gain).
The provision does not apply to any constructive ownership
transaction if all of the positions that are part of the
transaction are marked to market under the Code or regulations.
The provision also does not apply to transactions entered into
by tax-exempt organizations and foreign taxpayers.
The Treasury Department is authorized to prescribe
regulations as necessary to carry out the purposes of the
provision, including to (1) permit taxpayers to mark to market
constructive ownership transactions in lieu of the provision,
and (2) exclude certain forward contracts that do not convey
substantially all of the economic return with respect to a
financial asset.
No inference is intended as to the proper treatment of a
constructive ownership transaction entered into prior to the
effective date of this provision.
effective date
The provision applies to transactions entered into on or
after July 12, 1999. For this purpose, the Committee intends
that a contract, option or any other arrangement that is
entered into or exercised on or after July 12, 1999 which
extends or otherwise modifies the terms of a transaction
entered into prior to such date is treated as a transaction
entered into on or after July 12, 1999.
5. Denial of charitable contribution deduction for transfers associated
with split-dollar insurance arrangements (sec. 1315 of the bill
and new sec. 501(c)(28) of the Code)
present law
Under present law, in computing taxable income, a taxpayer
who itemizes deductions generally is allowed to deduct
charitable contributions paid during the taxable year. The
amount of the deduction allowable for a taxable year with
respect to any charitable contribution depends on the type of
property contributed, the type of organization to which the
property is contributed, and the income of the taxpayer (secs.
170(b) and 170(e)). A charitable contribution is defined to
mean a contribution or gift to or for the use of a charitable
organization or certain other entities (sec. 170(c)). The term
``contribution or gift'' is not defined by statute, but
generally is interpreted to mean a voluntary transfer of money
or other property without receipt of adequate consideration and
with donative intent. If a taxpayer receives or expects to
receive a quid pro quo in exchange for a transfer to charity,
the taxpayer may be able to deduct the excess of the amount
transferred over the fair market value of any benefit received
in return, provided the excess payment is made with the
intention of making a gift.72
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\72\ United States v. American Bar Endowment, 477 U.S. 105 (1986).
Treas. Reg. sec. 1.170A-1(h).
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In general, no charitable contribution deduction is allowed
for a transfer to charity of less than the taxpayer's entire
interest (i.e., a partial interest) in any property (sec.
170(f)(3)). In addition, no deduction is allowed for any
contribution of $250 or more unless the taxpayer obtains a
contemporaneous written acknowledgment from the donee
organization that includes a description and good faith
estimate of the value of any goods or services provided by the
donee organization to the taxpayer in consideration, whole or
part, for the taxpayer's contribution (sec. 170(f)(8)).
reasons for change
The Committee is concerned about an abusive scheme
73 referred to as charitable split-dollar life
insurance, and the provision is designed to stop the spread of
this scheme. Under this scheme, taxpayers typically transfer
money to a charity, which the charity then uses to pay premiums
for cash value life insurance on the transferor or another
person. The beneficiaries under the life insurance contract
typically include members of the transferor's family (either
directly or through a family trust or family partnership).
Having passed the money through a charity, the transferor
claims a charitable contribution deduction for money that is
actually being used to benefit the transferor and his or her
family. If the transferor or the transferor's family paid the
premium directly, the payment would not be deductible. Although
the charity eventually may get some of the benefit under the
life insurance contract, it does not have unfettered use of the
transferred funds.
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\73\ ``A Popular Tax Shelter for `Angry Affluent' Prompts Ire of
Others,'' Wall Street Journal, Jan. 22, 1999, p. A1; ``U.S. Treasury
Officials Investigating Charitable Split-Dollar Insurance Plan,'' Wall
Street Journal, Jan. 29, 1999, p. B5; ``Brilliant Deduction?,'' The
Chronicle of Philanthropy, Aug. 13, 1998, p. 24; ``Charitable Reverse
Split-Dollar: Bonanza or Booby Trap,'' Journal of Gift Planning, 2nd
quarter 1998.
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The Committee is concerned that this type of transaction
represents an abuse of the charitable contribution deduction.
The Committee is also concerned that the charity often gets
relatively little benefit from this type of scheme, and serves
merely as a conduit or accommodation party, which the Committee
does not view as appropriate for an organization with tax-
exempt status. In substance, the charity receives a transfer of
a partial interest in an insurance policy, for which no
charitable contribution deduction is allowed. While there is no
basis under present law for allowing a charitable contribution
deduction in these circumstances, the Committee intends that
the provision stop the marketing of these transactions
immediately.
Therefore, the provision clarifies present law by
specifically denying a charitable contribution deduction for a
transfer to a charity if the charity directly or indirectly
pays or paid any premium on a life insurance, annuity or
endowment contract in connection with the transfer, and any
direct or indirect beneficiary under the contract is the
transferor, any member of the transferor's family, or any other
noncharitable person chosen by the transferor. In addition, the
provision clarifies present law by specifically denying the
deduction for a charitable contribution if, in connection with
a transfer to the charity, there is an understanding or
expectation that any person will directly or indirectly pay any
premium on any such contract.
The provision provides that certain persons are not treated
as indirect beneficiaries, in certain cases in which a
charitable organization purchases an annuity contract to fund
an obligation to pay a charitable gift annuity. The provision
also provides that a person is not treated as an indirect
beneficiary solely by reason of being a noncharitable recipient
of an annuity or unitrust amount paid by a charitable remainder
trust that holds a life insurance, annuity or endowment
contract. The rationale for these rules is that the amount of
the charitable contribution deduction is limited under present
law to the value of the charitable organization's interest.
Congress has previously enacted rules designed to prevent a
charitable contribution deduction for the value of any personal
benefit to the donor in these circumstances, and the Committee
expects that the personal benefit to the donor is appropriately
valued.
Further, the provision imposes an excise tax on the
charity, equal to the amount of the premiums paid by the
charity. Finally, the provision requires a charity to report
annually to the Internal Revenue Service the amount of premiums
subject to this excise tax and information about the
beneficiaries under the contract.
explanation of provision
Deduction denial
The provision 74 restates present law to provide
that no charitable contribution deduction is allowed for
purposes of Federal tax, for a transfer to or for the use of an
organization described in section 170(c) of the Internal
Revenue Code, if in connection with the transfer (1) the
organization directly or indirectly pays, or has previously
paid, any premium on any ``personal benefit contract'' with
respect to the transferor, or (2) there is an understanding or
expectation that any person will directly or indirectly pay any
premium on any ``personal benefit contract'' with respect to
the transferor. It is intended that an organization be
considered as indirectly paying premiums if, for example,
another person pays premiums on its behalf.
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\74\ The provision is similar to H.R. 630, introduced by Mr. Archer
for himself and for Mr. Rangel (106th Cong., 1st Sess.).
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A personal benefit contract with respect to the transferor
is any life insurance, annuity, or endowment contract, if any
direct or indirect beneficiary under the contract is the
transferor, any member of the transferor's family, or any other
person (other than a section 170(c) organization) designated by
the transferor. For example, such a beneficiary would include a
trust having a direct or indirect beneficiary who is the
transferor or any member of the transferor's family, and would
include an entity that is controlled by the transferor or any
member of the transferor's family. It is intended that a
beneficiary under the contract include any beneficiary under
any side agreement relating to the contract. If a transferor
contributes a life insurance contract to a section 170(c)
organization and designates one or more section 170(c)
organizations as the sole beneficiaries under the contract,
generally, it is not intended that the deduction denial rule
under the provision apply. If, however, there is an outstanding
loan under the contract upon the transfer of the contract, then
the transferor is considered as a beneficiary. The fact that a
contract also has other direct or indirect beneficiaries
(persons who are not the transferor or a family member, or
designated by the transferor) does not prevent it from being a
personal benefit contract. The provision is not intended to
affect situations in which an organization pays premiums under
a legitimate fringe benefit plan for employees.
It is intended that a person be considered as an indirect
beneficiary under a contract if, for example, the person
receives or will receive any economic benefit as a result of
amounts paid under or with respect to the contract. For this
purpose, as described below, an indirect beneficiary is not
intended to include a person that benefits exclusively under a
bona fide charitable gift annuity (within the meaning of sec.
501(m)).
In the case of a charitable gift annuity, if the charitable
organization purchases an annuity contract issued by an
insurance company to fund its obligation to pay the charitable
gift annuity, a person receiving payments under the charitable
gift annuity is not treated as an indirect beneficiary,
provided certain requirements are met. The requirements are
that (1) the charitable organization possess all of the
incidents of ownership (within the meaning of Treas. Reg. sec.
20.2042-1(c)) under the annuity contract purchased by the
charitable organization; (2) the charitable organization be
entitled to all the payments under the contract; and (3) the
timing and amount of payments under the contract be
substantially the same as the timing and amount of payments to
each person under the organization's obligation under the
charitable gift annuity (as in effect at the time of the
transfer to the charitable organization).
Under the provision, an individual's family consists of the
individual's grandparents, the grandparents of the individual's
spouse, the lineal descendants of such grandparents, and any
spouse of such a lineal descendant.
In the case of a charitable gift annuity obligation that is
issued under the laws of a State that requires, in order for
the charitable gift annuity to be exempt from insurance
regulation by that State, that each beneficiary under the
charitable gift annuity be named as a beneficiary under an
annuity contract issued by an insurance company authorized to
transact business in that State, then the foregoing
requirements (1) and (2) are treated as if they are met,
provided that certain additional requirements are met. The
additional requirements are that the State law requirement was
in effect on February 8, 1999, each beneficiary under the
charitable gift annuity is a bona fide resident of the State at
the time the charitable gift annuity was issued, the only
persons entitled to payments under the annuity contract issued
by the insurance company are persons entitled to payments under
the charitable gift annuity when it was issued, and (as
required by clause (iii) of subparagraph (D) of the provision)
the timing and amount of payments under the annuity contract to
each person are substantially the same as the timing and amount
of payments to the person under the charitable organization's
obligation under the charitable gift annuity (as in effect at
the time of the transfer to the charitable organization).
In the case of a charitable remainder annuity trust or
charitable remainder unitrust (as defined in section 664(d))
that holds a life insurance, endowment or annuity contract
issued by an insurance company, a person is not treated as an
indirect beneficiary under the contract held by the trust,
solely by reason of being a recipient of an annuity or unitrust
amount paid by the trust, provided that the trust possesses all
of the incidents of ownership under the contract and is
entitled to all the payments under such contract. No inference
is intended as to the applicability of other provisions of the
Code with respect to the acquisition by the trust of a life
insurance, endowment or annuity contract, or the
appropriateness of such an investment by a charitable remainder
trust.
Nothing in the provision is intended to suggest that a life
insurance, endowment, or annuity contract would be a personal
benefit contract, solely because an individual who is a
recipient of an annuity or unitrust amount paid by a charitable
remainder annuity trust or charitable remainder unitrust uses
such a payment to purchase a life insurance, endowment or
annuity contract, and a beneficiary under the contract is the
recipient, a member of his or her family, or another person he
or she designates.
Excise tax
The provision imposes on any organization described in
section 170(c) of the Code an excise tax, equal to the amount
of the premiums paid by the organization on any life insurance,
annuity, or endowment contract, if the premiums are paid in
connection with a transfer for which a deduction is not
allowable under the deduction denial rule of the provision
(without regard to when the transfer to the charitable
organization was made). The excise tax does not apply if all of
the direct and indirect beneficiaries under the contract
(including any related side agreement) are organizations
described in section 170(c). Under the provision, payments are
treated as made by the organization, if they are made by any
other person pursuant to an understanding or expectation of
payment. The excise tax is to be applied taking into account
rules ordinarily applicable to excise taxes in chapter 41 or 42
of the Code (e.g., statute of limitation rules).
Reporting
The provision requires that the charitable organization
annually report the amount of premiums that is paid during the
year and that is subject to the excise tax imposed under the
provision, and the name and taxpayer identification number of
each beneficiary under the life insurance, annuity or endowment
contract to which the premiums relate, as well as other
information required by the Secretary of the Treasury. For this
purpose, it is intended that a beneficiary include any
beneficiary under any side agreement to which the section
170(c) organization is a party (or of which it is otherwise
aware). Penalties applicable to returns required under Code
section 6033 apply to returns under this reporting requirement.
Returns required under this provision are to be furnished at
such time and in such manner as the Secretary shall by forms or
regulations require.
Regulations
The provision provides for the promulgation of regulations
necessary or appropriate to carry out the purposes of the
provisions, including regulations to prevent the avoidance of
the purposes of the provision. For example, it is intended that
regulations prevent avoidance of the purposes of the provision
by inappropriate or improper reliance on the limited exceptions
provided for certain beneficiaries under bona fide charitable
gift annuities and for certain noncharitable recipients of an
annuity or unitrust amount paid by a charitable remainder
trust.
effective date
The deduction denial provision applies to transfers after
February 8, 1999 (as provided in H.R. 630). The excise tax
provision applies to premiums paid after the date of enactment.
The reporting provision applies to premiums paid after February
8, 1999 (determined as if the excise tax imposed under the
provision applied to premiums paid after that date).
No inference is intended that a charitable contribution
deduction is allowed under present law with respect to a
charitable split-dollar insurance arrangement. The provision
does not change the rules with respect to fraud or criminal or
civil penalties under present law; thus, actions constituting
fraud or that are subject to penalties under present law would
still constitute fraud or be subject to the penalties after
enactment of the provision.
6. Modify estimated tax rules for closely held REIT dividends (sec.
1316 of the bill and sec. 6655 of the Code)
Present Law
If a person has a direct interest or a partnership interest
in income producing assets (such as securities generally, or
mortgages) that produce income throughout the year, that
person's estimated tax payments must reflect the quarterly
amounts expected from the asset.
However, a dividend distribution of earnings from a REIT is
considered for estimated tax purposes when the dividend is
paid. Some corporations have established closely held REITS
that hold property (e.g. mortgages) that if held directly by
the controlling entity would produce income throughout the
year. The REIT may make a single distribution for the year,
timed such that it need not be taken into account under the
estimated tax rules as early as would be the case if the assets
were directly held by the controlling entity. The controlling
entity thus defers the payment of estimated taxes.
Reasons for Change
The Committee is concerned that REITs may be used to defer
estimated taxes. Income producing property might be acquired in
or transferred to a REIT, and a dividend paid from the REIT
only at the end of the year. So long as the dividend is paid by
year end (or within a certain period after year end), the REIT
pays no tax on the dividend, while the shareholder of the REIT
does not include the payment in income until the dividend is
paid. Thus, the income from the assets is not counted in the
earlier quarters of the year, for purposes of the shareholder's
estimated tax.
The Committee is concerned that this type of situation is
most likely to occur in cases where the REIT is relatively
closely held and may be used to structure payments for the
benefit of significant shareholders. In such situations, the
Committee believes that persons who are significant
shareholders in the REIT should be able to obtain sufficient
information regarding the quarterly income of the REIT to
determine their share of that income for estimated tax
purposes.
Explanation of Provision
In the case of a REIT that is closely held, any person
owning at least 10 percent of the vote or value of the REIT is
required to accelerate the recognition of year-end dividends
attributable to the closely held REIT, for purposes of such
person's estimated tax payments. A closely held REIT is defined
as one in which at least 50 percent of the vote or value is
owed by five or fewer persons. Attribution rules apply to
determine ownership.
No inference is intended regarding the treatment of any
transaction prior to the effective date.
Effective Date
The provision is effective for estimated tax payments due
on or after September 15, 1999.
7. Prohibited allocations of stock in an ESOP of an S corporation (sec.
1317 of the bill and secs. 409 and 4979A of the Code)
Present Law
The Small Business Job Protection Act of 1996 allowed
qualified retirement plan trusts described in section 401(a) to
own stock in an S corporation. That Act treated the plan's
share of the S corporation's income (and gain on the
disposition of the stock) as includible in full in the trust's
unrelated business taxable income (``UBTI'').
The Tax Relief Act of 1997 repealed the provision treating
items of income or loss of an S corporation as UBTI in the case
of an employee stock ownership plan (``ESOP''). Thus, the
income of an S corporation allocable to an ESOP is not subject
to current taxation.
Present law provides a deferral of income on the sales of
certain employer securities to an ESOP (sec. 1042). A 50-
percent excise tax is imposed on certain prohibited allocations
of securities acquired by an ESOP in a transaction to which
section 1042 applies. In addition, such allocations are
currently includible in the gross income of the individual
receiving the prohibited allocation.
Reasons for Change
In enacting the provision relating to S corporation ESOPs
in 1997, the Congress was concerned that the prior-law rule
imposed double taxation on such ESOPs and ESOP participants.
The Congress believed such a result was unfair. Since the
enactment of the 1997 Act, however, the Committee has become
aware that the present-law rule provides inappropriate deferral
and tax avoidance in some case.
The Committee believes that S corporations should be able
to establish ESOPs. The Committee does not believe, however,
that the ESOP should provide inappropriate deferral or tax
avoidance. The Committee is particularly concerned at this time
about S corporations owned by a small group of individuals who
may use the present-law rule to avoid or defer taxes.
Explanation of Provision
Under the provision, if there is a prohibited allocation of
stock to a disqualified person under an ESOP sponsored by an S
corporation (a ``Sub S ESOP'') for a nonallocation year: (1) an
excise tax is imposed on the employer equal to 50 percent of
the amount involved in the prohibited allocation; and (2) the
stock allocated in the prohibited allocation is treated as
distributed to the disqualified individual.
A nonallocation year means any plan year of a Sub S ESOP
if, at any time during the plan year, disqualified individuals
own at least 50 percent of the number of outstanding shares of
the S corporation.
An individual is a disqualified person if the individual is
either (1) a member of a ``deemed 20-percent shareholder
group'' or (2) a ``deemed 10-percent shareholder''. An
individual is a member of a ``deemed 20-percent shareholder
group'' if the number of deemed-owned shares of the individual
and his or her family members is at least 20 percent of the
number of outstanding shares of the corporation. An individual
is a deemed 10-percent shareholder if the individual is not a
member of a deemed 20-percent shareholder group and the number
of the individual's deemed-owned shares is at least 10 percent
of the number of outstanding shares of stock of the
corporation.
``Deemed-owned shares'' mean: (1) stock allocated to the
account of the individual under the ESOP, and (2) the
individual's share of unallocated stock held by the ESOP. An
individual's share of unallocated stock held by an ESOP is
determined in the same manner as the most recent allocation of
stock under the terms of the plan.
For purposes of determining whether disqualified
individuals own 50 percent or more of the outstanding stock of
the corporation, deemed-owned shares and shares owned directly
by an individual are taken into account. The family attribution
rules of section 318 would apply, modified to include certain
other family members, as described below.
Under the provision, family members of an individual
include (1) the spouse of the individual, (2) an ancestor or
lineal descendant of the individual or his or her spouse, (3) a
sibling of the individual (or the individual's spouse) and any
lineal descendant of the brother or sister, and (4) the spouse
of any person described in (2) or (3).
The Secretary is directed to prescribe rules under which
holders of options, restricted stock and similar interests are
or are not treated as owning stock attributable to such
interests as appropriate to carry out the purposes of the
provision. For example, it is intended that such interests
would be taken into account if so doing would result in
disqualified individuals owning at least 50 percent of the
stock of the corporation and that such interests would not be
taken into account if so doing would result in disqualified
individuals owning less than 50 percent of the stock of the
corporation.
The following example illustrates the provision.
S Corp has 100 outstanding shares. There are no synthetic
equity interests in S Corp. Shareholder A, who is unrelated to
any other shareholders of the S corporation, has 25 shares of
stock allocated to his account in S Corp's ESOP. Shareholder A
owns 20 shares of stock directly. Shareholder B has 10 shares
of stock allocated to her account in the S Corp ESOP, and owns
30 shares directly. B's husband and B's son each have 5 shares
of stock allocated to their account in the ESOP. A is a
``deemed 10 percent shareholder.'' B, her husband and her son
are a ``deemed 20-percent shareholder group.'' A and B's
``deemed 20-percent shareholder group'' own 50 percent or more
of the outstanding stock of S Corp. Thus, if an allocation of
stock is made for the year under the ESOP to A, B, B's husband
or B's son, such allocation would be a prohibited allocation.
Effective Date
The provision is generally effective with respect to years
beginning after December 31, 2000. In the case of an ESOP
established after July 14, 1999, or an ESOP established on or
before such date if the employer maintaining the plan was not
an S corporation on such date, the provision is effective with
respect to plan years ending after July 14, 1999.
8. Modify anti-abuse rules related to assumption of liabilities (sec.
1318 of the bill and sec. 357 of the Code)
Present Law
Generally, no gain or loss is recognized if property is
exchanged for stock of a controlled corporation. The transferor
may recognize gain to the extent other property (``boot'') is
received by the transferor. The assumption of liabilities by
the transferee generally is not treated as boot received by the
transferor. The assumption of a liability is treated as boot to
the transferor, however, ``[i]f, taking into consideration the
nature of the liability and the circumstances in the light of
which the arrangement for the assumption or acquisition was
made, it appears that the principal purpose of the taxpayer . .
. was a purpose to avoid Federal income tax on the exchange, or
. . . if not such purpose, was not a bona fide business
purpose.'' Sec. 357(b). Thus, this exception requires that the
principal purpose of having the transferee assume the liability
was the avoidance of tax on the exchange.
The transferor's basis in the stock of the transferee
received in the exchange is reduced by the amount of any
liability assumed, but generally increased in the amount of any
gain recognized by the transferor on the exchange. If the
transferee assumes liabilities in excess of the basis of assets
transferred, the transferor recognizes gain in the amount of
the excess. However, this gain recognition rule does not apply
if the assumption of a liability is treated as boot under the
tax avoidance rule. Stock basis is reduced, however, for an
assumption. For other liabilities (where the assumption is not
treated as boot under the tax avoidance rule), no gain
recognition or basis reduction is required for the assumption
of a liability that would give rise to a deduction.
Similar rules apply in connection with certain tax-free
reorganizations.
Reasons for Change
The Committee is concerned that the anti-abuse rule related
to the assumption of liabilities may be inadequate to address
the concerns that underlie the provision, given the high
standard before it is applicable. A standard of ``the''
principal purpose may be difficult to prove. In addition,
taxpayers may contend that the ``exchange'' itself is not the
tax-avoidance transaction, even though the exchange may make
the tax avoidance possible.
As one example of a transaction that concerns the
Committee, a transferor corporation may transfer assets with a
fair market value basis (as one example, a note of another
member of the corporate group) in exchange for preferred stock
of the transferee corporation, plus the transferee's assumption
of a contingent liability that is deductible in the future, but
capable of current valuation. The transferor claims a high
basis for the stock of the transferee held with respect to this
transfer, because the basis of the assets is taken into
account, while the taxpayer contends that the assumed liability
does not reduce stock basis under current law. However, the
value of the transferee stock in the hands of the transferor is
nominal, because of the liability that offsets virtually all
the value of the assets. The transferor may then attempt to
accelerate the deduction that would be attributable to the
liability, by selling or exchanging the transferee stock at a
loss. Furthermore, the transferee (which may still be a member
of the consolidated group filing a tax return with the
transferor) might take the position that it is entitled to
deduct the payments on the liability, effectively duplicating
the deduction attributable to the liability.
The Committee believes that a change in the standard under
section 357(b) is desirable, to affect transactions where the
taxpayer has ``a principal purpose'' of tax avoidance. A
taxpayer may have ``a principal purpose'' of tax avoidance even
though it is outweighed by other purposes (taken together or
separately).
Explanation of Provision
The provision deletes the limitation that the assumption of
liabilities anti-abuse rule only applies to tax avoidance on
the exchange itself, and changes ``the principal purpose''
standard to ``a principal purpose.'' The provision also affects
the basis rule that requires a decrease in the transferor's
basis in the transferee's stock when a liability, the payment
of which would give rise to a deduction, is treated as boot
under the anti-abuse rule.\75\
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\75\ Section 357(b)(1) liabilities are not within the scope of
section 357(c)(3) or section 358(d)(2). Thus, the transferee's
assumption of a liability under section 357(b)(1), as modified by the
provision, is treated as the transferor's receipt of money for purposes
of 358 and related provisions.
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Effective Date
The provision is effective for assumptions of liabilities
on or after July 15, 1999.
9. Require consistent treatment and provide basis allocation rules for
transfers of intangibles in certain nonrecognition transactions
(sec. 1319 of the bill and secs. 351 and 721 of the Code)
Present Law
Generally, no gain or loss is recognized if one or more
persons transfer property to a corporation solely in exchange
for stock in the corporation and, immediately after the
exchange such person or persons are in control of the
corporation. Similarly, no gain or loss is recognized in the
case of a contribution of property in exchange for a
partnership interest. Neither the Internal Revenue Code nor the
regulations provide the meaning of the requirement that a
person ``transfer property'' in exchange for stock (or a
partnership interest). The Internal Revenue Service interprets
the requirement consistent with the ``sale or other disposition
of property'' language in the context of a taxable disposition
of property. See, e.g., Rev. Rul. 69-156, 1969-1 C.B. 101.
Thus, a transfer of less than ``all substantial rights'' to use
property will not qualify as a tax-free exchange and stock
received will be treated as payments for the use of property
rather than for the property itself. These amounts are
characterized as ordinary income. However, the Claims Court has
rejected the Service's position and held that the transfer of a
nonexclusive license to use a patent (or any transfer of
``something of value'') could be a ``transfer'' of ``property''
for purposes of the nonrecognition provision. See E.I. DuPont
de Nemours & Co. v. U.S., 471 F.2d 1211 (Ct. Cl. 1973).
Explanation of Provision
The provision treats a transfer of an interest in
intangible property constituting less than all of the
substantial rights of the transferor in the property as a
transfer of property for purposes of the nonrecognition
provisions regarding transfers of property to controlled
corporations and partnerships. In the case of a transfer of
less than all of the substantial rights, the transferor is
required to allocate the basis of the intangible between the
retained rights and the transferred rights based upon their
respective fair market values.
No inference is intended as to the treatment of these or
similar transactions prior to the effective date.
Effective Date
The provision is effective for transfers on or after the
date of enactment.
10. Modify treatment of closely-held REITs (sec 1320 of the bill and
sec. 856 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 related investments and that 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 tax at the REIT level.
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.
Under the organizational structure test, 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. Certain attribution rules
apply in making this determination. No similar rule applies to
corporate ownership of a REIT. Certain transactions have been
structured to attempt to achieve special tax benefits for an
entity that controls a REIT.
Reasons for Change
The Committee is aware of a number of situations in which a
closely held REIT may be used as a conduit to recharacterize
items of income. Some cases causing concern have already been
addressed by legislation (e.g., ``liquidating reits,'' which
attempted to eliminate tax on income for a period of years) or
by regulations (e.g., ``step-down preferred'' stock, which
attempted to provide a corporate borrower with a deduction for
payment of principal as well as interest on a loan).
Despite these actions, the Committee is concerned that
closely-held REITs may still be used to obtain other tax
benefits, chiefly from the ability to recharacterize the income
earned by the REIT as a dividend to the REIT owners, as well as
to control the timing of such a dividend. Therefore, the
provision adds new ownership restrictions designed to limit
opportunities for inappropriate income recharacterization.
In certain limited cases, the Committee believes that
additional time to satisfy the new requirements should be
granted to enable the REIT to establish an operating history
before bringing the REIT public. The Committee believes that,
in addition to other indicia, evidence of significant and
steady growth of the REIT is an important component in
demonstrating an intent to bring the REIT public.
Explanation of Provision
The provision imposes as an additional requirement for REIT
qualification that, except for the first taxable year for which
an entity elects to be a REIT, no one person can own stock of a
REIT possessing 50 percent or more of the combined voting power
of all classes of voting stock or 50 percent or more of the
total value of shares of all classes of stock of the REIT. For
purposes of determining a person's stock ownership, rules
similar to attribution rules for REIT qualification under
present law apply (secs. 856(d)(5) and 856(h)(3)). The
provision does not apply to ownership by a REIT of 50 percent
or more of the stock (vote or value) of another REIT.
An exception applies for a limited period to certain
``incubator REITs''. An incubator REIT is a corporation that
elects to be treated as an incubator REIT and that meets all
the following other requirements. (1) it has only voting common
stock outstanding, (2) not more than 50 percent of the
corporation's real estate assets consist of mortgages, (3) from
not later than the beginning of the last half of the second
taxable year, at least 10 percent of the corporation's capital
is provided by lenders or equity investors who are unrelated to
the corporation's largest shareholder, (4), the corporation
must annually increase the value of real estate assets by at
least 10 percent, (5) the directors of the corporation must
adopt a resolution setting forth an intent to engage in a going
public transaction, and (6) no predecessor entity (including
any entity from which the electing incubator REIT acquired
assets in a transaction in which gain or loss was not
recognized in whole or in part) had elected incubator REIT
status.
The new ownership requirement does not apply to an electing
incubator REIT until the end of the REIT's third taxable year;
and can be extended for an additional two taxable years if the
REIT so elects. However, a REIT cannot elect the additional two
year extension unless the REIT agrees that if it does not
engage in a going public transaction by the end of the extended
eligibility period, it shall pay Federal income taxes for the
two years of the extended period as if it had not made an
incubator REIT election and had ceased to qualify as a REIT for
those two taxable years. In such
case, the corporation shall file appropriate amended returns
within 3 months of the close of the extended eligibility
period. Interest would be payable, but no substantial
underpayment penalties would apply except in cases where there
is a finding that incubator REIT status was elected for a
principal purpose other than as part of a reasonable plan to
engage in a going public transaction. Notification of
shareholders and any other person whose tax position would
reasonably be expected to be affected is also required.
If an electing incubator REIT does not elect to extend its
initial 2-year extended eligibility period and has not engaged
in a going public transaction by the end of such period, it
must satisfy the new control requirements as of the beginning
of its fourth taxable year (i.e., immediately after the close
of the last taxable year of the two-year initial extension
period) or it will be required to notify its shareholders and
other persons that may be affected by its tax status, and pay
Federal income tax as a corporation that has ceased to qualify
as a REIT at that time.
If the Secretary of the Treasury determines that an
incubator REIT election was filed for a principal purpose other
than as part of a reasonable plan to undertake a going public
transaction, an excise tax of $20,000 is imposed on each of the
corporation's directors for each taxable year for which the
election was in effect.
For purposes of determining whether a corporation has met
the requirement that it annually increase the value of its real
estate assets by 10 percent, the following rules shall apply.
First, values shall be based on cost and properly capitalizable
expenditures with no adjustment for depreciation. Second, the
test shall be applied by comparing the value of assets at the
end of the first taxable year with those at the end of the
second taxable year and by similar successive taxable year
comparisons during the eligibility period. Third, if a
corporation fails the 10 percent comparison test for one
taxable year, it may remedy the failure by increasing the value
of real estate assets by 25 percent in the following taxable
year, provided it meets all the other eligibility period
requirements in that following taxable year.
A going public transaction is defined as either (1) a
public offering of shares of stock of the incubator REIT, (2) a
transaction, or series of transactions, that result in the
incubator REIT stock being regularly traded on an established
securities market (as defined in section 897) and being held by
shareholders unrelated to persons who held such stock before it
began to be so regularly traded, or (3) any transaction
resulting in ownership of the REIT by 200 or more persons
(excluding the largest single shareholder) who in the aggregate
own least 50 percent of the stock of the REIT. Attribution
rules apply in determining ownership of stock.
Effective Date
The provision is effective for taxable years ending after
July 14, 1999. Any entity that elects (or has elected) REIT
status for a taxable year including July 14, 1999, and which is
both a controlled entity and has significant business assets or
activities on such date, will not be subject to the proposal.
Under this rule, a controlled entity with significant business
assets or activities on July 14, 1999, can be grandfathered
even if it makes its first REIT election after that date with
its return for the taxable year including that date.
For purposes of the transition rules, the significant
business assets or activities in place on July 14, 1999, must
be real estate assets and activities of a type that would be
qualified real estate assets and would produce qualified real
estate related income for a REIT.
11. Distributions by a partnership to a corporate partner of stock in
another corporation (sec. 1321 of the bill and sec. 732 of the
Code)
Present Law
Present law generally provides that no gain or loss is
recognized on the receipt by a corporation of property
distributed in complete liquidation of another corporation in
which it holds 80 percent of the stock (by vote and value)
(sec. 332). The basis of property received by a corporate
distributee in the distribution in complete liquidation of the
80-percent-owned subsidiary is a carryover basis, i.e., the
same as the basis in the hands of the subsidiary (provided no
gain or loss is recognized by the liquidating corporation with
respect to the distributed property) (sec. 334(b)).
Present law provides two different rules for determining a
partner's basis in distributed property, depending on whether
or not the distribution is in liquidation of the partner's
interest in the partnership. Generally, a substituted basis
rule applies to property distributed to a partner in
liquidation. Thus, the basis of property distributed in
liquidation of a partner's interest is equal to the partner's
adjusted basis in its partnership interest (reduced by any
money distributed in the same transaction) (sec. 732(b)).
By contrast, generally, a carryover basis rule applies to
property distributed to a partner other than in liquidation of
its partnership interest, subject to a cap (sec. 732(a)). Thus,
in a non-liquidating distribution, the distributee partner's
basis in the property is equal to the partnership's adjusted
basis in the property immediately before the distribution, but
not to exceed the partner's adjusted basis in its partnership
interest (reduced by any money distributed in the same
transaction). In a non-liquidating distribution, the partner's
basis in its partnership interest is reduced by the amount of
the basis to the distributee partner of the property
distributed and is reduced by the amount of any money
distributed (sec. 733).
If corporate stock is distributed by a partnership to a
corporate partner with a low basis in its partnership interest,
the basis of the stock is reduced in the hands of the partner
so that the stock basis equals the distributee partner's
adjusted basis in its partnership interest. No comparable
reduction is made in the basis of the corporation's assets,
however. The effect of reducing the stock basis can be negated
by a subsequent liquidation of the corporation under section
332.76
---------------------------------------------------------------------------
\76\ In a similar situation involving the purchase of stock of a
subsidiary corporation as replacement property following an involuntary
conversion, the Code generally requires the basis of the assets held by
the subsidiary to be reduced to the extent that the basis of the stock
in the replacement corporation itself is reduced (sec. 1033).
---------------------------------------------------------------------------
Reasons for Change
The Committee is concerned that the downward adjustment to
the basis of property distributed by a partnership may be
nullified if the distributed property is corporate stock. The
distributed corporation can be liquidated by the corporate
partner, so that the stock basis adjustment has no effect.
Similarly, if the corporations file a consolidated return,
their taxable income may be computed without reference to the
downward adjustment to the basis of the stock. These results
can occur either if the partnership has contributed property to
the distributed corporation, or if the property was held by the
corporation before the distribution. Therefore, the provision
requires a basis reduction to the property of the distributed
corporation.
Explanation of Provision
In general
The provision provides for a basis reduction to assets of a
corporation, if stock in that corporation is distributed by a
partnership to a corporate partner. The reduction applies if,
after the distribution, the corporate partner controls the
distributed corporation.
Amount of the basis reduction
Under the provision, the amount of the reduction in basis
of property of the distributed corporation generally equals the
amount of the excess of (1) the partnership's adjusted basis in
the stock of the distributed corporation immediately before the
distribution, over (2) the corporate partner's basis in that
stock immediately after the distribution.
The provision limits the amount of the basis reduction in
two respects. First, the amount of the basis reduction may not
exceed the amount by which (1) the sum of the aggregate
adjusted bases of the property and the amount of money of the
distributed corporation exceeds (2) the corporate partner's
adjusted basis in the stock of the distributed corporation.
Thus, for example, if the distributed corporation has cash of
$300 and other property with a basis of $600 and the corporate
partner's basis in the stock of the distributed corporation is
$400, then the amount of the basis reduction could not exceed
$500 (i.e., ($300+$600)-$400=$500).
Second, the amount of the basis reduction may not exceed
the adjusted basis of the property of the distributed
corporation. Thus, the basis of property (other than money) of
the distributed corporation may not be reduced below zero under
the provision, even though the total amount of the basis
reduction would otherwise be greater.
The provision provides that the corporate partner
recognizes long-term capital gain to the extent the amount of
the basis reduction does exceed the basis of the property
(other than money) of the distributed corporation. In addition,
the corporate partner's adjusted basis in the stock of the
distribution is increased in the same amount. For example, if
the amount of the basis reduction were $400, and the
distributed corporation has money of $200 and other property
with an adjusted basis of $300, then the corporate partner
would recognize a $100 capital gain under the provision. The
corporate partner's basis in the stock of the distributed
corporation would also be increased by $100 in this example,
under the provision.
The basis reduction is to be allocated among assets of the
controlled corporation in accordance with the rules provided
under section 732(c).
Partnership distributions resulting in control
The basis reduction generally applies with respect to a
partnership distribution of stock if the corporate partner
controls the distributed corporation immediately after the
distribution or at any time thereafter. For this purpose, the
term control means ownership of stock meeting the requirements
of section 1504(a)(2) (generally, an 80-percent vote and value
requirement).
The provision applies to reduce the basis of any property
held by the distributed corporation immediately after the
distribution, or, if the corporate partner does not control the
distributed corporation at that time, then at the time the
corporate partner first has such control. The provision does
not apply to any distribution if the corporate partner does not
have control of the distributed corporation immediately after
the distribution and establishes that the distribution was not
part of a plan or arrangement to acquire control.
Under the provision, a corporation is treated as receiving
a distribution of stock from a partnership, if the corporation
acquires stock other than in a distribution from a partnership
and the basis of the stock is determined in whole or in part by
reference to the partnership rules limiting the basis of the
stock to a partner's basis in his partnership interest (secs.
732(a)(2) or 732(b)).
In the case of tiered corporations, a special rule provides
that if the property held by a distributed corporation is stock
in a corporation that the distributed corporation controls,
then the provision is applied to reduce the basis of the
property of that controlled corporation. The provision is also
reapplied to any property of any controlled corporation that is
stock in a corporation that it controls. Thus, for example, if
stock of a controlled corporation is distributed to a corporate
partner, and the controlled corporation has a subsidiary, the
amount of the basis reduction allocable to stock of the
subsidiary is applied again to reduce the basis of the assets
of the subsidiary, under the special rule.
Effective Date
The provision is effective for distributions made after
July 14, 1999.
TITLE XIV. TAX TECHNICAL CORRECTIONS
Except as otherwise provided, the technical corrections
contained in the bill generally are effective as if included in
the originally enacted related legislation.
Amendments related to the Tax and Trade Relief Extension Act of 1998
(sec. 1401 of the bill)
Exempt organizations.--The provision clarifies that
nonexempt charitable trusts and nonexempt private foundations
are subject to the public disclosure requirements of section
6104(d).
Capital gains.--The provision clarifies that if (1) a
charitable remainder trust sold section 1250 property after
July 28, 1997, and before January 1, 1998, (2) the property was
held more than one year but not more than 18 months, and (3)
the capital gain is distributed after December 31, 1997, then
any capital gain attributable to depreciation will be taxed at
25 percent (rather than 28 percent). Treasury has published a
notice (Notice 99-17, 1999-14 I.R.B., April 5, 1999) providing
that the gain is taxed at 25 percent.
Amendments related to the Internal Revenue Service Restructuring and
Reform Act of 1998 (sec. 1402 of the bill)
IRS restructuring.--When the Office of the Chief Inspector
was replaced by the Treasury Inspector General for Tax
Administration (TIGTA) under the IRS Restructuring and Reform
Act of 1998, Inspection's responsibilities were assigned to the
TIGTA. TIGTA personnel are Treasury, rather than IRS,
personnel. TIGTA personnel still need to make investigative
disclosures to carry out the duties they took over from
Inspection and their additional tax administration
responsibilities. However, section 6103(k)(6) refers only to
``internal revenue'' personnel. The provision clarifies that
section 6103(k)(6) permits TIGTA personnel to make
investigative disclosures.
Compliance.--Section 3509 of the IRS Restructuring and
Reform Act of 1998 expanded the disclosure rules of section
6110 to also cover Chief Counsel advice (sec. 6110(i)). This is
a conforming change related to ongoing investigations. The
provision adds to section 6110(g)(5)(A), after the words
technical advice memorandum, ``or Chief Counsel advice.''
Amendments related to the Taxpayer Relief Act of 1997 (sec. 1403 of the
bill)
Roth IRAs.--Code section 3405 provides for withholding with
respect to designated distributions from certain tax-favored
arrangements, including IRAs. In general, section
3405(e)(1)(B)(ii) excludes from the definition of a designated
distribution the portion of any distribution which it is
reasonable to believe is excludable from gross income. However,
all distributions from IRAs are treated as includible in
income. The exception does not account for the tax-free nature
of certain Roth IRA distributions. The provision extends the
exception to Roth IRAs.
Transportation benefits.--Under present law, salary
reduction amounts are generally treated as compensation for
purposes of the limits on contributions and benefits under
qualified plans. In addition, an employer can elect whether or
not to include such amounts for nondiscrimination testing
purposes. The IRS Reform Act permitted employers to offer a
cash option in lieu of qualified transportation benefits. The
provision treats salary reduction amounts used for qualified
transportation benefits the same as other salary reduction
amounts for purposes of defining compensation under the
qualified plan rules.
Tax Court jurisdiction.--The Tax Court recently held that
its jurisdiction pursuant to section 7436 extends only to
employment status, not to the amount of employment tax in
dispute (Henry Randolph Consulting v. Comm'r, 112 T.C. #1, Jan.
6, 1999). The provision provides that the Tax Court also has
jurisdiction over the amount.
Amendments to Other Acts (sec. 1404 of the bill)
Worthless securities.--Section 165(g)(3) provides a special
rule for worthless securities of an affiliated corporation. The
test for affiliation in section 165(g)(3)(A) is the 80-percent
vote test for affiliated groups under section 1504(a) that was
in effect prior to 1984. When section 1504(a) was amended in
the Deficit Reduction Act of 1984 to adopt the vote and value
test of present law, no corresponding change was made to
section 165(g)(3)(A), even though the tests had been identical
until then. The provision conforms the affiliation test of
section 165(g)(3)(A) to the test in section 1504(a)(2),
effective for taxable years beginning after December 31, 1984.
Work opportunity tax credit.--Section 51(d)(2) refers to
eligibility for the work opportunity tax credit with respect to
certain welfare recipients without taking into account the
enactment of the temporary assistance for needy families
(``TANF'') program. The provisions conform references in the
work opportunity tax credit to the operation of TANF, effective
as if included in the amendments made by section 1201 of the
Small Business Job Protection Act of 1996.
IRAs for nonworking spouses.--Section 1427 of the Small
Business Job Protection Act of 1996 expanded the IRA deduction
for nonworking spouses. The maximum permitted IRA contribution
is generally limited by the individual's earned income.
However, under present law, it is possible for a nonworking (or
lesser earning) spouse to make IRA contributions in excess of
the couple's combined earned income. The following example
illustrates present law.
Example: Suppose H and W retire in the middle of
January, 1999. In that year, H earns $1,000 and W earns
$500. Both are active participants in an employer-
sponsored retirement plan. Their modified AGI is
$60,000. They make no Roth IRA contributions. Before
application of the income phase-out rules, the maximum
deductible IRA contribution that H can make is $1,000
(sec. 219(b)(1)). After application of the income
phase-out rule in section 219(g), H's maximum
contribution is $200, and H contributes that amount to
an IRA. Under 408(o)(2)(B), H can make nondeductible
contributions of $800 ($1,000-$200). W's maximum
permitted deductible contribution under section
219(c)(1)(B), before the income phase-out, is $1,300
(the sum of H and W's earned income ($1,500), less H's
deductible IRA contribution ($200)). Under the income
phase-out, W's deductible contribution is limited to
$200, and she can make a nondeductible contribution of
$1,100 ($1,300-$200).
The total permitted contributions for H and W are
$2,300 ($1,000 for H plus $1,300 for W). The combined
contribution should be limited to $1,500, their
combined earned income.
The provision provides that the contributions for the
spouse with the lesser income cannot exceed the combined earned
income of the spouses. The provision is effective as if
included with section 1427 of the Small Business Job Protection
Act of 1996 (i.e., for taxable years beginning after December
31, 1996).
Insurance.--The legislative history of section 7702A(a)
(enacted in the Technical and Miscellaneous Revenue Act of
1988) indicated that if a life insurance contract became a
modified endowment contract (``MEC''), then the MEC status
could not be eliminated by exchanging the MEC for another
contract. Section 7702A(a)(2), however, arguably might be read
to allow a policyholder to exchange a MEC for a contract that
does not fail the 7-pay test of section 7702A(b), then exchange
the second contract for a third contract, which would not
literally have been received in exchange for a contract that
failed to meet the 7-pay test. The provision clarifies section
7702A(a)(2) to correspond to the legislative history, effective
as if enacted with the Technical and Miscellaneous Revenue Act
of 1988 (generally, for contracts entered into on or after June
21, 1988).
Insurance.--Under section 7702A, if a life insurance
contract that is not a modified endowment contract is actually
or deemed exchanged for a new life insurance contract, then the
7-pay limit under the new contract is first be computed without
reference to the premium paid using the cash surrender value of
the old contract, and then would be reduced by \1/7\ of the
premium paid taking into account the cash surrender value of
the old contract. For example, if the old contract had a cash
surrender value of $14,000 and the 7-pay premium on the new
contract would equal $10,000 per year but for the fact that
there was an exchange, the 7-pay premium on the new contract
would equal $8,000 ($10,000-$14,000/7). However, section
7702a(c)(3)(A) arguably might be read to suggest that if the
cash surrender value on the new contract was $0 in the first
two years (due to surrender charges), then the 7-pay premium
might be $10,000 in this example, unintentionally permitting
policyholders to engage in a series of ``material changes'' to
circumvent the premium limitations in section 7702A. The
provision clarifies section 7702A(c)(3)(A) to refer to the cash
surrender value of the old contract, effective as if enacted
with the Technical and Miscellaneous Revenue Act of 1988
(generally, for contracts entered into on or after June 21,
1988).
Definition of lump-sum distribution.--Section 1401(b) of
the Small Business Job Protection Act of 1996 Act repealed 5-
year averaging for lump-sum distributions. The definition of
lump-sum distribution was preserved for other provisions,
primarily those relating to NUA in employer securities. The
definition was moved from section 402(d)(4)(A) to section
402(e)(4)(D)(i). This definition included the following
sentence: ``A distribution of an annuity contract from a trust
or annuity plan referred to in the first sentence of this
subparagraph shall be treated as a lump sum distribution.'' The
provision adds this language back into the definition of lump-
sum distribution, effective as if included with section 1401 of
the Small Business Job Protection Act of 1996. The sentence is
relevant to section 401(k)(10)(B), which permits certain
distributions if made as a ``lump-sum distribution.''
Losses from section 1256 contracts.--Section 6411 allows
tentative refunds for NOL carrybacks, business credit
carrybacks and, for corporations only, capital loss carrybacks.
Individuals normally cannot carry back a capital loss. However,
section 1212(c) does allow a carryback of section 1256 losses,
if elected by the taxpayer. The provision amends section
6411(a) by including a reference to section 1212(c), effective
as if included with section 504 of the Economic Recovery Tax
Act of 1981.
Clerical changes (sec. 1405 of the bill)
Individual.--Section 67(f), as enacted in 1988, has a cross
reference to ``the last sentence of section 162(a).''
Additional ``last sentences'' were later added at the end of
section 162(a) in 1992 and 1997. The provision corrects the
reference in section 67(f).
Excess contributions.--The provision modifies the heading
for section 408(d)(5) to ``Distributions of excess
contributions after due date for taxable year and certain
excess rollover contributions.''
Qualified State tuition programs.--Under section
529(e)(3)(B) (enacted in the Small Business Job Protection Act
of 1996), qualified higher education expenses include room and
board expenses of a designated beneficiary who is enrolled at
least half-time in a degree program, regardless of whether the
qualified state tuition program is a prepaid (i.e., guaranteed)
program or a savings program. Therefore, the provision deletes
the words ``under guaranteed plans'' from the heading of
section 529(e)(3)(B).
S corporations.--Sections 678(e) and 6103(e)(1)(D)(v) refer
to ``an electing small business corporation under subchapter S
of chapter 1.'' The reference was inadvertently not changed to
``S corporation'' when the Subchapter S Revision Act was
enacted in 1982, and the provision corrects the reference.
Foreign--Military FSCs.--The Tax Reform Act of 1976 added
section 995(b)(3)(B), limiting DISC benefits relating to
``military property,'' which is defined by reference to a list
under the ``Military Security Act of 1954.'' That Act properly
was titled the ``Mutual Security Act of 1954,'' and it had been
repealed and superseded by the ``International Security
Assistance and Arms Export Control Act of 1976'' (signed into
law June 30, 1976). Section 923 (relating to FSCs) also refers
to the definition in section 995(b)(3)(B). Treasury regulations
correctly reference the International Security Assistance and
Arms Export Control Act of 1976. The provision names the
correct Act in the statute.
Private foundation excise taxes.--Section 4946 provides a
definition of ``government official'' for purposes of
determining acts of self-dealing under section 4941. In section
4946(c)(3)(B), the definition refers to ``compensation at the
lowest rate prescribed for GS-16 . . . .'' The provision
changes this language so that it refers to compensation at the
lowest rate prescribed for Senior Executive Service (SES)
positions.
TITLE XV. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT
(secs. 1501 and 1502 of the bill)
Present Law
Reconciliation is a procedure under the Congressional
Budget Act of 1974 (``the Budget Act'') by which Congress
implements spending and tax policies contained in a budget
resolution. The Budget Act contains numerous rules enforcing
the scope of items permitted to be considered under budget
reconciliation process. One such rule, the so-called ``Byrd
rule,'' was incorporated into the Budget Act in 1990. The Byrd
rule, named after its principal sponsor, Senator Robert C.
Byrd, is contained in section 313 of the Budget Act. The Byrd
rule generally permits members to raise a point of order
against extraneous provisions (those which are unrelated to the
deficit reduction goals of the reconciliation process) from
either a reconciliation bill or a conference report on such
bill.
Under the Byrd rule, a provision is considered to be
extraneous if it falls under one or more of the following six
definitions:
(1) it does not produce a change in outlays or
revenues;
(2) it produces an outlay increase or revenue
decrease when the instructed committee is not in
compliance with its instructions;
(3) it is outside of the jurisdiction of the
committee that submitted the title or provision for
inclusion in the reconciliation measure;
(4) it produces a change in outlays or revenues which
is merely incidental to the non-budgetary components of
the provision;
(5) it would increase the deficit for a fiscal year
beyond those covered by the reconciliation measure; and
(6) it recommends changes in Social Security.
Reasons for Change
The Committee believes that it is difficult to apply the
Byrd rule (which was intended to promote deficit reduction
during a time of budget deficits) in an era of budget
surpluses. However, the Byrd rule is a part of the Budget Act
which governs the budget reconciliation process and the
Committee intends to comply with the Budget Act.
Explanation of Provision
The bill, to ensure compliance with the Budget Act,
provides that all provisions of, and amendments made by, this
Act which are in effect on September 30, 2009, shall cease to
apply as of such date, and shall begin to apply again as of
October 1, 2009.
Effective Date
The provision is effective on date of enactment.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of Rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the provisions of
the bill as reported.
The bill, as reported, is estimated to have the following
budget effects for fiscal years 1999-2009.
ESTIMATED BUDGET EFFECTS OF THE ``TAXPAYER REFUND ACT OF 1999,'' AS APPROVED BY THE COMMITTEE ON FINANCE ON JULY 21, 1999
[Fiscal years 1999-2009, millions of dollars]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1999-2004 1999-2009
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Title I. Broad-Based Tax Relief Provisions
A. Reduce 15% Income Tax Rate to 14% in 2001 tyba 12/31/00......................... ..... ......... -15,798 -23,062 -23,685 -24,245 -24,801 -25,371 -25,874 -26,357 -26,857 -86,790 -216,050
and thereafter.
B. Increase the Width of the 14% Bracket by tyba 12/31/04......................... ..... ......... ......... ......... ......... ......... -10,156 -14,720 -17,417 -19,098 -20,062 .......... -81,453
$2,000 ($4,000 for Joint Returns) Beginning in
2005, and by $2,500 ($5,000 for Joint Returns)
Beginning in 2007.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Broad-Based Tax Relief ...................................... ..... ......... -15,798 -23,062 -23,685 -24,245 -34,957 -40,091 -43,291 -45,455 -46,919 -86,790 -297,503
Provisions.
================================================================================================================================================
Title II. Family Tax Relief Provisions
A. Election to Calculate Combined Tax for a tyba 12/31/04......................... ..... ......... ......... ......... ......... ......... -16,226 -23,478 -23,795 -24,121 -24,460 .......... -112,080
Married Couple Filing a Joint Return--allow
married couples filing joint returns to elect
to file single returns on a combined form;
both must itemize deductions or take standard
deduction; income follows ownership (50% split
on jointly owned assets).
B. Marriage Penalty Relief Relating to the tyba 12/31/04......................... ..... ......... ......... ......... ......... ......... -268 -1,344 -1,349 -1,336 -1,316 .......... -5,613
Earned Income Credit--adjust the income
starting and ending point for the earned
income credit for married couples filing joint
returns by $2,000 indexed after 2005 (phaseout
rate stays the same).
C. Expand the Exclusion from Income for Certain tyba 12/31/99......................... ..... -6 -14 -21 -29 -37 -44 -52 -61 -70 -80 -106 -414
Foster Care Payments.
D. Increase and Expand the Dependent Care Tax tyba 12/31/00......................... ..... ......... -191 -762 -762 -773 -764 -761 -755 -729 -733 -2,488 -6,231
Credit--increase percentage to 50% for AGI
under $30,000 and index maximum expense limits
for inflation; percentage phases down in 1%
increments for each $1,000 of AGI over $30,000
(percentage does not go below 20%).
E. Tax Credit for Employer-Provided Child Care tyba 12/31/00......................... ..... ......... -46 -91 -108 -127 -146 -161 -175 -188 -202 -372 -1,245
Facilities (maximum $150,000).
F. Modify the individual Alternative Minimum tyba 12/31/98 &....................... ..... -980 -1,073 -1,744 -2,250 -3,039 -7,866 -13,000 -17,115 -21,910 -27,134 -9,086 -96,111
Tax--make permanent the present-law provision tyba 12/31/04.........................
to allow nonrefundable personal credits fully;
allow personal exemption against the AMT.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Family Tax Relief Provisions.... ...................................... ..... -986 -1,324 -2,618 -3,149 -3,976 -25,314 -38,796 -43,250 -48,354 -53,925 -12,052 -221,694
================================================================================================================================================
Title III. Retirement Savings Tax Relief
Provisions
A. Individual Retirement Arrangements:
1. Increase the annual contribution limit tyba 12/31/00......................... ..... ......... -618 -1,878 -3,068 -3,968 -4,701 -5,444 -6,199 -6,882 -7,659 -9,532 -40,418
for deductible, nondeductible, and Roth
IRAs in $1,000 increments until it reaches
$5,000 and index for inflation thereafter,
beginning in 2001.
2. Increase the AGI limitation for tyba 12/31/07......................... ..... ......... ......... ......... ......... ......... ......... .......... .......... -200 -774 .......... -975
contributions to a deductible IRA--$2,000
($4,000 joint returns) for 2008, and
$2,500 ($5,000 joint returns) for 2009
through 2010; index in years thereafter.
3. Eliminate the AGI limitation for tyba 12/31/00......................... ..... ......... -2 -102 -342 -655 -1,002 -1,347 -1,691 -2,049 -2,406 -1,101 -9,596
contributions to a Roth IRA.
4. Increase the income limit to $1 million tyba 12/31/02......................... ..... ......... ......... ......... 1,330 3,484 1,326 -2,257 -3,175 -1,803 -347 4,814 -1,441
for conversions of an IRA to a Roth IRA.
5. 85% tax credit for matching tyba 12/31/00......................... ..... ......... -66 -149 -160 -177 -190 -105 2 2 2 -552 -840
contributions by financial institutions to
individual development accounts, effective
for 2001 through 2005; maximum tax credit
$300 per account per year.
6. U.S. legal tender coins to be qualified tyba 12/31/99......................... Negligible Revenue Effect
investments for IRAs, if traded on
national exchange.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Individual Retirement ...................................... ..... ......... -686 -2,129 -2,240 -1,316 -4,567 -9,153 -11,063 -10,932 -11,184 -6,371 -53,270
Arrangements.
================================================================================================================================================
B. Expanding Coverage:
1. Option to treat elective deferrals under pyba 12/31/00......................... ..... ......... 50 100 131 144 89 -2 -104 -218 -345 426 -155
a 401(k) plan or tax-sheltered annuities
after-tax contributions.
2. Increase contribution and benefit
limits:
a. Increase limitation on exclusion for yba 12/31/00.......................... ..... ......... -131 -315 -465 -574 -658 -715 -764 -808 -849 -1,485 -5,279
elective deferrals from $10,000 to:
$11,000 in 2001, $12,000 in 2002,
$13,000 in 2003, $14,000 in 2004,
$15,000 in 2005; index in $500
increments thereafter \1\, \2\.
b. Increase section 457 limit from yba 12/31/00.......................... ..... ......... -13 -33 -55 -79 -111 -128 -136 -145 -153 -180 -854
$8,000 to $9,000 in 2001, $10,000 in
2002, $11,000 in 2003, $12,000 in
2004, and index in $500 increments
thereafter.
c. Increase limitation on SIMPLE yba 12/31/00.......................... ..... ......... -5 -14 -22 -27 -29 -29 -30 -31 -33 -67 -219
elective contributions from $6,000 to
$7,000 in 2001, $8,000 in 2002, $9,000
in 2003, $10,000 in 2004; index in
$500 increments thereafter \1\, \2\.
3. Plan loans for subchapter S owners, yba 12/31/00.......................... ..... ......... -20 -30 -32 -35 -37 -39 -41 -44 -46 -117 -325
partners, and sole proprietors.
4. Elective deferrals not taken into yba 12/31/00.......................... ..... ......... -38 -71 -81 -85 -89 -93 -97 -101 -104 -275 -759
account for purposes of deduction limits.
5. Reduce PBGC premium for new plans of pea 12/31/00.......................... ..... ......... ......... (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) -1 -3
small employers \3\.
6. Phase-in of additional PBGC premium for pea 12/31/00.......................... ..... ......... ......... -1 -1 -1 -2 -2 -2 -2 -2 -4 -12
new plans \3\.
7. Elimination of user fee for requests rma 12/31/00.......................... ..... ......... (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) -8 -18
regarding new employer pension plans \3\.
8. SAFE anuities and trusts................ pyba 12/31/00......................... ..... ......... -22 -124 -273 -409 -474 -454 -460 -480 -492 -828 -3,188
9. Modify top-heavy rules.................. pyba 12/31/00......................... ..... ......... -3 -5 -6 -7 -8 -9 -10 -11 -12 -21 -72
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Expanding Coverage........... ...................................... ..... ......... -184 -495 -806 -1,075 -1,321 -1,473 -1,646 -1,842 -2,038 -2,560 -10,884
================================================================================================================================================
C. Enhancing Fairness for Women:
1. Increase in maximum contribution limits cmi tyba 12/31/00..................... ..... ......... -136 -310 -329 -323 -353 -395 -443 -493 -565 -1,097 -3,346
for IRAs and other pension plans for
individuals age 50 and above by 10%
annually beginning in 2001, not to exceed
50%.
2. Equitable treatment for contributions of yba 12/31/00.......................... ..... ......... -50 -75 -81 -87 -92 -97 -103 -107 -110 -294 -804
employees to defined contribution plans
\1\.
3. Clarification of tax treatment of tdapma 12/31/00....................... Negligible Revenue Effect
division of section 457 plan benefits upon
divorce.
4. Modification of safe harbor relief for aiii TRA'97........................... Negligible Revenue Effect
hardship withdrawals from 401(k) plans.
5. Faster vesting of certain employer pyba 12/31/00......................... Negligible Revenue Effect
matching contributions.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Enhancing Fairness for Women. ...................................... ..... ......... -186 -385 -410 -410 -445 -492 -546 -600 -675 -1,391 -4,150
================================================================================================================================================
D. Increasing Portability for Participants:
1. Rollovers allowed among governmental dma 12/31/00.......................... ..... ......... -7 -11 -12 -12 -12 -13 -13 -13 -14 -41 -106
section 457, section 403(b), and qualified
plans.
2. Rollovers of IRAs to workplace dma 12/31/00.......................... Negligible Revenue Effect
retirement plans.
3. Rollovers of after-tax retirement plan dma 12/31/00.......................... Negligible Revenue Effect
contributions.
4. Waiver of 60-day rule................... dma 12/31/00.......................... Negligible Revenue Effect
5. Treatment of forms of qualified plan yba 12/31/00.......................... Negligible Revenue Effect
distributions.
6. Rationalization of restrictions on da 12/31/00........................... Negligible Revenue Effect
distributions.
7. Purchase of service credit in ta 12/31/00........................... Negligible Revenue Effect
governmental defined benefit plans.
8. Employers may disregard rollovers for da 12/31/00........................... Negligible Revenue Effect
cash-out amounts.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Increasing Portability for ...................................... ..... ......... -7 -11 -12 -12 -12 -13 -13 -13 -14 -41 -106
Participants.
================================================================================================================================================
E. Strengthening Pension Security and
Enforcement:
1. Phase-in repeal of 150% of current yba 12/31/00.......................... ..... ......... -7 -21 -33 -36 -36 -38 -38 -39 -41 -98 -290
liability funding limit; extend maximum
deduction rule.
2. Missing plan participants............... (\5\)................................. Negligible Revenue Effect
3. Treatment of multiemployer plans under yba 12/31/00.......................... ..... ......... -4 -7 -8 -8 -8 -8 -9 -9 -9 -26 -69
section 415.
4. Excise tax relief for sound pension yba 12/31/00.......................... ..... ......... -2 -3 -3 -3 -3 -3 -3 -3 -3 -11 -26
funding.
5. Notice of significant reduction in plan pateo/a DOE........................... Negligible Revenue Effect
benefit accruals.
6. Protection of investment of employee yba 12/31/00.......................... Negligible Revenue Effect
contributions in 401(k) plans.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Strengthening Pension ...................................... ..... ......... -13 -31 -44 -47 -47 -49 -50 -51 -53 -135 -385
Security and Enforcement.
================================================================================================================================================
F. Encouraging Retirement Education:
1. Periodic pension benefit statements..... yba 12/31/00.......................... Negligible Revenue Effect
2. Treatment of employer-provided yba 12/31/00.......................... Negligible Revenue Effect
retirement advice.
Subtotal of Encouraging Retirement ...................................... Negligible Revenue Effect
Education.
G. Reducing Regulatory Burdens:
1. Flexibility in nondiscrimination and DOE................................... Negligible Revenue Effect
line of business rules \6\.
2. Modification of timing of plan pyba 12/31/00......................... Negligible Revenue Effect
valuations.
3. Rules for substantial owner benefits in noitta 12/31/00....................... Negligible Revenue Effect
terminated plans \3\.
4. ESOP dividends may be reinvested without tyba 12/31/00......................... ..... ......... -19 -44 -56 -61 -63 -66 -69 -71 -74 -180 -523
loss of dividend deduction.
5. Notice and consent period regarding yba 12/31/00.......................... No Revenue Effect
distributions.
6. Repeal transition rule relating to pyba 12/31/99......................... ..... -1 -2 -3 -3 -3 -3 -4 -4 -4 -4 -12 -31
certain highly compensated employees.
7. Employees of tax-exempt entities \6\.... DOE................................... Negligible Revenue Effect
8. Provisions relating to plan amendments.. DOE................................... No Revenue Effect
9. Extension to international organization yba 12/31/00.......................... Negligible Revenue Effect
of moratorium on application of certain
nondiscrimination rules applicable to
State and local government plans.
10. Annual report dissemination............ yba 12/31/98.......................... No Revenue Effect
11. Clarification of exclusion for employer- tyba 12/31/99......................... ..... -4 -8 -10 -13 -14 -15 -15 -16 -16 -16 -49 -127
provided transit passes.
------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal of Reducing Regulatory Burdens.. ...................................... ..... -5 -29 -57 -72 -78 -81 -85 -89 -91 -94 -241 -681
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Retirement Savings Tax Relief ...................................... ..... -5 -1,105 -3,108 -3,584 -2,938 -6,473 -11,265 -13,407 -13,529 -14,058 -10,739 -69,476
Provisions.
================================================================================================================================================
Title IV. Education Tax Relief Provisions
A. Student Loan Interest Deduction--increase tyea 12/31/99......................... ..... -55 -228 -261 -294 -332 -343 -354 -366 -378 -390 -1,170 -3,000
student loan deduction income limits for
single taxpayers by $10,000 and adjust the
income limits for married couples filing joint
returns to twice that of a single taxpayer;
phase-out range of $15,000 for both; repeal 60-
month rule for everyone.
B. Prepaid Savings Plans--State-sponsored tyba 12/31/99......................... ..... -8 -26 -41 -61 -87 -120 -155 -191 -225 -261 -222 -1,175
plans: exclusions for distributions for
education expenses, beginning in 2000; private
plans: tax deferral on income beginning in
2000; exclusion for distributions for
education expenses beginning in 2004; allow
tax-free education withdrawals from prepaid
savings plans and education IRAs as long as
they are not used for the same expenses for
which HOPE or Lifetime Learning credits are
claimed, beginning in 2000; miscellaneous
other changes (clarify definition; one
rollover per year).
C. Exclude from Tax Awards Under the Following tyba 12/31/93......................... ..... -2 -1 -1 -1 (\7\) (\7\) -1 -1 -1 -1 -5 -8
Programs: The National Health Corps
Scholarship program, beginning in 1994; and F.
Edward Hebert Armed Forces Health Professions
Scholarship program, beginning in 1994.
D. Permanent Extension of Employer Provided 1/1/00................................ ..... -254 -510 -598 -637 -682 -731 -783 -839 -899 -964 -2,682 -6,898
Educational Assistance--extend the exclusion
for undergraduate courses; add the exclusion
for graduate level courses \8\.
E. Liberalize Tax-Exempt Financing Rules for
Public School Construction:
1. Increase the school construction small bia 12/31/99.......................... ..... (\7\) -2 -4 -5 -13 -14 -14 -15 -16 -17 -25 -102
issue arbitrage rebate exception school
construction from $10 million to $15
million.
2. Provide for issuance of tax-exempt bia 12/31/99.......................... ..... -4 -16 -33 -52 -76 -103 -133 -163 -192 -220 -181 -992
private activity bonds for qualified
education facilities with annual volume
cap the greater of $10 per resident or $5
million.
3. Allow Federal Home Loan Bank to (\9\)................................. No Revenue Effect
guarantee school construction bonds,
capped at $500 million a year.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Education Tax Relief Provisions. ...................................... ..... ......... -323 -783 -938 -1,050 -1,311 -1,440 -1,575 -1,711 -1,853 -4,285 -12,175
================================================================================================================================================
Title V. Health Care Tax Relief Provisions
A. Provide an above-the-line deduction for tyba 12/31/00......................... ..... ......... -416 1,289 -1,379 -2,014 -3,241 -4,781 -7,783 -8,299 -8,848 -5097 -38,050
health insurance expenses for which the
taxpayer pays at least 50% of the premium,
phased in as follows: 25% in 2001 through
2003, 50% in 2004 through 2005, 100% and
thereafter; for purposes of the 50% payment
rule, all health plans of a single employer
are combined; does not apply to any month in
which the taxpayer is enrolled in Medicare,
Medicaid, Champus, VA, Indian Health service,
Children's Health Insurance or Federal
Employees Health Benefits (non-COBRA) programs.
B. Long Term Care Insurance Provisions:
1. Provide an above-the-line deduction for tyba 12/31/00......................... ..... ......... -40 -276 -328 -425 -801 -1,005 -1,908 -2,027 -2,146 -1,069 -8,956
long-term care insurance expenses for
which the taxpayer pays at least 50% of
the premium, phased on as follows: 25% in
2001 through 2003, 50% in 2004 through
2005; 100% in 2006 and thereafter.
2. Allow long-term care insurance to be tyba 12/31/00......................... ..... ......... -99 -136 -151 -165 -173 -185 -184 -215 -247 -551 -1,555
offered as part of cafeteria plans (\10\).
C. Provide an Additional Dependency Deduction tyba 12/31/99......................... -180 -266 -262 -265 -268 -336 -388 -414 -438 -463 -1,240 -3,279
to Caretakers to Elderly Family Members.
D. Add Streptococcus Pneumoniae Vaccine to the (\11\)................................ ..... 4 7 9 10 10 -62 -87 -87 -88 -89 39 -374
List of Taxable Vaccines; Reduce Excise Tax on
All Taxable Vaccines to $0.25 Per Does
Beginning in 2005; Study of Vaccine Program.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Health Care Tax Relief ...................................... ..... -176 -814 -1,954 -2,113 -2,862 -4,613 -6,446 -10,376 -11,067 -11,793 -7,918 -52,214
Provisions.
================================================================================================================================================
Title VI. Small Business Tax Relief Provisions
A. Accelerate 100% Deduction for Health tyba 12/31/99......................... ..... -245 -1,007 -1,040 -657 ......... ......... .......... .......... .......... .......... -2,949 -2,949
Insurance of Self-Employed Individuals.
B. Increase Section 179 Expensing to $30,000... tyba 12/31/99......................... ..... -790 -880 -189 -95 2 -31 -90 -142 -157 -160 -1,954 2,533
C. Accelerate Repeal of the FUTA Surtax........ lpo/a 1/1/05.......................... ..... ......... ......... ......... ......... ......... -1,029 -421 -21 1,058 413 .......... ..........
D. Coordinate Farmer Income Averaging and the tyba 12/31/99......................... ..... (\7\) -1 -1 -1 -2 -2 -2 -3 -4 -5 -6 -22
AMT.
E. Create New Farm and Ranch Risk Management tyba 12/31/00......................... ..... ......... -7 -147 -204 -173 -142 -110 -48 -23 -23 -531 -877
(``FARRM'') Accounts.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Small Business Tax Relief ...................................... ..... -1,035 -1,895 -1,377 -957 -173 -1,204 -623 -214 874 225 -5,440 -6,381
Provisions.
================================================================================================================================================
Title VII. Estate and Gift Tax Relief
Provisions
A. Reduce Estate, Gift, and Generation-Skipping dda & gma 12/31/00.................... ..... ......... ......... -2,076 -2,190 -2,236 -6,385 -6,872 -7,337 -15,227 -16,262 -6,502 -58,585
Transfer Taxes: beginning in 2001, repeal the
5% ``bubble'' (which phases out the lower
rates), and repeal rates in excess of 50%;
beginning in 2004, convert the unified credit
into a true exemption; in 2007; increase $1
million exemption amount to $1.5 million.
B. Expand Estate Tax Rule for Conservation dda 12/31/97 &........................ ..... ......... -9 -12 -17 -18 -18 -19 -20 -22 -23 -56 -158
Easements--increase the 25-mile limit to 50 dda 12/31/99..........................
miles and clarify that the date for
determining easement compliance..
C. Increase the Annual Gift Tax Exclusion-- gma 12/31/00.......................... ..... ......... ......... -74 -137 -281 -389 -516 -705 -794 -903 -492 -3,799
increase from $10,000 to $12,000 for 2001,
$13,500 for 2002, $15,000 for 2003, $16,500
for 2004, $18,000 for 2005, and $20,000 for
2006 and thereafter.
D. Simplification of Generation-Skipping generally DOE......................... ..... -3 -4 -5 -6 -6 -6 -6 -6 -6 -6 -24 -54
Transfer Tax Rules.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Estate and Gift Tax Relief ...................................... ..... -3 -13 -2,167 -2,350 -2,541 -6,798 -7,413 -8,068 -16,049 -17,194 -7,074 -62,596
Provisions.
================================================================================================================================================
Title VIII. Tax-Exempt Organization Provisions
A. Provide a Tax Exemption for Organizations tyba 12/31/99......................... ..... -2 -4 -4 -4 -5 -5 -6 -7 -8 -8 -19 -53
Created by a State to Provide Property and
Casualty Insurance Coverage for Property for
Which Such Coverage is Otherwise Unavailable.
B. Modify Section 512(b)(13)--exempt income DOE & pra 12/31/99.................... ..... -7 -9 -11 -11 -11 -11 -12 -12 -12 -13 -49 -110
received by a tax-exempt organization from
certain subsidiaries when fair market value
pricing is used, excess of fair market value
subject to UBIT and 20% penalty, and extension
of transition relief for certain binding
contracts.
C. Simplify Lobbying Expenditure Limitations... tyba 12/31/99......................... ..... (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) -1
D. Tax-Free Withdrawals from IRAs for tyba 12/31/00......................... ..... ......... -172 -267 -270 -273 -276 -279 -282 -285 -288 -982 -2,393
Charitable Donations After Age 70.5.
E. Provide Exclusion for Mileage Reimbursements tyba 12/31/99......................... ..... (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) -1 -2
by Public Charities (not in excess of standard
business mileage rate.
F. Charitable Deduction for Certain Expenses in tyba 12/31/99......................... ..... (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) -1 -3
Support of Native Alaskan Subsistence Whaling.
G. Allow Charitable Donations to Certain Low tyba 12/31/99......................... ..... -4 -30 -32 -33 -35 -37 -38 -40 -42 -44 -134 -335
Income Schools to be Made on or Before the
Deadline for Filing a Federal Income Tax
Return (not including extensions).
H. Allow Taxpayers Who Do Not Itemize to Deduct tyba 12/31/99......................... ..... -98 -665 -558 ......... ......... ......... .......... .......... .......... .......... -1,311 -1,311
up to $50 ($100 joint0 of Their Charitable
Contributions in Addition to Their Standard
Deduction for 2000 and 2001.
I. Increase AGI Percentage Limits for Deduction tyba 12/31/01......................... ..... ......... ......... -122 -275 -317 -326 -333 -614 -842 -882 -714 -3,711
of Charitable Donations by 2% Annually Until
the 50%-of-AGI Limit Reaches 60% and the 30%-
of-AGI Limit Reaches 40%, Then by an
Additional 10% in 2007 for Both Limits.
J. Increase the Limit for Deduction for tyba 12/31/01......................... ..... ......... ......... -15 -34 -40 -41 -42 -43 -45 -47 -89 -307
Corporate Charitable Donations by 2% Annually
Until the 10% Limit Reaches 20%.
K. Allow Private Foundations to Increase Their dda 12/31/06.......................... ..... ......... ......... ......... ......... ......... ......... .......... .......... -627 -845 .......... -1,472
Holding in Publicly Traded Voting Stock of a
Corporation Received by Bequest from 20% to:
40% in 2007, and 49% in 2008 and thereafter.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Tax-Exempt Organization ...................................... ..... -111 -870 -1,009 -627 -681 -696 -710 -998 -1,861 -2,127 -3,300 -9698
Provisions.
================================================================================================================================================
Title IX. International Tax Relief Provisions
A. Allocation Interest Expense on Worldwide tyba 12/31/03......................... ..... ......... ......... ......... ......... -820 -2,190 -2,278 -2,369 -2,464 -2,562 -820 -12,683
Basis.
B. Simplify and Apply Look-Through Treatment tyba 12/31/02......................... ..... ......... ......... ......... -221 -255 -63 -32 -22 -17 -12 -476 -622
for Dividends of 10/50 Companies and Separate
Basket Excess Credit Carryovers.
C. Exception from Subpart F Treatment of tyba 12/31/02......................... ..... ......... ......... ......... -4 -13 -15 -17 -20 -23 -25 -17 -117
Certain Pipeline Transportation and
Electricity Transmission Income.
D. Prohibit Disclosure of Advance Pricing DOE................................... Negligible Revenue Effect
Agreements (APAs) and Related Information;
Require the IRS to Submit to Congress and
Annual Report of Such Agreements; APA User Fee.
E. Exempt from the 7.5% Air Passenger Ticket 1/1/00................................ ..... -15 -15 -17 -21 -24 -26 -28 -29 -30 -32 -92 -238
Tax Frequent Flier Miles to Persons With
Foreign Addresses.
F. Repeal Limits on Foreign Sales Corporation tyba 12/31/04......................... ..... ......... ......... ......... ......... ......... -56 -160 -173 -194 -215 .......... -798
Tax Benefits for the Defense Products Industry.
G. Repeal the 90% Limit on Foreign Tax Credits tyba 12/31/04......................... ..... ......... ......... ......... ......... ......... -239 -446 -447 -440 -441 .......... -2,014
for the Individual and Corporate Alternative
Minimum Tax.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of International Tax Relief ...................................... ..... -15 -15 -17 -246 -1,112 -2,589 -2,961 -3,060 -3,168 -3,287, -1,405 -16,472
Provisions.
================================================================================================================================================
Title X. Housing and Real Estate Tax Relief
Provisions
A. Increase Low-Income Housing Per Capita tyba 12/31/00......................... ..... ......... -4 -24 -71 -147 -251 -382 -528 -681 -836 -246 -2,924
Amount--increase from $1.25 by $0.10 annually
for 2001 through 2005; allow $2 million small
State minimum beginning in 2001.
B. Tax Credit for Renovating Historic Homes-- eia 12/31/99.......................... ..... -33 -132 -135 -139 -141 -143 -146 -149 -151 -154 -580 -1,323
20% tax credit for renovating historic homes
up to a maximum of $20,000; must live in the
home for 5 years; limit to homes in historic
districts with median income less than twice
the State median income; include mortgage
certificates.
C. Provisions Relating to REITs:
1. Impose 10% vote or value test........... tyba 12/31/00......................... ..... ......... 2 8 8 8 9 9 9 10 10 26 73
2. Treatment of income and services tyba 12/31/00......................... ..... ......... 60 158 53 23 -9 -45 -84 -127 -173 294 -145
provided by taxable REIT subsidiaries.
3. Special foreclosure rule for health care tyba 12/31/00......................... Negligible Revenue Effect
REITs.
4. Conformity with RIC 90% distribution tyba 12/31/00......................... ..... ......... 1 1 1 1 1 1 1 1 1 3 5
rules.
5. Clarification of definition of tyba 12/31/00......................... Negligible Revenue Effect
independent contracts for REITs.
6. Modification of earnings and profits da 12/31/00........................... ..... ......... -6 -3 -3 -3 -4 -4 -4 -4 -4 -16 -35
rules.
D. Accelerate 5-Year Phase in of Private bia12/31/00........................... ..... ......... -9 -36 -75 -117 -155 -183 -188 -177 -164 -237 -1,104
Activity Bond Volume Cap.
E. Provide a 15-Year Recovery Period for ima 12/31/02.......................... ..... ......... ......... ......... -35 -123 -227 -325 -411 -445 -475 -158 -2,041
Depreciation of Leasehold Improvements.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Housing and Real Estate Tax ...................................... ..... -33 -88 -31 -261 -499 -779 -1,075 -1,354 -1,574 -1,795 -914 -7,494
Relief Provisions.
================================================================================================================================================
Title XI. Miscellaneous Provisions
A. Motor Fuels Taxes--repeal 4.3-cents-per- 10/1/00............................... ..... ......... -109 -117 -120 -122 -125 -128 -131 -134 -137 -469 -1,124
gallon fuel tax on railroads inland waterway
carriers currently paid into the General Fund.
B. Tax Treatment of Alaska Native Settlement da & tyea 12/31/99.................... -9 -7 -7 -7 -7 -8 -8 -8 -8 -8 -38 -76
Trusts--exempt from tax distributions from
Alaska Native Corporations to Alaska Native
Settlement Trusts; special treatment of income
earned; distributions to beneficiaries taxed
as ordinary income.
C. Corporate AMT--allow certain AMT credit tyba 12/31/03......................... ..... ......... ......... ......... ......... -552 -772 -671 -578 -499 -432 -552 -3,504
carryovers to reduce minimum tax by 50% but
not below regular tax.
D. Allow 5-Year Carryback of Oil and Gas Net lii tyba 12/31/98..................... ..... -46 -28 -24 -21 -20 -20 -21 -21 -22 -23 -139 -246
Operating Losses.
E. Allow Deduction for Geological and eiopi tyba 12/31/99................... ..... -16 -25 -26 -27 -27 -28 -29 -29 -30 -31 -121 -267
Geophysical Expenses.
F. Allow Deduction for ``Delay Rental pi tyba 12/31/99...................... ..... -3 -4 -4 -4 -4 -4 -4 -3 -4 -5 -16 -39
Payments''.
G. Simplify the Active Trade or Business da DOE................................ ..... -3 -5 -5 -5 -5 -5 -5 -5 -5 -5 -23 -48
Requirement for Tax-Free Spin-Offs.
H. Increase Reforestation Credit Expenses to epoii tyba 12/31/99................... ..... -5 -15 -22 -29 -34 -36 -38 -37 -33 -29 -104 -277
$25,000 Beginning in 2000; No Cap on
Reforestation Expenses Qualifying for 7 Year
Amortization for 2000 through 2003; Cap of
$25,000 Beginning in 2004.
I. Add Inserts and Outserts to Arrow Excise fcqb 30da DOE......................... Negligible Revenue Effect
Tax; Reduce Excise Tax Rate on ``Broadhead''
Arrow Points.
J. Increase the Joint Committee on Taxation DOE................................... Negligible Revenue Effect
Refund Review Threshold from $1 Million to $2
Million.
K. Clarify the Definition of Rural Airport to tyba 12/31/99......................... ..... (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) -1 -3
Include Communities That Cannot be Reached by
Road.
L. Allow Farmer Cooperatives to Pay Dividends tyba DOE.............................. ..... (\7\) (\7\) -1 -1 -1 -1 -2 -2 -3 -4 -3 -15
on Capital Stock Without Reducing Patronage
Dividends.
M. Repeal Prohibition on Life Companies Filing tyba 12/31/00......................... ..... ......... -42 -85 -86 -87 -88 -90 -92 -93 -94 -300 -757
on a Consolidated Basis Until They Have Been
Part of an Affiliated Group for at Least 5
Years.
N. Modifies Definition of Personal Holding tyba 12/31/99......................... ..... -4 10 -17 -24 -27 -28 -28 -28 -29 -30 -82 -227
Company and Groups Treating all Lending or
Finance Businesses of a Controlled Corporate
Group as a Single Corporation.
O. 50% Tax Credit for Cost of Complying with tyba 12/31/99......................... ..... ......... -1 -3 -3 -3 -3 -4 -4 -4 -4 -11 -29
Wheelchair Accessibility on Certain Inter-City
Buses (sunset 12/23/11).
P. Accelerate the 80% Meals Deduction for DOE................................... ..... ......... ......... ......... ......... ......... ......... .......... -13 -13 .......... .......... -26
Persons Subject to the Hours of Service
Requirements by 1 Year.
Q. Allow a Limited Number of Private Highway bia 12/31/99.......................... ..... ......... ......... -2 -5 -8 -11 -14 -18 -21 -24 -15 -102
Projects to Quality for Tax-Exempt-Facility
Bond Financing.
R. Extend the DC First-Time Homebuyer Tax tyba 12/31/99......................... (\7\) -11 -14 (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) -25 -25
Credit 1 Year and Increase Phaseout for Joint
Filers to $140,000-$180,000.
S. Expand the Zero-Percent Capital Gains Rate DCZaoaa 12/31/99...................... ..... -1 -3 -4 -6 -13 -15 -17 -18 -19 -21 -28 -118
for DC Zone Assets to the Entire District of
Columbia.
T. Establish 7-year Recovery Period for Natural ppiso/a DOE........................... Negligible Revenue Effect
Gas Gathering Lines.
U. Treat Small Seaplanes as General Aviation tyba 12/31/99......................... ..... -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -11
for Purposes of the Aviation Excise Taxes.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Miscellaneous Provisions........ ...................................... ..... -99 -264 -318 -339 -911 -1,145 -1,060 -988 -918 -848 -1,932 -6,894
================================================================================================================================================
Title XII. Extension of Expired and Expiring
provisions
A. Research Credit, and Increase in the Rates (\12\)................................ ..... -1,657 -1,853 -2,226 -2,537 -2,766 -2,926 -3,072 -3226 -3,387 -3,556 -11,038 -27,203
for the Alternative Incremental Research
Credit by One-Percentage Point Per Step
(permanent).
B. Exception from Subpart F for Active typa 1999............................. ..... -187 -827 -992 -1,190 -1,369 -1,156 .......... .......... .......... .......... -4,565 -5,721
Financing Income (through 12/31/04).
C. Suspension of 100% Net Income Limitaiton for tyba 12/31/99......................... ..... -23 -35 -36 -36 -37 -13 .......... .......... .......... .......... -167 -180
Marginal Properties (through 12/31/04).
D. Work Opportunity Tax Credit (through 6/30/04 wpoifibwa 6/30/99..................... ..... -229 -321 -397 -430 -391 -254 -114 -40 -11 -2 -1,767 -2,188
E. Welfare-to-Work Tax Credit (through 6/30/04. wpoifibwa 6/30/99..................... ..... -49 -77 -101 -112 -105 -74 -37 -14 -4 -1 -445 -575
F. Extend and Modify Tax Credit for Electricity (\13\)................................ ..... -33 -82 -124 -159 -186 -198 -203 -208 -213 -217 -585 -1,623
Produced from wind and Closed-Loop Biomass
Facilities (credit to include electricity
produced from poultry waste and operators of
such government owned facilities, landfill gas
used to produce electricity, and non-closed
loop biomass (including production from such
biomass at coal cofiring facilities) to the
list of qualified resources under section 45
(through 6/30/04 generally, and through 12/31/
02 for non-closed-loop biomass).
G. Alaska Exemption from Diesel Fuel and DOE................................... ..... ......... ......... ......... ......... (\7\) -1 -1 -1 -1 -1 (\7\) -3
Kerosene Dyeing Rules (permanent).
H. Brownfields Environmental Remediation eia 12/31/99.......................... ..... -1 -65 -160 -207 -240 -145 -27 10 23 30 -672 -782
(through 6/30/04); Expand to all of the United
States.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Extension of Expired and ...................................... ..... -2,179 -3,260 -4,036 -4,671 -5,094 -4,767 -3,454 -3,479 -3,593 -3,747 -19,239 -38,275
Expiring Provisions.
================================================================================================================================================
Title XIII. Revenue Offset Provisions
A. Modify Foreign Tax Credit Carryover Rules--1- tyba 12/31/99......................... ..... 87 562 502 468 437 406 279 263 259 257 2,056 3,520
year carryback of foreign tax credits and 7-
year carryforward.
B. Information reporting on Cancellation of coda 12/31/99......................... ..... ......... 7 7 7 7 7 7 7 7 7 28 63
Indebtedness by Non-Bank Financial
Institutions.
C. Increase to 15% (from 10%) Optional dma 12/31/00.......................... ..... ......... 52 1 1 1 1 1 1 1 1 55 59
Withholding Rate for Nonperiodic Payments from
Deferred Compensation Plans.
D. Extend IRS User Fees (through 9/30/09 [3]... 9/30/03............................... ..... ......... ......... ......... ......... 50 53 56 59 61 64 50 343
E. Allow Employers to Transfer Excess Defined tmi tyba 12/31/00..................... ..... ......... 19 38 39 40 41 42 42 43 44 136 348
Benefit Plan Assets to a Special Account for
Health Benefits of Retirees (through 9/30/09).
F. Clarify the Tax Treatment of Income and DOE................................... ..... (\1\) 1 1 1 1 1 1 1 1 1 4 9
Losses from Derivatives.
G. Loophole Closers:
1. Limit use of non-accrual experience tyea DOE.............................. ..... 77 60 33 28 10 12 14 16 18 20 208 288
method of accounting to amounts to be
received for the performance of qualified
professional services.
2. Impose limitation on pre-funding of cmo/a 6/9/99.......................... 22 93 141 147 149 140 129 118 105 90 74 693 1,209
certain employee benefits.
3. Repeal installment method for most iso/a DOE............................. ..... 477 677 406 257 72 8 21 35 48 62 1,889 2,063
accrual basis taxpayers; adjust pledge
rules.
4. Prevent the conversion of ordinary teio/a 7/12/99........................ ..... 15 45 47 49 51 54 58 62 66 70 207 517
income or short-term capital gains into
income eligible for long-term capital gain
rates.
5. Deny deduction and impose excise tax (14).................................. Negligible Revenue Effect
with respect to charitable split-dollar
life insurance arrangements.
6. Modify estimated tax rules for closely- epdo/a 9/15/99........................ ..... 40 1 1 1 1 1 1 1 1 1 45 52
owned REIT dividends.
7. Prohibited allocation of Stock in an (15).................................. ..... (16) (16) (16) (16) (16) (16) (16) (16) (16) (16) 17 47
ESOP of a subchapter S corporation.
8. Modify anti-abuse rules related to aolo/a 7/15/99........................ ..... 2 4 5 5 5 5 5 5 5 5 21 46
assumption of liabilities.
9. Require consistent treatment and provide to/a DOE.............................. ..... 25 26 28 29 30 32 34 35 37 39 138 315
basis allocation rules for transfers of
intangibles in certain nonrecognition
transactions.
10. Modify treatment of closely-held REITs, tyea 7/14/99.......................... ..... 2 5 5 5 6 6 6 6 7 7 23 55
with incubator REIT exception.
11. Distributions by a partnership to a dma 7/14/99........................... ..... 6 11 10 10 9 9 9 9 9 8 46 90
corporate partner of stock in another
corporation.
------------------------------------------------------------------------------------------------------------------------------------------------
Total of Revenue Offset Provisions....... ...................................... 22 826 1,614 1,235 1,053 865 770 658 653 659 666 5,616 9,024
================================================================================================================================================
Title XIV. Tax Technical Correction Provisions. ...................................... No Revenue Effect
Net Total................................ ...................................... 22 -4,139 -24,615 -39,400 -41,979 -45,357 -89,876 -114,676 -129,407 -145,746 -156,655 -155,472 -791,848
Addendum: Tax Cut Target....................... ...................................... ..... -14,000 -7,800 -53,500 -31,800 -49,200 -62,600 -109,300 -135,800 -150,700 -177,200 -156,300 -791,900
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Proposal includes interaction with other provisions in Provisions for Expanding Coverage.
\2\ Proposal includes interaction with other provisions in Provisions for Individual Retirement Arrangements.
\3\ Estimate provided by the Congressional Budget Office.
\4\ Loss of less than $5 million.
\5\ Effective for distributions from terminating plans that occur after the PBGC has adopted final regulations implementing provision.
\6\ Directs the Secretary of the Treasury to modify rules through regulations.
\7\ Loss of less than $500,000.
\8\ Estimate considers interaction with HOPE and Lifetime Learning tax credits.
\9\ The provision takes effect only if subsequent non-tax legislation specifically granting the Federal Home Loan Banks the authority to enter into these guarantees is enacted.
\10\ Estimate assumes concurrent enactment of the above-the line deduction for health and long-term care insurance (item 1. under Health Care Tax Relief Provisions).
\11\ Effective for vaccine sales the date after the date on which the Centers for Disease Control make final recommendation for routine administration of conjugate Streptococcus Pneumoniae vaccines to children.
\12\ Extension of credit effective for expenses incurred after 6/30/99; increase in AIC rates effective for taxable years beginning after 6/30/99.
\13\ For wind and closed-loop biomass, provision applies to production from facilities placed in service after 6/30/99 and before 7/1/04; for poultry waste and landfill gas, provision applies to production from facilities placed in
service after 12/31/99 and before 7/1/04; for non-closed-loop biomass, provision applies to production after 12/31/99 from facilities placed in service before 1/1/03.
\14\ Effective for transfers made after 2/8/99 and for premiums paid after the date of enactment.
\15\ Effective with respect to ESOPs established on or after July 15, 1999; in the case of an ESOP established by an S corporation before such date, the provision would apply to plan years beginning after 12/31/00.
\16\ Gain of less than $10 million.
Legend for ``Effective'' column: aiii TRA'97 = as if included in the Taxpayer Relief Act of 1997; aolo/a = assumption of liabilities on or after; bia = bonds issued after; cmi = contributions made in; coda = cancellation of
indebtedness after; cmo/a = contributions made on or after; da = distributions after; dda = decedents dying after; dma = distributions made after; DCZaoaa = DC Zone assets originally acquired after; DOE = date of enactment; eia =
expenses incurred after; eiopi = expenses incurred or paid in; epdo/a = estimated payments due on or after; fcqb = first calendar quarter beginning at least; gma = gifts made after; ima = improvements made after; iso/a =
installment sales on or after; lii = losses incurred in; lpo/a = labor performed on or after; noitta = notice of intent to terminate after; pateo/a = plan amendments taking effect on or after; pea = plans established after; pi =
payments in; ppiso/a = property placed in service on or after; pra = payments received after; pyba = plan years beginning after; rma = requests made after; ta =transfers after; tdapma = transfers, distributions, and payments made
after; teia = transactions entered into after; teio/a = transactions entered into on or after; tmi = transfers made in; to/a = transactions on or after; tyba = taxable years beginning after; tyea = taxable years ending after;
wpoifibwa = wages paid or incurred for individuals beginning work after; and yba = years beginning after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee of Taxation.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the provisions of the bill as reported
involve increased budget authority (outlays) for the refundable
portion of certain tax credit changes in the bill. The
estimated outlay effects are $11 million in 2000, $40 million
in 2001, $227 million in 2002, $360 million in 2003, $373
million in 2004, $424 million in 2005, $1,576 million in 2006,
$1,601 million in 2007, $1,598 million in 2008, and $1,594
million in 2009.
Tax expenditures
In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing income tax
provisions (other than the tax rate and marriage penalty
provisions) involve increased tax expenditures and the revenue-
increasing income tax provisions (other than the foreign tax
credit provision) involve reduced tax expenditures (see revenue
table in Part III.A, above).
C. Consultation With the Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget office has not
submitted a statement on this bill. The letter from CBO was not
received in a timely manner, and therefore, will be provided
separately.
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 rollcall votes in the Committee's consideration
of the bill.
Motion to report the bill
The bill was ordered favorably reported by a roll call vote
of 13 yeas and 6 nays (13 yeas and 7 nays including 1 nay
proxy) on July 21, 1999. The vote, with a quorum present, was
as follows:
Yeas.--Senators Roth, Chafee, Hatch, Murkowski, Nickles,
Gramm, Lott, Jeffords, Mack, Thompson, Breaux, and Kerrey.
Nays.--Senators Moynihan, Baucus, Rockefeller, Conrad,
Graham, Bryan (proxy), and Robb.
Votes on other amendments
A substitute amendment by Senator Gramm to reduce all
marginal income tax rates by 10 percent, eliminate the marriage
tax penalty, repeal estate and gift taxes, and provide 100
percent deduction for self-employed health insurance was
defeated by a rollcall vote of 7 yeas and 13 nays. The vote was
as follows:
Yeas.--Senator Hatch, Murkowski, Nickles, Gramm, Lott,
Mack, and Thompson.
Nays.--Senators Roth, Chafee, Grassley, Jeffords, Moynihan,
Baucus, Rockefeller, Breaux, Conrad, Graham, Bryan, Kerry
(proxy) and Robb.
An amendment by Senators Baucus and Conrad to reduce the
tax cuts in the bill by an amount sufficient to allow one-third
of the on budget surplus to be dedicated to Medicare was
defeated by a rollcall vote of 7 yeas and 9 nays. The vote was
as follows:
Yeas.--Senators Moynihan, Baucus, Rockefeller, Conrad,
Graham, Bryan, and Robb.
Nays.--Senators Roth, Chafee, Grassley, Nickles, Gramm,
Lott, Jeffords, Mack, and Breaux.
An amendment by Senators Graham and Robb to delay the
effective date of the tax cut bill until after enactment of
legislation to extend the solvency of the Social Security Trust
Fund through 2075 and the Medicare Part A program through 2027
was defeated by a roll call vote of 9 yeas and 11 nays. The
vote was as follows:
Yeas.--Senators Moynihan, Baucus, Rockefeller, Breaux,
Conrad (proxy), Graham, Bryan, Kerrey, and Robb (proxy).
Nays.--Senators Roth, Chafee (proxy), Grassley, Hatch,
Murkowski, Nickles, Gramm (proxy), Lott (proxy), Jeffords, Mack
(proxy), and Thompson (proxy).
An amendment by Senator Grassley to expand Code section 45
to include open-loop biomass and co-firing was adopted by a
roll call vote of 14 yeas and 6 nays. The vote was as follows:
Yeas.--Senators Grassley, Hatch, Murkowski; Lott (proxy),
Jeffords, Mack, Baucus, Rockefeller, Breaux (proxy), Conrad,
Graham, Bryan, Kerrey, and Robb.
Nays.--Senators Roth, Chafee (proxy), Nickles, Gramm,
Thompson, and Moynihan.
An amendment by Senator Conrad to provide a tax credit for
information technology training expenses and to reduce the tax
reductions pro rata in the bill (except for extenders and paid-
for items) was defeated by a roll call vote of 9 yeas and 11
nays. The vote was as follows:
Yeas.--Senators Moynihan, Baucus, Rockefeller, Breaux,
Conrad, Graham, Bryan, Kerrey (proxy), and Robb.
Nays.--Senators Roth, Chafee, Grassley, Hatch, Murkowski,
Nickles, Gramm, Lott, Jeffords, Mack (proxy), and Thompson
(proxy).
An amendment by Senator Nickles to expand the 15-percent
individual income tax bracket was defeated by a rollcall vote
of 8 yeas and 12 nays. The vote was as follows:
Yeas.--Senators Grassley (proxy), Hatch, Murkowski,
Nickles, Gramm, Lott, Mack, and Thompson.
Nays.--Senators Roth, Chafee, Jeffords, Moynihan, Baucus,
Rockefeller, Breaux, Conrad, Graham, Bryan (proxy), Kerrey, and
Robb.
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
Title I of the bill provides a reduction in the 15-percent
individual income tax rate to 14 percent in 2001, and increases
the width of this bracket beginning in 2005.
Title II of the bill provides family tax relief: (1)
election for married couples to calculate combined tax as
individuals on a combined return; (2) marriage penalty relief
for the earned income credit; (3) expand the exclusion for
certain foster care payments; (4) increase and expand the
dependent care tax credit; (5) new tax credit for employer-
provided child care facilities; and (6) permanent extension of
the allowance of nonrefundable personal tax credits against the
individual minimum tax and allow personal exemptions against
the AMT.
Title III of the bill provides retirement savings tax
relief: (1) increase the annual contribution limit for all
IRAs; (2) increase the AGI limitation for contributions to a
deductible IRA; (3) eliminate the AGI limitation for
contributions to a Roth IRA; (4) increase the AGI limitation to
$1 million for conversions of an IRA to a Roth IRA; (5) new tax
credit for matching contributions by financial institutions to
Individual Development Accounts; (6) certain coins not treated
as collectibles for IRAs; and (7) various provisions expanding
pension coverage, enhancing pension fairness for women,
increasing pension portability, strengthening pension security
and enforcement, encouraging retirement education, and reducing
pension regulatory burdens.
Title IV of the bill provides tax relief for education: (1)
increase student loan interest deduction income limits and
repeal the 60-month rule; (2) exclusion for distributions from
State-sponsored tuition plans and tax deferral for private
plans, as well as tax-free education withdrawals from prepaid
plans and education savings plans as long as they are not used
for the same expenses for which HOPE or Lifetime Learning tax
credits are claimed; (3) exclusion for awards under the
National Health Corps Scholarships and F. Edward Hebert Armed
Forces Health Professions Scholarships; (4) permanent extension
of the exclusion for employer-provided education assistance
(including graduate education); (5) increase in the school
construction small issue arbitrage rebate exception; (6)
issuance of tax-exempt private activity bonds for qualified
education facilities; and (7) Federal Home Loan Bank guarantee
of certain school bonds (contingent on subsequent legislation).
Title V of the bill includes certain health care tax
provisions: (1) an above-the-line deduction for a portion of
certain health insurance costs where the individual is not
eligible to participate in an employer-subsidized health plan;
(2) an above-the-line deduction for certain long-term care
insurance costs; (3) allow long-term care insurance to be
offered as part of cafeteria plans; (4) an additional personal
exemption for caretakers of elderly family members; (5) add
Streptococcus Pneumoniae vaccine to the list of taxable
vaccines; and (6) reduce the vaccine excise tax on all taxable
vaccines to 25 cents per dose beginning in 2005.
Title VI of the bill provides small business tax relief:
(1) accelerate the 100-percent deduction for self-employed
health insurance to 2000; (2) increase section 179 expensing to
$30,000 in 2000; (3) repeal of the FUTA 0.2 surtax on January
1, 2005; (4) coordination of farmer income averaging and the
alternative minimum tax; and (5) permit new Farm and Ranch Risk
Management Accounts.
Title VII of the bill provides estate and gift tax relief:
(1) reduce estate and gift and generation-skipping transfer
(GST) taxes; (2) expand estate tax rule for conservation
easements; (3) increase the annual gift tax exclusion to
$20,000; and (4) simplify the GST rules.
Title VIII of the bill provides tax modifications relating
to tax-exempt organizations: (1) tax exemption for
organizations created by a State to provide property and
casualty insurance coverage for property for which such
coverage is otherwise unavailable; (2) modify Code section
512(b)(13) relating to exempt income from certain subsidiaries;
(3) simplify lobbying expenditure limitations; (4) tax-free
withdrawals from IRAs for charitable donations after age 70\1/
2\; (5) exclusion for mileage reimbursements by public
charities (not in excess of standard business mileage rate);
(6) charitable deduction for certain expenses in support of
native Alaskan subsistence whaling; (7) allow charitable
donations to certain low-income schools to be made on or before
April 15; (8) allow non-itemizers a deduction of $50 ($100 for
joint returns) for 2000 and 2001 in addition to regular
standard deduction; (9) increase in percentage limits for
individual and corporate charitable contributions deductions;
and (10) allow private foundations to increase their holdings
in publicly traded voting stock of a corporation received by
bequest from 20 percent to 40 percent in 2007 and 49 percent in
2008 and thereafter.
Title IX of the bill provides tax relief for certain
international businesses and transactions: (1) allocate
interest expense on worldwide basis; (2) simplify and apply
look-through rules for dividends from noncontrolled section 902
corporations and separate excess credit carryovers; (3)
exception from subpart F treatment for certain pipeline
transportation and electricity transmission income; (4)
prohibit disclosure of Advance Pricing Agreements (APAs) and
related information and impose an APA user fee; (5) exempt
certain sales of frequent flyer and similar reduced-fare air
transportation rights from air passenger excise tax for persons
with foreign addresses; (6) repeal the 90-percent limit on
foreign tax credits for the individual and corporate AMT; and
(7) repeal limits on Foreign Sales Corporation tax benefits for
the defense products industry.
Title X of the bill provides housing and real estate tax
relief: (1) increase in the low-income housing tax credit per
capita amount; (2) tax credit for renovating historic homes;
(3) certain revisions relating to real estate investment trusts
(REITs); (4) increase State volume limits on tax-exempt private
activity bonds; and (5) 15-year recovery period for
depreciation of certain leasehold improvements.
Title XI of the bill provides certain miscellaneous tax
provisions: (1) repeal of 4.3-cents-per-gallon General Fund
excise tax for rail and inland waterway fuels on October 1,
2000; (2) exemption for distributions from Alaska Native
Corporations to Alaska Native Settlement Trusts; (3) allow
corporate AMT credit carryovers to reduce AMT by 50 percent
(but not below regular tax); (4) 5-year carryback of oil and
gas net operating losses; (5) current deduction for geological
and geographical expenses; (6) deduction for certain oil and
gas ``delay rental payments;'' (7) simplify the active trade or
business requirement for tax-free spin-offs; (8) increase
maximum amount of reforestation expenses eligible for
amortization and tax credit; (9) modify excise tax on arrow
components and accessories (add ``inserts and outserts'' to the
tax and reduce the tax rate on ``broadhead'' arrow points);
(10) allow farmer cooperatives to pay dividends on capital
stock without reducing patronage dividends; (11) repeal the 5-
year limitation on treating life insurance companies as
includible corporations that may file a consolidated tax return
with an affiliated group including non-life insurance
companies; (12) modify personal holding company provisions to
treat all lending or finance businesses of a controlled group
of corporations as a single corporation for purposes of an
active business safe harbor and modify the definition of
lending or finance business; (13) new 50-percent tax credit for
costs of complying with wheelchair accessibility requirements
on certain inter-city buses for 2000-2011; (14) clarify
definition of rural airport for purposes of the air passenger
ticket tax; (15) accelerate the scheduled increase in the
deduction for meals for individuals subject to Federal hours of
service rules so that the deduction is 80 percent in 2007 and
thereafter; (16) allow private activity tax-exempt bonds to be
issued to finance the 15 pilot projects eligible for certain
innovative financing assistance under the Transportation Equity
Act for the 21st Century, limited to a maximum of $15 billion
of such bonds; (17) 7-year cost recovery for natural gas
gathering lines; (18) one-year extension of the D.C. first-time
homebuyer tax credit, with an increase in the income phaseout
for joint filers; (19) expand the D.C. zero-rate capital gains
to the whole District of Columbia; (20) treat certain seaplanes
as general aviation for purposes of the aviation excise taxes;
and (21) increase the Joint Committee on Taxation refund review
threshold from $1 million to $2 million.
Title XII of the bill provides extensions of certain
expired or expiring tax provisions: (1) permanent extension of
the research credit, with an increase in the rates for the
alternative incremental research credit; (2) exception from
subpart F for active financing income (through December 31,
2004); (3) suspension of 100-percent-of-net-income limitation
on percentage depletion for marginal oil and gas wells (through
December 31, 2004); (4) work opportunity tax credit (through
June 30, 2004); (5) welfare-to-work tax credit (through June
30, 2004); (6) tax credit for electricity produced by wind and
closed-loop biomass facilities (through June 30, 2004), and to
include electricity produced from poultry waste, other biomass,
landfill gas, and co-firing; (7) permanent extension of Alaskan
exemption from diesel dyeing requirements; and (8) expensing of
environmental remediation (``brownfields'') costs (through June
30, 2004), to include all of the United States.
Title XIII of the bill provides certain revenue-offset
provisions: (1) one-year carryback of foreign tax credits and
7-year carryforward; (2) information reporting on cancellation
of indebtedness by non-bank financial institutions; (3)
increase (from 10 percent to 15 percent) in optional
withholding for nonperiodic payments from deferred compensation
plans; (4) extension of IRS user fees (through September 30,
2009); (5) transfer of excess defined benefit plans assets for
retiree health benefits; (6) clarify tax treatment of income
and loss on derivatives; (7) limit use of non-accrual
experience method of accounting to amounts to be received for
the performance of qualified professional services; (8)
limitation on prefunding of certain employee benefits; (9)
repeal installment method for most accrual basis taxpayers and
adjust pledge rules; (10) limit conversion of ordinary income
or short-term capital gain to long-term capital gain from
constructive ownership transactions; (11) deny deduction and
impose excise tax with respect to charitable split-dollar life
insurance arrangements; (12) modify estimated tax rules for
closely-held REITS; (13) prohibited allocation of stock in an
ESOP of a subchapter S corporation; (14) modify anti-abuse
rules related to assumption of liabilities; (15) require
consistent treatment and provide basis allocation rules for
transfer of intangibles in certain nonrecognition transactions;
(16) modify treatment of closely-held REITs; and (17)
distributions by a partnership to a corporate partner of stock
in another corporation.
Title XIV provides necessary technical corrections to
recent tax legislation.
Finally, Title XV relates to compliance with the
Congressional budget rules.
The revenue-offset provisions will increase the tax burden
on the affected taxpayers. The other provisions generally will
reduce the tax burdens on individuals, small businesses,
estates, and others.
Impact on personal privacy and paperwork
The bill should not have any adverse impact on personal
privacy.
New tax credits under the bill (tax credit for employer-
provided child care facilities, tax credit for new Individual
Development Accounts, tax credit for renovating historic homes,
and tax credit for costs of complying with wheelchair
accessibility requirements on certain inter-city buses for
2000-2011) will involve some increased paperwork for affected
taxpayers and the Internal Revenue Service.
Also, new above-the-line deductions for individual
taxpayers (certain health insurance and long-term care
insurance expenses, and a limited amount of charitable
donations for 2000 and 2001) will involve some increased
paperwork for affected taxpayers and the Internal Revenue
Service.
In addition, a new exemption from the excise tax on rights
to free and reduced-fare air transportation for persons with
foreign addresses will require additional paperwork for
affected taxpayers and the Internal Revenue Service.
For further discussion of the impact of certain provisions
of the bill on tax complexity, see V.C., below.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the following provisions
of the bill contain Federal mandates on the private sector: (1)
add certain vaccines against streptococcus pneumoniae to the
list of taxable vaccines; (2) impose 10-percent vote or value
test for REITs; (3) treatment of income and services provided
by taxable REIT subsidiaries; (4) one-year carryback of foreign
tax credits and 7-year carryforward; (5) information reporting
on cancellation of indebtedness by non-bank financial
institutions; (6) limit use of non-accrual experience method of
accounting to amounts to be received for the performance of
qualified professional services; (7) impose limitation on
prefunding of certain employee benefits; (8) repeal installment
method for most accrual basis taxpayers; (9) prevent the
conversion of ordinary income or short-term capital gains into
income eligible for long-term capital gain rates; (10) deny
deduction and impose excise tax with respect to charitable
split dollar life insurance arrangements; (11) modify estimated
tax rules for closely-held REITs; (12) prohibited allocation of
stock in an ESOP of a subchapter S corporation; (13) modify
anti-abuse rules related to assumption of liabilities; (14)
require consistent treatment and provide basis allocation rules
for transfers of intangibles in certain nonrecognition
transactions; (15) modify treatment of closely held REITs, with
incubator REIT exception; and (16) distributions by a
partnership to a corporate partner of stock in another
corporation.
The costs required to comply with each Federal private
sector mandate generally are no greater than the estimated
budget effect of the provision. Benefits from the provisions
include improved administration of the Federal tax laws and a
more accurate measurement of income for Federal income tax
purposes.
The provision that adds Streptococcus Pneumoniae vaccine to
the list of taxable vaccines for purposes of the vaccine excise
tax imposes a Federal intergovernmental mandate on State,
local, and tribal governments. The staff of the Joint Committee
on Taxation estimates that the direct costs of complying with
this Federal intergovernmental mandate will not exceed
$50,000,000 in either the first fiscal year or in any of the 4
fiscal years following the first fiscal year. The Committee
intends that this Federal intergovernmental mandate be unfunded
because the net revenues from the Federal vaccine excise tax
are used to finance the Federal Vaccine Injury Compensation
Trust Fund. Since the excise tax is imposed on the private
sector and on State, local, and tribal governments, they do not
affect the competitive balance between such governments and the
private sector.
C. Complexity Analysis
The following tax complexity analysis is provided pursuant
to section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998, which requires the staff of the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service (``IRS'') and the Treasury Department) to
provide a complexity analysis of tax legislation reported by
the House Committee on Ways and Means, the Senate Committee on
Finance, or a Conference Report containing tax provisions. The
complexity analysis is required to report on the complexity and
administrative issues raised by provisions that directly or
indirectly amend the Internal Revenue Code and that have
widespread applicability to individuals or small businesses.
For each such provision identified by the staff of the Joint
Committee on Taxation, a summary description of the provision
is provided, along with an estimate of the number and the type
of affected taxpayers, and a discussion regarding the relevant
complexity and administrative issues.
Following the analysis of the staff of the Joint Committee
on Taxation are the comments of the IRS regarding each of the
provisions included in the complexity analysis, including a
discussion of the likely effect on IRS forms and any expected
impact on the IRS.
1. Reduce the 15 percent income tax rate to 14 percent in 2001 and
thereafter (sec. 101 of the bill)
Summary description of provision
The provision reduces the lowest individual regular income
tax rate from 15 percent to 14 percent. The rate reduction does
not apply to the capital gains tax rates.
Number of affected taxpayers
It is estimated that the reduction of the regular income
tax rates will affect approximately 98 million individual
income tax returns each year, of which approximately 80 million
have income of less than $75,000.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision. The information
necessary to implement the provision will be readily available
to taxpayers (in the form of new tax tables and tax rate
schedules). The rate reduction should not result in an increase
in disputes with the IRS, nor will regulatory guidance be
necessary to implement this provision.
Because the provision does not include a corresponding
reduction in the individual alternative minimum tax rates, the
provision could result in some individual taxpayers having to
calculate their tax liability under the alternative minimum tax
(AMT). While other provisions in this bill reduce the number of
individual taxpayers subject to the alternative minimum tax
(e.g., by allowing individuals to offset the entire regular tax
liability by the nonrefundable personal credits and allowing
the deduction for personal exemptions in computing AMT), some
taxpayers may still be required to make additional calculations
under the AMT rules. For those individuals, the provision could
result in some increased complexity (and possibly an increase
in tax preparation costs).
2. Increase the width of the 14 percent bracket in 2005 (sec. 102 of
the bill)
Summary description of provision
The provision increases the size of the otherwise
applicable 14-percent rate bracket by $2,000 ($4,000 for
married couples filing a joint return) beginning in 2005. The
size of the otherwise applicable 14-percent rate bracket would
then be increased by a total of $2,500 ($5,000 for married
couples filing a joint return) beginning in 2007.
Number of affected taxpayers
It is estimated that the reduction of the regular income
tax rates will affect approximately 36 million individual
income tax returns.
Discussion
The effects of this provision are similar to that of the
reduced rate. Thus, it is not anticipated that individuals will
need to keep additional records due to this provision. The
information necessary to implement the provision will be
readily available to taxpayers (in the form of new tax tables
and tax rate schedules). The rate reduction should not result
in an increase in disputes with the IRS, nor will regulatory
guidance be necessary to implement this provision. In addition,
the provision should not increase individuals' tax preparation
costs unless the individual is required to calculate its tax
liability under the AMT rules as a result of this provision.
3. Election to calculate combined tax as individuals for a married
couple filing a joint return (sec. 201 of the bill)
Summary description of provision
Under the provision, married taxpayers have the option to
calculate separate taxable income for each spouse and to be
taxed as two single individuals on the same return. The tax due
is calculated by applying the tax rates for single individuals
to the separate taxable incomes.
Number of affected taxpayers
It is estimated that this provision will affect
approximately 19 million individual income tax returns.
Discussion
In order for married individuals to file separately under
the provision, they will have to allocate to each spouse items
of income or loss, deductions, and exemptions. The provision
may result in an increase in disputes with the IRS, because the
proper allocation of such items may be unclear. It is
anticipated that regulatory guidance will be necessary to
implement the provision, e.g., to address allocation issues.
The provision includes an authorization to the Secretary to
prescribe such regulations as the Secretary deems necessary or
appropriate to carry out the provision. New forms and
instructions will be needed to implement the provision.
Taxpayers who utilize the separate filing option will need to
maintain records to demonstrate that items of income, loss,
etc. were properly allocated under the provision. It is
expected that, in most cases, taxpayers will have such records
for other purposes (e.g., records showing the ownership
interest of each spouse in property).
The provision will add complexity for taxpayers because, in
order to take advantage of the proposal, taxpayers will have to
compute their tax liability in two different ways. Some States
offer a similar option; in those States, taxpayers may already
be calculating tax liability in a manner similar to that
provided under the proposal. In such cases, the complexity
added by the proposal may depend on the extent to which the
State-law rules vary from the Federal rules. Because of the
additional calculations under the provision, the provision may
increase individuals' tax preparation costs.
4. Allow nonrefundable credits to offset regular tax liability and
allow personal exemptions against AMT (sec. 206 of the bill)
Summary description of proposal
The provision allows the nonrefundable personal credits to
offset the entire regular tax (without regard to the minimum
tax), and also to allow the deduction for personal exemptions
in computing the minimum tax.
Number of affected taxpayers
It is estimated that the minimum tax provisions will affect
approximately 13 million individual income tax returns.
Discussion
It is not anticipated that individuals or small business
will need to keep additional records due to this provision. It
is estimated that five million people will no longer have to
make the minimum tax computations and file the minimum tax form
in filing their individual income tax returns. As a result, the
provision is expected to result in a decrease in disputes with
the IRS, and a decrease tax return preparation costs. It is not
anticipated that regulatory guidance will be needed to
implement this provision.
5. Increase in IRA contribution limit (sec. 301 of the bill)
Summary description of provision
The provision increases the $2,000 maximum IRA contribution
limit to $3,000 in 2001, $4,000 in 2002, and $5,000 in 2003.
Thereafter, the contribution limit is indexed in $100
increments.
Number of affected taxpayers
It is estimated that the provision will affect 15 million
individual tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to the provision. It is not anticipated
that the provision will result in increased disputes with the
IRS. It is not anticipated that the provision will increase tax
return preparation costs. Regulatory guidance will not be
needed to implement the provision; however, the Internal
Revenue Service will need to publish the contribution limit as
increased for inflation.
6. Accelerate 100-percent self-employed health insurance deduction
(sec. 601 of the bill)
Summary description of provision
The provision accelerates the increase in the deduction for
health insurance expenses of self-employed individuals so that
the deduction is 100 percent in years beginning after December
31, 1999.
Number of affected taxpayers
It is estimated that the provision will affect three
million small businesses.
Discussion
It is not anticipated that individuals or small businesses
will need to keep additional records due to the provision. It
is not anticipated that the provision will result in an
increase in disputes with the IRS, or increase tax return
preparation costs. It is not anticipated that regulatory
guidance will be needed to implement the provision.
Accelerating the 100-percent deduction may simplify the
preparation of tax returns for self-employed individuals,
because they will no longer need to keep track of the percent
of health insurance expenses that are deductible, and will need
to perform one less calculation.
7. Repeal of the temporary federal unemployment ``FUTA'' surtax (sec.
803 of the bill)
Summary description of provision
Under present law, in addition to the regular FUTA tax of
0.6 percent of taxable wages, a temporary surtax of 0.2 percent
of taxable wages applies through 2007. The provision repeals
the temporary FUTA surtax after December 31, 2004.
Number of affected taxpayers
It is estimated that the repeal of the FUTA surtax will
affect over six million small businesses.
Discussion
It is not anticipated that small businesses will need to
keep additional records due to this provision, nor is it
anticipated that this provision will result in an increase in
disputes with the IRS. Additional regulatory guidance should
not be necessary to implement this provision. The provision
should not increase the tax preparation cost for small
businesses.
8. Allow non-itemizers to deduct charitable contributions for 2000 and
2001 (sec. 808 of the bill)
Summary description of provision
The provision allows taxpayers who do not itemize their
deductions to claim an above-the-line deduction for charitable
contributions for years 2000 and 2001. The deduction is limited
to $50 for single taxpayers and $100 for married taxpayers
filing a joint return.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 36 million individual tax returns, of which
approximately 33 million have incomes less than $75,000.
Discussion
Individuals who do not itemize their deductions will need
to keep additional records (e.g., canceled checks, a receipt
from the donee organization, or other reliable written records)
in order to prove that a contribution was made to a qualified
charitable organization. The information necessary to implement
the provision should be readily available to taxpayers (in the
form of new tax return forms and instructions). The non-
itemizer charitable contribution deduction is expected to
require an addition line on the individual income tax return
forms. The provision might result in a slight increase in
disputes with the IRS for taxpayers who are unable to prove a
claimed deduction (though the amount involved is not
significant). Additional regulatory guidance should not be
necessary to implement this provision. Any increase in the tax
preparation costs should be negligible.
Department of the Treasury,
Internal Revenue Service,
Washington, DC, July 22, 1999.
Ms. Lindy L. Paull,
Chief of Staff, Joint Committee on Taxation,
Washington, DC.
Dear Ms. Paull: Attached are the Internal Revenue Service's
(IRS) comments on the eight provisions from the Senate
Committee on Finance markup of the ``Taxpayer Refund Act of
1999'' that you identified for complexity analysis in your
letter of July 20, 1999. The comments are based on the Joint
Committee on Taxation staff description (JCX-46-99) of the
provisions and, in the case of marriage penalty relief, the
statutory language for a similar item provided in H.R. 2656,
introduced by Mr. Weller in the 105th Congress.
Due to the short turnaround time, our comments are
provisional and subject to change upon a more complete and in-
depth analysis of the provisions.
Sincerely,
Charles O. Rossotti,
Commissioner.
Attachment.
irs comments on eight tax provisions of the tax refund act of 1999
identified for complexity analysis
Reduce 15 percent income tax rate to 14 percent beginning in 2001
The tax rate change mandated by this provision would be
incorporated in the tax tables and tax rate schedules during
IRS' annual update of these items. The provision would require
changes to the tax rates shown in the 2001 instructions for
Forms 1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, and 1041, and on
Forms 1040-ES, W-4V, and 8814 for 2001. No new forms would be
required. Programming changes would be required to reflect the
14 percent rate.
Increase width of 14 percent bracket by $2,000 beginning in 2005
The increase in the width of the 14 percent bracket would
be incorporated in the tax tables and tax rate schedules during
IRS' annual update of these items. The provision would require
changes to the rates shown in the 2005 instructions for Forms
1040, 1040A, 1040EZ, 1040NR, 1040NR-EZ, and 1041, and on the
Forms 1040-ES for 2005. No new forms would be required.
Programming changes would be required to reflect the expanded
14 percent bracket.
Marriage penalty relief for joint filers beginning in 2005
Forms
The following form changes would be necessary to implement
this provision. The changes noted for Form 1040EZ could affect
the scanability of the form.
1. A new line and check box would be added to the 2005
Forms 1040, 1040A, and 1040EZ for married taxpayers to indicate
they are filing single returns on a combined form.
2. Three new schedules would be developed (for 1040 filers,
1040A filers, and 1040EZ filers) with columns for each spouse
to separately report the information required to determine his
or her total income, adjusted gross income (AGI), taxable
income, and tax before nonrefundable credits. This information
is shown on the following lines of the 1999 forms: Form 1040,
lines 7 through 40; Form 1040A, lines 7 through 25; and Form
1040EZ, lines 1 through 6, and line 10. The new schedules would
also show the couple's combined AGI and combined tax before
nonrefundable credits. The combined tax would also be entered
on the appropriate line of the couple's 1040 return and the
rest of that return would be completed as if a joint return had
been filed.
Based on the 1999 forms, the new schedule for Form 1040
filers would have a total of 82 entry spaces. The schedule for
Form 1040A filers would have a total of 46 entry spaces, and
the one for 1040EZ filers would have a total of 16 entry
spaces. The new schedules would contain several calculations
involving multiplication. The instructions for the new
schedules would be between 2 and 5 pages.
If credits are to be determined as if the spouses had filed
a joint return (as indicated in JCX-46-99), a third computation
of AGI and tax before nonrefundable credits would be necessary.
The AGI and tax would be computed as if a joint return had been
filed. The reason for this additional computation is because
some credits are affected by AGI and may also be limited by the
regular tax liability. These items would not necessarily be the
same as the two spouse's combined AGIs and tax. To eliminate
this third computation, the provision relating to credits
should be changed to specify that the couples' combined AGI and
tax are to be used in figuring the amount of any credit.
3. A new four-line, two-column worksheet would be developed
for each spouse to compute his or her applicable percentage for
purposes of determining the deductions, such as the deduction
for exemptions, that are required to be allocated based on each
spouse's share of the combined AGIs. This worksheet would be
included in the instructions for the new schedules.
4. The 2005 TeleFile Tax Record would be revised to permit
its use by married taxpayers choosing the combined filing
status. Based on the 1999 TeleFile Tax Record, this would
require the addition of 10 entry spaces.
5. The provision would require many electing taxpayers to
complete two separate Schedules A, B, D, and E, or Forms 4797
(and possibly other schedules/forms) to determine the amounts
to enter on the new schedule. In general, two separate
schedules/forms will be required where both spouses have items
that affect the schedule/form.
IRS understands that rules clarifying the application of
the election for AMT purposes will be forthcoming. The above
does not reflect the additional form changes that would be
needed to integrate the election with the alternative minimum
tax.
Processing, programming, compliance
The marriage penalty election would impact most aspects of
IRS operators.
The form changes needed to implement the provision would
increase the time it takes the IRS to process a 1040 on which
the election is made and issue a refund, as well as increase
the cost of processing the return. Devoting additional time and
resources to the processing of electing returns could delay the
processing of other returns and the issuance of other refunds.
The complexity of this provision would likely cause an
increase in the number of taxpayers who use a paid preparer and
discourage the use by taxpayers of e-file programs such as
Telefile and On-Line Filing. The error rate among those who do
prepare their own returns would also increase. During
processing, these returns would have to be sent to Error
Resolution for correction. This could result in additional
taxpayer contacts, delays in the issuing of refunds, and
additional costs to the IRS. The provision would also increase
the number of amended returns which would have to be examined
and processed.
The IRS would have to make substantial changes to its IRM
procedures for processing marriage penalty election returns and
train the service center in those procedures.
The added complexity would also increase the number of
taxpayers who would seek assistance either over the toll-free
lines or at the walk-in sites. The number of taxpayers seeking
assistance about the marriage penalty election could reduce the
opportunity for other taxpayers to get assistance. The IRS
would have to make substantial changes to the customer service
IRM and would have to train the Customer Service
Representatives to enable them to assist taxpayers in these
complex provisions.
The rules for allocating income and deductions between
spouses, which are in part based on state property law, would
cause confusion and errors by taxpayers. In many instances,
mis-allocations could only be detected on examination. The IRS
would have to develop new examination procedures and train its
examiners in the law and the new procedures. The marriage
penalty election could also affect the resolution of
examination cases involving the innocent spouse provisions.
This provision would require major systemic programming
changes to IRS' computation process. This provision would
affect many of our tax systems including Integrated Submission
and Remittance Processing (ISRP), Error Resolution System
(ERS), Generalized Unpostable Framework (GUF), Generalized
Mainline Framework (GMF), Federal Tax Deposits (FTDs), SCRIPS,
MasterFile, Electronic Filing, and TeleFile. It is estimated
that at least 50 staff years and approximately $5,000,000 in
contractor costs would be needed to make the necessary
programming changes.
Alternative minimum tax
Since the provision regarding personal credits and the AMT
is the same as that applicable to 1998 tax years, and reflected
in the 1998 tax forms, no form or programming changes would be
needed to implement the provision provided it is enacted in the
near future. If enactment is delayed, the IRS will have to
begin taking steps to re-institute the pre-1998 rules for 1999
tax years. It is critical that this provision be enacted as
soon as possible to avoid costly and unnecessary programming
changes and to minimize the impact on timely distribution of
the 1999 tax packages. In addition, a return to pre-1998 law
would significantly increase the complexity of these credits.
The provision relating to the deduction for personal
exemptions would eliminate the nine line AMT worksheet in the
Form 1040A instructions for 2005. This provision would not
affect the number of lines on the 2005 Form 6251 or the AMT
worksheet in the 2005 Form 1040 instructions.
Individual retirement arrangements
This provision would require a change to the dollar limit
specified in the Form 1040, Form 1040A, Form 8606, and Form
5329 instructions for 2001 through 2005 and possibly in future
years. The change would also be reflected in the Form 1040-ES
for all applicable years. No new forms or additional lines
would be required. Programming changes would be needed to
reflect the increased contribution limits.
IRS would need to provide guidance to financial
institutions that sponsor IRAs on how to take into account the
higher contribution limits (currently all sponsors utilize IRS
approved documents). In addition, the following model IRA and
Roth IRA documents that are issued by the Assistant
Commissioner (EPEO) would need to be modified to take into
account the increased contribution limits:
Form 5305, Individual Retirement Trust Account
Form 5305-A, Individual Retirement Custodial Account
Form 5305-R, Roth Individual Retirement Account
Form 5305-RA, Roth Individual Retirement Custodial
Account
Form 5305-RB, Roth Individual Retirement Annuity
Endorsement
Increase deduction for self-employed to 100 percent
This provision would eliminate one line from the self-
employed health insurance deduction worksheet contained in the
2000 instructions for Forms 1040 and 1040NR. This worksheet is
currently four lines. The Form 1040-ES for 2000 would also
reflect the provision. No new forms would be required.
Repeal FUTA surtax after December 31, 2004
The provision would require a change to the FUTA tax rate
on Forms 904, 940-EZ, 940-ER and Schedule H of Form 1040 for
2005. The rate would be reduced from 6.2 % to 6.0%. No new
forms would be required. Programming changes would be necessary
to reflect the reduced FUTA rate.
Allow non-itemizers to deduct up to $50 ($100 for joint returns) of
charitable contributions for 2000 and 2001
Assuming the deduction is allowed in determining adjusted
gross income (unlike the 1982-86 deduction for non-itemizers),
the following changes would be necessary to implement this
provision:
1. One line would be added to the adjustments section of
Forms 1040, 1040A, 1040NR, and 1040NR-EZ for 2000 and 2001.
2. Two new lines would be added to Form 1040EZ for 2000 and
2001 (one for the deduction and one to subtract the deduction
from total income to arrive at adjusted gross income). This
change could affect the scanability of the form.
Ensuring compliance with the above-the-line charitable
deduction would be difficult. The only means of verifying
amounts deducted would be through examination, which is not
practical because of the small amounts involved.
No new forms would be required.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of Rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).
VII. MINORITY VIEWS 1
Democratic Priorities
The Federal Government has finally moved from an era of
seemingly intractable budget deficits, into an era of budget
surpluses, with the Congressional Budget Office projecting
surpluses of nearly $3 trillion over the next ten years. This
remarkable turnaround is due to the bold deficit reduction
measures proposed by President Clinton and enacted by
congressional Democrats in 1993, and the bipartisan agreement
on the 1997 Balanced Budget Act.
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\1\ Attachments: Senate Finance Democratic Alternative offered
July, 21, 1999 as an amendment to Chairman Roth's mark and the
Estimated Revenue Effects of the Democratic Alternative Tax Package as
prepared by the Joint Committee on Taxation (99-2 132 R3, July 20,
1999).
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Roughly two-thirds of the $3 trillion in projected
surpluses--about $2 trillion--will be generated by surpluses in
the Social Security program. We are pleased that there is
virtual unanimity among Democrats and Republicans that all of
those Social Security surpluses should be saved for Social
Security. Reducing the debt 2 by more than one-half
from about $3.6 trillion to $1.6 trillion is good for the
economy and good for Social Security. Paying down the debt will
reduce the Federal government's net interest payments, which,
at more than $200 billion, is the third largest item in the
Federal budget.
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\2\ References to ``debt'' refer to ``debt held by the public.''
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There is disagreement, however, on how to allocate the
remaining one trillion dollars of non-Social Security surpluses
projected for the next ten years. Our Republican colleagues, in
the Budget Resolution they adopted in April, committed to a
fiscal policy which would spend nearly all of the non-Social
Security surpluses--about $800 billion plus interest--on tax
cuts over the next 10 years. Furthermore, the Treasury
Department estimates that the cost of the bill would explode in
the second 10 years (2010-2019) to as much as $2 trillion.
Tax cuts of this magnitude would be unwise and potentially
destabilizing in an economy that has strong growth, low
unemployment and zero inflation. Alan Greenspan, Chairman of
the Federal Reserve Board, in testimony before the House
Banking and Financial Services Committee on Thursday, July 22,
1999, questioned the timing of the tax cut. He suggested
reserving tax cuts for recessions when:
. . . that will be the most effective means that we can
have to regenerate the economy and keep the long-term
growth path moving higher.
We believe a responsible approach for the budget and for
the economy is to: reserve about a third of the non-Social
Security surpluses for Medicare, including prescription drugs;
reserve another third for restoring funding to discretionary
spending priorities; and reserve the final third for tax relief
targeted for working Americans.
During Committee mark-up, Senator Moynihan offered on
behalf of all Finance Committee Democrats, a substitute
proposal which would provide for a tax cut of $317 billion
($290 billion net) over 10 years--a level consistent with: (1)
saving Social Security first; (2) strengthening Medicare; (3)
restoring funds to discretionary priorities; and (4) providing
a reasonable level of tax relief to working Americans. This
Democratic tax proposal stands in stark contrast to the
Committee's bill which reserves none of the surpluses for
Medicare, and spends so much of the surplus on tax cuts that it
would force drastic cuts in domestic priorities such as
veterans' medical care, education, medical research, law
enforcement, and environmental protection.
democratic tax alternative
Tax relief for working families
The Democratic alternative is a fiscally responsible tax
cut package given the uncertainties of budget projections. The
$317 billion Democratic alternative has, at its core, an
increase in the standard deduction. The current standard
deduction increases to $11,550 from $7,200 for joint filers; to
$8,500 from $6,350 for head of households; and to $5,600 from
$4,300 for single filers. We also incorporate an increase in
the phase-out levels for married earned income tax credit
recipients to provide a similar benefit for joint filers
claiming the earned income tax credit. After these increases
are fully phased-in, the standard deduction for joint returns
will be twice that applicable to single returns to address the
marriage penalty for couples who do not itemize. A separate,
below-the-line deduction will reduce the marriage penalty for
couples who do itemize. In contrast to the bill, the Democratic
alternative addresses the marriage penalty with a simpler
approach. This targeted relief ensures, without undue
compliance burdens to taxpayers and the IRS, that millions of
couples no longer incur the marriage penalty.
The increase in the standard deduction provides significant
simplification by reducing the tax burden for the 73 percent of
taxpayers in the lowest income brackets. Thus, our broad-based
relief removes 3 million taxpayers from the tax rolls and
allows 9 million taxpayers currently itemizing their deductions
to claim the standard deduction.
We compliment the Committee for including a rate reduction
from 15 percent to 14 percent for broad-based tax relief. We
question the priorities, however, inherent in bracket
expansion. Rate reduction benefits all persons who pay income
taxes. In contrast, bracket expansion only benefits 25 percent
of taxpayers--those with the highest income--as 75 percent of
all taxpayers are in the 15 percent tax bracket and would not
benefit under the bracket expansion proposal.
Health care affordability and accessibility
The Democratic alternative provides a refundable tax credit
for individuals without employer-based coverage. Our goal is to
increase the number of newly-insured by making meaningful
health insurance more affordable while not eroding the current
employer-based insurance system. The alternative also addresses
the important issue of long-term care. We propose an above-the-
line deduction for long-term care insurance and a tax credit
for long-term care-givers, which would be available to
taxpayers who provide care to any close family member.
We compliment the bill in its attempt to deal with these
same issues. However, we are concerned that the bill does not
increase the number of newly-insured and does not extend long-
term care tax benefits to all family members. Instead of a tax
credit, the bill permits a tax deduction for health insurance
expenditures. This provision does not enable most uninsured
taxpayers--largely low-income individuals--to purchase
insurance, as tax deductions provide little benefit to low-
income individuals. We are concerned that it creates incentives
for employers to reduce their contributions or drop coverage
altogether. In addition, the bill's treatment of long-term care
only permits a tax benefit for care-givers who care for their
parents.
Estate tax relief
In recognition of the effect of the estate tax on family
farms and businesses, the Democratic Alternative increases the
estate tax exclusion for family farms and businesses to
$1,750,000 (a married couple could combine this to exclude up
to $3.5 million). In addition, the Democratic Alternative
accelerates the effective date of the $1 million estate tax
exemption amount for all estates, which is scheduled to take
effect in 2006 under current law.
The bill approved by the Committee reflects a different set
of priorities, by focusing much of the estate tax relief on the
wealthiest of all estates. The reduction in the marginal tax
rates alone would provide a person leaving an estate with a net
worth of $1 billion with an estate tax cut of $50 million.
Estate taxes affect relatively few taxpayers. More than 98
percent of persons who die in a year simply do not possess
estates with a net worth in excess of $650,000 or family farms
and businesses worth in excess of $1.3 million (the present
thresholds before an estate is subject to any tax). While we
share the goal of reducing estate taxes for everyone, our
priority is to focus estate tax relief on family farms and
businesses, and on estates of more modest means.
We also note that the estate tax can provide a strong
incentive for charitable giving. The Joint Committee on
Taxation estimates that there will be $257.6 billion in estate
tax charitable deductions claimed over the next 10 years, and
that estates in excess of $10 million will claim 60 percent of
these deductions. While charitable giving will not stop if
estate taxes are substantially reduced, it is important for
this Committee to consider--which it has not--the effect that
substantial estate tax reductions would have on charitable
giving, and whether other aspects of our tax laws (or non-tax
laws) should be modified to mitigate any reduction in services
provided by charities and any harm that persons served by
charities may suffer as a result.
Alternative minimum tax reforms
The Democratic alternative ensures that families and
middle-income taxpayers receive the full benefit of their
child, Hope, adoption, dependent care, and other personal
nonrefundable tax credits by extending the provision allowing
taxpayers to claim their personal tax credits without regard to
the AMT. The alternative also ensures that farmers receive the
full benefit of income averaging.
Quality education initiatives
We compliment the bill for including several provisions
identical to the Democratic alternative. Both packages help
families prepare students for college through savings in state-
sponsored college savings plans (operational in 44 states) by
eliminating taxes on these plans. We are pleased that both tax
cut packages improve the competitiveness of companies by
ensuring an educated workforce through the permanent extension
of employer-provided tuition assistance for all higher
education, including graduate. We further support the
elimination of the 60-month provision for student loan
interest, enhanced small issuer and private activity bonds for
school construction, and allowing charitable contributions to
low-income elementary and secondary schools to be made for a
calendar year as late as April 15 of the subsequent year.
However, we believe that substantial resources are needed
for school construction and repair. The Democratic alternative
provides $24 billion in public school modernization bonds to
help build new schools and renovate existing ones. We also
provide a 20 percent tax credit to companies for the cost of
computer and technology training for their employees. Further,
the Democratic alternative encourages contributions of
computers to schools by increasing the amount that companies
donating computers to schools may deduct as charitable
contributions.
Environmental conservation and protection
The Democratic alternative encourages landowners,
investors, and philanthropists to preserve open space and
protect fish, wildlife, and endangered species and promotes a
cleaner environment by encouraging the use of public
transportation to reduce auto emissions and road congestion,
and by encouraging technological innovation. The alternative
creates a capital gains incentive for conservation; it provides
tax incentives for alternative fuels and alternative fuel
vehicles; it extends tax incentives for renewable waste
facilities; and it increases public transportation benefits. In
contrast, the bill pays little attention to these important
environmental initiatives.
Savings and pension incentives
We appreciate the savings and pension incentive provisions
passed by the Committee. In fact, there are several
similarities between the bill and the Democratic alternative.
However, we believe that the bill focuses too much on
individual arrangements (IRAs). While we believe that some
adjustments are in order regarding IRAs, we are concerned that
the bill goes too far and might undermine employer-sponsored
plans. Further, the bill is targeted toward very wealthy
persons--by allowing Roth IRA benefits to extend to taxpayers
earning $1 million.
The alternative expands plan eligibility and prevents
``leakage'' of assets upon job change. The Democratic
alternative offers small businesses a tax credit to start
pension plans, permits portability of savings from one job to
another, and increases protection of assets. Additionally, we
believe that plan participants must receive more information
about their benefits. While the bill includes a ``cash
balance'' disclosure proposal, it provides little meaningful
information to employees. The disclosure proposal included in
the bill requires notice of who would be adversely affected by
a pension change, but it does not require notice of how much a
person will be adversely affected. Moreover, it does not
require a true benefit comparison: employers could satisfy the
disclosure requirements by providing the accrued annuity value
under the old plan and the lump sum value under the new plan.
This ``apples-to-oranges'' comparison which would be available
six months after the change occurs would allow plan designers
to continue to obscure benefit reductions.
Further, we are concerned with the bill's increase in IRA
contribution limits by 150 percent, making employer sponsored
plans less attractive to owners. It also increases the income
limits for persons who already contribute to employer-sponsored
plans (e.g., 401k plans)--which simply gives further tax
benefits to those who already have them. Interestingly, despite
the creation of SIMPLE retirements plans and Roth IRAs in 1996
and 1997, personal savings rates are going down. Consequently,
we believe that more information is needed for Congress to
ensure that changes in the pension laws actually benefit the
desired income groups. As such, theDemocratic alternative
requires the Department of Treasury to conduct a study of the
distribution by income group of tax benefits under IRAs, 401k's,
defined benefit plans, and other pension arrangements, to determine
which income group benefits.
Farm relief and economic development
The Democratic alternative recognizes the hardships facing
our Nation's farmers. The alternative provides equitable and
ratable income treatment for farmers through tax-deferred risk
management accounts and extends to farmers the full advantage
of the $500,000 capital gains tax break on the sale of a
principal residence. Further, the alternative helps attract new
farmers by reducing the cost of credit and stimulating
investment in agriculture through a volume cap increase for
agriculture bonds.
Technology and economic development
We invest $31 billion in technology and economic
development incentives. The largest portion of which is
dedicated to promoting long-term research and development by
permanently extending the research credit. The Democratic
alternative stimulates the development of high quality rental
housing for families of limited means by increasing the low
income housing tax credit from $1.25 to $1.50 per capita. The
alternative creates ``patient capital''--capital that will be
invested for long-term improvement and incentives in
economically underdeveloped areas--by establishing a ``New
Markets'' tax credit to encourage $3.75 billion of private
investment in low income communities.
Other incentives
We believe that working families need increased and
enhanced assistance to meet the demands of child care costs. As
such, the Democratic alternative increases the child care
credit and creates a worksite child care facilities credit to
encourage employers to provide child care facilities. We also
encourage entrepreneurism by increasing capital investment and
accelerating the increase in small business expensing to
$25,000. By reducing the depreciation period for leasehold
improvements from 39 years to 15 years, we remove a significant
disincentive to modernizing buildings and revitalizing
communities. Further, the alternative enhances job
opportunities with small businesses by allowing 100 percent
deductibility for self-employed health insurance and providing
small business pension incentives.
conclusion
We remain convinced that now is not the time for a tax cut
that uses all of the projected on-budget surplus. We believe
that the size of the Democratic alternative tax package is
appropriate as it leaves room in the budget for other important
priorities, including Medicare and discretionary programs.
Daniel P. Moynihan.
Max Baucus.
John D. Rockefeller.
Kent Conrad.
Bob Graham.
Richard Bryan.
Charles Robb.
Senate Finance Democratic Alternative
Tax relief for working families
1. Increase the Standard Deduction. Increase the standard
deduction according to the following schedule:
----------------------------------------------------------------------------------------------------------------
Single Head of Household Joint
----------------------------------------------------------------------------------------------------------------
2001................................................... $4600 (+300) $6850 (+500) $8200 (+1000)
2003................................................... 4900 (+300) 7350 (+500) 9200 (+1000)
2005................................................... 5200 (+300) 7850 (+500) 10,200 (+1000)
2007................................................... 5600 (+400) 8500 (+650) 11,550 (+1350)
----------------------------------------------------------------------------------------------------------------
For joint filers claiming the earned income tax credit,
provide a comparable reduction in modified AGI for purposes of
computing the phase-out of the earned income tax credit.
Accordingly, for purposes of computing the EITC phase-out for a
couple in 2001, the couple's modified AGI is deemed to be $1000
lower than it would be but for this proposal. For similar
taxpayers in 2006, the couple's modified AGI is deemed to be
$3000 less than it would be but for this proposal.
2. Two-Earner Couple Deduction. Provide an itemized
deduction for two-earner couples equal to 20% of the earned
income of the lower earning spouse. The maximum deduction that
could be claimed would be $4350, and that amount would be
phased in over the same schedule as the increase in the
standard deduction outlined above. Accordingly, the maximum
deduction in 2001 and 2002 would be $1,000. For 2003 and 2004,
the maximum deduction would be $2000. For 2005 and 2006, the
maximum deduction would be $3000. For 2007 and beyond, the
maximum deduction would be $4350. In addition, the deduction
would phase out for joint filers with incomes between $75,000
and $95,000. Effective date: TYBA 12-31-00.
Health care affordability and accessibility
1. Accelerate 100% Deduction for Self-Employed. Allow self-
employed taxpayers a 100% deduction for health insurance
beginning in 2001.
2. 30% Tax Credit For Health Insurance Premiums. Eligible
taxpayers would receive a 30% credit for expenditures on health
insurance (but not long-term care insurance), not to exceed
$1,000 for single coverage and $2,000 for family coverage. The
amount of the credit would be limited to the sum of the
taxpayer's income tax liability and the payroll taxes paid by
or on behalf of the taxpayer. Medicare premiums, Champus
premiums, other Federally-subsidized health plan premiums, and
employees with access to coverage under employer-sponsored
health plans would not qualify for the credit. Self-employed
taxpayers would have the option of claiming the credit or the
present-law deduction for self-employed health insurance
premiums. Taxpayers would be ineligible for the credit if their
modified adjusted gross income (``AGI'') exceeds specified
limits. The modified AGI limits would be $40,000 for married
taxpayers filing joint returns and $20,000 for all other
taxpayers. The modified AGI limits would be indexed for changes
in the Consumer Price Index. Effective date: taxable years
beginning after December 31, 2000.
3. Long-Term Care Insurance Deduction. Provide an above-
the-line deduction for long-term care insurance expenses for
which the taxpayer pays at least 50% of the premium, phased-in
as follows: 10% in 2001 and 2002, 25% in 2003 and 2004, 35% in
2005 and 2006, and 50% in 2007 and thereafter. Deductible
premiums would be capped at the limits provided in section 213.
4. Long-Term Care Credit. Provide a $250 credit ($500 for
years 2007 and thereafter) for taxpayers, spouses, and
qualifying dependents who have long-term care needs. Except for
the size of the credit, all of the details of the proposal are
the same as those contained in the Administration's FY2000
budget request. Effective date: taxable years beginning after
12-31-02.
Estate tax relief
1. Estate Tax Exemption Amount. Accelerate the increase in
the estate tax exemption to $740,000 in 2003 and $1 million in
2004 and thereafter.
2. Family-Owned Farms and Businesses. Increase the
qualified family-owned business interest deduction from $1.3
million to $1.75 million in 2003 and thereafter.
Alternative minimum tax reforms
1. Allow Personal Credits. Extend through 2003 the 1998
provision to allow taxpayers to claim nonrefundable credits
under the alternative minimum tax.
2. Repeal 90% Foreign Tax Credit Limitation. Repeal the
limitation on the use of foreign tax credits under the AMT to
offsetting 90% of alternative minimum tax. Effective date:
taxable years beginning after 12-31-00.
3. Income Averaging for Farmers. Provide that a farmer's
use of income averaging for a particular taxable year may not
increase a farmers' liability under the alternative minimum
tax. Effective date: taxable years beginning after 12-31-00.
4. Corporate AMT Modifications. Permit corporations with
unused AMT credits that are more than five years old to reduce
tentative minimum tax by up to 20 percent. Effective date:
taxable years beginning after 12-31-00.
Extension of expiring incentives
1. Work Opportunity Tax Credit. Extend the work opportunity
tax credit through June 30, 2001.
2. Welfare-To-Work Tax Credit. Extend the welfare-to-work
tax credit through June 30, 2001.
3. Wind and Biomass. Extend the credits for electricity
produced from wind and biomass through June 30, 2001.
4. Active Financing. Extend the exemption from Subpart F
for active financing through December 31, 2001.
5. Brownfields. Extend the provision allowing expensing of
brownfields environmental remediation costs through June 30,
2001.
6. Rum Cover Over. Increase the amount of rum excise tax
that is covered over to Puerto Rico and the U.S. Virgin Islands
from $10.50 per proof gallon to $13.50 per proof gallon through
June 30, 2001.
7. Puerto Rico Economic Activity Tax Credit. Modify the
temporary wage credit for corporations based in Puerto Rico by:
(1) removing the limitation for newly established business
operations and (2) removing the base period cap which,
beginning in 2002, limits the size of the credit for existing
claimants (sunsets taxable years beginning after 12-31-02).
Quality education initiatives
1. School Modernization Bonds. Provide for the issuance of
up to $24.8 billion in qualified school modernization bonds,
with bondholders receiving tax credits in lieu of an interest
payment from the issuer of the bond. Any taxpayer may hold
these bonds, the term of which will be 15 years. The issuance
shall occur as follows: $12.4 billion in 2001 and $12.4 billion
in 2005. For those states or localities that do not issue their
entire allocation amount, the unused portion of the allocation
may be carried over to the next year. Schools funded by the
Bureau of Indian Affairs shall be qualified to issue bonds
under this proposal.
2. Qualified Tuition Plans. Permit tax-free distributions
from qualified State tuition plans; allow private institutions
to offer prepaid tuition plans with tax-free distributions
beginning in 2004; allow taxpayers to exclude State plan
distributions from gross income and claim the HOPE or Lifetime
learning credits as long as they are not used for the same
expenses. Effective date: taxable years beginning after 12-31-
99.
3. Student Loan Interest. Eliminate the rule limiting
deductibility of student loan interest to interest paid in the
first 60 months for which payments are required. Effective
date: interest on student loans paid after December 31, 1999.
4. Small Issuer Arbitrage Rebate. Increase the amount of
governmental bonds that may be issued by governments qualifying
for the ``small governmental unit'' arbitrage rebate exception.
The additional amount of bonds for public schools that the
governmental unit may issue without being subject to the
arbitrage rebate rule would be increased from $5 million to $10
million. Effective date: bonds issued on or after 1-1-01.
5. Private Activity Bonds. The private activities for which
tax-exempt bonds may be issued are expanded to include
elementary and secondary public school facilities. The
facilities for which these bonds are issued must be operated by
a public educational agency as part of a system of public
schools. Issuance of these bonds is subject to a separate
annual per-State volume limit equal to the greater of $10 per
resident or $5 million. States decide how to allocate the bond
authority to State and local government agencies. Effective
date: bonds issued on or after 1-1-01.
6. Extension of Section 127. Make permanent section 127,
which allows taxpayers to exclude the value of employer-
provided educational assistance, and allow for graduate
coursework to qualify. Effective date: courses beginning after
12-31-99.
7. Enhanced Charitable Deduction for Computer Donations.
Extend and modify section 170(e)(6)(B) relating to the enhanced
charitable deduction for computer donations to schools. The
modification eliminates the existing limitation of the
deduction to twice the basis in the computer. In addition,
allow the deduction to equal 90% of the difference between the
basis in the computer and the property's fair market value.
Finally, give the same treatment currently afforded new
property to reacquired property that is refurbished to a
standard equivalent to newly constructed property. The
modifications would be effective January 1, 2000 and the
provision is extended through December 31, 2001.
8. Tax Credit for Information Technology Training Expenses.
Provide for a tax credit against income tax for information
technology training expenses. The tax credit would be equal to
20 percent of information technology training expenses, not to
exceed $6,000 per employee in a taxable year. The percentage
would increase by 5 percent to 25 percent for a business that
operates or initiates a training program in an empowerment
zone, an enterprise community, a school district where at least
50 percent of the students are eligible to participate in the
school lunch program, a tribal collage, a small business
employer, or in an area designated by the President or
Secretary of Agriculture as a disaster zone. The tax credit
would apply to businesses providing the IT training directly,
or through certified commercial information technology training
providers. Effective date: taxable years beginning after 12-31-
00.
9. Tax Credit for Educational Television Conversions.
Provide a 20 percent vendor tax credit for equipment,
structures, and software used to convert the 28 statewide
public television networks from analog broadcasting to the
higher definition digital transmission technology. Effective
date: taxable years beginning after 12-31-00.
10. Charitable Contributions To Low-Income Schools. Allows
taxpayers to claim a charitable contributions deduction for
donations to public, private, and parochial low-income
elementary and secondary school made after the end of the
taxable year and on or before the date of filing the taxpayer's
Federal income tax return. For purposes of this proposal, low-
income elementary schools are those where 50 percent or more of
the students qualify for free or reduced price lunches.
Effective date: contributions made after 12-31-99.
Environmental conservation and protection
1. Better America Bonds. State and local governments
(including Indian tribal governments and U.S. possessions)
would be able to issue Better America Bonds (BABs) to the
extent of authority to do so allocated by the BABs Board. The
volume of authority to issue BABs that may be allocated by the
Board in each of the five years, beginning in 2001, would be
$1.9 billion. Bonds must be issued for qualifying purposes,
which include acquisition of land for open space, wetlands,
improving access to public lands, or public parks or greenways;
construction or renovation of affiliated visitors centers;
remediation of such land to enhance water quality by planting
trees or other vegetation; acquisition of certain easements;
and qualified environmental assessment and remediation. The
holder of a BAB would receive annual income tax credits in lieu
of interest from the issuer of the bond. Effective date: bonds
issued on or after 12-31-00.
2. Endangered Species. Three proposals to protect
endangered species:
a. Cost-Share Payments. Exclude from income the same
portion of cost-share payments made to landowners under
the Partners for Wildlife Program (authorized by the
Fish and Wildlife Act of 1956) that is permitted for
other qualified cost-sharing payments under section
126. Effective date: taxable years beginning after 12-
31-00.
b. Conservation Easement Donations. Permit
individuals to deduct the value of a qualified
conservation contribution against 50 percent of the
individual's AGI (rather than 30%), and to carry
forward any unused deduction for up to 20 years
(instead of five). Also, if the donor dies before all
the deduction is used, the deduction can be used on the
final income tax return or the estate tax return.
Effective date: taxable years beginning after 12-31-00.
c. National Wildlife Refuge Conservation Easements.
Provides landowners who place a conservation easement
on property located near a National Wildlife Refuge the
same estate tax benefits as lands located in or within
25 miles of a National Park or National Wilderness
Area. Effective date: taxable years beginning after 12-
31-00.
3. Exclusion for Certain Conservation Sales. Exclude from
income 50 percent of any gain realized from private, voluntary
sales of land, or interests in land, to Government agencies or
qualified conservation organizations. The land must be used to
protect fish, wildlife, or plant habitat, or to preserve open
space for agriculture, outdoor recreation or scenic beauty.
Effective date: taxable years beginning after 12-31-00.
4. Alternative Fuels Incentives. Four provisions to promote
the use of alternative fuels:
a. Extended Range Credit. Increase electric vehicle
tax credit for vehicles with extended range.
b. Credit Extension. Extend the current electric
vehicle credit through 2010.
c. Alternative Fueling Stations Deduction. Permit
deduction for up to $30,000 of cost of installing
alternative fuel stations.
d. Per Gallon Credit for Sale of Clean Burning Fuels.
Provide a credit of 15 cents per gasoline equivalent
gallon to sellers of clean burning alternative fuels.
Effective date: taxable years beginning after 12-31-
00.
5. Section 29 Placed-In-Service Date. Modify section 29 of
the code by striking ``July 1, 1998'' in subparagraph (g)(1)(A)
and inserting ``the date which is 8 months after the date of
enactment of [this legislation].''
6. Transportation Tax Incentives. Increase the limit on the
income exclusion of public transportation and vanpool benefits
to $175 per month. The proposal would eliminate the discrepancy
between parking benefits and transit benefits. Effective date:
taxable years beginning after 12-31-99.
Savings and Pension Promotion (unless otherwise indicated,
all provisions are effective for taxable years beginning after
12-31-00.)
1. Plan Loans for Self-Employed Individuals. Permit S
corporation and unincorporated owners who own no more than 25%
of the business to take plan loans under the same rules
applicable to employees and owners of C corporations. (Section
101 of S. 741.)
2. IRA Contributions through Payroll Deduction. Clarify
that employers may establish automatic payroll deduction plans
so their employees may contribute directly to an IRA account.
(Section 102 of S. 741.)
3. SAFE Trusts. Create a simplified defined benefit plan
for small businesses. $100,000 pay limit for benefit
considerations; calculate contributions using 5% interest rate;
limit benefit accrual rate to 2%; replace past service credit
with optional 3% accrual rate for first five years; no double-
dipping in maximum benefit limits under Section 415. (Section
103 of S. 741, as modified.)
4. Modify Top Heavy Rules. This form of nondiscrimination
protection effectively applies only to small businesses. The
proposal would lighten the burden of the top heavy rules
through the following changes. Establish a one-year lookback
period, exempt fro-
zen plan from minimum accruals, and exempting any plan which is
not top heavy, and is not expected to become top heavy, from
top heavy plan document requirements. (Section 104 of S. 741,
as modified.)
5. Small Business Pension Start Up Tax Credit. Tax credit
for small employer pension plan contributions and start-up
costs; 25% credit on employer contributions for the first three
taxable years for employers with 25 or fewer employees; 50% tax
credit for the first three years on start-up costs for
employers with 100 or fewer employees. (Section 106 of S. 741,
as modified.) Effective for plans established after 12-31-00.
6. Increase SIMPLE 401(k) and SIMPLE IRA Limits. Increase
the maximum elective deferral to SIMPLE retirement plans from
$6,000 to $8,000 per year. 1% employer nonelective contribution
required. (Section 107 of S. 741, as modified.)
7. Elective deferrals not taken into account for purposes
of limits. Elective deferrals would not be taken into account
in applying the deduction limits to other contributions.
(Section 112 of S. 741, modified to follow H.R. 2488, ``The
Financial Freedom Act of 1999.)
8. Allow More Contributions to Defined Contribution Plans
by Increasing the ``25% of Salary'' rule to ``50% of Salary''
and Creating a $10,000 Annual Floor. A participant is limited
in a DC plan to contributing not more than 25% of salary, even
though the annual contribution limit is $10,000. The provision
would increase the limitation to 50% and creating a floor of
$10,000, which all participants could contribute regardless of
compensation level. For nondiscrimination testing, only 25% of
compensation considered.
9. Three Year Vesting for Matching Contributions. Under
current law, employers may require up to five years of service
before an employee is entitled to employer contributions to a
defined contribution plan. The proposal would reduce that
maximum to three years with respect to matching contributions.
(Section 202 of S. 741.)
10. Rights of Spouses of Government Employees. The Federal
Government retirement program (CSRS) will be changed so that if
an employee dies before collecting benefits, the surviving
spouse will be eligible for some benefit. (Section 203 of S.
741.)
11. Division of 457 Plan Benefits Upon Divorce. This
provision clarifies that, for purposes of taxation of
distributions form 457 plans, the recipient of those funds is
liable for income taxes. Enactment of this provision would
prevent the case where a participant is taxed on retirement
income that, under a divorce decree, belongs to an ex-spouse.
(Section 204 of S. 741.)
12. Spousal Notice. Require notification of a spouse when a
participant is notified about a survivor and benefit option.
(Section 205 of S. 741.)
13. Rollovers among Employer-Provided Plans. Allow
rollovers among various types of employer-provided plans. 457
plan rollovers limited to governmental 457 plans, and 10%
excise tax applied to early distributions of monies rolled over
to 457 plans. (Section 301 of S. 741, as modified.)
14. Rollovers from IRAs to Employer Provided Plans. Allow
rollovers of IRAs to employer provided plans. Institutional
trustee required for qualified plan. (Section 302 of S. 741,
with institutional trustee requirement, and as further modified
by H.R. 2488, ``The Financial Freedom Act of 1999.'')
15. After Tax Rollovers; Waiver of 60-day Rule. Where new
employers are willing to accept them, individuals changing
employers will be allowed to roll over after-tax contributions
to the new employer's plan. IRA trustees accepting such
rollovers would track basis. Also, in hardship exceptions, IRS
could waive the 60-day limit on rolling over distribution to an
IRA without incurring tax. (Section 303 of S. 741, with trustee
tracking requirement, and as further modified by H.R. 2488, The
Financial Freedom Act of 1999.)
16. Modify The Same Desk Rule. Conform the treatment if
401(k) plans to the treatment of defined benefit plans and
money purchase plans in ``same desk'' situations. That is,
where an employee's company is acquired by another business,
the employee would meet the ``separation from service''
definition required to allow portability of the 401(k) benefit
to the new employer. (Section 304 of S. 741.)
17. Treatment of Forms of Distribution. Employees would be
allowed to waive section 411(d)(6) (anti-cut-back rules) under
certain circumstances when rolling one defined contribution
plan into another. The transferee plan would not be required to
preserve the optional forms of benefits under the transferor
plan if requirements are met to ensure the protection of
participants' interests. Transfer must be in connection with a
bona fide transaction or job change. (Section 305 of S. 741,
with ``bona fide'' modification.)
18. Purchase of Service Credit in Governmental Defined
Benefit Plans. Ease rules allowing purchase of service credits
when moving from one defined benefit plan to another. For
example, many teachers purchase service credits when they move
from one state to another. Under current law, individuals may
not use defined contribution assets without penalty to purchase
these credits. This provision would allow individuals to
purchase these credits with other retirement assets, like
monies from 401(k), 403(b), governmental 457 plans. (Section
306 of S. 741.)
19. Disregard Rollovers for Purposes of Cash-Out Amounts.
This provision permits an employer to disregard rollovers for
purposes of making a cash-out. This provision removes a
disincentive for employers to accept rollovers. (Section 307 of
S. 741.)
20. Limited Relief for Multiemployer Plans. Exempt
multiemployer plans from the high-3-year-average compensation
limit of 415(b)(1)(A). Also, exemption from aggregation rules
between multiemployer and single employer plans. (Section 403
of S. 741.)
21. Expand PBGC Missing Participant Program. PBGC's Missing
Participant Program will be expanded to help find individuals
who are eligible for benefits from multi-employer plans.
(Section 404 of S. 741.)
22. Grant Department of Labor Discretion in Cases of
Fiduciary Breach. DOL would have discretion to waive certain
penalties for fiduciary breaches. (Section 405 of S. 741.)
23. Regular Benefit Statements. An annual benefit statement
would be required to be sent every year to participants in DC
plans. Participants in DB plans would receive a statement every
3 years, unless the employer automatically provided an annual
notice to employees of the right to receive a benefit statement
and how to go about obtaining one. (Section 501 of S. 2339,
105th Congress.)
24. Clarify that Employer Provided Retirement Planning is a
Non-Taxable Benefit. Employer provided retirement planning
would be deemed not to constitute a taxable fringe benefit. To
be eligible for the exclusion from taxable fringe benefit, the
employer must sponsor a tax-qualified retirement plan, and the
planning advice must be available on substantially the same
terms to substantially all employees participating in the plan.
The term ``retirement planning'' is defined to apply only to
advice, not services (e.g., tax preparation, accounting, legal
services, brokerage services, etc.) Annual limitation of $300
of value per participant. (Section 503 of S. 741, with
definitional clarification of ``retirement planning''.)
25. Encourage ESOP Dividend Reinvestment. In order for an
employer to deduct dividends paid on stock held by an ESOP, the
employer would be required to give employees a choice of
whether to receive dividends in cash or allow them to be
reinvested and grow tax-deferred until retirement. (Section 603
of S. 741.)
26. Plan Amendments Pursuant to this Proposal. Plan
amendments necessary to comply with this proposal would not be
required to be made before the last day of the first plan year
on or after January 1, 2002. For governmental plans, the date
for amendments is extended to the first plan year beginning on
or after January 1, 2004. Operational compliance would be
required with respect to all plans as of the applicable
effective date of any amendment made by the proposal.
27. Cash Balance Pension Disclosure. Require employers
converting to cash balance plans or otherwise significantly
reducing future benefit accruals to provide employees with
benefit comparisons under the old and new plans. Requirement
applies only to vested employees who are likely to be adversely
affected. Treasury directed to prepare guidance defining
``significant reductions'' (in addition to cash balance
conversions) that require the enhanced disclosure. Effective
for all conversions not announced in writing before 3-18-99.
28. Treasury Study of the Distribution of Pension Tax
Benefits. Require Treasury to prepare a distributional analysis
of the tax benefits of major pension and retirement savings
arrangements by income group to be concluded by June 30, 2000.
A preliminary analysis is to be submitted within 60 days after
enactment to the extent feasible.
29. Reduce PBGC Premium for Small Businesses. The PBGC
premium is normally set at $19 per participant. This proposal
would set the premium for a small employer plan at $5 per
participant for the first five years of a plan. (Section 109 of
S. 741.)
30. Phase-in of Additional PBGC premium for new plans. Any
applicable variable rate premium would be phased in over a six
year period as follows: 0% for year one; 20% for year two; 40%
for year three; 60% for year four; 80% for year five; and 100%
for year six. (Section 108 of S. 741.)
31. Eliminate the ``New Plan Fee.'' Employers who establish
a pension plan must pay a fee, sometimes up to $1000, to
receive a determination letter from the Internal Revenue
Service stating that the plan is qualified. In order to
decrease the costs of establishing retirement plans, the
legislation eliminates this fee. (Section 110 of S. 741.)
Farm relief and economic development
1. Farm and Ranch Accounts. Allow farmers to contribute up
to 20% of their annual active participation farm income to tax-
deferred accounts. The funds would be taxed as regular income
if withdrawn within five years. Funds not withdrawn within 5
years are subject to a 10% penalty. Effective date: taxable
years beginning after 12-31-00.
2. Farmland Rentals. Clarify that rental income from
farmland under a lease arrangement is not considered net income
from self-employment for SECA purposes. Effective date: taxable
years beginning after 12-31-00.
3. Farm Residence Expanded Definition. Exclude from capital
gains tax up to 160 acres of farmland that is contiguous to and
sold with a principal residence, provided the farmland was
farmed in three of the five years prior to sale with material
participation by the taxpayer or a members of the taxpayer's
family. Effective date: taxable years beginning after 12-31-00.
4. Agriculture Bonds. Exempt small issue bonds for
agriculture from the State volume cap. Effective date: taxable
years beginning after 12-31-00.
5. Capital Gains Relief for Farmers Leaving the Business.
Provide an exclusion from gross income of up to $300,000
(lifetime total) of capital gain from the transfer of property
in complete or partial satisfaction of qualified farm
indebtedness of a taxpayer: (1) whose gross receipts for six of
the preceding ten years are at least 50 percent attributable to
farming; and (2) whose equity in all property held after the
transfer in question does not exceed the greater of $25,000 or
150 percent of income tax liability. The provision also applies
a comparable exclusion with respect to the discharge of
qualified farm indebtedness of solvent farmers who meet these
requirements and whose indebtedness both before and after the
relevant transfer equals at least 70 percent or more of equity.
Effective date: taxable years beginning after 12-31-00.
Technology and economic development
1. R&E Credit. Extend the R&E credit permanently and modify
the credit in two respects: (1) increase the alternative
incremental research credit by one percentage point and (2)
permit investment in Puerto Rico to meet the test for qualified
R&E expenditures. Effective date: 7-1-99
2. New Markets Initiative. A new tax credit for qualified
investments made to acquire stock (or other equity interests)
in selected community development entities. Taxpayers would
receive a credit equal to six percent of the investment each
year during each of the first five years after making the
investment. The maximum investments that would qualify for the
credit would be capped at an aggregate annual amount of $750
million (a maximum of $3.75 billion for the entire period of
the tax credit) Effective date: investments made on or after 1-
1-01. Except for the aggregate caps, the initiative tracks the
Proposal included in the Administration's FY2000 budget.
3. Low Income Housing Tax Credit. Phase-in an increase in
the per capita amount of low-income housing tax credit from
$1.25 to $1.50 according to the following schedule:
2001.............................................................. $1.30
2002.............................................................. 1.30
2003.............................................................. 1.30
2004.............................................................. 1.40
2005.............................................................. 1.40
2006 and thereafter............................................... 1.50
4. Private Activity Bonds. Accelerate the scheduled
increases in the per capita State volume cap for private
activity bonds according to the following schedule:
2001........................................ $55 per capita (minimum $165 million)
2002........................................ $60 per capita (minimum $180 million)
2003........................................ $65 per capita (minimum $195 million)
2004........................................ $70 per capita (minimum $210 million)
2005 and thereafter......................... $75 per capita (minimum $225 million)
5. Spaceport Bonds. Permit spaceports to be treated like
airports under the tax-exempt exempt-facility bond rules. The
term ``spaceport'' would include facilities directly related
and essential to servicing spacecraft, enabling spacecraft to
take off or land, and transferring passengers or space cargo
to, or from close proximity to, the launch site to perform
these functions. Effective date: bonds issued on or after 1-01-
01.
6. Small Business Expensing. Increase the limit on
expenditures allowable under section 179 for immediate
expensing by small businesses to $25,000 in 2001.
Other incentives
1. Oil & Gas Incentives.
a. Geological and Geophysical Costs. Allow geological and
geophysical costs incurred in connection with oil and gas
exploration in the United States to be deducted currently.
Effective date: geological and geophysical costs incurred or
paid in taxable years beginning after December 31, 2000.
b. Delay Rental Payments. Allow delay rental payments for
domestic oil and gas wells to be deducted currently. Effective
date: delay rental payments incurred in taxable years beginning
after 12-31-00.
c. Suspend 65% of Taxable Income Limit. For purposes of
percentage depletion, suspend the 65-percent-of-taxable income
limit on percentage depletion for five years. Effective date:
taxable years beginning after 12-31-00 and before 1-01-06.
2. Electricity Deregulation Provisions.
a. Electric Cooperatives. Modify the 85-15 test applicable
to electric cooperatives (section 501(c)(12)) so that revenues
received from nonmembers solely as a result of conforming
operations to meet provisions of an applicable State or federal
plan designed to provide for customer choice in electric power
supply. Effective date: taxable years beginning after 12-31-99.
b. Tax-Exempt Bonds. Liberalize the private business
restrictions to allow limited tax-exempt financed generation,
transmission, and distribution facilities pursuant to electric
restructuring plans, and to grandfather the tax status of
previously issued debt. Under the proposal, electing utilities
would forego the issuance of future tax-exempt debt for
generation facilities, but could continue to issue such debt
for transmission and distribution facilities. Non-electing
utilities would continue to be subject to the current law
restrictions on private business use. In addition, the tax-
exempt status of debt issued by electing utilities would be
grandfathered, so that utilities are not penalized for opening
their systems to competitors. Effective date: date of
enactment.
c. Qualified Nuclear Decommissioning Funds. Repeal the cost
of service requirement for deductible contributions to nuclear
decommissioning funds. Under the proposal, taxpayers, including
unregulated taxpayers, would be allowed a deduction for amounts
contributed to a qualified nuclear decommissioning fund. As
under current law, the maximum contribution and deduction for a
taxable year could not exceed the IRS ruling amount for that
year. Effective date: generally effective for taxable years
beginning after 12-31-99; the provision relating to transfers
of non-qualified funds is effective for taxable years beginning
after 12-31-01.
3. Child Care Credit. Increase the maximum amount of
employment-related expenses eligible for the credit from $2,400
to $2,700 for expenses incurred for one qualifying individual
and from $4,800 to $5,400 for two or more qualifying
individuals. Effective date: taxable years beginning after 12-
31-00.
4. Worksite Child Care Credit. Provide a 25% credit for
qualified expenses of employers assisting employees with child
care. Qualified expenses would include (1) child care facility
start-up expenses, (2) child care facility operational
expenses, and (3) payments or reimbursements for ``off site''
child care. The maximum credit an employer could claim in any
year would be $90,000. Effective date: taxable years beginning
after 12-31-00.
5. Leasehold Improvement Depreciation. Reduce the MACRS
recovery period for qualifying leasehold improvements to
nonresidential real property from 39 years to 15 years.
Qualifying improvements would be restricted to those used
exclusively by the lessee and would not include improvements
made within the first three years after the date at which the
building was first placed in service. Effective date:
improvements made after 12-31-00
6. Tax-Exempt Status for State-Chartered Underwriters.
Grant tax-exempt status to State-chartered, not-for profit
insurers serving markets in which commercial insurance is not
available. No part of the net earnings may inure to the benefit
of any private shareholder or individual. Effective date:
taxable years beginning after 12-31-00.
7. Combined Employment Tax Reporting. Permit employers to
file both State and federal payroll taxes with a single form
through a single point. This is accomplished by permitting the
IRS to disclose the common data (name, identification number,
address and the signature of the taxpayer) received on the form
to the appropriate State. The program would be elective--each
State would determine whether to participate. Effective date:
date of enactment.
8. Charitable Contributions. Increase the percentage of AGI
that individual taxpayer may contribute in cash to private
foundations and certain other charitable organizations and in
capital gain property to public charities from 30 percent to 50
percent.
9. REITs Structure. Modify structure of businesses
indirectly conducted by REITs. Impose 10% vote or value test;
modify treatment of income and services provided by taxable
REIT subsidiaries, with a requirement that securities of
taxable REIT subsidiaries may not exceed 15 percent of the
total value of a REIT's assets; establish special foreclosure
rule for health care REITs; conform REIT distributions rules to
RIC 90% distribution rules; clarify definition of independent
contractors for REITs; and modify earnings and profits rules.
Effective date: taxable years beginning after 12-31-00, with
special transition rules for provisions relating to permitted
ownership of securities of an issuer.
Revenue offsets
1. Foreign Tax Credit. One-year carryback and seven year
carryforward of foreign tax credits. Effective date: credits
arising in taxable years beginning after 12-31-99. Except for
effective date, same as provision included in the Affordable
Education Act.
2. Non-Accrual Experience Method of Accounting. Limit use
of non-accrual experience method of accounting to amounts to be
received for the performance of qualified professional
services. Effective date: Tax years ending after date of
enactment. Same as provision included in the Affordable
Education Act.
3. Cancellation of Indebtedness Reporting. Information
reporting on cancellation of indebtedness by non-bank financial
institutions. Effective date: cancellation of indebtedness
after 12-31-99. Same as provision included in the Affordable
Education Act.
4. IRS User Fees. Extension of IRS user fees through 9-30-
09. Effective date: September 30, 2003. Same as provision
included in the Affordable Education Act.
5. Charitable Split Dollar Insurance. Deny deduction for
charitable split dollar life insurance. Effective date:
transfers made after February 28, 1999 and for premiums paid
after the date of enactment. Same as provision included in the
Affordable Education Act.
6. Retiree Health Benefits. Allow employers to transfer
excess defined benefit plan assets to a special account for
health benefits of retirees (through September 30, 2009).
Effective date: transfers made in taxable years beginning after
12-31-00. Same as provision included in the Affordable
Education Act, except with maintenance of benefits, not
maintenance of cost.
7. Prefunding Employee Benefits. Impose limitation on pre-
funding of certain employee benefits. Effective date:
Contributions paid after date of enactment. Same as provision
included in the Affordable Education Act.
8. Installment Method for Accrual Taxpayers. Repeal the
installment method of accounting for most accrual taxpayers;
adjust the pledge rules. Effective date: installment sales
entered into on or after date of enactment. Same as provision
included in the Affordable Education Act.
9. Streptococcus Pneumonia Vaccine. Include the
Streptococcus Pneumonia vaccine in the Federal vaccine
insurance program. Effective date: vaccine purchases the day
after the date on which the Centers for Disease Control make
final recommendation for routine administration of conjugated
Streptococcus Pneumonia vaccines to children. Same as provision
included in the Affordable Education Act.
10. Restore Phase-Out of Unified Credit. Restore the phase-
out of the unified credit for large estates. Effective date:
decedents dying after date of enactment. Same as President's
FY2000 budget proposal.
11. Lower-of-Cost-or-Market. Repeal the lower-of-cost-or-
market inventory accounting method. Effective Date: TYBA DOE.
Same as President's FY2000 budget proposal.
12. Start-Up and Organizational Expenses. Modify treatment
of start-up and organizational expenditures. Effective Date:
Generally effective for start-up and organizational
expenditures incurred after date of enactment. Same as
President's FY2000 budget proposal.
13. Corporate Environmental Tax. Reinstate the
environmental tax imposed on corporate taxable income and
deposited in the Hazardous Substance Superfund. Effective Date:
TYBA 12-31-99 through 12-31-09. Except for effective date, same
as President's FY2000 budget proposal.
14. Superfund Excise Taxes. Reinstate excise taxes
deposited in the Hazardous Substance Superfund. Effective Date:
Date of enactment through 9-30-09. Same as President's FY2000
budget proposal.
15. Corporate Tax Shelters. Pending review of Joint
Committee on Taxation report and recommendations, include
restrictions on corporate tax shelters.
16. Closely Held REITs. Modify treatment of closely-held
REITs. Effective Date: Taxable years beginning on or after date
of first committee action. Same as President's FY2000 budget
proposal.
ESTIMATED REVENUE EFFECTS OF THE DEMOCRATIC ALTERNATIVE TAX PACKAGE
[Fiscal year 2000-2009, millions of dollars]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1999-2004 1999-2009
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Tax Relief for Working Families
1. Increase standard deduction by $1,300 tyba 12/31/00........................ ....... ......... -4,297 -6,172 -10,701 -12,644 -17,317 -19,352 -25,622 -28,703 -29,246 -33,814 -154,054
single, $4,350 joint, and $2,150 head of
household (phased in).
2. Allow married couples an itemized deduction tyba 12/31/00........................ ....... ......... -304 -1,504 -1,634 -2,371 -2,342 -3,069 -4,099 -2,779 -2,665 -5,813 -20,767
equal to the lesser of $4,350 (phased in) or
20% of the earned income of the spouse with
lower earned income (phaseout between $75,000-
$95,000).
3. Increase income levels for the phaseout of tyba 12/31/00........................ ....... ......... -148 -737 -858 -1,392 -1,504 -1,999 -2,125 -2,742 -2,702 -3,135 -14,207
the EIC for married couples filing a joint
return by the amount that the standard
deduction for married couples is being
increased: $1,000 for 2001 and 2002, $2000
for 2003 and 2004, $3,000 for 2005 and 2006,
and $4,350 for 2007 and indexed thereafter.
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Tax Relief for Working Families ..................................... ....... ......... -4,749 -8,413 -13,193 -16,407 -21,163 -24,420 -31,846 -34,224 -34,613 -42,762 -189,028
==================================================================================================================================================
Health Care Affordability and Accessibility
1. 100% self-employed health insurance tyba 12/31/00........................ ....... ......... -274 -1,040 -657 ......... ......... .......... .......... .......... .......... -1,971 -1,971
deduction beginning in 2001.
2. 30% tax credit for health insurance \1\.... tyba 12/31/00........................ ....... ......... -489 -1,678 -1,793 -1,928 -2,024 -2,124 -2,228 -2,333 -2,435 -5,888 -17,033
3. Provide an above-the-line deduction for tyba 12/31/00........................ ....... ......... -16 -109 -162 -364 -417 -592 -676 -971 -1,027 -652 -4,334
long-term care insurance expenses for which
the taxpayer pays at least 50% of the
premium, phased in as follows: 10% in 2001
and 2002, 25% in 2003 and 2004, 35% in 2005
and 2006, and 50% in 2007 and thereafter.
4. Provide a tax credit for taxpayers, spouses tyba 12/31/02........................ ....... ......... ......... ......... -68 -459 -486 -510 -576 -969 -965 -527 -4,033
and qualifying dependents who have long-term
care needs--$250 for 2003 through 2006; $500
for 2007 and thereafter.
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Health Care Affordability and ..................................... ....... ......... -779 -2,827 -2,680 -2,751 -2,927 -3,226 -3,480 -4,273 -4,427 -9,038 -27,371
Accessibility.
==================================================================================================================================================
Estate Security
1. Increase the estate tax unified credit dda & gma 12/31/02................... ....... ......... ......... ......... ......... -956 -3,004 -1,005 .......... .......... .......... -956 -4,965
exemption amount to: $740,000 in 2003, and $1
million in 2004 and 2005.
2. Increase exemption for family-owned farms dda & gma 12/31/..................... ....... ......... ......... ......... ......... -231 -569 -680 -861 -1,116 -1,549 -231 -5,006
and businesses by $450,000.
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Estate Security................ ..................................... ....... ......... ......... ......... ......... -1,187 -3,573 -1,685 -861 -1,116 -1,549 -1,187 -9,971
==================================================================================================================================================
AMT Reforms
1. Extend the 1998 provision for nonrefundable yba 12/31/98......................... ....... ......... -980 -980 -1,315 -1,703 -1,800 .......... .......... .......... .......... -6,778 -6,778
personal tax credits for 5 years.
2. Repeal 90% foreign tax credit limit under tyba 12/31/00........................ ....... ......... -125 -243 -225 -202 -176 -151 -124 -99 -80 -795 -1,425
AMT (S. 216).
3. Prevent farm income averaging from tyba 12/31/00........................ ....... ......... [2] -1 -1 -2 -2 -2 -3 -4 -5 -5 -21
increasing AMT liability (S. 1207).
4. Corporate AMT--allow long-term AMT credit tyba 12/31/00........................ ....... ......... -273 -376 -325 -283 -242 -218 -191 -163 -140 -1,258 -2,213
(unused for 5 or more years and arising from
tax year prior to 2000) to offset AMT up to
20% of tentative minimum tax.
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of AMT Reforms.................... ..................................... ....... -980 -1,378 -1,935 -2,254 -2,287 -420 -371 -318 -266 -225 -8,836 -10,437
==================================================================================================================================================
Extension of Expiring Incentives
1. Work opportunity tax credit (through 6/30/ wpoifibwa 6/30/99.................... ....... -229 -269 -207 -99 -37 -11 -2 .......... .......... .......... -841 -854
01).
2. Welfare-to-work tax credit (through 6/30/ wpoifibwa 6/30/99.................... ....... -49 -67 -58 -31 -13 -4 -1 .......... .......... .......... -218 -223
01).
3. Credits for electricity production from 6/1/99 & 7/1/99...................... ....... -7 -14 -17 -18 -18 -19 -19 -20 -20 -19 -74 -171
wind and biomass (through 6/30/01).
4. Extend subpart F exemption for active tybi 2000............................ ....... -187 -785 -744 ......... ......... ......... .......... .......... .......... .......... -1,716 -1,716
financing (through 12/31/01).
5. Brownfields environmental remediation 1/1/01............................... ....... 11 -33 -45 -15 -2 -1 1 3 5 7 -84 -68
(through 6/30/01).
6. Increase amount of rum excise tax that is (\4\)................................ -16 -65 -49 ......... ......... ......... ......... .......... .......... .......... .......... -130 -130
covered over to Puerto Rico and the U.S.
Virgin Islands (from $10.50 per proof gallon
to $13.50 per proof gallon) (through 6/30/01)
\3\.
7. Modify economic activity credit by removing tyba 12/31/98........................ ....... -223 -236 -236 -313 ......... ......... .......... .......... .......... .......... -1,008 -1,008
the limitation from newly established
business operations and removing the base
period cap which, beginning in 2002, limits
the size of the credit for existing claimants
(sunsets taxable years beginning after 12/31/
02).
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Extension of Expiring ..................................... ....... -749 -1,453 -1,307 -476 -70 -35 -21 -17 -15 -12 -4,071 -4,170
Incentives.
==================================================================================================================================================
Quality Education Initiatives
1. Tax credits for qualified school tyba 12/31/00........................ ....... ......... -88 -263 -418 -508 -620 -801 -962 -1,055 -1,079 -1,276 -5,793
modernization bonds, with one-half issued
after 12/31/00 and one-half after 12/31/04.
2. Qualified Tuition Plans--tax-free tyba 12/31/99........................ ....... -6 -22 -38 -57 -84 -118 -154 -191 -225 -262 -208 -1,157
distributions from State plans; and allow
private institutions to offer prepaid tuition
plans, tax-deferred in 2000, with tax-free
distributions beginning in 2004; allow a
taxpayer to exclude State plan distributions
from gross income and claim the HOPE or
Lifetime Learning credits as long as they are
not used for the same expenses.
3. Student Loan Interest--eliminate the 60 ipa 12/31/99......................... ....... -16 -64 -69 -71 -74 -77 -78 -79 -87 -94 -295 -709
month rule for interest paid after 12/31/99.
4. Increase arbitrage rebate exception for bia 12/31/00......................... ....... ......... (\2\) -2 -4 -5 -13 -14 -14 -15 -16 -12 -84
governmental bonds used to finance qualified
school construction from $10 million to $15
million.
5. Issuance of tax-exempt private activity bia 12/31/00......................... ....... ......... -4 -16 -33 -52 -76 -103 -133 -163 -192 -105 -772
bonds for qualified education facilities with
annual volume cap the greater of $10 per
resident or $5 million.
6. Exclusion for employer-provided educational 1/1/00............................... ....... -254 -510 -598 -637 -682 -731 -783 -839 -899 -964 -2,682 -6,898
assistance for undergraduates and graduates
(permanent).
7. Enhance charitable deduction for computer 1/1/00............................... ....... -41 -165 -107 (\2\) (\2\) ......... .......... .......... .......... .......... -314 -314
donations to schools (through 12/31/01).
8. Tax credit for information technology tyba 12/31/00........................ ....... ......... -11 -29 -40 -45 -47 -49 -52 -55 -57 -125 -386
training expenses (S. 456).
9. 20% tax credit for conversion of public TV tyba 12/31/00........................ ....... ......... -46 -70 -70 -70 -70 -52 -15 .......... .......... -256 -392
networks from analog to higher definition
transmission technolog.
10. Allow charitable donations to certain low- tyba 12/31/99........................ ....... -4 -30 -32 -33 -35 -37 -38 -40 -42 -44 -134 -335
income schools to be made on or before the
deadline for filing a Federal income tax
return (not including extensions).
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Quality Education Initiatives.. ..................................... ....... -321 -940 -1,224 -1,363 -1,555 -1,789 -2,072 -2,325 -2,541 -2,708 -5,407 -16,840
==================================================================================================================================================
Environmental Conservation and Protection
1. Tax credits for holders of Better America bio/a 12/31/00....................... ....... ......... -6 -33 -85 -152 -222 -287 -332 -350 -353 -275 -1,821
Bonds.
2. Endangered Species:
a. Tax exclusion for cost-sharing payments tyba 12/31/00........................ ....... ......... -1 -2 -2 -3 -3 -3 -3 -3 -3 -8 -22
under Partners for Wildlife Program.
b. Enhanced deduction for donation of tyba 12/31/00........................ ....... ......... -1 -1 -2 -3 -3 -4 -5 -6 -7 -7 -32
conservation easements.
c. Estate tax exclusion for real property tyba 12/31/00........................ ....... ......... -7 -9 -13 -17 -20 -21 -22 -23 -25 -46 -157
subject to qualified conservation
easement expanded to include property
within 25 miles of a National Park or
Wilderness Area.
3. Exclude from income 50% of any gain tyba 12/31/00........................ ....... ......... -34 -77 -80 -84 -87 -91 -95 -10 -104 -275 -662
realized from private, voluntary sales of
land, or interest in land, to government
agencies or qualified conservation
organizations.
4. S. 1003, the ``Alternative Fuels Promotion
Act'':
a. Increase electric vehicle tax credit tyba 12/31/00........................ ....... ......... (\2\) -1 -1 -1 -2 -4 -7 -10 -11 -3 -36
for vehicles with extended range.
b. Extend electric vehicle tax credit tyba 12/31/00........................ ....... ......... ......... -2 -4 -11 -25 -43 -73 -96 -111 -17 -366
through 2010.
c. Deduction for up to #30,000 of cost of tyba 12/31/00........................ ....... ......... -15 -18 -23 -27 -9 .......... .......... .......... .......... -83 -92
installing alternative fueling stations.
d. 15 cents per gasoline equivalent gallon sa 12/31/01.......................... ....... ......... ......... -38 -67 -73 -81 -89 -97 -40 .......... -177 -485
tax credit to sellers of clean-burning
alternative fuels \5\.
5. Extend section 29 placed-in-service date... tyba 7/1/98.......................... ....... -80 -89 -91 -92 -94 -96 -98 -101 -103 -59 -443 -900
6. Accelerate increase in limit on exclusion tyba 12/31/99........................ ....... -38 -57 -35 -30 -29 -32 -31 -34 -34 -40 -189 -360
of public transit benefits ($175 in 2000,
adjusted for COLA).
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Environmental Conservation and ..................................... ....... -118 -210 -307 -399 -494 -580 -671 -769 -675 -713 -1,523 -4,933
Protection.
==================================================================================================================================================
Saving and Pension Promotion
1. Plan loans for subchapter S owners, yba 12/31/00......................... ....... ......... -20 -30 -32 -35 -37 -39 -41 -44 -46 -117 -325
partners, and sole proprietors.
2. Contributions to IRAs through payroll tyba 12/31/00........................ ....... ......... -7 -10 -1 -1 -1 -1 -1 -1 -1 -19 -24
deductions.
3. SAFE annuities and trusts.................. tyba 12/31/00........................ ....... ......... -22 -124 -273 -409 -474 -454 -460 -480 -492 -828 -3,188
4. Modification of top-heavy rules............ tyba 12/31/00........................ ....... ......... -8 -16 -20 -23 -27 -30 -33 -36 -40 -68 -234
5. Tax credit for small employer pension plan pea 12/31/00......................... ....... ......... -83 -167 -218 -243 -255 -266 -281 -296 -309 -711 -2,117
contributions and start-up costs; 25% credit
on employer contributions for the first 3
taxable years for employers with 25 or fewer
employees; 50% tax credit for the first 3
years on start-up costs for employers with
100 or fewer employees.
6. Increase limitation on SIMPLE elective yba 12/31/00......................... ....... ......... -6 -17 -18 -18 -19 -19 -20 -20 -21 -59 -158
contributions to $8,000 \1\.
7. Elective deferrals not taken into account yba 12/31/00......................... ....... ......... -38 -71 -81 -85 -89 -93 -97 -101 -104 -275 -759
for purposes of deduction limits.
8. Equitable treatment for contributions of yba 12/31/00......................... ....... ......... -50 -75 -81 -87 -92 -97 -103 -107 -110 -294 -804
employees to defined contribution plans \6\.
9. Faster vesting of certain employer matching tyba 12/31/00........................ Negligible Revenue Effect
contributions.
10. Deferred annuities for surviving spouses tyba 12/31/00........................ ....... ......... -2 -3 -3 -2 -2 -1 -1 (\2\) (\7\) -10 -14
of Federal employees.
11. Clarification of tax treatment of section tyba 12/31/00........................ Negligible Revenue Effect
457 plan benefits upon divorce.
12. Spouses' right to know distribution tyba 12/31/00........................ No Revenue Effect
information.
13. Rollovers allowed among governmental dma 12/31/00......................... ....... ......... -7 -11 -12 -12 -12 -13 -13 -13 -14 -41 -106
section 457, section 403(b), and qualified
plans.
14. Rollovers of IRAs into workplace tyba 12/31/00........................ Negligible Revenue Effect
retirement plans.
15. Rollovers of after-tax contributions; tyba 12/31/00........................ Negligible Revenue Effect
hardship exception.
16. Rationalization of restrictions on tyba 12/31/00........................ Negligible Revenue Effect
distributions from defined contribution plans.
17. Treatment of forms of qualified plan tyba 12/31/00........................ Negligible Revenue Effect
distribution.
18. Purchase of service credit in governmental tyba 12/31/00........................ Negligible Revenue Effect
defined benefit plans.
19. Employers may disregard rollovers for tyba 12/31/00........................ Negligible Revenue Effect
purposes of cash-out amounts.
20. Treatment of multiemployer plans under tyba 12/31/00........................ ....... ......... -3 -5 -5 -5 -5 -5 -5 -6 -6 -18 -45
section 415.
21. Extension of missing participants program tyba 12/31/00........................ Negligible Revenue Effect
to multiemployer plans.
22. Civil penalties for breach of fiduciary tyba 12/31/00........................ No Revenue Effect
responsibility \8\.
23. Periodic pension benefits statements...... tyba 12/31/00........................ No Revenue Effect
24. Treatment of employer-provided retirement yba 12/31/00......................... ....... ......... -5 -10 -14 -15 -15 -15 -16 -16 -17 -44 -123
advice.
25. ESOP dividends may be reinvested without tyba 12/31/00........................ ....... ......... -19 -44 -56 -61 -63 -66 -69 -71 -74 -180 -523
loss of dividend deduction.
26. Plan Amendments........................... tyba 12/31/00........................ No Revenue Effect
27. Disclosure for cash balance conversions... (\9\)................................ Negligible Revenue Effect
28. Treasury study of distribution of tax ..................................... No Revenue Effect
benefits of pension arrangements.
29. Reduce PBGC premium for new plans of small pea 12/31/00......................... ....... ......... ......... (\10\) (\10\) (\10\) (\10\) (\10\) (\10\) (\10\) (\10\) -15 -40
employers; additional PBGC premium relief for
plans with 25 or fewer employees \3\.
30. Phase-in of additional PBGC premium for pea 12/31/00......................... ....... ......... ......... -1 -1 -1 -2 -2 -2 -2 -2 -4 -12
new plans \3\.
31. Elimination of user fee for determination pea 12/31/00......................... ....... ......... -17 -8 -8 -9 -9 -9 -9 -10 -10 -42 -88
requests regarding small employer pension
plans \8\.
--------------------------------------------------------------------------------------------------------------------------------------------------
Total of Savings and Pension Promotion.. ..................................... ....... ......... -287 -595 -826 -1,009 -1,105 -1,113 -1,154 -1,206 -1,249 -2,725 -8,560
==================================================================================================================================================
Farm Relief and Economic Development
1. S. 642, the ``Farm and Ranch Risk tyba 12/31/00........................ ....... ......... -7 -147 -204 -173 -142 -110 -48 -23 -23 -531 -877
Management Act''.
2. Clarify that rental income from farmland tyba 12/31/00........................ ....... ......... (\2\) -3 -3 -3 -3 -3 -3 -3 -3 -8 -23
under a lease ``arrangement'' is not
considered net income from self-employment
for SECA purposes (S. 569).
3. Exclude from capital gains up to 160 acres soea 5/7/97.......................... ....... -539 -204 -211 -217 -223 -237 -237 -244 -251 -259 -1,394 -2,615
of farmland that is contiguous to and sold
with a principal residence, provided the
farmland was farmed in 3 of the 5 years
period to sale with material participation by
the taxpayer or a member of the taxpayer's
family.
4. Exempt small issue bonds for agriculture tyba 12/31/00........................ ....... ......... (\2\) -1 -2 -3 -4 -4 -5 -6 -6 -6 -31
from the State volume cap (S. 1038).
5. Capital gains relief for framers leaving tyba 12/31/00........................ ....... ......... -16 -111 -126 -143 -162 -181 -202 -223 -246 -395 -1,410
business.
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Total of Farm Relief and Economic ..................................... ....... -539 -227 -473 -552 -545 -541 -535 -502 -506 -537 -2,334 -4,956
Development.
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Technology and Economic Development
1. Extend R&E (permanent), with modifications. (\11\)............................... ....... -1,659 -1,855 -2,228 -2,540 -2,769 -2,929 -3,075 -3,229 -3,390 -3,559 -11,051 -27,232
2. Tax credit for investments in ``new tyba 12/31/00........................ ....... ......... ......... -6 -43 -96 -146 -190 -203 -165 -100 -145 -949
markets'' community development (total
investments over 10 years is $3.75 billion).
3. Low-income housing credit--phase in tyba 12/31/00........................ ....... ......... -2 -8 -20 -37 -64 -105 -161 -228 -300 -66 -925
increase in per capita amount of low-income
housing tax credit from $1.25 to $1.30 for
2001 through 2003, $1.40 for 2004 through
2005, and $1.50 for 2006 and thereafter.
4. Accelerate increase in per capita State tyba 12/31/00........................ ....... ......... -9 -36 -75 -117 -155 -183 -188 -177 -164 -237 -1,104
volume cap for private activity bonds to the
greater of $55 per capita or $165 million in
2001, $60 per capita or $180 million in 2002,
$65 per capita of $195 million in 2003, $70
per capita or $210 million in 2004, and $75
per capita or $225 million in 2005 and
thereafter.
5. Permit qualified spaceport facilities to bia 12/31/00......................... ....... ......... -1 -4 -7 -10 -13 -16 -19 -21 -24 -21 -114
qualify as exempt-facility bonds.
6. Accelerate increase in section 179 tyba 12/31/00........................ ....... ......... -103 -173 -14 90 58 44 28 13 7 -199 -48
expensing to $25,000.
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Total of Technology and Economic ..................................... ....... -1,659 -1,970 -2,455 -2,699 -2,939 -3,249 -3,525 -3,772 -3,968 -4,140 -11,719 -30,372
Development.
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Other Incentives
1. Oil and Gas Incentives:
a. Allow geological and geophysical costs cpoii tyba 12/31/00.................. ....... ......... -17 -26 -27 -27 -28 -29 -29 -30 -31 -97 -244
to be deducted currently.
b. Allow delay rental payments to be tyba 12/31/00........................ ....... ......... -3 -4 -4 -4 -4 -4 -3 -4 -5 -15 -34
deducted currently.
c. Permanently suspend 65% of taxable tyba 12/31/00........................ ....... ......... -45 -72 -76 -79 -81 -83 -85 -88 -90 -271 -698
income limit on percentage depletion.
2. Electric Deregulation Provisions:
a. Modify the 85-15 test applicable to tyba 12/31/00........................ ....... -1 -6 -12 -22 -30 -35 -38 -40 -41 -43 -71 -267
electric cooperatives.
b. Tax-exempt bond financing of certain tyba DOE............................. ....... -12 -79 -135 -168 -186 -198 -207 -215 -212 -204 -580 -1,616
electric facilities.
c. Nuclear decommissioning costs: one-time (\12\)............................... ....... -24 -51 -89 -126 -128 -130 -131 -132 -132 -132 -418 -1,075
transfer of non-qualified funds, with
amortization over remaining useful life
beginning in 2002; modify section 468A to
eliminate cost of service requirement in
determining nuclear decommissioning costs
and clarify treatment of funds transfers.
3. Child care credit--increase the maximum tyba 12/31/00........................ ....... ......... -33 -132 -132 -130 -124 -120 -113 -108 -104 -426 -996
amount of employment-related expenses
eligible for the credit from $2,400 to $2,700
for expenses incurred for one qualifying
individual, and from $4,800 to $5,400 for two
or more qualifying individuals.
4. Worksite Child Care Facilities Credit--25% tyba 12/31/00........................ ....... ......... -44 -85 -97 -110 -122 -130 -136 -142 -149 -336 -1,014
credit up to $90,000 for child care facility
start-up expenses, operating expenses, or
reimbursements for ``off-site'' child care.
5. Reduce the MACRS recovery period for lima 12/31/00........................ ....... ......... -31 -112 -207 -295 -372 -402 -428 -490 -545 -645 -2,882
qualifying leasehold improvements to
nonresidential real property from 39 years to
15 years.
6. Provide a tax exemption for organizations tyba 12/31/00........................ ....... ......... -2 -4 -4 -5 -5 -6 -7 -8 -8 -15 -50
created by a State to provide property and
casualty insurance coverage for property for
which such coverage is otherwise unavailable.
7. Combined Federal-State employment tax DOE.................................. No Revenue Effect
reporting.
8. Increase AGI percentage limits from 30% to tyba 12/31/00........................ ....... ......... -133 -204 -174 -144 -112 -96 -99 -102 -106 -655 -1,170
50% for capital gain property donated to
public charities.
9. Real estate investment trust (REIT)
provisions:
a. Impose 10% vote or value test.......... tyba 12/31/00........................ ....... ......... 2 8 8 8 9 9 9 10 10 26 73
b. Treatment of income and services tyba 12/31/00........................ ....... ......... 40 105 35 15 -8 -32 -58 -87 -119 195 -109
provided by taxable REIT subsidiaries
with 15% asset limitation.
c. Special foreclosure rule for health tyba 12/31/00........................ Negligible Revenue Effect
care REITs.
d. Conformity with RIC 90% distribution tyba 12/31/00........................ ....... ......... 1 1 1 1 1 1 1 1 1 3 5
rules.
e. Clarification of definition of tyba 12/31/00........................ Negligible Revenue Effect
independent operators for REITs.
f. Modification of earnings and profits da 12/31/00.......................... ....... ......... -6 -3 -3 -3 -4 -4 -4 -4 -4 -16 -35
rules.
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Total of Other Incentives..................... ..................................... ....... -37 -407 -764 -996 -1,117 -1,213 -1,272 -1,339 -,1,437 -1,529 -3,321 -10,112
==================================================================================================================================================
Revenue Offsets
1. 1-year carryback of foreign tax credits and tyba 12/31/99........................ ....... 87 562 502 468 437 406 279 263 259 257 2,056 3,520
7-year carryforward.
2. Limit use of non-accrual experience method tyea DOE............................. ....... 77 60 33 28 10 12 14 16 18 20 208 288
of accounting to amounts to be received for
the performance of qualified professional
services.
3. Information reporting on cancellation of coda 12/31/99........................ ....... ......... 7 7 7 7 7 7 7 7 7 28 63
indebtedness by non-bank financial
institutions.
4. Extension of IRS user fees through 9/30/09 9/30/03.............................. ....... ......... ......... ......... ......... 50 53 56 59 61 64 50 343
\3\.
5. Deny deduction for charitable split dollar (\13\)............................... Negligible Revenue Effect
life insurance.
6. Allow employers to transfer excess defined tmi tyba 12/31/00.................... ....... ......... 19 38 39 40 41 42 42 43 44 136 348
benefit plan assets to a special account for
health benefits of retirees (through 9/30/09).
7. Imposes limitation on pre-funding of cap DOE.............................. ....... 81 141 147 149 140 129 118 105 90 74 659 1,175
certain employee benefits.
8. Repeal installment method for most accrual iseio/a DOE.......................... ....... 477 677 406 257 72 8 21 35 48 62 1,889 2,063
basis taxpayers; adjust pledge rules.
9. Include the Streptococcus Pneumonia vaccine (\14\)............................... ....... 4 7 9 10 10 10 10 10 10 11 39 91
in the Federal vaccine insurance program.
10. Restore phase-out of unified credit for dda DOE.............................. ....... 37 74 75 83 87 118 144 170 178 187 365 1,153
large estates.
11. Repeal lower-of-cost-or-market inventory tyba DOE............................. ....... 162 365 354 350 284 111 64 68 72 78 1,515 1,908
accounting method.
12. Modify treatment of start-up and (\15\)............................... ....... -71 -68 78 224 371 430 403 376 349 322 534 2,414
organizational expenditures.
13. Reinstate environmental tax imposed on (\16\)............................... ....... 333 559 571 584 602 631 663 690 716 739 2,650 6,089
corporate taxable income and deposited in the
Hazardous Substance Superfund.
14. Reinstate excise taxes deposited in the (\17\)............................... ....... 701 708 715 721 724 730 738 748 754 761 3,569 7,300
Hazardous Substance Superfund.
15. Corporate tax shelter proposal--pending dofca................................ Presently Unavailable
review of Joint Tax Committee report.
16. Modify structure of businesses indirectly DOE.................................. ....... 2 7 8 8 8 9 9 9 10 10 33 80
conducted by REITs.
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Total of Revenue Offset................. ..................................... ....... 1,890 3,118 2,943 2,928 2,842 2,695 2,568 2,598 2,615 2,636 13,722 26,835
==================================================================================================================================================
Net total..................................... ..................................... ....... -2,513 -9,282 -17,357 -22,510 -27,519 -33,900 -36,343 -43,785 -47,612 -49,066 -79,201 -289,915
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\1\ Medicare and Medigap premiums, Champus premiums, other Federally-subsidized premiums, and premiums for employer-sponsored health insurance would not qualify for the credit. AGI limits of $40,000 for joint filers and $20,000 for
all other filers.
\2\ Loss of less than $500,000.
\3\ Estimate provided by the Congressional Budget Office.
\4\ Effective for rum imported into the United States after 6/30/99.
\5\ The credit terminates on 12/31/07.
\6\ Proposal includes interaction with other provisions in Provisions for Expanding Coverage.
\7\ Gain of less than $500,000.
\8\ Department of Labor penalties.
\9\ Effective for plan amendments which have not been announced to employees in writing prior to 3/18/99.
\10\ Loss of less than $5 million.
\11\ Extension of credit effective for expenses incurred after 6/30/99; increase in A/C rates effective for taxable years beginning after 6/30/99; expand to Puerto Rico for taxable years beginning after 6/30/99.
\12\ Generally effective for taxable years beginning after 12/31/99. The provision relating to transfers of non-qualified funds is effective for taxable years beginning after 12/31/01.
\13\ Effective for transfers made after 2/8/99 and for premiums paid after the date of enactment.
\14\ Effective for vaccine purchases the day after the date on which the Centers for Disease Control make final recommendation for routine administration of conjugated Streptococcus Pneumonia vaccines to children.
\15\ Generally effective for start-up and organizational expenditures incurred after the date of enactment.
\16\ The corporate environmental income tax would be reinstated for taxable years beginning after 12/31/99, and before 1/1/10.
\17\The three Superfund excise taxes would be reinstated for the period after the date of enactment and before 10/91/09.
Legend for ``Effective'' column: bia = bonds issued after; bio/a = bonds issued on or after; coda = cancellation of indebtedness after; cpa = contributions paid after; cpoii = costs paid or incurred in; da = distributions after; dda
= decedents dying after; dma = distributions made after; DOE = date of enactment; dofca = date of first committee action; gma = gifts made after; ipa = interest paid after; iseio/a = installment sales entered into on or after;
lima = leasehold improvements made after; pea = plans established after; pyba = plan years beginning after; rma = requests made after; sa = sales after; soea = sales or exchanges after; tmi = transfers made in; tyba = taxable
years beginning after; tybi = taxable years beginning in; tyea = taxable years beginning after; wpoifibwa = wages paid or incurred for individuals beginning work after; and yba = years beginning after.
Note.--Details may not add to/totals due to rounding.
Source: Joint Committee on Taxation.
VIII. ADDITIONAL VIEWS OF SENATORS GRAHAM, ROCKEFELLER AND BRYAN
The expectation of large federal budget surpluses in the
coming years has given Congress an opportunity to address the
country=s long-term financial challenges. Principal among those
challenges is enacting legislation that restores the long-term
solvency of two important programs B Social Security and
Medicare--that provide retirement security to millions of
seniors. We believe that these priorities must be addressed
before tax cuts are enacted.
We do not know what on-budget resources may be needed to
reform the Social Security and Medicare programs. Many of the
Social Security reform plans under consideration contemplate at
least some portion of future benefits coming from the on-budget
portion of the budget. By enacting substantial tax cuts in
advance of considering these proposals, Congress limits the
options available to it.
Similarly, it is likely that on-budget resources will be
necessary to reform and modernize the Medicare program. Many
Members, Republicans and Democrats, believe the Medicare
program no longer meets the medical needs of many seniors.
Prescription drug coverage, a common aspect of many health care
plans, is not a part of the Medicare benefit package. The
President has proposed comprehensive reform and strengthening
of the Medicare program including modernization through
extended prevention services and prescription drug benefits.
This comprehensive plan to extend the solvency of the Medicare
program would require $328 billion over the next ten years.
The bill ignores these two programs and instead devotes
virtually all of the anticipated surplus to tax cuts. The
bill=s tax cut level B $792 billion B represents 80% of the
projected non-Social Security surpluses. Additionally, because
these funds will not be used for debt reduction the baseline
surplus is further reduced because interest savings assumed in
that estimate will not materialize. Therefore, the tax cuts in
this bill leave precious few resources to address the financing
shortfalls facing Social Security and Medicare.
It is imperative that we enact legislation in its proper
order. Extending the solvency of the Social Security program
and modernizing the Medicare program should take priority over
tax cuts. The amendment we offered to the bill would have
delayed the tax cuts until Congress and the President have
reached an agreement on legislation extending the solvency of
the Social Security program through 2075 and strengthened the
Medicare program through 2027. We believe that without this
amendment Congress risks losing the financial resources and the
opportunity to ensure that Social Security and Medicare will be
able to meet its obligations for future generations.
Bob Graham.
Jay Rockefeller.
Richard H. Bryan.