[Senate Report 106-120]
[From the U.S. Government Publishing Office]



-----------------------------------------------------------------------

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

                               --------

                    U.S. GOVERNMENT PRINTING OFFICE                    
58-113                     WASHINGTON : 1999





                            C O N T E N T S

                              ----------                              
                                                                   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.
------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \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.''
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \5\ No adjustment is required if the taxpayer materially 
participates in the activity that relates to the research and 
experimental expenditures.
---------------------------------------------------------------------------
    (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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \8\ Matching contributions (and earnings) are accounted for 
separately from individual IDA contributions (and earnings).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \9\ The financial institution is to use forfeited amounts to make 
other matching contributions. No credit is provided with respect to 
such reallocated contributions.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \12\ Another provision of the provision increases the 33\1/3\ 
percentage of compensation limit to 100 percent.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \14\  Certain transactions involving a plan and Subchapter S 
shareholders are permitted.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \16\ Tres. Reg. sec. 1.416-1 Q&A M-19.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                             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
---------------------------------------------------------------------------

    \20\ The various dollar limits on contributions described below 
increases under other provisions in the provision.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \25\ The minimum vesting requirements are also contained in Title I 
of the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA'').
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \29\  A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \30\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \31\ Rev. Rul. 79-336, 1979-2 C.B. 187.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
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    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.
---------------------------------------------------------------------------
    \41\ Another provision increases this limit to 100 percent of 
compensation.
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \44\ As under present law, the Secretary may require that a 
valuation be made more frequently in particular cases.
---------------------------------------------------------------------------

                             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
---------------------------------------------------------------------------
    \45\ Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \46\ An employee includes a self-employed individual.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \47\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \48\ The maximum allowable deduction for 1998 was $1,000.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \49\ ``Eligible educational institutions'' are defined the same for 
purposes of education IRAs (described in II.1., above) and qualified 
State tuition programs.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \61\ Elective contributions under a qualified cash or deferred 
arrangement that is part of a cafeteria plan are subject to employment 
taxes.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \64\ This rule is applied separately with respect to health 
insurance.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \66\ Joint Committee on Taxation, Schedule of Present Federal 
Excise Taxes (as of January 1, 1999) (JCS-2-99), March 29, 1999, p. 48.
---------------------------------------------------------------------------

                        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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \68\ P.L. 97-34 (August 13, 1981).
    \69\ Sec. 2503(b)(2); P.L. 105-34 (August 5, 1997).
---------------------------------------------------------------------------

                        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
---------------------------------------------------------------------------
    \70\ No implication is intended with respect to the application of 
a rule of substantial compliance prior to enactment of this provision.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \71\ No implication is intended with respect to the application of 
a rule of substantial compliance prior to enactment of this provision.
---------------------------------------------------------------------------

             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\
---------------------------------------------------------------------------
    \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)).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \6\ Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in 1997 (JCS-23-97), December 17, 1997, p. 302.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \7\ Sec. 6103(b)(2)(A).
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \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'').
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \27\ 15 U.S.C. 80a-1 and following.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \33\ 43 U.S.C. 1601 et seq.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \34\ A taxpayer could elect to forgo the carryback of an NOL.
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \35\ Treas. Reg. sec. 1.263(a)-(1)(b).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------
    \38\ ca b120sr.0961977-1 C.B. 76.
---------------------------------------------------------------------------
    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)).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

                        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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \45\ Treas. Reg. sec. 1.194-3(a).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \46\ Sec. 1245(b)(7); Treas. Reg. sec. 1.194-1(c).
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

                           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)).
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \49\ 1987-2 C.B. 674.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------

                           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
---------------------------------------------------------------------------
    \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)).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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)).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------

                           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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \62\ Treas. Reg. sec. 1.1221-2(c)(5)(ii).
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \64\ The net proceeds equal the gross loan proceeds less the direct 
expenses of obtaining the loan.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \74\ The provision is similar to H.R. 630, introduced by Mr. Archer 
for himself and for Mr. Rangel (106th Cong., 1st Sess.).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ References to ``debt'' refer to ``debt held by the public.''
---------------------------------------------------------------------------
    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.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Farm Relief and Economic         .....................................  .......       -539       -227       -473       -552       -545       -541        -535        -502        -506        -537      -2,334      -4,956
       Development.
                                                                                      ==================================================================================================================================================
      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.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      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.
                                                                                      ==================================================================================================================================================
               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.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
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.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      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

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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.