[Senate Report 106-201]
[From the U.S. Government Publishing Office]




                                                       Calendar No. 346

106th Congress                                                   Report
  1st Session                    SENATE                         106-201

=======================================================================



 
                    TAX RELIEF EXTENSION ACT OF 1999

                                _______
                                

                October 26, 1999.--Ordered to be printed

                                _______


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

                              R E P O R T

                         [To accompany S. 1792]

    The Committee on Finance reported an original bill (S. 
1792) to amend the Internal Revenue Code of 1986 to extend 
expiring provisions, to fully allow the nonrefundable personal 
credits against regular tax liability, and for other purposes, 
having considered the same, reports favorably thereon and 
recommends that the bill do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background.......................................     2
II. Explanation of the bill......................................     3
    Title I. Extension of Expired and Expiring Tax Provisions....     3
        A. Extend Minimum Tax Relief for Individuals (sec. 101)..     3
        B. Extend Exclusion for Employer-Provided Educational 
            Assistance (sec. 102)................................     4
        C. Extension of Research and Experimentation Credit, 
            Increase in the Rates for the Alternative Incremental 
            Research Credit, and Expansion to Puerto Rico and 
            U.S. Possessions (sec. 103)..........................     6
        D. Extend Exceptions Under Subpart F for Active Financing 
            Income (sec. 104)....................................     9
        E. Extend Suspension of Net Income Limitation on 
            Percentage Depletion From Marginal Oil and Gas Wells 
            (sec. 105)...........................................    11
        F. Extend the Work Opportunity Tax Credit (sec. 106).....    12
        G. Extend the Welfare-to-Work Tax Credit (sec. 106)......    13
        H. Extend and Modify Tax Credit for Electricity Produced 
            by Wind and Closed-Loop Biomass Facilities (sec. 107)    14
        I. Expansion of Qualifying Sites for Expensing of 
            Environmental Remediation Expenditures (sec. 108)....    17
        J. Temporary Increase in Amount of Rum Excise Tax That is 
            Covered Over to Puerto Rico and the U.S. Virgin 
            Islands (sec. 109)...................................    18
        K. Delay Requirement That Registered Motor Fuels 
            Terminals Offer Dyed Fuel as a Condition of 
            Registration (sec. 110)..............................    19
        L. Production Credit for Fuel Produced by Certain Coal 
            Gasification Facilities (sec. 111)...................    20
    Title II. Revenue Offset Provisions..............................21
        A. Modification of Individual Estimated Tax Safe Harbor 
            (sec. 201)...........................................    21
        B. Modify Foreign Tax Credit Carryover Rules (sec. 202)..    22
        C. Clarify the Tax Treatment of Income and Losses on 
            Derivatives (sec. 203)...............................    23
        D. Add Certain Vaccines Against Streptococcus Pneumoniae 
            to the List of Taxable Vaccines (sec. 204)...........    25
        E. Expand Reporting of Cancellation of Indebtedness 
            Income (sec. 205)....................................    27
        F. Impose Limitation on Prefunding of Certain Employee 
            Benefits (sec. 206)..................................    28
        G. Increase Elective Withholding Rate for Nonperiodic 
            Distributions From Deferred Compensation Plans (sec. 
            207).................................................    30
        H. Limit Conversion of Character of Income From 
            Constructive Ownership Transactions (sec. 208).......    32
        I. Treatment of Excess Pension Assets Used for Retiree 
            Health Benefits (sec. 209)...........................    35
        J. Modify Installment Method and Prohibit its Use by 
            Accrual Method Taxpayers (sec. 210)..................    38
        K. Limitation on Use of Nonaccrual Experience Method of 
            Accounting (sec. 210)................................    40
        L. Denial of Charitable Contribution Deduction for 
            Transfers Associated With Split-Dollar Insurance 
            Arrangements (sec. 212)..............................    41
        M. Prevent Duplication or Acceleration of Loss Through 
            Assumption of Certain Liabilities (sec. 213).........    46
        N. Require Consistent Treatment and Provide Basis 
            Allocation Rules for Transfer of Intangibles in 
            Certain Nonrecognition Transactions (sec. 214).......    48
        O. Distributions by a Partnership to a Corporate Partner 
            of Stock in Another Corporation (sec. 215)...........    49
        P. Prohibited Allocations of Stock in an S Corporation 
            ESOP (sec. 216)......................................    52
        Q. Treatment of Real Estate Investment Trusts (``REITs'')    55
            1. Provisions relating to REITs (secs. 221-261)......    55
            2. Modify estimated tax rules for closely held REITs 
                (sec. 271).......................................    62
            3. Modify treatment of closely held REITs (sec. 281).    63
    Title III. Exclusion From Paygo Scorecard........................66
        A. Exclusion From Paygo Scorecard (sec. 301).............    66
III.Budget Effects of the Bill.......................................66

        A. Committee Estimates...................................    66
        B. Budget Authority and Tax Expenditures.................    70
        C. Consultation With the Congressional Budget Office.....    70
IV. Votes of the Committee...........................................70
 V. Regulatory Impact and Other Matters..............................70
        A. Regulatory Impact.....................................    70
        B. Unfunded Mandates Statement...........................    71
        C. Tax Complexity Analysis...............................    72
VI. Changes to Existing Law Made by the Bill as Reported.............72

                       I. LEGISLATIVE BACKGROUND


Committee markup

    The Senate Committee on Finance marked up an original bill 
(the ``Tax Relief Extension Act of 1999'') on October 20, 1999, 
and ordered the bill favorably reported by a unanimous voice 
vote on October 20, 1999.

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);
           Complexity of the individual income tax 
        (April 15, 1999); and
           Pension reform proposals (June 30, 1999).

                      II. EXPLANATION OF THE BILL


       TITLE I. EXTENSION OF EXPIRED AND EXPIRING TAX PROVISIONS


A. Extend Minimum Tax Relief for Individuals (sec. 101 of the bill and 
                      secs. 24 and 26 of the Code)


                              Present Law

    Present law provides for certain nonrefundable personal tax 
credits (i.e., the dependent care credit, the credit for the 
elderly and disabled, the adoption credit, the child tax 
credit, the credit for interest on certain home mortgages, the 
HOPE Scholarship and Lifetime Learning credits, and the D.C. 
homebuyer's credit). Except for taxable years beginning during 
1998, these credits are allowed only to the extent that the 
individual's regular income tax liability exceeds the 
individual's tentative minimum tax, determined without regard 
to the minimum tax foreign tax credit. For taxable years 
beginning during 1998, these credits are allowed to the extent 
of the full amount of the individual's regular tax (without 
regard to the tentative minimum tax).
    An individual's tentative minimum tax is an amount equal to 
(1) 26 percent of the first $175,000 ($87,500 in the case of a 
married individual filing a separate return) of alternative 
minimum taxable income (``AMTI'') in excess of a phased-out 
exemption amount and (2) 28 percent of the remaining AMTI. The 
maximum tax rates on net capital gain used in computing the 
tentative minimum tax are the same as under the regular tax. 
AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments. The exemption 
amounts are: (1) $45,000 in the case of married individuals 
filing a joint return and surviving spouses; (2) $33,750 in the 
case of other unmarried individuals; and (3) $22,500 in the 
case of married individuals filing a separate return, estates 
and trusts. The exemption amounts are phased out by an amount 
equal to 25 percent of the amount by which the individual's 
AMTI exceeds (1) $150,000 in the case of married individuals 
filing a joint return and surviving spouses, (2) $112,500 in 
the case of other unmarried individuals, and (3) $75,000 in the 
case of married individuals filing separate returns or an 
estate or a trust. These amounts are not indexed for inflation.
    For families with three or more qualifying children, a 
refundable child credit is provided, up to the amount by which 
the liability for social security taxes exceeds the amount of 
the earned income credit (sec. 24(d)). For taxable years 
beginning after 1998, the refundable child credit is reduced by 
the amount of the individual's minimum tax liability (i.e., the 
amount by which the tentative minimum tax exceeds the regular 
tax liability).

                           reasons for change

    The Committee believes that middle-income families should 
be able to use the nonrefundable credits without limitations by 
reason of the minimum tax. This provision will result in 
significant simplification by reducing the number of 
individuals required to make AMT computations for purposes of 
determining their personal credits.

                        explanation of provision

    The bill extends the provision that allows the 
nonrefundable credits to offset the individual's regular tax 
liability in full (as opposed to only the amount by which the 
regular tax exceeds the tentative minimum tax) to taxable years 
beginning in 1999 to 2000.
    Under the bill, the refundable child credit will not be 
reduced by the amount of an individual's minimum tax in taxable 
years beginning in 1999 to 2000.

                             effective date

    The provisions are effective for taxable years beginning in 
1999 and 2000.

B. Extend Exclusion for Employer-Provided Educational Assistance (sec. 
               102 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 expired 
with respect to graduate courses June 30, 1996. With respect to 
undergraduate 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.\1\ 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.\2\
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    \1\ These rules also apply in the event that section 127 expires 
and is not reinstated.
    \2\ In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized deducation 
only if such expenses, along with other miscellaneous deductions, 
exceed 2 percent of the taxpayer's AGI. The 2-percent floor limitation 
is disregarded in determining whether an item is excludable as a 
working condition fringe benefit.
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                           reasons for change

    The Committee believes that the exclusion for employer-
provided educational assistance has enabled millions of workers 
to advance their education and improve their job skills without 
incurring additional taxes and a reduction in take-home pay. In 
addition, the exclusion lessens the complexity of the tax laws. 
Without the special exclusion, a worker receiving educational 
assistance from his or her employer is subject to tax on the 
assistance, unless the education is related to the worker's 
current job. Because the determination of whether particular 
educational assistance is job-related is based on the facts and 
circumstances, it may be difficult to determine with certainly 
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 to 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 of 
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. Thus, the 
Committee believes it appropriate to extend the provisions so 
that employers and employees can plan for some time into the 
future.

                        explanation of provision

    The provision reinstates the exclusion for employer-
provided educational experience for graduate-level courses, and 
extends the exclusion, as applied to both undergraduate and 
graduate-level courses through 2000.

                             effective date

    The provision is effective with respect to undergraduate 
courses beginning after May 31, 2000, and before January 1, 
2001. The provision is effective with respect to graduate-level 
courses beginning after December 31, 1999, and before January 
1, 2001.

 C. Extension of Research and Experimentation Credit, Increase in the 
Rates for the Alternative Incremental Research Credit, and Expansion to 
 Puerto Rico and U.S. Possessions (sec. 103 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.\3\
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    \3\ 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 of 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-base 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 ``contractresearch expenses'').\4\
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    \4\ 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 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

    Deduction allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year. Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed (sec. 280C(c)(3)).

                           reasons for change

    The Committee believes that increasing technological 
knowledge ultimately will lead to new and better products 
produced at lower costs. New and better products and lower 
production costs are the genesis of economic growth. For this 
reason, the Committee believes it is important to extend the 
research and experimentation tax credit.
    In addition, the Committee believes the alternative 
incremental credit enacted in 1996 should be strengthened. The 
alternative incremental research credit was enacted to respond 
to the changing economic circumstances of many taxpayers which 
invest heavily in research. However, the Committee believes 
that, under current law, the alternative incremental research 
credit provides less of a research incentive than does the 
regular research and experimentation tax credit. Therefore, the 
Committee believes it is appropriate to increase the rate of 
the alternative incremental research credit.
    Lastly, the Committee believes that qualified research 
expenditures incurred in Puerto Rico and other possessions 
should qualify for purposes of determination of the research 
credit, so long as such expenses are not otherwise related to 
credits allowable under sec. 30A (``Puerto Rico economic 
activity credit'') or under sec. 936 (``Puerto Rico and 
possession tax credit.'').

                        explanation of provision

    The bill extends the research tax credit for 18 months--
i.e., generally, for the period July 1, 1999, through December 
31, 2000.
    In addition, the bill increases the credit rate applicable 
under the alternative incremental research credit one 
percentage point per step, that is, from 1.65 percent to 2.65 
percent when a taxpayer's current-year research expenses exceed 
a base amount of 1 percent but do not exceed a base amount of 
1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's 
current-year research expenses exceed a base amount of 1.5 
percent but do not exceed a base amount of 2 percent; and from 
2.75 percent to 3.75 percent when a taxpayer's current-year 
research expenses exceed a base amount of 2 percent.
    Lastly, the bill expands the definition of qualified 
research to include research undertaken in Puerto Rico and 
other possessions of the United States. However, any employee 
compensation or other expense claimed for computation of the 
research credit may not also be claimed for the purpose of any 
credit allowable under sec. 30A (``Puerto Rico economic 
activity credit'') or under sec. 936 (``Puerto Rico and 
possession tax credit'').
    In extending the research credit, the Committee is 
concerned that the definition of qualified research be 
administered in a manner that is consistent with the intent 
Congress has expressed in enacting and extending the research 
credit. The Committee urges the Secretary to consider carefully 
the comments he has and may receive regarding proposed 
regulations relating to the computation of the credit under 
section 41(c) and the definition of qualified research under 
section 41(d). The Committee wishes to reaffirm that qualified 
research is research undertaken for the purpose of discovering 
new information which is technological in nature. Employing 
existing technologies in a particular field or relying on 
existing principles of engineering or science is qualified 
research, if such activities are otherwise undertaken for 
purposes of discovering information and satisfy the other 
requirements under section 41.
    The Committee also is concerned about unnecessary and 
costly taxpayer record keeping burdens and reaffirms that 
eligibility for the credit is not intended to be contingent on 
meeting unreasonable record keeping requirements.

                             effective date

    The extension of the research credit is effective for 
qualified research expenditures paid or incurred during the 
period July 1, 1999, through December 31, 2000. The increase in 
the credit rate under the alternative incremental research 
credit is effective for taxable yearsbeginning after June 30, 
1999. The expansion of qualified research to include research 
undertaken in any possession of the United States is effective for 
qualified research expenditures paid or incurred beginning after June 
30, 1999.

D. Extend Exceptions Under Subpart F for Active Financing Income (sec. 
           104 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 subparts 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.\5\
---------------------------------------------------------------------------
    \5\ 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 \6\ 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''),\7\ 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 another year.
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    \6\ 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).
    \7\ Division J of H.R. 4328, Making Omnibus Consolidated and 
Emergency Supplemental Appropriations For Fiscal Year 1999.
---------------------------------------------------------------------------

                        explanation of provision

    The bill extends for one year 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 only for taxable years of 
foreign corporations beginning in 2000, and for taxable years 
of U.S. shareholders with or within which such taxable years of 
foreign corporations end.

 E. Extend Suspension of Net Income Limitation on Percentage Depletion 
From Marginal Oil and Gas Wells (sec. 105 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 any 
producing property. Among the limitations that apply in 
calculating percentage depletion deductions is a restriction 
that, for any oil and gas property, 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, 2001.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1999.

  F. Extend the Work Opportunity Tax Credit (sec. 106 of the bill and 
                          sec. 51 of the Code)


                              present law

In general

    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 employer's deduction for wages is reduced by the amount 
of the credit.

Targeted groups eligible for the credit

    The eight targeted groups are: (1) families eligible to 
receive benefits under theTemporary Assistance for Needy 
Families (TANF) Program; (2) high-risk youth; (3) qualified ex-felons; 
(4) vocational rehabilitation referrals; (5) qualified summer youth 
employees; (6) qualified veterans; (7) families receiving food stamps; 
and (8) persons receiving certain Supplemental Security Income (SSI) 
benefits.

Minimum employment period

    No credit is allowed for wages paid to employees who work 
less than 120 hours in the first year of employment.

Expiration date

    The credit is effective for wages paid to, or incurred with 
respect to, qualified individuals who began work for the 
employer before July 1, 1999.

                           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 18 months, so that the credit 
is available for eligible individuals who begin work for an 
employer before January 1, 2001. The bill also clarifies the 
definition of first year of employment for purposes of the 
WOTC.

                             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 January 
1, 2001.

G. Extend The Welfare-To-Work Tax Credit (sec. 106 of the bill and sec. 
                            51A of the Code)


                              present law

    The Code provides a tax credit to employer 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 ere: (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 18 months, 
so that the credit is available for eligible individuals who 
begin work for an employer before January 1, 2001.

                             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.

 H. Extend and Modify Tax Credit for Electricity Produced by Wind and 
Closed-Loop Biomass Facilities (sec. 107 of the bill and sec. 45 of the 
                                 Code)


                              present law

    An income tax credit is allowed or 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 close-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 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 over the greater of (1) 25 percent of the net regular 
tax liability above $25,000 or (2) the tentative minimum tax. 
An unused general business credit generally may be carried back 
one taxable year and carried forward 20 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 produced 
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 to include production from 
facilities placed in service after June 30, 1999, and before 
January 1, 2001. The present-law initial placed in-service date 
(January 1, 1993) for closed-loop biomass facilities and 
definition of a closed-loop biomass facility is modified to 
extend the credit to post-December 31, 1999, electricity 
production at existing facilities that are modified after 
December 31, 1992, to use closed-loop biomass (e.g., 
switchgrass) as a fuel co-fired with coal. Production at co-
fired facilities is eligible without regard to whether the 
modification otherwise qualify the facility as having been 
newly placed in service under general income tax principles.
    The proposal also modifies the tax credit to include 
electricity produced from poultry litter, for facilities placed 
in service after December 31, 1999, and before January 1, 2001. 
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.
    The credit is expanded to include electricity produced from 
landfill gas, for electricity produced from facilities placed 
in service after December 31, 1999, and before January 1, 2001.
    Finally, the credit is expanded to include electricity 
produced from certain other biomass (in addition to close-loop 
biomass and poultry waste). This additional biomass includes 
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 crop, 
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, 2001 (including facilities 
placed in service before the date of enactment of this 
provision). As with closed-loop biomass facilities, the credit 
is allowed for electricity production attributable to this 
additional biomass produced at facilities that are co-fired 
with coal.
    In the case of electricity produced from landfill gas or 
gas from other biomass eligible for a credit under Code section 
29, the electricity production credit is available only if no 
section 29 credits have been claimed in the past on production 
from the gas production facility and if the owner of that 
facility irrevocably elects not to claim the section 29 credit 
with respect to any future production. Such an election 
attaches to the otherwise qualified gas production facility and 
is binding without regard to changes in ownership of the 
facility.
    With this extension and expansion of the section 45 
production credit, the Committee emphasizes its commitment to 
encouraging new, environmentally friendly technologies for the 
production of electricity. However, the Committee observes that 
there are many different policies that help promote a better 
environment for future generations to enjoy. Sometimes these 
other policies may conflict with the goals promoted by the 
section 45 production credit. For example in certain areas of 
the western United States, construction of wind turbines may 
pose ahazard to the endangered California condor. Even when 
creating more environmentally friendly electric power, qualified 
facilities can diminish our future by their encroachment on delicate 
habitats. The Committee strongly encourages Federal, State, and local 
officials to be cognizant of such concerns for the environment and 
ecosystems when approving the siting of facilities that quality for the 
section 45 production credit.

                             effective date

    The provision is effective on the date of enactment.

    I. Expansion of Qualifying Sites for Expensing of Environmental 
  Remediation Expenditures (sec. 108 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'' sties 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 expand the set of brownfield sites that may claim 
the tax benefits of expending beyond the relatively narrow 
class of sites identified in the Taxpayer Relief Act of 1997.

                        explanation of provision

    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 expand the class of eligible sites is 
effective for expenditures paid or incurred after December 31, 
1999.

J. Temporary Increase in Amount of Rum Excise Tax That is Covered Over 
 the Puerto Rico and the U.S. Virgin Islands (sec. 109 of the bill and 
                         sec. 7652 of the Code)


                              present law

    A $13.50 per proof gallon \8\ excise tax is imposed on 
distilled spirits produced in or imported (or brought) into the 
United States (sec. 5001). The excise tax does not apply to 
distilled spirits that are exported from the United States or 
to distilled spirits that are consumed in U.S. possessions 
(e.g., Puerto Rico and the Virgin Islands).
---------------------------------------------------------------------------
    \8\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol.
---------------------------------------------------------------------------
    The Code provides for coverover (payment) of $10.50 per 
proof gallon of the excise tax imposed on rum imported (or 
brought) into the United States (without regard to the country 
of origin) to Puerto Rico and the Virgin Islands (sec. 7652). 
Before 1984, the full amount of the excise tax ($10.50) was 
covered over to the treasuries of Puerto Rico and the Virgin 
Islands. However, since 1983, the excise tax has been increased 
to $13.50 without a corresponding increase in the amount 
covered over being provided. During the five-year period ending 
on September 30, 1998, the amount covered over was $11.30 per 
proof gallon. This temporary increase was enacted in 1993 as 
transitional relief accompanying a reduction in certain tax 
benefits for corporations operating in Puerto Rico and the 
Virgin Islands (sec. 936).
    Amounts covered over to Puerto Rico and the Virgin Islands 
are deposited in the treasuries of the two possessions for use 
as those possessions determine.

                           reasons for change

    The Committee finds that the fiscal needs of Puerto Rico 
and the Virgin Islands remain substantial and, therefore, finds 
it appropriate to increase to the full amount of the tax the 
amount covered over to Puerto Rico and the Virgin Islands from 
rum imported (or brought) into the United States.
    In addition, the Committee finds the need for natural 
resource protection in Puerto Rico to be urgent. Puerto Rico 
has a population density of more than 1,000 persons per square 
mile. The pressure on this small island's remaining open land 
and biodiversity is great. The Puerto Rico Conservation Trust 
is a private, non-profit section 501(c)(3) organization 
operating in Puerto Rico. The Puerto Rico Conservation Trust is 
the principal organization involved in land and marine 
conservation projects in Puerto Rico. It currently manages 14 
nature reserves on the island and has acquired or protected 
over 13,000 acres of land. Because of the unique role of the 
Puerto Rico Conservation Trust in natural and historic 
preservation in Puerto Rico, the Committee finds it appropriate 
to direct a portion of the cover to over to the Puerto Rico 
Conservation Trust for an 18-month period to help address the 
need for natural resource protection in Puerto Rico.

                        Explanation of Provision

    The provision increases from $10.50 to $13.50 per proof 
gallon the amount of excise taxes collected on rum brought into 
the United States that is covered over to Puerto Rico and the 
U.S. Virgin Islands.
    The provision provides that $0.50 per proof gallon of the 
amount covered over to Puerto Rico will be transferred to the 
Puerto Rico Conservation Trust, a private, non-profit section 
501(c)(3) organization operating in Puerto Rico.

                             Effective Date

    The provision is effective for excise taxes collected on 
rum imported or brought into the United States after June 30, 
1999 and before July 1, 2001.

 K. Delay Requirement That Registered Motor Fuels Terminals Offer Dyed 
Fuel as a Condition of Registration (sec. 110 of the bill and sec. 4101 
                              of the Code)


                              Present Law

    Excise taxes are imposed on highway motor fuels, including 
gasoline, diesel fuel, and kerosene, to finance the Highway 
Trust fund programs. Subject to limited exceptions, these taxes 
are imposed on all such fuels when they are removed from 
registered pipeline or barge terminal facilities, with any tax-
exemptions being accomplished by means of refunds to consumers 
of the fuel.\9\ One such exception allows removal of diesel 
fuel without payment of tax if the fuel is destined for a 
nontaxable use (e.g., use as heating oil) and is indelibly 
dyed.
---------------------------------------------------------------------------
    \9\ Tax is imposed before that point if the motor fuel is 
transferred (other than in bulk) from a refinery or if the fuel is sold 
to an unregistered party while still held in the refinery or bulk 
distribution system (e.g., in a pipeline or terminal facility).
---------------------------------------------------------------------------
    Terminal facilities are not permitted to receive and store 
non-tax-paid motor fuels unless they are registered with the 
Internal Revenue Service. Under present law, a prerequisite to 
registration is that if the terminal offers for sale diesel 
fuel, it must offer both dyed and undyed diesel fuel. 
Similarly, if the terminal offers for sale kerosene, it must 
offer both dyed and undyed kerosene. This ``dyed-fuel mandate'' 
was enacted in 1997, to be effective on July 1, 1998. 
Subsequently, the effective date was delayed until July 1, 
2000.

                           Reasons for Change

    When the present rules governing taxation of kerosene used 
as a highway motor fuel were enacted in 1997, the Congress was 
concerned that dyed kerosene (destined for nontaxable use) 
might not be available in markets where that fuel was commonly 
used (e.g., as heating oil). To ensure availability of untaxed 
kerosene for these uses, the Congress included a requirement 
that terminals offer both dyed and undyed kerosene and diesel 
fuel (if they offered the fuels for sale at all) as a condition 
of receiving untaxed fuels. Since that time, markets have 
provided dyed kerosene and diesel fuel for nontaxable uses in 
markets where there is a demand for such fuel even in the 
absence of a statutory mandate for such fuels. The Committee 
found that a further delay in this registration requirement is 
appropriate to allow a more complete evaluation before a 
decision is made on whether to repeal or retain the mandate.

                        Explanation of Provision

    The provision delays the effective date of the dyed-fuel 
mandate for an additional six months, through December 31, 
2000. No other changes are made to the present highway motor 
fuels excise tax rules.

                             Effective Date

    The provision is effective on the date of enactment.

  L. Production Credit for Fuel Produced by Certain Coal Gasification 
       Facilities (sec. 111 of the bill and sec. 29 of the Code)


                              Present Law

    Certain fuels produced from ``nonconventional sources'' and 
sold to unrelated parties are eligible for an income tax credit 
equal to $3 (adjusted for inflation except in the case of tight 
sands gas) per barrel or Btu oil barrel equivalent (sec. 29). 
Qualified fuels must be produced in the United States. For 
1999, the applicable credit rate is $6.23 per oil barrel 
equivalent.
    Qualified fuels include:
          (1) oil produced from shale and tar sands;
          (2) gas produced from geopressured brine, Devonian 
        shale, coal seams, tight formations (``tight sands''), 
        or biomass; and
          (3) liquid, gaseous, or solid synthetic fuels 
        produced from coal (including lignite).
    Except with respect to fuel produced from coal and biomass 
facilities, the credit is available only for wells drilled or 
facilities placed in service before January 1, 1993. In the 
case of coal and biomass facilities, the credit is available 
for production from facilities placed in service before July 1, 
1998, pursuant to a binding contract entered into before 
January 1, 1997.
    The credit may be claimed for qualified fuels produced and 
sold before January 1, 2003 (January 1, 2008 in the case of 
coal and biomass facilities subject to the later placed-in-
service date described above).

                           reasons for change

    The Committee believes that the credit provided under 
section 29 has been important to the development of 
environmentally friendly, domestic fuel sources. For example, 
the Committee 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 the section 
29 credit has encouraged taxpayers to exploit this organic fuel 
source which can help produce needed electricity while 
providing environmental benefits for communities and the 
nation. The Committee concludes that extending the placed in 
service date will increase the further development of such 
energy sources.

                        explanation of provision

    The provision extends the date by which certain facilities 
must be placed in service through June 30, 2000. This extension 
applies to the coal and biomass facilities which under present 
law were required to be paced in service before July 1, 1998. 
The January 1, 1997, binding contract date and the January 1, 
2008, production period expiration date are not changed.
    Credits allowed under the proposal that are attributable to 
periods before October 1, 2004, may not be taken into account 
in determining any amount required to be paid for any purpose 
under the Internal Revenue Code before October 1, 2004. Such 
credits will be available (without interest) on or after 
October 1, 2004, by filing an amended return, applying for an 
expedited refund, applying for an adjustment of estimated tax 
payments, or by other means allowed under the Internal Revenue 
Code.

                             effective date

    The provision is effective on the date of enactment.

                  TITLE II. REVENUE OFFSET PROVISIONS


 A. Modification of Individual Estimated Tax Safe Harbor (sec. 201 of 
                  the bill and sec. 6654 of the Code)


                              present law

    Under present law, an individual taxpayer generally is 
subject to an addition to tax for any underpayment of estimated 
tax. An individual generally does not have an underpayment of 
estimated tax if he or she makes timely estimated tax payments 
at least equal to: (1) 90 percent of the tax shown on the 
current year's return or (2) 100 percent of the prior year's 
tax. For taxpayers with a prior year's AGI above $150,000,\10\ 
however, the rule that allows payment of 100 percent of prior 
year's tax is modified. Those taxpayers with AGI above $150,000 
generally must make estimated payments based on either (1) 90 
percent of the tax shown on the current year's return or (2) 
110 percent of the prior year's tax.
---------------------------------------------------------------------------
    \10\ $75,000 for married taxpayers filing separately.
---------------------------------------------------------------------------
    For taxpayers with a prior year's AGI above $150,000, the 
prior year's tax safe harbor is modified for taxable years 
through 2002. For such taxpayers making estimated payments 
based on prior year's tax, payments must be made based on 105 
percent of prior years tax for taxable years beginning in 1999, 
106 percent of prior year's tax for taxable years beginning in 
2000 and 2001, and 112 percent of prior year's tax for taxable 
years beginning in 2002.

                           reasons for change

    The Committee believes it is appropriate to modify the 
operation of these rules.

                        explanation of provision

    For taxpayers with a prior year's AGI above $150,000, the 
prior year's tax safe harbor is modified for taxable years 2000 
and 2004. For such taxpayers making estimated payments based on 
prior year's tax, payments must be made based on 110.5 percent 
of prior year's tax for taxable years beginning in 2000, and 
payments must be based on 112 percent of prior year's tax for 
taxable years beginning in 2004.

                             effective date

    For taxable years beginning after December 31, 1999, and 
before January 1, 2001, taxpayers with prior year's AGI above 
$150,000 who make estimated tax payments based on prior year's 
tax must do so based on 110.5 percent of the prior year's tax. 
For taxable years beginning after December 31, 2003, and before 
January 1, 2005, taxpayers with prior year's AGI above $150,000 
who make estimated payments based on prior year's tax must do 
so based on 112 percent of prior year's tax.

B. Modify Foreign Tax Credit Carryover Rules (sec. 202 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.

C. Clarify the Tax Treatment of Income and Losses on Derivatives (sec. 
               203 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.\11\
---------------------------------------------------------------------------
    \11\ 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.\12\
---------------------------------------------------------------------------
    \12\ 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.\13\ The Committee believes that it is 
appropriate to confirm this treatment by specifying that such 
supplies are ordinary assets.
---------------------------------------------------------------------------
    \13\ 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 commodities 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.

D. Add Certain Vaccines Against Streptococcus Pneumoniae to the List of 
 Taxable Vaccines (sec. 204 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 penumococcal 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.\14\ 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.
---------------------------------------------------------------------------
    \14\ 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.
    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 expanses 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 
by January 31, 2000.

                             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.

E. Expand Reporting of Cancellation of Indebtedness Income (sec. 205 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 Serivce (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.

 F. Impose Limitation on Prefunding of Certain Employee Benefits (sec. 
          206 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 section 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 quantified 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 a plan will not be 
treated as failing to provide only medical benefits, disability 
benefits, and qualifying group-term life insurance benefits to 
plan beneficiaries merely because the plan provides certain de 
minimis ancillary benefits in addition to medical, disability, 
and qualifying group-term life insurance benefits (e.g., 
accidental death and dismemberment insurance, group-term life 
insurance coverage for dependents and directors, business 
travel insurance, and 24-hour accident insurance). Such 
ancillary benefits are considered de minimis only if the total 
premiums for all such insurance coverages for the year do not 
exceed 2 percent of the total contributions to the plan for the 
year for all employers. Of course, any benefits provided are 
includable in income unless expressly excluded under a specific 
provision under the Code.
    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 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.\15\ 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.
---------------------------------------------------------------------------
    \15\ For purposes of the provision, medical benefits, disability 
benefits, and qualifying group-term life insurance benefits include de 
minimis ancillary benefits as described above.
---------------------------------------------------------------------------
    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.

  G. Increase Elective Withholding Rate for Nonperiodic Distributions 
From Deferred Compensation Plans (sec. 207 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 includable in gross income, (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)).
    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 includable 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.

H. Limit Conversion of Character of Income From Constructive Ownership 
   Transactions (sec. 208 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.\16\
---------------------------------------------------------------------------
    \16\ Section 1234A, as amended by the Taxpayer Relief Act of 1997.
---------------------------------------------------------------------------
    A pass-thru entity (such as 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 \17\ 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.
---------------------------------------------------------------------------
    \17\ 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.\18\
---------------------------------------------------------------------------
    \18\ 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, \19\ (9) a foreign personal holding company, and (10) 
a foreign investment company.
---------------------------------------------------------------------------
    \19\ For this purpose, a passive foreign investment company 
includes an investment company that is also a controlled foreign 
corporation.
---------------------------------------------------------------------------
    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).\20\ 
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).
---------------------------------------------------------------------------
    \20\ 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.
---------------------------------------------------------------------------
    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 ordinaryincome 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 \21\ during the term of the constructive 
ownership transaction.
---------------------------------------------------------------------------
    \21\ The accrual rate is the applicable Federal rate on the day the 
transaction closed.
---------------------------------------------------------------------------
    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.
    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 contract, option, or 
other position that is 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, 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.

I. Treatment of Excess Pension Assets Used for Retiree Health Benefits 
 (sec. 209 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 includable 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 
accrues 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 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 includable 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 orindirectly) 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.\22\
---------------------------------------------------------------------------
    \22\ Title I of the Employee Retirement Income Security Act of 
1974, as amended (``ERISA''), provides that plan participants, the 
Secretaries of 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 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.

  J. Modify Installment Method and Prohibit its Use by Accrual Method 
  Taxpayers (sec. 210 of the bill and secs. 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 
therecognition 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 \23\ 
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.
---------------------------------------------------------------------------
    \23\ 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 the next ten years. The provision does 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 (1) 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), (2) sales of property used or produced in the 
trade or business of farming, or (3) 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.

K. Limitation on the Use of Non-Accrual Experience Method of Accounting 
            (sec. 211 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 
generally are allowed to use the cash method without regard to 
whether their average annual gross receipts exceed $5 million 
unless the purchase, production, or sale of merchandise is an 
income producing factor.

                           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 (service 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 tat could result if the non-accrual 
experience method were eliminated with regard to amounts to be 
received for such services.

                        explanation of provision

    The provision 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 will be taken into account over a 
period not to exceed four years under principles consistent 
with those in Rev. Proc. 98-60.\24\
---------------------------------------------------------------------------
    \24\ 1998-51 I.R.B. 16.
---------------------------------------------------------------------------

L. Denial of Charitable Contribution Deduction for Transfers Associated 
With Split-dollar Insurance Arrangements (sec. 212 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.\25\
---------------------------------------------------------------------------
    \25\ United States v. Americn Bar Endowment, 477 U.S. 105 (1986). 
Treas. Reg. sec. 1.170A-1(h).
---------------------------------------------------------------------------
    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 taxpayerobtains 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 \26\ 
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.
---------------------------------------------------------------------------
    \26\ ``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.
---------------------------------------------------------------------------
    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 with 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 \27\ 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.
---------------------------------------------------------------------------
    \27\ The provision is similar to H.R. 630, introduced by Mr. Archer 
and 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 thetransfer 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.

 M. Prevent Duplication or Acceleration of Loss Through Assumption of 
  Certain Liabilities (sec. 213 of the bill and sec. 358 of the Code)


                              present law

    Generally, no gain or loss is recognized when one or more 
persons contribute property in exchange for stock and 
immediately after the exchange such person or persons control 
the corporation. However, the person may recognize gain to the 
extent it receives money or other property (``boot'') as part 
of the exchange (sec. 351).
    The assumption of liabilities by the controlled corporation 
generally is not treated as boot received by the transferor. 
One exception to this rule is when, ``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)). Another exception applies to the 
extent that the liabilities assumed exceed the total of the 
adjusted basis of the property transferred to the controlled 
corporation pursuant to the exchange (sec. 357(c)).
    In general, the transferor's basis in the stock of the 
controlled corporation is the same as the basis of the property 
contributed to the controlled corporation, increased in the 
amount of any gain recognized by the transferor on the 
exchange, and reduced by the amount of any money or property 
received (sec. 358). For this purpose, the assumption of a 
liability is treated as money received by the transferor.
    Special rules apply in connection with the assumption of a 
liability that would give rise to a deduction. These 
liabilities are not taken into account in determining whether 
the transferor has gain on the exchange, and the transferor's 
basis in the stock of the controlled corporation is not reduced 
by the assumption of these liabilities. The Internet Revenue 
Service has ruled that the assumption of certain contingent 
liabilities by an accrual basis corporation is covered by this 
rule.\28\
---------------------------------------------------------------------------
    \28\ Rev. Rul. 95-74, 1995-2 C.B. 36.
---------------------------------------------------------------------------

                           reasons for change

    The Committee is concerned about a type of transaction in 
which taxpayers seek to accelerate, and potentially duplicate, 
deductions involving certain liabilities. As an example, assume 
a transferor corporation transfers assets with a fair market 
value basis) in exchange for preferred stock of the transferee 
corporation, plus the transferee's assumption of a contingent 
liability that is deductible in the future. The transferor 
claims a basis for the stock equal to the basis of the 
transferred assets. However, the value of the stock is reduced 
by the amount of the liability, creating a potential loss. The 
transferor may then attempt to accelerate the deduction that 
would be attributable to the liability by selling or exchanging 
the stock. Furthermore, the transferee might take the position 
that it is entitled to deduct the payments on the liability, 
effectively duplicating the deduction attributable to the 
liability.
    The conference report to the Taxpayer Refund and Relief Act 
of 1999 contained a provision that would have amended the 
``principal purpose'' aspect of the anti-abuse rule. The 
Committee believes that a different approach is more 
appropriate; one that eliminates any loss on the sale of stock 
attributable to such liabilities.

                        explanation of provision

    The provision provides that if the basis of stock received 
by a transferor as part of a tax-free exchange with a 
controlled corporation exceeds its fair market value (without 
regard to this proposal), then the basis of the stock received 
is reduced (but not below the fair market value) by the amount 
(determined as of the date of the exchange) of any liability 
that (1) is assumed in exchange for such property, and (2) did 
not otherwise reduce the transferor's basis of the stock by 
reason of the assumption. The provision does not apply where 
the trade or business giving rise to the liability is 
transferred to the corporation as part of the exchange. Nor 
does the provision change the tax treatment with respect to the 
transferee corporation. For this purpose, the term 
``liability'' includes any obligation to make payment, without 
regard to whether the obligation is fixed or contingent or 
otherwise taken into account under the Code. The Secretaryof 
the Treasury shall prescribe such regulations as may be necessary to 
carry out the purposes of this provision.
    The application of the provision is illustrated in the 
following example: Assume a taxpayer transfers assets with an 
adjusted basis and fair market value of $100 to its wholly-
owned corporation and the corporation assumes $40 of 
liabilities (the payment of which would give rise to a 
deduction). Thus, the value of the stock received by the 
transferor is $60. Under present law, the basis of the stock 
would be $100. The provision requires that the basis of the 
stock be reduced to $60 (i.e., a reduction of $40). The basis 
reduction would not be required if the transferred assets 
consisted of the trade or business with respect to which the 
liability arose.
    The Secretary of the Treasury is directed to prescribe 
rules providing appropriate adjustments to prevent the 
acceleration or duplication of losses through the assumption of 
liabilities (as defined in the provision) in transactions 
involving partnerships.

                             effective date

    The provision is effective for assumptions of liabilities 
on or after October 19, 1999. Except as provided by the 
Secretary of the Treasury, the rules addressing transactions 
involving partnerships would be effective for assumptions of 
liabilities on or after October 19, 1999.

N. Require Consistent Treatment and Provide Basis Allocation Rules for 
 Transfers of Intangibles in Certain Nonrecognition Transactions (sec. 
           214 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 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).

                           reasons for change

    The Committee is concerned that the uncertainty of present 
law may encourage transferors and transferees to attempt to 
take inconsistent reporting positions that may have the effect 
of ``whipsawing'' the government. Also, the Committee believes 
that clear basis allocation rules should be provided.

                        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.

 O. Distributions by a Partnership to a Corporate Partner of Stock in 
  Another Corporation (sec. 215 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.\29\
---------------------------------------------------------------------------
    \29\ 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 could 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 exceeds 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 is also increased by $100 in this example, under 
the provision.
    The basis reduction is 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.
    For purposes of the provision, if a corporation acquires 
(other than in a distribution from a partnership) stock the 
basis of which is determined (by reason of being distributed 
from a partnership) in whole or in part by reference to section 
732(a)(2) or (b), then the corporation is treated as receiving 
a distribution of stock from a partnership. For example, if a 
partnership distributes property other than stock (such as real 
estate) to a corporate partner, and that corporate partner 
contributes the real estate to another corporation in a section 
351 transaction, then the stock received in the section 351 
transaction is not treated as distributed by a partnership, and 
the basis reduction under this provision does not apply. As 
another example, if a partnership distributes stock to two 
corporate partners, neither of which have control of the 
distributed corporation, and the two corporate partners merge 
and the survivor obtains control of the distributed 
corporation, the stock of the distributed corporation that is 
acquired as a result of the merger is treated as received in a 
partnership distribution; the basis reduction rule of the 
provision applies.
    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.
    The provision also provides for regulations, including 
regulations to avoid double counting and to prevent the abuse 
of the purposes of the provision. It is intended that 
regulations prevent the avoidance of the purposes of the 
provision through the use of tiered partnerships.

                             effective date

    The provision is effective for distributions made after 
July 14, 1999, except that in the case of a corporation that is 
a partner in a partnership on July 14, 1999, the provision is 
effective for distributions by that partnership to the 
corporation after the date of enactment.

 P. Prohibited Allocations of Stock in an S Corporation ESOP (sec. 216 
          of the bill and secs. 409(n) and 4979A of the Code)

    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 includable 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 includable 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 that such a result was inappropriate. 
Since the enactment of the 1997 Act, however, the Committee has 
become aware that the present-law rules allow inappropriate 
deferral and possibly tax avoidance in some cases.
    The Committee believes that S corporations should be able 
to establish ESOPs. The Committee does not believe, however, 
that ESOPs should be used by S corporation owners to obtain 
inappropriate tax deferral or avoidance. The Committee is 
particularly concerned about S corporations owned by a small 
group of individuals who may attempt to use present law to 
defer or avoid income taxes. The Committee believes that the 
provision in the bill strikes an appropriate balance between 
the policies of fostering employee ownership in S corporations 
and ensuring the proper application of the Federal income tax 
laws.

                        explanation of provision

In general

    Under the bill, if there is a nonallocation year with 
respect to an ESOP maintained by an S corporation: (1) the 
amount allocated in a prohibited allocation to an individual 
who is a disqualified person is treated as distributed to such 
individual (i.e., the value of the prohibited allocation is 
includable in the gross income of the individual receiving the 
prohibited allocation); (2) an excise tax is imposed on the S 
corporation equal to 50 percent of the amount involved in a 
prohibited allocation; and (3) an excise tax is imposed on the 
S corporation with respect to any synthetic equity owned by a 
disqualified person.\30\
---------------------------------------------------------------------------
    \30\ A prohibited allocation does not result in disqualification of 
the plan.
---------------------------------------------------------------------------

Definition of nonallocation year

    A nonallocation year means any plan year of an ESOP holding 
shares in an S corporation if, at any time during the plan 
year, disqualified persons own at least 50 percent of the 
number of outstanding shares of the S corporation.
    A person is a disqualified person if the person is either 
(1) a member of a ``deemed 20-percent shareholder group'' or 
(2) a ``deemed 10-percent shareholder.'' A person is a member 
of a ``deemed 20-percent shareholder group'' if the number of 
deemed-owned shares of the person and his or her family members 
is at least 20 percent of the number of deemed-owned shares of 
stock in the S corporation.\31\ A person is a deemed 10-percent 
shareholder if the person is not a member of a deemed 20-
percent shareholder group and the number of the person's 
deemed-owned shares is at least 10 percent of the number of 
deemed-owned shares of stock of the corporation.
---------------------------------------------------------------------------
    \31\ A family member of a member of a ``deemed 20-percent 
shareholder group'' with deemed owned shares is also treated as a 
disqualified person.
---------------------------------------------------------------------------
    In general, ``deemed-owned shares'' mean: (1) stock 
allocated to the account of an individual under the ESOP, and 
(2) an 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 contributions under the terms of the plan.
    For purposes of determining whether there is a 
nonallocation year, ownership of stock is generally attributed 
under the rules of section 318,\32\ except that (1) the family 
attribution rules are modified to include certain other family 
members, as described below, (2) option attribution does not 
apply (but instead special rules relating to synthetic equity 
describes below apply), and (3) ``deemed-owned shares'' held by 
the ESOP are treated as held by the individual with respect to 
whom they are deemed owned.
---------------------------------------------------------------------------
    \32\ These attribution rules also apply to stock treated as owned 
by reason of the ownership of synthetic equity.
---------------------------------------------------------------------------
    Under the bill, family members of an individual include (1) 
the spouse \33\ 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 and 
linear descendant of the brother or sister, and (4) the spouse 
of any person described in (2) or (3).
---------------------------------------------------------------------------
    \33\ As under section 318, an individual's spouse is not treated as 
a member of the individual's family if the spouses are legally 
separated.
---------------------------------------------------------------------------
    The bill contains special rules applicable to synthetic 
equity interests. Except to the extent provided in regulations, 
the stock on which a synthetic equity interest is based is 
treated as outstanding stock of the S corporation and as 
deemed-owned shares of the person holding the synthetic equity 
interest if such treatment would result in the treatment of any 
person as a disqualified person or the treatment of any year as 
a nonallocation year. Thus, for example, disqualified persons 
for a year include those individuals who are disqualified 
persons under the general rule (i.e., treating only those 
shares held by the ESOP as deemed-owned shares) and those 
individuals who are disqualified individuals if synthetic 
equity interests are treated as deemed-owned shares.
    ``Synthetic equity'' means any stock option, warrant, 
restricted stock, deferred issuance stock right, or similar 
interest that gives the holder the right to acquire or receive 
stock of the S corporation in the future. Except to the extent 
provided in regulations, synthetic equity also includes a stock 
appreciation right, phantom stock unit, or similar right to a 
future cash payment based on the value of such stock or 
appreciation in such value.\34\ Ownership of synthetic equity 
is attributed in the same manner as stock is attributed under 
the provision (as described above). In addition, ownership of 
synthetic equity is attributed under the rules of section 
318(a)(2) and (3) in the same manner as stock.
---------------------------------------------------------------------------
    \34\ The provisions relating to synthetic equity do not modify the 
rules relating to S corporations, e.g., the circumstances in which 
options or similar interests are treated as creating a second class of 
stock.
---------------------------------------------------------------------------

Definition of prohibited allocation

    An ESOP of an S corporation is required to provide that no 
portion of the assets of the plan attributable to (or allocable 
in lieu of) S corporation stock may, during a nonallocation 
year, accrue (or be allocated directly or indirectly under any 
qualified plan of the S corporation) for the benefit of a 
disqualifed person. A ``prohibited allocation'' refers to 
violation of this provision. A prohibited allocation occurs, 
for example, if income on S corporation stock held by an ESOP 
were allocated to the account of an individual who is a 
disqualified person.

Application of excise tax

    In the case of a prohibited allocation, the S corporation 
is liable for an excise tax equal to 50 percent of the amount 
of the allocation. For example, if S corporation stock were 
allocated in a prohibited allocation, the excise tax would be 
equal to 50 percent of the fair market value of such stock.
    A special rule applies in the case of the first 
nonallocation year, regardless of whether there is a prohibited 
allocation. In that year, the excise tax also applies to the 
fair market value of the deemed-owned shares of any 
disqualified person held by the ESOP, even though those shares 
are not allocated to the disqualified person in that year.
    As mentioned above, the S corporation is also liable for an 
excise tax with respect to any synthetic equity interest owned 
by any disqualified person in a nonallocation year. The excise 
tax is 50 percent of the value of the shares on which synthetic 
equity is based.

Treasury regulations

    The Treasury Department is given the authority to prescribe 
such regulations as may be necessary to carry out the purposes 
of the provision.

                             Effective Date

    The provision generally is 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.

         Q. Treatment of Real Estate Investment Trusts (REITs)


1. Provisions relating to REITs (sec. 221-226, 231, 241, 251, and 261 
        of the bill and secs. 852, 856, and 857 of the Code)

                              Present Law

    A real estate investment trust (``REIT'') is an entity that 
receives most of its income from passive real-estate related 
investments and that essentially receives pass-through 
treatment for income that is distributed to shareholders. If an 
electing entity meets the requirements of REIT status, the 
portion of its income that is distributed to the investors each 
year generally is taxed to the investors without being 
subjected to a tax at the REIT level. In general, a REIT must 
derive its income from passive sources and not engage in any 
active trade or business.
    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 source-of-income tests, at 
least 95 percent of its gross income generally must be derived 
from rents from real property, dividends, interest, and certain 
other passive sources (the ``95 percent test''). In addition, 
at least 75 percent of its gross income generally must be from 
real estate sources, including rents from real property and 
interest on mortgages secured by real property. For purposes of 
the 95 and 75 percent tests, qualified income includes amounts 
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 indebtness which such property secured.
    In general, for purposes of the 95 percent and 75 percent 
tests, rents from real property do not include amounts for 
services to tenants or for managing or operating real property. 
However, there are some exceptions. Qualified rents include 
amounts received for services that are ``customarily furnished 
or rendered'' in connection with the rental or real property, 
so long as the services are furnished through an independent 
contractor from whom the REIT does not derive any income. 
Amounts received for services that are not ``customarily 
furnished or rendered'' are not qualified rents.
    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. In addition, a REIT cannot 
derive any income from an independent contractor.
    Rents for certain personal property leased in connection 
with real property are treated as rents from real property if 
the adjusted basis of the personal property does not exceed 15 
percent of the aggregate adjusted bases of the real and the 
personal property.
    Rents from real property do not include amounts received 
from any corporation if the REIT owns 10 percent or more of the 
voting power or of the total number of shares of all classes of 
stock of such corporation. Similarly, in the case of other 
entities, rents are not qualified if the REIT owns 10 percent 
of more in the assets or net profits of such person.
    At the close of each quarter of the taxable year, at least 
75 percent of the value of total REIT assets must be 
represented by real estate assets, cash and cash items, and 
Government securities. Also, 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. Securities for purposes of these rules 
are defined by reference to the Investment Company Act of 
1940.\35\
---------------------------------------------------------------------------
    \35\ 15 U.S.C. 80a-1 and following. See Code section 856(c)(5)(F).
---------------------------------------------------------------------------
    Under an exception to the ownership rule, a REIT is 
permitted to have a wholly owned subsidiary corporation, but 
the assets and items of income and deduction of such 
corporation are treated as those of the REIT, and thus can 
affect the qualification of the REIT under the income and asset 
tests.
    A REIT generally is 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 madebefore 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.\36\
---------------------------------------------------------------------------
    \36\ Treas. Reg. sec. 1.858-1(b)(2).
---------------------------------------------------------------------------
    A REIT that has been or has combined with a C corporation 
\37\ 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 as being first 
from pre-REIT accumulated earnings and profits. RICs do not 
have a similar ordering rule.
---------------------------------------------------------------------------
    \37\ A ``C corporation'' is a corporation that is subject to 
taxation under the rules of subchapter C of the Internal Revenue Code, 
which generally provides for a corporate level tax on corporate income. 
Thus, a C corporation is not a pass-through entity. Earnings and 
profits of a C corporation, when distributed to shareholders, are taxed 
to the shareholders as dividends.
---------------------------------------------------------------------------
    In the case of a RIC, any distribution made within a 
specific period after determination that the investment company 
did not qualify as a RIC for the taxable year will be treated 
as applying to the RIC for the non-RIC year, ``for purposes of 
applying [the earnings and profits rule that forbids a RIC to 
have non-RIC earnings and profits] to subsequent taxable 
years''. 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.'' \38\
---------------------------------------------------------------------------
    \38\ Treas. Reg. sec. 1.857-11(c).
---------------------------------------------------------------------------

                           reasons for change

    The Committee is concerned that under present law, 
disqualified income of a REIT may be avoided through 
transactions with entities that are engaged in activities that 
produce disqualified income but that are effectively owned by 
the REIT. For example, a REIT may invest in an entity in which 
it owns virtually all the value (e.g., through preferred stock) 
even though it owns only 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, and 
receive significant interest income that reduces the entity's 
taxable income (subject to corporate level tax if the entity is 
a C corporation) while producing permissible income to the 
REIT.
    Similarly, 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 combined with a small equity 
interest, to reduce the amount of nonqualified income it would 
report from the partnership through its partnership interest, 
while still receiving a significant income stream through the 
debt.
    As a result of these concerns, the Committee believes that 
a 10-percent value, as well as a 10-percent vote test, 
generally is appropriate to test the permitted relationship of 
a REIT to the entities in which it invests.
    The Committee believes, however, that certain types of 
activities that relate 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'' where there are rules which limit the amount of 
the subsidiary's income that can be reduced through 
transactions with the REIT. A limit on the amount of REIT asset 
value that can be represented by investment in such 
subsidiaries is also desirable. In addition, 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. One type of activity is the provision of tenant 
services that the REIT wishes to provide in order to remain 
competitive that might not be considered customary because they 
are relatively new or ``cutting-edge''. The Committee believes 
that provision of tenant services by taxable REIT subsidiaries 
will simplify such rental operations since uncertainty whether 
a particular service provided by a subsidiary is ``customary'' 
will not affect the parent's qualification as a REIT. Another 
type of activity that the Committee believes appropriate for a 
subsidiary is management and operation of the real estate in 
which a REIT has developed expertise with respect to its own 
properties that it also would like to provide to third parties.
    The Committee believes that allowing operation of health 
care facilities directly by a REIT for a limited period of time 
is appropriate to assure continuous provision of health care 
services where the facilities are acquired by the REIT upon 
termination of a lease (as upon foreclosure) where there may 
not be enough time to obtain a new independent provider of such 
health care services.
    Finally, the Committee believes that a number of other 
simplifying changes are desirable, including simplifying the 
determination whether a publicly traded entity is an 
independent contractor and modifying and conforming certain RIC 
and REIT distribution rules.

                        explanation of provision

Investment limitations and taxable REIT subsidiaries

    General rule.--Under the provision, a REIT generally cannot 
own more than 10 percent of the total value of securities of a 
single issue, in addition to the present law that a REIT cannot 
own more than 10 percent of the outstanding voting securities 
of a single issuer. In addition, no more than 20 percent of the 
value of a REIT's assets can be represented by securities of 
the taxable REIT subsidiaries that are permitted under the 
bill.
    Exception for safe-harbor debt.--For purposes of the new 
10-percent value test, securities are generally 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 issuer is an 
individual, or if the REIT (and any taxable REIT subsidiary of 
such REIT) owns no other securities of the issuer. However, 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 through its 
partnership interest, even though it also may derive qualified 
interest income through its safe harbor debt interest.
    Exception for taxable REIT subsidiaries.--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 may not exceed 20 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, rents paid to 
a REIT are not generally qualified rents if the REIT owns more 
than 10 percent of the value (as well as of the vote) of a 
corporation paying the rents. The only exceptions are for rents 
that are paid by taxable REIT subsidiaries and that also meet a 
limited rental exception (where 90 percent of space is leased 
to third parties at comparable rents) and an exception for 
rents from certain lodging facilities (operated by an 
independent contractor).
    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 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 subisdiary 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 (1) the amounts are de minimis, (2) there 
is specified evidence that charges to unrelated parties are 
substantially comparable, (3) certain charges for services from 
the taxable REIT subsidiary are separately stated, or (4) 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 and 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 sole reason for 
the determination is that the RIC had no-RIC earnings and 
profits in the initial year (i.e., because it was determined 
not to have distributed all C corporation earnings and 
profits), 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.

Provision regarding rental income from certain personal property

    The provision modifies the present law rule that permits 
certain rents from personal property to be treated as real 
estate rental income if such personal property does not exceed 
15 percent of the aggregate of real and personal property. The 
provision replaces the present law comparison of the adjusted 
bases of properties with a comparison based on fair market 
values.

                             effective date

    The provision is 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. The grandfathering of such 
securities ceases to apply if the REIT acquires additional 
securities of that issuer after that date, other than pursuant 
to a binding contract in effect on that date and at all times 
thereafter, or in a reorganization with another corporation the 
securities of which are grandfathered.
    This transition also ceases to apply to securities of a 
corporation as of the first day of 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.
    The new 10 percent of value limitation for purposes of 
defining qualified rents is effective for taxable years 
beginning after December 31, 2000. There is an exception for 
rents paid under a lease or pursuant to a binding contract in 
effect on July 12, 1999 and at all times thereafter.

2. Modify estimated tax rules for closely held REITs (sec. 271 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 if 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 certainperiod 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 
owned 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 November 16, 1999.

3. Modify treatment of closely held REITs (sec. 281 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 independent contractor 
qualification under present law apply (secs. 856(d)(5) and 
856(h)(3)). However, once stock is deemed owned by a qualified 
entity (a REIT or a partnership of which a REIT is at least a 
50 percent partner) it will not be reattributed under section 
318(a)(3)(C). 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 
thecorporation's largest shareholder, (4) the directors of the 
corporation must adopt a resolution setting forth an intent to engage 
in a going public transaction, (5) 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, and (6) the corporation must 
annually increase the value of real estate assets by at least 10 
percent.
    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.
    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.
    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. The requirement 
that an incubator REIT have only common stock outstanding shall 
not fail to be met for a taxable year merely because during 
that year a going public transaction is accomplished through a 
transaction described in section 368(a)(1), with another entity 
that had another class of stock outstanding prior to the 
transaction.

                             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 under section 856 of the Code and 
would produce qualified real estate related income for a REIT.

               TITLE III. EXCLUSION FROM PAYGO SCORECARD


        A. Exclusion from Paygo Scorecard (sec. 301 of the bill)


                              present law

    Under the Balanced Budget and Emergency Deficit Control Act 
of 1985, as amended, tax reduction legislation is subject to a 
``pay-as-you-go'' (PAYGO) requirement. The PAYGO system tracks 
legislation that may increase budget deficits using a 
``scorecard'' (estimated by the Office of Management and 
Budget).

                           reasons for change

    The Committee believes that an exclusion from the paygo 
scorecard is appropriate for the bill.

                        explanation of provision

    The provision provides that any net deficit increase or net 
surplus increase resulting from the enactment of the Act is not 
counted for purposes of section 252 of the Balanced Budget and 
Emergency Deficit Control Act of 1985.

                             effective date

    The provision is effective upon 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 ``TAX RELIEF EXTENSION ACT OF 1999,'' AS REPORTED BY THE SENATE COMMITTEE ON FINANCE
                                                                        [Fiscal years 2000-2009, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
            Provision                     Effective            2000       2001       2002       2003       2004       2005       2006       2007       2008       2009     2000-2004   2000-2009
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 Extension of Expiring
 Provisions Through 12/31/00
    A. Treatment of               tybi 1999 & 2000........       -972       -742  .........  .........  .........  .........  .........  .........  .........  .........      -1,714      -1,714
     Nonrefundable Personal
     Credits Under the
     Alternative Individual
     Minimum Tax.
    B. Employer Provided          (1).....................       -254       -137  .........  .........  .........  .........  .........  .........  .........  .........        -391        -391
     Educational Assistance for
     Graduate and Undergraduate
     Courses.
    C. Research Tax Credit, and   (2).....................     -1,659       -942       -445       -322       -185        -43  .........  .........  .........  .........      -3,551      -3,594
     Increase AIC Rates by 1
     Percentage Point; Expand to
     Puerto Rico.
    D. Exception from Subpart F   tybi 2000...............       -187       -579  .........  .........  .........  .........  .........  .........  .........  .........        -766        -766
     for Active Financing Income.
    E. Suspension of 100% Net     tyba 12/31/99...........        -23        -12  .........  .........  .........  .........  .........  .........  .........  .........         -35         -35
     Income Limitation for
     Marginal Properties.
    F. Work Opportunity Tax       wpoifibwa 6/30/99.......       -229       -217       -121        -48        -17         -3  .........  .........  .........  .........        -632        -635
     Credit.
    G. Welfare-to-Work Tax        wpoifibwa 6/30/99.......        -49        -56        -37        -16         -6         -1        (3)  .........  .........  .........        -163        -165
     Credit.
    H. Extend Tax Credit for      (4).....................        -33        -44        -46        -47        -48        -49        -50        -51        -53        -53        -215        -473
     Electricity Produced from
     Wind and Closed-Loop
     Biomass Facilities and
     Modify to Include
     Electricity Produced from
     Poultry Waste and Operators
     of Such Government Owned
     Facilities, Landfill Gas
     Used to Produce
     Electricity, and Other
     Biomass (including
     production from such
     biomass at coal cofiring
     facilities).
    I. Brownfields Environmental  eia 12/31/99............        -19        -19         -5        (3)        (5)          1          2          2          3          5         -42         -29
     Remediation; Expand to all
     of the United States.
    J. Increased Amount of Rum    (7).....................        -83        -16  .........  .........  .........  .........  .........  .........  .........  .........         -99         -99
     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)
     and Transfer 50 cents to
     Puerto Rico Conservation
     Trust 6.
    K. Delay the Requirement      DOE.....................                                                        Negligible Revenue Effect
     that Registered Motor Fuels
     Terminals Offer Dyed
     Kerosene as a Condition of
     Registration.
    L. Extend Section 29 Placed-  DOE.....................  .........  .........  .........  .........  .........       -438        -74        -75        -27  .........  ..........        -613
     in-Service Date (for 8
     months) 8.
                                                           -------------------------------------------------------------------------------------------------------------------------------------
      Total of Extension of       ........................     -3,508     -2,764       -654       -433       -256       -533       -122       -124        -77        -48      -7,608      -8,514
       Expiring Provisions
       Through 12/31/00.
                                                           =====================================================================================================================================
II. Revenue Offset Provisions
    A. Modify Individual          tyba 12/31/99...........      2,700     -2,700  .........  .........      1,200     -1,200  .........  .........  .........  .........       1,200  ..........
     Estimated Tax Safe Harbor
     to 110.5% for tax year
     2000, and 112% for tax year
     2004.
    B. Modify Foreign Tax Credit  tyba 12/31/99...........         87        562        502        468        437        406        279        263        259        257       2,056       3,520
     Carryover Rules--1-year
     carryback of foreign tax
     credits and 7-year
     carryforward.
    C. Clarify the Tax Treatment  DOE.....................        (5)          1          1          1          1          1          1          1          1          1           4           9
     of Income and Losses from
     Derivatives.
    D. Add the Streptococcus      (9).....................          4          7          9         10         10         10         10         10         10         11          39          91
     Pneumoniae Vaccine to the
     List of Taxable Vaccines in
     the Federal Vaccine
     Insurance Program; Study of
     Program.
    E. Information Reporting on   coia 12/31/99...........  .........          7          7          7          7          7          7          7          7          7          28          63
     Cancellation of
     Indebtedness by Non-Bank
     Financial Institutions.
    F. Impose Limitation on Pre-  cpoaa 6/9/99............        115        141        147        149        140        129        118        105         90         74         693       1,209
     Funding of Certain Employee
     Benefits.
    G. Increase to 15% (from      dma /12/31/00...........  .........         52          1          1          1          1          1          1          1          1          55          59
     10%) Optional Withholding
     Rate for Nonperiodic
     Payments from Deferred
     Compensation Plan.
    H. Prevent the Conversion of  teio/a /7/12/99.........         15         45         47         49         51         54         58         62         66         70         207         517
     Ordinary Income or Short-
     Term Capital Gains into
     Income Eligible for Long-
     term Capital Gain Rates.
    I. Allow Employers to         tmi tyba 12/31/00.......  .........         19         38         39         40         41         42         42         43         44         136         348
     Transfer Excess Defined
     Benefit Plan Assets to a
     Special Account for Health
     Benefits of retirees
     (through 9/30/99).
    J. Repeal Installment Method  iso/a DOE...............        477        677        406        257         72          8         21         35         48         62       1,889       2,063
     for Most Accrual Basis
     Taxpayers; Adjust Pledge
     Rules.
    K. Limit Use of Non-Accrual   tyea DOE................         77         60         33         28         10         12         14         16         18         20         208         288
     Experience Method of
     Accounting to Amounts to be
     Received for the
     Performance of Qualified
     Professional Services.
    L. Deny Deduction and Impose  (10)....................                                                        Negligible Revenue Effect
     Excise Tax With Respect to
     Charitable Split-Dollar
     Life Insurance Arrangements.
    M. Prevent Duplication of     aolo/a 10/19/99.........        (5)          7          8         10         11         12         14         15         16         17          36         110
     Loss Through Assumption of
     Certain Liabilities.
    N. Require Consistent         to/a DOE................         25         26         28         29         30         32         34         35         37         39         138         315
     Treatment and Provide Basis
     Allocation Rules for
     Transfers of Intangibles in
     Certain Nonrecognition
     Transactions.
    O. Distributions by a         (11)....................          4          9         10         10          9          9          9          9          9          8          42          86
     Partnership to a Corporate
     Partner of Stock in Another
     Corporation.
    P. Prohibited Allocation of   (12)....................          2          4          5          6          8          8          9         10         10         10          26          74
     Stock in an ESOP of a
     Subchapter S Corporation.
    Q. Real Estate Investment
     Trust (REIT) Provisions:
    1. Impose 10% vote or value   tyba 12/31/00...........  .........          2          8          8          8          9          9          9         10         10          26          73
     test.
    2. Treatment of income and    tyba 12/31/00...........  .........         50        131         44         19         -9        -39        -72       -107       -146         244        -129
     services provided by
     taxable REIT subsidiaries,
     with 20% asset limitation.
    3. Personal property          tyba 12/31/00...........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -3          -7
     treatment for determining
     rents from real property
     for REITs.
    4. Special foreclosure rule   tyba 12/31/00...........                                                        Negligible Revenue Effect
     for health care REITs.
    5. Conformity with RIC 90%    tyba 12/31/00...........  .........          1          1          1          1          1          1          1          1          1           3           5
     distribution rules.
    6. Clarification of           tyba 12/31/00...........                                                        Negligible Revenue Effect
     definition of independent
     operators for REITs.
    7. Modification of earnings   da 12/31/00.............  .........         -6         -3         -3         -3         -4         -4         -4         -4          4         -16         -35
     and profits rules.
    8. Modify estimated tax       epdo/a 11/15/99.........         40          1          1          1          1          1          1          1          1          1          45          52
     rules for closely-owned
     REIT dividends.
    9. Modify treatment of        tyea 7/14/99............          2          5          5          5          6          6          6          6          7          7          23          55
     closely-held REITs, with
     incubator REIT exception;
     grandfather REIT
     transaction in progress.
          Subtotal of Revenue     ........................      3,548     -1,031      1,384      1,119      2,058       -467        590        551        522        489       7,079       8,766
           Offset Provisions.
                                                           -------------------------------------------------------------------------------------------------------------------------------------
          Total.................  ........................         40     -3,795        730        686      1,802     -1,000        468        427        445        441        -529         252
                                                           =====================================================================================================================================
III. Application of PAYGO         ........................  .........        529  .........  .........  .........  .........  .........  .........  .........  .........         529  ..........
 Surplus From Previously Enacted
 Legislation.
                                                           -------------------------------------------------------------------------------------------------------------------------------------
          Net Total.............  ........................         40     -3,266        730        686      1,802     -1,000        468        427        445        441  ..........        252
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Effective for graduate courses beginning after 12/31/99 under undergraduate courses beginning after 5/31/00.
\2\ Extension of credit effective for expenditures paid or incurred beginning after 6/30/99; increase in A/C rates effective for taxable years beginning after 6/30/99; expansion of the credit
  to include U.S. possessions effective for expenditures paid or incurred beginning after 6/30/99.
\3\ Loss of less than $500,000.
\4\ For wind, provision applies to production from facilities placed in service after 6/30/99 and before 1/1/01; for poultry waste, and landfill gas, provision applies to production from
  facilities placed in service after 12/31/99 and before 1/1/01; for closed-loop and other biomass, provision applies to electricity produced after 12/31/99 from facilities that are placed in
  service before 1/1/01.
\5\ Gain of less than $500,000.
\6\ Estimate provided by the Congressional Budget Office.
\7\ Effective for rum imported into the United States before 6/30/99.
\8\ Binding contract date of 1/1/97 and production deadline of 1/1/08 assumed to be unchanged. Credit cannot be claimed until after 9/30/04.
\9\ 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.
\10\ Effective for transfers made after 2/8/99 and for premiums paid after the date of enactment.
\11\ Effective 7/14/99 (except with respect to partnerships in existence on 7/14/99, the provision in effect on the date of enactment).
\12\ 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 proposal would be effective with respect to plan years ending after July 14, 1999.

 Legend for ``Effective'' column: aolo/a = assumption of liabilities on or after; coia = cancellation of indebtedness after; cpoaa = contributions paid or accrued after; da = distributions
  after, dma = distributions made after; DOE = date of enactment; eia = expenses incurred after; epdo/a = estimated payments due on or after; iso/a = installment sales on or after; teio/a =
  transactions entered into on or after; to/a = transactions on or after; tmi = transfers made in; tyba = taxable years beginning after; tyea = taxable years ending after; tybi = taxable years
  beginning in; and wpoifibwa = wages paid or incurred for individuals beginning work after.

 Note.--Details may not add to totals due to rounding.

 Source: Joint Committee on Taxation.

                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the provisions of the bill as reported 
involved no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the extensions of expiring income tax 
provisions involve increased tax expenditures, and that certain 
revenue offset provisions (other than the foreign tax credit 
provisions) 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.

                       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 unanimous 
voice vote on October 20, 1999. A quorum was present. No 
amendments were voted upon.

                 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 extensions of certain expired 
or expiring tax provisions: (1) extend minimum tax relief for 
individuals; (2) extend exclusion for employer-provided 
educational assistance; (3) extend research and experimentation 
credit and increase in the rates for the alternative 
incremental research credit; (4) extend exceptions under 
subpart F for active financing income; (5) extend suspension of 
net income limitation on percentage depletion from marginal oil 
and gas wells; (6) extend the work opportunity tax credit; (7) 
extend the welfare-to-work tax credit; (8) extend and modify 
tax credit for electricity produced by wind and closed-loop 
biomass facilities; (9) expand brownfields environmental 
remediation; (10) temporary increase in amount of rum excise 
tax that is covered over to Puerto Rico and the U.S. Virgin 
Islands; (11) delay requirement that registered motor fuels 
terminals offer dyed fuel as a condition of registration; and 
(12) production credit for fuel produced by certain coal 
gasification facilities.
    Title II of the bill provides certain revenue-offset 
provisions: (1) modification of individual estimated tax safe 
harbor; (2) modify foreign tax credit carryover rules; (3) 
clarify the tax treatment of income and losses on derivatives; 
(4) add certain vaccines against Streptococcus Pneumoniae to 
the list of taxable vaccines; (5) expand reporting of 
cancellation of indebtedness income; (6) impose limitation on 
prefunding of certain employee benefits; (7) increase elective 
withholding rate for nonperiodic distributions from deferred 
compensation plans; (8) limit conversion of character of income 
from constructive ownership transactions; (9) treatment of 
excess pension assets used for retiree health benefits; (10) 
modify installment method and prohibit its use by accrual 
method taxpayers; (11) limitation on use of nonaccrual 
experience method of accounting; (12) denial of charitable 
contribution deduction for transfers associated with split-
dollar insurance arrangements; (13) prevent duplication or 
acceleration of loss through assumption of certain liabilities; 
(14) require consistent treatment and provide basis allocation 
rules for transfers of intangibles in certain nonrecognition 
transactions; (15) distributions by a partnership to a 
corporate partner of stock in another corporation; (16) 
prohibited allocations of stock in an S corporation ESOP; (17) 
provisions relating to REITs; (18) modify treatment of closely 
held REITs; and (19) modify estimated tax rules for closely 
held REITs.
    Title III provides for an exclusion from the paygo 
scorecard.
    The revenue-offset provisions will increase the tax burden 
on the affected taxpayers. The extensions of expired and 
expiring provisions generally will reduce the tax burdens on 
individuals, small businesses, and others.

Impact on personal privacy and paperwork

    The bill should not have any adverse impact on personal 
privacy. Additional paperwork may be required by the changes in 
the estimated tax safe harbor for individuals, the estimated 
tax rules for REITs, and the expanded reporting of cancellation 
of indebtness income.

                     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) 
clarify the tax treatment of income and losses on derivatives; 
(2) add certain vaccines against Streptococcus Pneumoniae to 
the list of taxable vaccines; (3) expand reporting of 
cancellation of indebtedness income; (4) impose limitation on 
prefunding of certain employee benefits; (5) limit conversion 
of character of income from constructive ownership 
transactions; (6) modify installment method and prohibit its 
use by accrual method taxpayers; (7) limitation on use of 
nonaccrual experience method of accounting; (8) denial of 
charitable contribution deduction for transfers associated with 
split-dollar insurance arrangements; (9) prevent duplication or 
acceleration of loss through assumption of certain liabilities; 
(10) require consistent treatment and provide basis allocation 
rules for transfers of intangibles in certain nonrecognition 
transactions; (11) distributions by a partnership to a 
corporate partner of stock in another corporation; (12) 
prohibited allocations of stock in an S corporation ESOP; (13) 
impose 10 percent vote or value test for REITs; (14) treatment 
of income and services provided by taxable REIT subsidiaries, 
with 20 percent asset limitation; (15) modify treatment of 
closely held REITs; and (16) modify estimated tax rules for 
closely held REITs.
    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. Because the excise tax is imposed on the private 
sector and on State, local, and tribal governments, it does not 
affect the competitive balance between such governments and the 
private sector.

                         C. Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the House Committee on Ways and 
Means, the Senate Committee on Finance, or any committee of 
conference if the legislation includes a provision that 
directly or indirectly amends the Internal Revenue Code and has 
widespread applicability to individuals or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Internal Revenue Code and that have 
widespread applicability to individuals or small businesses.

       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).

                                

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