[Senate Report 106-54]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 124
106th Congress                                                   Report
                                 SENATE
 1st Session                                                     106-54

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



 
                    AFFORDABLE EDUCATION ACT OF 1999

                                _______
                                

                  May 26, 1999.--Ordered to be printed

                                _______


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

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 1134]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance reported an original bill (S. 
1134) to amend the Internal Revenue Code of 1986 to allow tax-
free expenditures from education individual retirement accounts 
for elementary and secondary school expenses, to increase the 
maximum annual amount of contributions to such accounts, and 
for other purposes, having considered the same, reports 
favorably thereon and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
  I. Legislative Background and Summary...............................2
        A. Legislative Background................................     2
        B. Summary...............................................     2
 II. Explanation of the Bill..........................................4
        Title I--Education Savings Incentives (secs. 101-102)....     4
            1. Modifications to education individual retirement 
                accounts (IRAs) (sec. 101).......................     4
            2. Private pre-paid tuition programs; exclusion from 
                gross income of education distributions from 
                qualified tuition programs (sec. 102)............    10
        Title II--Educational Assistance (secs. 201-203).........    13
            1. Exclusion for employer-provided educational 
                assistance (sec. 201)............................    13
            2. Eliminate 60-month limit on student loan interest 
                deduction (sec. 202).............................    14
            3. Eliminate tax on awards under National Health 
                Service Corps Scholarship Program and F. Edward 
                Herbert Armed Forces Health Professions 
                Scholarship and Financial Assistance Program 
                (sec. 203).......................................    15
        Title III--Liberalization of Tax-Exempt Financing Rules 
            for Public School Construction (secs. 301-303).......    16
        Title IV--Revenue Provisions (secs. 401-410).............    21
             1. Modify foreign tax credit carryover rules (sec. 
                401).............................................    21
             2. Limit use of non-accrual experience method of 
                accounting to amounts to be received for the 
                performance of qualified personal services (sec. 
                402).............................................    22
             3. Expand reporting of cancellation of indebtedness 
                income (sec. 403)................................    23
             4. Extension of IRS user fees (sec. 404)............    24
             5. Clarify definition of ``subject to'' liabilities 
                under code section 357(c) (sec. 405).............    25
             6. Denial of charitable contribution deduction for 
                transfers associated with split-dollar insurance 
                arrangements (sec. 406)..........................    27
             7. Treatment of excess pension assets used for 
                retiree health benefits (sec. 407)...............    32
             8. Impose limitation on prefunding of certain 
                employee benefits (sec. 408).....................    34
             9. Modify installment method and prohibit its use by 
                accrual method taxpayers (sec. 409)..............    36
            10. Add certain vaccines against streptococcus 
                pneumonia to the list of taxable vaccines (sec. 
                410).............................................    38
III. Budget Effects of the Bill......................................39
        A. Committee Estimates...................................    39
        B. Budget Authority and Tax Expenditures.................    43
        C. Consultation with the Congressional Budget Office.....    43
 IV. Votes of the Committee..........................................47
  V. Regulatory Impact and Other Matters.............................47
        A. Regulatory impact.....................................    47
        B. Unfunded Mandates Statement...........................    49
        C. Tax Complexity Analysis...............................    50
 VI. Changes in Existing Law Made by the Bill, as Reported...........50
VII. Minority Views..................................................51

                 I. LEGISLATIVE BACKGROUND AND SUMMARY


                       a. legislative background

    The Senate Committee on Finance marked up an original bill 
(the ``Affordable Education Act of 1999'') on May 19, 1999, and 
ordered the bill favorably reported by a roll call vote of 11-5 
(12-8 including proxy votes).

                               b. summary

Education tax incentives (Title I-III)

    The bill temporarily increases the annual contribution 
limit for education IRAs from $500 to $2,000, expands the 
definition of qualified education expenses to include qualified 
elementary and secondary education expenses, allows education 
IRA contributions for special needs beneficiaries above age 18, 
allows corporations and other entities to contribute to 
education IRAs, allows a taxpayer to exclude education IRA 
distributions from gross income and claim the HOPE or Lifetime 
Learning credit as they are not used for the same expenses, and 
makes certain technical corrections to the education IRA 
provisions. The provisions modifying education IRAs generally 
are effective for taxable years beginning after December 31, 
1999. However, the provision that increase the annual 
contribution limit for education IRAs (i.e., to $2,000 per 
year) applies during the period January 1, 2000, through 
December 31, 2003, the provision that expands the definition of 
qualified education expenses to include qualified elementary 
and secondary education expenses, and the provision permitting 
an exclusion from income for education IRA distributions even 
if the HOPE or Lifetime Learning credit is claimed applies to 
contributions (and earnings thereon) made during the period 
January 1, 2000, through December 31, 2003.
    The bill allows taxpayers to receive certain tax-free 
distributions from qualified State tuition programs. The bill 
also permits private institutions to offer prepaid tuition 
plans, effective for taxable years beginning after December 31, 
1999. In addition, during the period January 1, 2000, through 
December 31, 2003, the provision allows taxpayers to exclude 
qualified State tuition program distributions from income and 
claim the HOPE or Lifetime Learning credit as long as they are 
not used for the same expenses. The provisions generally are 
effective for distributions made in taxable years beginning 
after December 31, 1999. The exclusion from gross income is 
extended to private prepaid tuition plans, effective for 
taxable years beginning after December 31, 2003.
    The bill extends the exclusion from gross income for 
employer-provided educational assistance through June 30, 2004. 
In addition, the bill expands the section 127 exclusion to 
apply to graduate courses effective for education commencing 
after December 31, 1999, and before June 30, 2004.
    The bill eliminates the 60-month limit for purposes of the 
deduction for interest paid on qualified student loans. The 
provision is effective for interest paid after December 31, 
1999.
    The bill provides an exclusion from gross income for awards 
under the National Health Service Corps Scholarship program and 
the F. Edward Hebert Armed Forces Health Professions 
Scholarship program, effective for taxable years beginning 
after December 31, 1993.
    The bill increases the arbitrage rebate exception for 
governmental bonds used to finance qualified school 
construction from $10 million to $15 million, effective for 
bonds issued after December 31, 1999.
    The bill permits the issuance of tax-exempt private 
activity bonds for qualified education facilities with an 
annual volume cap of the greater of $10 per resident or $5 
million, effective for bonds issued after December 31, 1999.
    The bill allows the Federal Home Loan Bank to guarantee up 
to $500 million annually for school construction bonds, 
effective for bonds issued after December 31, 1999.

Revenue offsets (Title IV)

    The bill provides for the following revenue offsets to pay 
for the education-related provisions:
          Reduce the carryback period for excess foreign tax 
        credits from two years to one year, and extend the 
        carryforward period for excess foreign tax credits from 
        five years to seven years, effective for foreign tax 
        credits arising in taxable years beginning after 
        December 31, 2001;
          Limit the use of the non-accrual experience method of 
        accounting to amounts to be received for the 
        performance of qualified professional services, 
        effective for taxable years ending after the date of 
        enactment;
          Provide for information reporting on cancellation of 
        indebtedness by non-bank financial institutions, 
        effective for cancellation of indebtedness after 
        December 31, 1999;
          Extend IRS use fees through September 30, 2009;
          Clarify the meaning of ``subject to'' liabilities 
        under section 357(c), effective for transfers on or 
        after October 19, 1998;
          Deny a charitable contribution deduction for 
        charitable split dollar insurance, effective for 
        transfers made after February 8, 1999, and for premiums 
        paid after the date of enactment;
          Extend through September 30, 2009, the present-law 
        provision allowing employers to transfer excess defined 
        benefit plan assets to a special account for health 
        benefits of retirees;
          Impose limitations on the prefunding of certain 
        employee benefits, effective for contributions paid 
        after the date of enactment;
          Repeal the installment method for most accrual basis 
        taxpayers and modify the pledge rule applicable to 
        certain other installment sales, effective for sales 
        and other dispositions entered into on or after the 
        date of enactment; and
          Include the Streptococcus Pneumonia vaccine as a 
        taxable vaccine in the Federal vaccine insurance 
        program, effective for vaccine purchases the day after 
        the date on which the Centers for Disease Control make 
        final recommendation for routine administration of 
        conjugated Streptococcus Pneumonia vaccines to 
        children.

                      II. EXPLANATION OF THE BILL


         Title I--Education Savings Incentives (secs. 101-102)


1. Modifications to education individual retirement accounts (sec. 101 
        of the bill and secs. 530 and 4973 of the Code)

Present law

            In general
    Section 530 provides tax-exempt status to education 
individual retirement accounts (``education IRAs''), meaning 
certain trusts (or custodial accounts) which are created or 
organized in the United States exclusively for the purpose of 
paying the qualified higher education expenses of a named 
beneficiary.\1\ Contributions to education IRAs may be made 
only in cash. Annual contributions to education IRAs may not 
exceed $500 per designated beneficiary (except in cases 
involving certain tax-free rollovers, as described below), and 
may not be made after the designated beneficiary reaches age 
18.\2\ Moreover, an excise tax is imposed if a contribution is 
made by any person to an education IRA established on behalf of 
a beneficiary during any taxable year in which any 
contributions are made by anyone to a qualified State tuition 
program (defined under sec. 529) on behalf of the same 
beneficiary.
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    \1\ Education IRAs generally are not subject to Federal income tax, 
but are subject to the unrelated business income tax (``UBIT'') imposed 
by section 511.
    \2\ An excise tax may be imposed under present law to the extent 
that excess contributions above the $500 annual limit are made to an 
education IRA.
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            Phase-out of contribution limit
    The $500 annual contribution limit for education IRAs is 
phased out ratably for contributors with modified adjusted 
gross income (``AGI'') between $95,000 and $110,000 ($150,000 
and $160,000 for joint returns). Individuals with modified AGI 
above the phase-out range are not allowed to make contributions 
to an education IRA established on behalf of any individual.
            Treatment of distributions
    Amounts distributed from an education IRA are excludable 
from gross income to the extent that the amounts distributed do 
not exceed qualified higher education expenses of the 
designated beneficiary incurred during the year the 
distribution is made (provided that a HOPE credit or Lifetime 
Learning credit is not claimed with respect to the beneficiary 
for the same taxable year). Distributions from an education IRA 
are generally deemed to consist of distributions of principal 
(which, under all circumstances, are excludable from gross 
income) and earnings (which may be excludable from gross 
income) by applying the ratio that the aggregate amount of 
contributions to the account for the beneficiary bears to the 
total balance of the account. If the qualified higher education 
expenses of the student for the year are at least equal to the 
total amount of the distribution (i.e., principal and earnings 
combined) from an education IRA, then the earnings in their 
entirety are excludable from gross income. If, on the other 
hand, the qualified higher education expenses of the student 
for the year are less than the total amount of the distribution 
(i.e., principal and earnings combined) from an education IRA, 
then the qualified higher education expenses are deemed to be 
paid from a pro-rata share of both the principal and earnings 
components of the distribution. Thus, in such a case, only a 
portion of the earnings are excludable (i.e., a portion of the 
earnings based on the ratio that the qualified higher education 
expenses bear to the total amount of the distribution) and the 
remaining portion of the earnings is includable in the 
distributee's gross income.
    To the extent that a distribution exceeds qualified higher 
education expenses of the designated beneficiary, an additional 
10-percent tax is imposed on the earnings portion of such 
excess distribution, unless such distribution is made on 
account of the death or disability of, or scholarship received 
by, the designated beneficiary. The additional 10-percent tax 
also does not apply to the distribution of any contribution to 
an education IRA made during the taxable year if such 
distribution is made on or before the date that a return is 
required to be filed (including extensions of time) by the 
beneficiary for the taxable year during which the contribution 
was made (for, if the beneficiary is not required to file such 
a return, April 15th of the year following the taxable year 
during which the contribution was made.)
    Present law allows tax-free transfers or rollovers of 
account balances from one education IRA benefiting one 
beneficiary to another education IRA benefiting another 
beneficiary (as well as redesignations of the named 
beneficiary), provided that the new beneficiary is a member of 
the family of the old beneficiary. For this purpose, a ``member 
of the family'' means persons described in paragraphs (1) 
through (8) of section 152(a)--e.g., sons, daughters, brothers, 
sisters, nephews and nieces, certain in-laws and any spouse of 
such persons or of the original beneficiary.
    Any balance remaining in an education IRA is deemed to be 
distributed within 30 days after the date that the named 
beneficiary reaches age 30 (or, if earlier, within 30 days of 
the date that the beneficiary dies).
            Qualified higher education expenses
    The term ``qualified higher education expenses'' includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary if enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis. 
Moreover, the term ``qualified higher education expenses'' 
includes certain room and board expenses for any periodduring 
which the beneficiary is at least a half-time student. Qualified higher 
education expenses include expenses with respect to undergraduate or 
graduate-level courses. In addition, qualified higher education 
expenses include amounts paid or incurred to purchase tuition credits 
(or to make contributions to an account) under a qualified State 
tuition program, as defined in section 529, for the benefit of the 
beneficiary of the education IRA.
    Qualified higher education expenses generally include only 
out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under present-law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127.\3\
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    \3\ No reduction of qualified higher education expenses is 
required, however, for a gift, bequest, devise, or inheritance.
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    Present law also provides that, if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion for a distribution from an education 
IRA, then no deduction (e.g., for trade or business expenses 
deductible under sec. 162), or exclusion (e.g., for expenses 
paid with interest on education savings bonds excludable under 
sec. 135), or credit is allowed with respect to such expenses.
            Eligible educational institution
    Eligible educational institutions are defined by reference 
to section 481 of the Higher Education Act of 1965. Such 
institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.

Reasons for change

    The Committee believes that the present-law rules and 
contribution limits governing education IRAs should be expanded 
to provide a greater incentive for families (and other persons) 
to save for educational purposes, including for expenses 
related to elementary and secondary school education. The 
Committee also believes that more flexible rules are needed for 
education IRAs (e.g., accounts established for the benefit of 
special needs students). The Committee further believes that 
the benefits of education IRAs should be coordinated with other 
education tax provisions so as to maximize the potential 
benefit of all the education tax incentives.

Explanation of provisions

            Annual contribution limit
    For the period 2000 through 2003, the bill increases to 
$2,000 the annual education IRA contribution limit. Thus, under 
the bill, aggregate contributions that can be made by all 
contributions to one (or more) education IRAs established on 
behalf of any particular beneficiary are limited to $2,000 for 
each year during the period 2000 through 2003. For 2004 and 
later years, the annual contribution limit for education IRAs 
will be $500.
            Qualified expenses
    With respect to contributions made during the period 2000 
through 2003 (and earnings attributable to such contributions), 
the bill expands the definition of qualified education expenses 
that may be paid with tax-free distributions from an education 
IRA. Specifically, the definition of qualified education 
expenses is expanded to include ``qualified elementary and 
secondary education expenses,'' meaning (1) tuition, fees, 
academic tutoring,\4\ special needs services, books, supplies, 
and equipment (including computers and related software and 
services) incurred in connection with the enrollment or 
attendance of the designated beneficiary as an elementary or 
secondary student at a public, private, or religious school 
providing elementary or secondary education (kindergarten 
through grade 12), and (2) room and board, uniforms, 
transportation, and supplementary items and services (including 
extended-day programs) required or provided by such a school in 
connection with such enrollment or attendance of the designated 
beneficiary. ``Qualified elementary and secondary education 
expenses'' also include certain homeschooling education 
expenses if the requirements of any applicable State or local 
law are met with respect to such homeschooling. For 
contributions made in 2004 or later years (and for earnings 
attributable to such contributions), the definition of 
qualified education expenses will be limited to post-secondary 
education expenses as defined under present law.
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    \4\ For this purpose, the Committee intends that ``academic 
tutoring'' means additional, personalized instruction provided in 
coordination with the student's academic courses.
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    The aggregate tax-free distributions from an education IRA 
for all taxable years for qualified elementary and secondary 
education expenses cannot exceed the contributions (and 
earnings thereon) that are made to the education IRA during the 
period 2000-2003. Distributions in any year in excess of 
qualified elementary and secondary education expenses will be 
allocated first to contributions (and earnings thereon) made 
other than during the period 2000-2003. The bill requires that 
trustees of education IRAs keep separate accounts with respect 
to contributions made during the period 2000-2003 and earnings 
thereon.
            Special needs beneficiaries
    The bill also provides that, although contributions to an 
education IRA generally may not be made after the designated 
beneficiary reaches age 18, contributions may continue to be 
made to an education IRA in the case of a special needs 
beneficiary (as defined by Treasury Department regulations). In 
addition, under the bill, in the case of a special needs 
beneficiary, a deemed distribution of any balance in an 
education IRA will not occur when the beneficiary reaches age 
30.\5\
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    \5\ The Committee intends that the determination of whether a 
beneficiary has ``special needs'' will be made for each year that 
contributions are made to an education IRA after the beneficiary 
reaches age 18. However, if an individual meets the definition of a 
``special needs'' beneficiary when such individual reaches age 30, then 
such individual thereafter will be presumed to be a ``special needs'' 
beneficiary.
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            Contributions by persons other than individuals
    The bill clarifies that corporations and other entities 
(including tax-exempt organizations) are permitted to make 
contributions to education IRAs, regardless of the income of 
the corporation or entity during the year of the 
contribution.\6\ As under present law, the eligibility of high-
income individuals to make contributions to education IRAs is 
phased out ratably for individuals with modified AGI between 
$95,000 and $110,000 ($150,000 and $160,000 for joint returns).
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    \6\ The Committee intends that present-law rules governing the 
definition of gross income apply for purposes of determining whether a 
contribution by a corporation or another entity to an education IRA on 
behalf of a designated beneficiary is includible in the gross income of 
the beneficiary or another individual (e.g., includible in gross income 
as compensation to a parent employed by the contributing corporation).
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            Contributions permitted until April 15
    Under the bill, individual contributors to education IRAs 
are deemed to have made a contribution on the last day of the 
preceding taxable year if the contribution is made on account 
of such taxable year and is made not later than the time 
prescribed by law for filing the return for such taxable year 
(not including extensions), generally April 15. The bill also 
provides that the additional 10-percent tax does not apply to 
the distribution of any excess contribution to an education IRA 
made during the taxable year if such distribution is made on or 
before the first day of the sixth month of the taxable year 
(generally June 1) following the taxable year during which the 
contribution was or was deemed made.\7\
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    \7\ Thus, taxpayers will now have approximately one and one-half 
months after the April 15 deadline for making contributions to an 
education IRA on account of the preceding year to determine whether an 
excess contribution was made to an education IRA and distribute (or 
reallocate to the current taxable year) the excess in order to avoid 
the additional 10-percent tax.
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            Coordination with HOPE and Lifetime Learning credits
    For distributions made during the period January 1, 2000, 
through December 31, 2003, the bill allows a taxpayer to claim 
a HOPE credit or Lifetime Learning credit for a taxable year 
and to exclude from gross income amounts distributed (both the 
principal and the earnings portions) from an education IRA on 
behalf of the same student as long as the distribution is not 
used for the same educational expenses for which a credit was 
claimed.\8\ After 2003, if a HOPE of Lifetime Learning credit 
is claimed with respect to a student for a taxable year, then a 
distribution from an education IRA may (at the option of the 
taxpayer) be made on behalf of that student during that taxable 
year, but an exclusion from gross income would not be available 
for the earnings portion of such distribution.
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    \8\ The bill contains no rule for determining the order in which 
education provisions (e.g., HOPE and Lifetime Learning credits, 
education IRAs, and qualified tuition plans) must be used during the 
period 2000-2003. Nevertheless, in most cases, the taxpayer will obtain 
the greatest tax advantage by claiming either the HOPE or Lifetime 
Learning credit first and then determining which other education tax 
incentives are available to him or her. Taxpayers may determine how to 
allocate their qualified education expenses among the various education 
provisions for which they are eligible; however, under no 
circumstances, can the same expenses be allocated to more than one 
provision. For example, suppose that in 2000, a college freshman 
withdraws funds from both an education IRA and a qualified tuition 
program. If the student is otherwise eligible, he or she may claim a 
HOPE credit of $1,500 with respect to $2,000 of tuition expense. To the 
extent that the student's remaining educational expenses constitute 
``qualified higher education expenses'' and exceed the amounts 
distributed from both the education IRA and the qualified tuition 
program, the student may exclude from gross income the earnings 
portions (and, as always, the principal portions) of both 
distributions. Alternatively, if after allocating the first $2,000 of 
tuition expense to the HOPE credit, the student's remaining educational 
expenses do not exceed his or her total distributions from the 
education IRA and qualified tuition program, the student will not be 
able to exclude from gross income the entire earnings portions of both 
distributions. In addition, the student may be liable for a penalty 
imposed under the qualified tuition program or for additional tax 
imposed on the excess amounts distributed from the education IRA, or 
both. The student may allocate his or her educational expenses between 
the distributions as the student determines appropriate, but may not 
use the same expenses for both distributions, nor may he or she 
``reuse'' the expenses taken into account for purposes of computing the 
HOPE credit claimed.
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            Coordination with qualified tuition programs
    The bill repeals the excise tax on contributions made by 
any person to an education IRA on behalf of a beneficiary 
during any taxable year in which any contributions are made by 
anyone to a qualified State tuition program on behalf of the 
same beneficiary (sec. 4973(e)(1)(B)).

Effective date

    The provisions modifying education IRAs generally are 
effective for taxable years beginning after December 31, 1999. 
The provision increasing the annual contribution limit for 
education IRAs to $2,000 per year applies during the period 
January 1, 2000 through December 31, 2003, and the provisions 
expanding the definition of qualified education expenses to 
include qualified elementary and secondary expenses applies to 
contributions (and earnings thereon) made during the period 
January 1, 2000, through December 31, 2003. The provision 
coordinating distributions from education IRAs with the HOPE 
and Lifetime Learning credits is effective for distributions 
made during the period January 1, 2000, through December 31, 
2003.

2. Private pre-paid tuition programs; exclusion from gross income of 
        education distributions from qualified tuition programs (sec. 
        102 of the bill and sec. 529 of the Code)

Present law

    Section 529 provides tax-exempt status to ``qualified State 
tuition programs,'' meaning certain programs established and 
maintained by a State (or agency or instrumentality thereof) 
under which persons may (1) purchase tuition credits or 
certificates on behalf of a designated beneficiary that entitle 
the beneficiary to a waiver or payment of qualified higher 
education expenses of the beneficiary or (2) make contributions 
to an account that is established for the purpose of meeting 
qualified higher education expense of the designated 
beneficiary of the account (a ``savings account plan''). The 
term ``qualified higher education expenses'' generally has the 
same meaning as does the term for purposes of education IRAs 
(as described above) and, thus, includes expense for tuition, 
fees, books, supplies,and equipment required for the enrollment 
or attendance at an eligible educational institution,\9\ as 
well as certain room and board expenses for any period during 
which the student is at least a half-time student.
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    \9\ ``Eligible educational institutions'' are defined the same for 
purposes of education IRAs (described in II.1., above) and qualified 
State tuition programs.
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    No amount is included in the gross income of a contributor 
to, or beneficiary of, a qualified State tuition program with 
respect to any distribution from, or earnings under, such 
program, except that (1) amounts distributed or educational 
benefits provided to a beneficiary (e.g., when the beneficiary 
attends college) are included in the beneficiary's gross income 
(unless excludable under another Code section) to the extent 
such amounts or the value of the educational benefits exceed 
contributions made on behalf of the beneficiary, and (2) 
amounts distributed to a contributor (e.g., when a parent 
receives a refund) are included in the contributor's gross 
income to the extent such amounts exceed contributions and on 
behalf of the beneficiary.\10\
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    \10\ Distributions from qualified State tuition programs are 
treated as representing a pro-rata share of the principal (i.e., 
contributions) and accumulated earnings in the account.
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    A qualified State tuition program is required to provide 
that purchases or contributions only be made in cash.\11\ 
Contributors and beneficiaries are not allowed to directly or 
indirectly direct the investment of contributions to the 
program (or earnings thereon). The program is required to 
maintain a separate accounting for each designated beneficiary. 
A specified individual must be designated as the beneficiary at 
the commencement of participation in a qualified State tuition 
program (i.e., when contributions are first made to purchase an 
interest in such a program), unless interests in such a program 
are purchased by a State or local government or a tax-exempt 
charity described in section 501(c)(3) as part of a scholarship 
program operated by such government or charity under which 
beneficiaries to be named in the future will receive such 
interests as scholarships. A transfer of credits (or other 
amounts) from one account benefiting one designated beneficiary 
to another account benefiting a different beneficiary is 
considered a distribution (as is a change in the designated 
beneficiary of an interest in a qualified State tuition 
program), unless the beneficiaries are members of the same 
family. For this purpose, the term ``member of the family'' 
means persons described in paragraphs (1) through (8) of 
section 152(a)--e.g., sons, daughters, brothers, sisters, 
nephews and nieces, certain in laws--and any spouse of such 
persons or of the original beneficiary. Earnings on an account 
may be refunded to a contributor or beneficiary, but the State 
or instrumentality must impose a more than de minimis monetary 
penalty unless the refund is (1) used for qualified higher 
education expenses of the beneficiary (2) made on account of 
the death of disability of the beneficiary, or (3) made on 
account of a scholarship received by the designated beneficiary 
to the extent the amount refunded does not exceed the amount of 
the scholarship used for higher education expenses.
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    \11\ Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3) 
provide special estate and gift tax rules for contributions made to, 
and distributions made from, qualified State tuition programs and 
education IRAs.
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    To the extent that a distribution from a qualified State 
tuition program is used to pay for qualified tuition and 
related expenses (as defined in sec. 25A(f)(1)), the 
distributee (or another taxpayer claiming the distributee as a 
dependent) may claim the HOPE credit or Lifetime Learning 
credit under section 25A with respect to such tuition and 
related expenses (assuming that the other requirements for 
claiming the HOPE credit or Lifetime Learning credit are 
satisfied and the modified AGI phaseout for those credits does 
not apply).

Reasons for change

    The Committee believes that distributions from qualified 
tuition programs should not be subject to Federal income ax to 
the extent that such distributions are used to pay for 
qualified higher education expenses of undergraduate or 
graduate students who are attending college, university, or 
certain vocational schools. In addition, the Committee believes 
that the present-law rules governing qualified tuition programs 
should be expanded to permit private educational institutions 
to maintain certain prepaid tuition programs.

Explanation of provisions

            Qualified tuition program
    The bill expands the definition of ``qualified tuition 
program'' to include certain prepaid tuition programs 
established and maintained by one or more eligible educational 
institutions (which may be private institutions) that satisfy 
the requirements under section 529 (other than the present-law 
State sponsorship rule). In the case of a qualified tuition 
program maintained by one or more private educational 
institutions, persons will be able to purchase tuition credits 
or certificates on behalf of a designated beneficiary (as set 
forth in sec. 529(b)(1)(A)(i)), but would not be able to make 
contributions to a savings account plan (as described in 
section 529(b)(1)(A)(ii)).
            Exclusion from gross income
    Under the bill, an exclusion from gross income is provided 
for distributions made in taxable years beginning after 
December 31, 1999, from qualified State tuition programs to the 
extent that the distribution is used to pay for qualified 
higher education expenses. This exclusion from gross income is 
extended to distributions from qualified tuition programs 
established and maintained by an entity other than a State or 
agency or instrumentality thereof, for distributions made in 
taxable years after December 31, 2003.
    For the distributions made during the period, January 1, 
2000, through December 31, 2003, the bill allows a taxpayer to 
claim a HOPE credit or Lifetime Learning credit for a taxable 
year and to exclude from gross income amounts distributed (both 
the principal and the earnings portions) from a qualified 
tuition program on behalf of the same student as long as the 
distribution is not used for the same expenses for which a 
credit was claimed.\12\ After 2003, if a HOPE or Lifetime 
Learning credit is claimed with respect to a student for a 
taxable year, then a distribution from a qualified tuition 
program may be made on behalf of that student during that 
taxable year, but an exclusion from gross income would not be 
available for the earnings portion of such distribution.
---------------------------------------------------------------------------
    \12\ Examples of how a taxpayer may claim a HOPE or Lifetime 
Learning credit and, in the same year, exclude from gross income 
distributions from a qualified tuition program and an education IRA are 
discussed in connection with the modification of the rules governing 
education IRAs, supra.
---------------------------------------------------------------------------
            Rollovers for benefit of same beneficiary.
    The bill provides that a transfer of credits (or other 
amounts) from one qualified tuition program for the benefit of 
a designated beneficiary to another qualified tuition program 
for the benefit of the same beneficiary will not be considered 
a distribution for a maximum of three such transfers.
            Member of family
    The bill further provides that, for purposes of tax-free 
rollovers and changes of designated beneficiaries, a ``member 
of the family'' includes first cousins of the original 
beneficiary.

Effective date

    The provision permitting the establishment of qualified 
tuition programs maintained by one or more private educational 
institutions is effective for taxable years beginning after 
December 31, 1999. The exclusion from gross income for certain 
distributions from qualified State tuition programs under 
section 529 is effective for distributions made in taxable 
years beginning after December 31, 1999. In the case of a 
qualified tuition program established and maintained by an 
entity other than a State or agency or instrumentality thereof, 
the provision allowing an exclusion from gross income for 
certain distributions is effective for distributions made in 
taxable years beginning after December 31, 2003. The provision 
coordinating distributions from qualified tuition programs with 
the HOPE and Lifetime Learning credits is effective for 
distributions made during the period January 1, 2000, through 
December 31, 2003.

            Title II--Educational Assistance (secs. 201-203)


1. Exclusion for employer-provided educational assistance (sec. 201 of 
        the bill and sec. 127 of the Code)

Present law

    Educational expenses paid by an employer for its employees 
are generally deductible by the employer.
    Employer-paid educational expenses are excludable from the 
gross income and wages of an employee if provided under a 
section 127 educational assistance plan or if the expenses 
qualify as a working condition fringe benefit under section 
132. Section 127 provides an exclusion of $5,250 annually for 
employer-provided educational assistance. The exclusion does 
not apply to graduate courses. The exclusion for employer-
provided educational assistance expires with respect to courses 
beginning on or after June 1, 2000.
    In order for the exclusion to apply, certain requirements 
must be satisfied. The educational assistance must be provided 
pursuant to a separate written plan of the employer. The 
educational assistance program must not discriminate in favor 
of highly compensated employees. In addition, not more than 5 
percent of the amounts paid or incurred by the employer during 
the year for educational assistance under a qualified 
educational assistance plan can be provided for the class of 
individuals consisting of more than 5-percent owners of the 
employer (and their spouses and dependents).
    Educational expenses that do not qualify for the section 
127 exclusion may be excludable from income as a working 
condition fringe benefit.\13\ 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.\14\
---------------------------------------------------------------------------
    \13\ These rules also apply in the event that section 127 expires 
and is not reinstated.
    \14\ In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized education 
only if such expenses, along with other miscellaneous deductions, 
exceed 2 percent of the taxpayer's AGI. The 2-percent floor limitation 
is disregarded in determining whether an item is excludable as a 
working condition fringe benefit.
---------------------------------------------------------------------------

Reasons for change

    The Committee believes that the exclusion for employer-
provided educational assistance has enabled millions of workers 
to advance their education and improve their job skills without 
incurring additional taxes and a reduction in take-home pay. In 
addition, the exclusion lessens the complexity of the tax laws. 
Without the special exclusion, a worker receiving educational 
assistance from his or her employer is subject to tax on the 
assistance, unless the education is related to worker's current 
job. Because the determination of whether particular 
educational assistance is job-related is based on the facts and 
circumstances, it may be difficult to determine with certainty 
whether the educational assistance is excludable from income. 
This uncertainty may lead to disputes between taxpayers and the 
Internal Revenue Service.
    The Committee believes that reinstating the exclusion for 
graduate-level employer-provided educational assistance will 
enable more individuals to seek higher education, and that 
further extension of the exclusion is important.
    The past experience of allowing the exclusion to expire and 
subsequently retroactively extending it has created burdens for 
employers and employees. Employees may have difficulty planning 
for their educational goals if they do not know whether their 
tax bills will increase. For employers, the fits and starts of 
the legislative history of the provision have caused severe 
administrative problems. Uncertainty about the exclusion's 
future may discourage some employers from providing educational 
benefits.

Explanation of provision

    The provision extends the present-law exclusion for 
employer-provided educational assistance to undergraduate 
courses beginning before July 1, 2004. The provision also 
extends the exclusion to graduate education, effective for 
courses beginning after January 1, 2000, and before July 1, 
2004.

Effective date

    The provision extends the exclusion for undergraduate 
courses would be effective for courses beginning before July 1, 
2004. The exclusion with respect to graduate-level courses is 
effective for courses beginning after January 1, 2000, and 
before July 1, 2004.

2. Eliminate 60-month limit on student loan interest deduction (sec. 
        202 of the bill and sec. 221 of the Code)

Present law

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deductionlimit 
(sec. 221). The deduction is allowed only with respect to interest paid 
on a qualified education loan during the first 60 months in which 
interest payments are required. Required payments of interest generally 
do not include nonmandatory payments, such as interest payments made 
during a period of loan forbearance. Months during which interest 
payments are not required because the qualified education loan is in 
deferral or forbearance do not count against the 60-month period. No 
deduction is allowed to an individual if that individual is claimed as 
a dependent on another taxpayer's return for the taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.
    The maximum allowable deduction per taxpayer return is 
$1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and 
thereafter\15\. The deduction is phased out ratably for 
individual taxpayers with modified adjusted gross income of 
$40,000-$55,000 and $60,000-$75,000 for joint returns. The 
income ranges will be indexed for inflation after 2002.
---------------------------------------------------------------------------
    \15\ The maximum allowable deduction for 1998 was $1,000.
---------------------------------------------------------------------------

Reasons for change

    The Committee believes that it is appropriate to expand the 
deduction for individuals who have paid interest on qualified 
education loans by repealing the limitation that the deduction 
is allowed only with respect to interest paid during the first 
60 months in which interest payment are required. In addition, 
the repeal of the 60-month limitation lessens complexity and 
administrative burdens for taxpayers, lenders, loan servicing 
agencies, and the Internal Revenue Service.

Explanation of provision

    The bill repeals both the limit on the number of months 
during which interest paid on a qualified education loan is 
deductible and the restriction that nonmandatory payments of 
interest are not deductible.

Effective date

    The provision is effective for interest paid on qualified 
education loans after December 31, 1999.

3. Eliminate tax on awards under National Health Service Corps 
        Scholarship Program and F. Edward Hebert Armed Forces Health 
        Professions Scholarship and Financial Assistance Program (sec. 
        203 of the bill and sec. 117 of the Code)

Present law

    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for course of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarships, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations.
    Section 117(c) specifically provides that the exclusion for 
qualified scholarships and qualified tuition reductions does 
not apply to any amount received by a student that represents 
payment for teaching, research, or other services by the 
student required as a condition for receiving the scholarship 
or tuition reduction.
    The National Health Service Corps Scholarship Program (the 
``NHSC Scholarship Program'') and the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance 
Program (the ``Armed Forces Scholarship Program'') provide 
education awards to participant on condition that the 
participants provide certain services. In the case of the NHSC 
Program, the recipient of the scholarship is obligated to 
provide medical services in a geographic area (or to an 
undeserved population group or designated facility) identified 
by the Public Health Service as having a shortage of health-
care professionals. In the case of the Armed Forces Scholarship 
Program the recipient of the scholarship is obligated to serve 
a certain number of years in the military at an armed forces 
medical facility. Because the recipients are required to 
perform services in exchange for the education awards, the 
awards used to pay higher education expenses are taxable income 
to the recipient.

Reasons for change

    The Committee believes that it is appropriate to provide 
tax-free treatment for scholarships received by medical, 
dental, nursing, and physician assistant students under the 
NHSC Scholarship Program and Armed Forces Scholarship Program.

Explanation of provision

    The bill provides that amounts received by an individual 
under the NHSC Scholarship Program or the Armed Forces 
Scholarship Program are eligible for tax-free treatment as 
qualified scholarships under section 117, without regard to any 
service obligation by the recipient. As with other qualified 
scholarships under section 117, the tax-free treatment does not 
apply to amounts received by students for regular living 
expenses, including room and board.

Effective date

    The provision is effective for education awards received 
after December 31, 1993.

  Title III--Liberalization of Tax-exempt Financing Rules for Public 
School Construction (secs. 301-303 of the bill and secs. 103 and 148 of 
                               the Code)


Present law

1. Tax-exempt bonds

            In general
    Interest on debt incurred by States or local governments is 
excluded from income if the proceeds of the borrowing are used 
to carry out governmental functions of those entities or the 
debt is repaid with governmental funds (sec. 103). Like other 
activities carried out and paid for by States and local 
governments, the construction, renovation, and operation of 
public schools is an activity eligible for financing with the 
proceeds of tax-exempt bonds.
    Interest on bonds that nominally are issued by States or 
local governments, but the proceeds of which are used (directly 
or indirectly) by a private person and payment of which is 
derived from funds of such a private person is taxable unless 
the purpose of the borrowing is approved specifically in the 
Code or in a non-Code provision of a revenue Act. These bonds 
are called ``private activity bonds.'' The term ``private 
person'' includes the Federal Government and all other 
individuals and entities other than States or local 
governments.
            Private activities eligible for financing with tax-exempt 
                    private activity bonds
    The Code includes several exceptions permitting States or 
local governments to act as conduits providing tax-exempt 
financing for private activities. Both capital expenditures and 
limited working capital expenditures of charitable 
organizations described in section 501(c)(3) of the Code--
including elementary, secondary, and post-secondary schools--
may be financed with tax-exempt private activity bonds 
(``qualified 501(c)(3) bonds'').
    States or local governments may issue tax-exempt ``exempt-
facility bonds'' to finance property for certain private 
businesses. Businesses eligible for this financing include 
transportation (airports, ports, local mass commuting, and high 
speed intercity rail facilities); privately owned and/or 
privately operated public works facilities (sewage, solid waste 
disposal, local district heating or cooling, and hazardous 
waste disposal facilities); privately-owned and/or operated 
low-income rental housing; and certain private facilities for 
the local furnishing of electricity or gas. A further provision 
allows tax-exempt financing for ``environmental enhancements of 
hydro-electric generating facilities.'' Tax-exempt financing is 
authorized for capital expenditures for small manufacturing 
facilities and land and equipment for first-time farmers 
(``qualified small-issue bonds''), local redevelopment 
activities (``qualified redevelopment bonds''), and eligible 
empowerment zone and enterprise community businesses.
    Finally, tax-exempt private activity bonds may be issued to 
finance limited non-business purposes: student loans and 
mortgage loans for owner-occupied housing (``qualified mortgage 
bonds'' and ``qualified veterans' mortgage bonds'').
    In most cases, the volume of tax-exempt private activity 
bonds is restricted by aggregate annual limits imposed on bonds 
issued by issuers within each State. These annual volume limits 
equal $50 per resident of the State, or $150 million if 
greater. The annual State private activity bond volume limits 
are scheduled to increase to the greater of $75 per resident of 
the State or $225 million in calendar year 2007. The increase 
will be phased in ratably beginning in calendar year 2003. This 
increase was enacted by the Tax and Trade Relief Extension Act 
of 1998. Qualified 501(c)(3) bonds are among the tax-exempt 
private activity bonds that are not subject to these volume 
limits.
    Private activity tax-exempt bonds may not be used to 
finance schools owned or operated by private, for-profit 
businesses.
            Arbitrage restrictions on tax-exempt bonds
    The Federal income tax does not apply to income of States 
and local governments that is derived from the exercise of an 
essential governmental function. To prevent these tax-exempt 
entities from issuing more Federally subsidized tax-exempt 
bonds than is necessary for the activity being financed or from 
issuing such bonds earlier than necessary, the Code includes 
arbitrage restrictions limiting the ability to profit from 
investment of tax-exempt bond proceeds. In general, arbitrage 
profits may be earned only during specified periods (e.g., 
defined ``temporary periods'') before funds are needed for the 
purpose of the borrowing or on specified types of investments 
(e.g., ``reasonably required reserve or replacement funds''). 
Subject to limited exceptions, investment profits that are 
earned during these periods or on such investments must be 
rebated to the Federal Government.
    The Code includes three exceptions applicable to education-
related bonds. First, issuers of all types of tax-exempt bonds 
are not required to rebate arbitrage profits if all of the 
proceeds of the bonds are spent for the purpose of the 
borrowing within six months after issuance. In the case of 
governmental bonds (including bonds to finance public schools) 
the six-month expenditure exception is treated as satisfied if 
at least 95 percent of the proceeds is spent within six months 
and the remaining five percent is spent within 12 months after 
the bonds are issued.
    Second, in the case of bonds to finance certain 
construction activities, including school construction and 
renovation, the six-month period is extended to 24 months for 
construction proceeds. Arbitrage profits earned on construction 
proceeds are not required to be rebated if all such proceeds 
(other than certain retainage amounts) are spent by the end of 
the 24-month period and prescribed intermediate spending 
percentages are satisfied.
    Third, governmental bonds issued by ``small'' governments 
are not subject to the rebate requirement. Small governments 
are defined as general purpose governmental units that issue no more 
than $5 million of tax-exempt governmental bonds in a calendar year. 
The $5 million limit is increased to $10 million if at least $5 million 
of the bonds are used to finance public schools.
            Restriction on Federal guarantees of tax-exempt bonds
    Unlike interest on State or local government bonds, 
interest on Federal debt (e.g., Treasury bills) is taxable. 
Generally, interest on State and local government bonds that 
are Federally guaranteed does not qualify for tax-exemption. 
This restriction was enacted in 1984. The 1984 legislation 
included exceptions for housing bonds and for certain other 
Federal insurance programs that were in existence when the 
restriction was enacted.

2. Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, certain 
States and local governments are given the authority to issue 
``qualified zone academy bonds.'' Under present law, a total of 
$400 million of qualified zone academy bonds may be issued in 
each of 1998 and 1999. The $400 million aggregate bond 
authority is allocated each year to the States according to 
their respective populations of individuals below the poverty 
line. Each State, in turn, allocates the credit to qualified 
zone academies within such State. A State may carry over any 
unused allocation into subsequent years.
    Certain financial institutions (i.e., banks, insurance 
companies, and corporations actively engaged in the business of 
lending money) that hold qualified zone academy bonds are 
entitled to a nonrefundable tax credit in an amount equal to a 
credit rate (set monthly by Treasury Department regulation at 
110 percent of the applicable Federal rate for the month in 
which the bond is issued) multiplied by the face amount of the 
bond (sec. 1397E). The credit rate applies to all such bonds 
issued in each month. A taxpayer holding a qualified zone 
academy bond on the credit allowance date (i.e., each one-year 
anniversary of the issuance of the bond) is entitled to a 
credit. The credit amount is includable in gross income (as if 
it were a taxable interest payment on the bond), and credit may 
be claimed against regular income tax and alternative minimum 
tax liability.
    ``Qualified zone academy bonds'' are defined as bonds 
issued by a State or local government, provided that: (1) at 
least 95 percent of the proceeds is used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy;'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
    A school is a ``qualified zone academy'' if (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zone or 
a designated enterprise community, or (b) it is reasonably 
expected that at least 35 percent of the students at the school 
will be eligible for free or reduced-cost lunches under the 
school lunch program established under the National School 
Lunch Act.

Reasons for change

    The policy underlying the arbitrage rebate exception for 
bonds of small governmental units is to reduce complexity for 
these entities because they may not have in-house financial 
staff to engage in the expenditure and investment tracking 
necessary for rebate compliance. The exception further is 
justified by the limited potential for arbitrage profits at 
small issuance levels and limitation of the provisions to 
governmental bonds, which typically require voter approval 
before issuance. The Committee believes that a limited increase 
of $5 million per year for public school construction bonds 
will more accurately conform this present-law exception to 
current school construction costs.
    Further, the Committee wishes to encourage public-private 
partnerships to improve educational opportunities. To permit 
public-private partnerships to reap the benefit of the implicit 
subsidy to capital costs provided through tax-exempt financing, 
the Committee determined that is appropriate to allow the 
issuance of tax-exempt private activity bonds for public school 
facilities.
    Finally, the Committee believes it is appropriate to foster 
public school construction by permitting the Federal Home Loan 
Bank Board to satisfy its present-law community development 
requirements in a more cost-effective manner--by guaranteeing 
tax-exempt bonds for such construction.

Explanation of provisions

1. Increase amount of governmental bonds that may be issued by 
        governments qualifying for the ``small governmental unit'' 
        arbitrage rebate exception

    The additional amount of governmental bonds for public 
schools that small governmental units may issue without being 
subject to the arbitrage rebate requirement is increased from 
$5 million to $10 million. Thus, these governmental units may 
issue up to $15 million of governmental bonds in a calendar 
year provided that at least $10 million of the bonds are used 
to finance public school construction expenditures.

2. Allow issuance of tax-exempt private activity bonds for public 
        school facilities

    The private activities for which tax-exempt bonds may be 
issued are expanded to include elementary and secondary public 
school facilities which are owned by private, for-profit 
corporations pursuant to public-private partnership agreements 
with a State or local educational agency. The term school 
facility includes school buildings and functionally related and 
subordinate land (including stadiums or other athletic 
facilities primarily used for school events) \16\ and 
depreciable personal property used in the school facility. The 
school facilities for which these bonds are issued must be 
operated by a public educational agency as part of a system of 
public schools.
---------------------------------------------------------------------------
    \16\ The present-law limit on the amount of the proceeds of a 
private activity bond issue that may be used to finance land 
acquisition does not apply to these bonds.
---------------------------------------------------------------------------
    A public-private partnership agreement is defined as an 
arrangement pursuant to which the for-profit corporate party 
constructs, rehabilitates, refurbishes or equips a school 
facility. The agreement must provide that, at the end of the 
contract term, ownership of the bond-financed property is 
transferred to the public school agency party to the agreement 
for no additional consideration.
    Issuance of these bonds is subject to a separate annual 
per-State volume limit equal to the greater of $10 per resident 
($5 million, if greater) in lieu of the present-law State 
private activity bond volume limits. As with the present-law 
State private activity bond volume limits, States decide how to 
allocate the bond authority to State and local governments 
agencies. Bond authority that is unused in the year in which it 
arises may be carried forward for up to three years for public 
school projects under rules similar to the carryforward rules 
of the present-law private activity bond volume limits.

3. Permit limited Federal guarantees of school construction bonds by 
        the Federal Housing Finance Board

    The Federal Housing Finance Board is permitted to guarantee 
(through the regional Federal Home Loan Banks in its system) up 
to $500 million per year of governmental bonds 95 percent of 
more of the proceeds of which are used for public schools 
construction (including renovation).

Effective dates

    These provisions of the bill are effective for bonds issued 
after December 31, 1999.

              Title IV--Revenue Provisions (secs. 401-410)


1. Modify foreign tax credit carryover rules (sec. 401 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 difference 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 to 
seven years.

Effective date

    The provision applies to foreign tax credits arising in 
taxable years beginning after December 31, 2001.

2. Limit use of non-accrual experience method of accounting to amounts 
        to be received for the performance of a qualified personal 
        services (sec. 402 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 determinedwith 
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 may not use the cash 
method if the purchase, production, or sale of merchandise is a 
material income producing factor. Such taxpayers are generally 
required to keep inventories and use the 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, which are corporations 
(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 their heirs. 
Qualified personal service corporations may use the cash method 
without regard to whether their average annual gross receipts 
exceed $5 million.

Reasons for change

    The Committee understands that the use of the non-accrual 
experience method provides the equivalent of a bad debt 
reserve, which generally is not available to taxpayers using 
the accrual method of accounting. The Committee believes that 
accrual method taxpayers should be treated similarly, unless 
there is a strong indication that different treatment is 
necessary to clearly reflect income or to address a particular 
competitive situation.
    The Committee understands that accrual basis providers of 
qualified personal services (services in the fields of health, 
law, engineering, architecture, accounting, actuarial science, 
performing arts, or consulting) compete on a regular basis and 
on an even footing 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 to be 
received for the performance of qualified personal services. 
The Committee believes that it is important to avoid the 
disparity of treatment between competing cash and accrual 
method providers of qualified personal services that could 
result if the non-accrual experience method were eliminated 
with regard to amounts to be received for such services.

Explanation of provision

    The bill provides that the non-accrual experience method 
will be available only for amounts to be received for the 
performance of qualified personal services. Amounts to be 
received for the performance of all other services will be 
subject to the general rule regarding inclusion in income. 
Qualified personal services are personal services in the fields 
of health, law, engineering, architecture, accounting, 
actuarial science, performing arts, or consulting. As under 
present law, the availability of the method is conditioned on 
the taxpayer not charging interest or a penalty for failure to 
timely pay the amount.

Effective date

    The provision is effective for taxable years ending after 
the date of enactment. Any change in the taxpayer's method of 
accounting necessitated as a result of the proposal will be 
treated as a voluntary change initiated by the taxpayer with 
the consent of the Secretary of the Treasury. Any required 
section 481(a) adjustment is to be taken into account over a 
period not to exceed four years under principles consistent 
with those in Rev. Proc. 98-60.\17\
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    \17\ 1998-51 I.R.B. 16.
---------------------------------------------------------------------------

3. Expand reporting of cancellation of indebtedness income (sec. 403 of 
        the bill and sec. 6050P of the Code)

Present law

    Under section 61(a)(12), a taxpayer's gross income includes 
income from the discharge of indebtedness. Section 6050P 
requires ``applicable entities'' to file information returns 
with the Internal Revenue Service (IRS) regarding any discharge 
of indebtedness of $66 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.

4. Extension of IRS user fees (sec. 404 of the bill and new sec. 7527 
        of the Code)

Present law

    The IRS provides written responses to questions of 
individuals, corporations, and organizations relating to their 
tax status or the effects of particular transactions for tax 
purposes. The IRS generally charges a fee for requests for a 
letter ruling, determination letter, opinion letter, or other 
similar ruling or determination. Public Law 104-117 \18\ 
extended the statutory authorization for these user fees \19\ 
through September 30, 2003.
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    \18\ An Act to provide that members of the Armed Forces performing 
services for the peacekeeping efforts in Bosnia and Herzegovina, 
Croatia, and Macedonia shall be entitled to tax benefits in the same 
manner as if such services were performed in a combat zone, and for 
other purposes (March 20, 1996).
    \19\ These user fees were originally enacted in section 10511 of 
the Revenue Act of 1987 (Public Law 100-203, December 22, 1987).
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Reasons for change

    The Committee believes that it is appropriate to extend the 
statutory authorization for these user fees for an additional 
six years.

Explanation of provision

    The bill extends the statutory authorization for these user 
fees through September 30, 2009. The bill also moves the 
statutory authorization for these fees into the Internal 
Revenue Code.

Effective date

    The provision, including moving the statutory authorization 
for these fees into the Code and repealing the off-Code 
statutory authorization for these fees, is effective for 
requests made after the date of enactment.

5. Clarify definition of ``subject to'' liabilities under Code section 
        357(c) (sec. 405 of the bill and secs. 357 and 362 of the Code)

Present law

    Present law provides that the transferor of property 
recognizes no gain or loss if the property is exchanged solely 
for qualified stock in a controlled corporation (sec. 351). The 
assumption by the controlled corporation of a liability of the 
transferor (or the acquisition of property ``subject to'' a 
liability) generally will not cause the transferor to recognize 
gain. However, under section 357(c), the transferor does 
recognize gain to the extent that the sum of the assumed 
liabilities, together with the liabilities to which the 
transferred property is subject, exceeds the transferor's basis 
in the transferred property. If the transferred property is 
``subject to'' a liability, Treasury regulations indicate that 
the amount of the liability is included in the calculation 
regardless of whether the underlying liability is assumed by 
the controlled corporation. Treas. Reg. sec. 1.357-2(a). 
Similar rules apply to reorganizations described in section 
368(a)(1)(D).
    The gain recognition rule of section 357(c) is applied 
separately to each transferor in a section 351 exchange.
    The basis of the property in the hands of the controlled 
corporation equals the transferor's basis in such property, 
increased by the amount of gain recognized by the transferor, 
including section 357(c) gain.

Reasons for change

    The tax treatment under present law is unclear in 
situations involving the transfer of certain liabilities. As a 
result, the Committee is concerned that some taxpayers may be 
structuring transactions to take advantage of the uncertainty. 
For example, where more than oneasset secures a single 
liability, some taxpayers might take the position that, on a transfer 
of the assets to different subsidiaries, each subsidiary counts the 
entire liability in determining the basis of the asset. This 
interpretation arguably might result in the duplication of tax basis or 
in assets having a tax basis in excess of their value, resulting in 
excessive depreciation deductions and mismeasurement of income. The 
provision is intended to eliminate the uncertainty, and to better 
reflect the underlying economics of these corporate transfers.

Explanation of provision

    Under the provision, the distinction between the assumption 
of a liability and the acquisition of an asset subject to a 
liability generally is eliminated. First, except as provided in 
Treasury regulations, a recourse liability (or any portion 
thereof) is treated as having been assumed if, as determined on 
the basis of all facts and circumstances, the transferee has 
agreed to, and is expected to satisfy the liability or portion 
thereof (whether or not the transferor has been relieved of the 
liability). Thus, where more than one person agrees to satisfy 
a liability or portion thereof, only one would be expected to 
satisfy such liability or portion thereof. Second, except as 
provided in Treasury regulations, a nonrecourse liability (or 
any portion thereof) is treated as having been assumed by the 
transferee of any asset that is subject to the liability. 
However, this amount is reduced in cases where an owner of 
other assets subject to the same nonrecourse liability agrees 
with the transferee to, and is expected to, satisfy the 
liability (up to the fair market value of the other assets, 
determined without regard to section 7701(g)).
    In determining whether any person has agreed to and is 
expected to satisfy a liability, all facts and circumstances 
are to be considered. In any case where the transferee does 
agree to satisfy a liability, the transferee also will be 
expected to satisfy the liability in the absence of facts 
indicating the contrary.
    In determining any increase to the basis of property 
transferred to the transferee as a result of gain recognized 
because of the assumption of liabilities under section 357, in 
no event will the increase cause the basis to exceed the fair 
market value of the property (determined without regard to sec. 
7701(g)).
    If gain is recognized to the transferor as the result of an 
assumption by a corporation of a nonrecourse liability that 
also is secured by any assets not transferred to the 
corporation, and if no person is subject to Federal income tax 
on such gain, then for purposes of determining the basis of 
assets transferred, the amount of gain treated as recognized as 
the result of such assumption of liability shall be determined 
as if the liability assumed by the transferee equaled such 
transferee's ratable portion of the liability, based on the 
relative fair market values (determined without regard to sec. 
7701(g)) of all assets subject to such nonrecourse liability. 
In no event will the gain cause the resulting basis to exceed 
the fair market value of the property (determined without 
regard to sec. 7701(g)).
    The Treasury Department has authority to prescribe such 
regulations as may be necessary to carry out the purposes of 
the provision. This authority includes the authority to specify 
adjustments in the treatment of any subsequent transactions 
involving the liability, including the treatment of payments 
actually made with respect to any liability as well as 
appropriate basis and other adjustments with respect to such 
payments. Where appropriate, the Treasury Department also may 
prescribe regulations which provide that the manner in which a 
liability is treated as assumed under the provision is applied 
elsewhere in the Code.

Effective date

    The provision is effective for transfers on or after 
October 19, 1998. No inference regarding the tax treatment 
under present law is intended.

6. Denial of charitable contribution deduction for transfers associated 
        with charitable split-dollar insurance arrangements (sec. 406 
        of the bill and sec. 170(f)(10) 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.\20\
---------------------------------------------------------------------------
    \20\ United States v. American 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 taxpayer obtains a 
contemporaneous written acknowledgment from the donee 
organization that includes a description and good faith 
estimate of the value of any goods or services provided by the 
donee organization to the taxpayer in consideration, whole or 
part, for the taxpayer's contribution (sec. 170(f)(8)).

Reasons for change

    The Committee is concerned about an abusive scheme \21\ 
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 a family partnership). Having passed 
the money through a charity, the transferor claims a charitable 
contribution deduction for more that is actually being used to 
benefit the transferor and his or her family. If the transferor 
or the transferor's family paid the premium directly, the 
payment would not be deductible. Although the charity 
eventually may get some of the benefit under the life insurance 
contract, it does not have unfettered use of the transferred 
funds.
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    \21\ ``A Popular Tax Shelter for `Angry Affluent' Prompts Ire of 
Others,'' Wall Street Journal, Jan. 22, 1999, p. A1; ``U.S. Treasury 
Officials Investigating Charitable Split-Dollar Insurance Plan,'' Wall 
Street Journal, Jan. 29, 1999, p. B5; ``Brilliant Deduction?,'' The 
Chronicle of Philanthropy, Aug. 13, 1998, p. 24; ``Charitable Reverse 
Split-Dollar: Bonanza or Booby Trap,'' Journal of Gift Planning, 2nd 
quarter 1998.
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    The Committee is concerned that this type of transaction 
represents an abuse of the charitable contribution deduction. 
The Committee is also concerned that the charity often gets 
relatively little benefit from this type of scheme, and serves 
merely as a conduit or accommodation party, which the 
Commission does not view as appropriate for an organization 
with tax-exempt status. In substance, the charity receives a 
transfer of a partial interest in an insurance policy, for 
which no charitable contribution deduction is allowed. While 
there is no basis under present law for allowing a charitable 
contribution deduction in these circumstances, the Committee 
intends that the provision stop the marketing of these 
transactions immediately.
    Therefore, the provision clarifies present law by 
specifically denying a charitable contribution deduction for a 
transfer to a charity if the charity directly or indirectly 
pays or paid any premium on a life insurance, annuity or 
endowment contract in connection with the transfer, and any 
direct or indirect beneficiary under the contract is the 
transferor, any member of the transferor's family, or any other 
noncharitable person chosen by the transferor. In addition, the 
provision clarifies present law by specifically denying the 
deduction for a charitable contribution if, in connection with 
a transfer to the charity, there is an understanding or 
expectation that any person will directly or indirectly pay any 
premium on any such contract.
    The provision provides that certain persons are not treated 
as indirect beneficiaries, in certain cases in which a 
charitable organization purchases an annuity contract to fund 
an obligation to pay a charitable gift annuity. The provision 
also provides that a person is not treated as an indirect 
beneficiary solely by reason of being a noncharitable recipient 
of an annuity or unitrust amount paid by a charitable remainder 
trust that holds a life insurance, annuity or endowment 
contract. The rationale for these rules is that 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 \22\ 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.
---------------------------------------------------------------------------
    \22\ The provision is similar to H.R. 630, introduced by Mr. Archer 
for himself and for Mr. Rangel (106th Cong., 1st Sess.).
---------------------------------------------------------------------------
    A personal benefit contract with respect to the transferor 
is any life insurance, annuity, or endowment contract, if any 
direct or indirect beneficiary under the contract is the 
transferor, any member of the transferor's family, or any other 
person (other than a section 170(c) organization) designated by 
the transferor. For example, such a beneficiary would include a 
trust having a direct or indirect beneficiary who is the 
transferor or any member of the transferor's family, and would 
include an entity that is controlled by the transferor or any 
member of the transferor's family. It is intended that a 
beneficiary under the contract include any beneficiary under 
any side agreement relating to the contract. If a transferor 
contributes a life insurance contract to a section 170(c) 
organization and designates one or more section 170(c) 
organizations as the sole beneficiaries under the contract, 
generally, it is not intended that the deduction denial rule 
under the provision apply. If, however, there is an outstanding 
loan under the contract upon the transfer of the contract, then 
the transferor is considered as a beneficiary. The fact that a 
contract also has other direct or indirect beneficiaries 
(persons who are not the transferor or a family member, or 
designated by the transferor) does not prevent it from being a 
personal benefit contract. The provision is not intended to 
affect situations in which an organization pays premiums under 
a legitimate fringe benefit plan for employees.
    It is intended that a person be considered as an indirect 
beneficiary under a contract if, for example, the person 
receives or will receive any economic benefit as a result of 
amounts paid under or with respect to the contract. For this 
purpose, as described below, an indirect beneficiaryis 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).
    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 its 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 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 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 
requirements. 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 provisions. 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.

7. Treatment of excess pension assets used for retiree health benefits 
        (sec. 407 of the bill and sec. 420 of the Code)

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 my 
result in disqualification of the plan. Certain limitations and 
procedural requirements apply to a reversion upon plan 
termination. Any assets that revert to the employer upon plan 
termination are includible in the gross income of the employer 
and subject to an excise tax. The excise tax rate, which my be 
as high as 50 percent of the reversion, varies depending upon 
whether or not the employer maintains a replacement plan or 
makes certain benefit increases. Upon plan termination, the 
accrued benefits of all plan participants are required to be 
100-percent vested.
    A pension plan may provide medical benefits to retired 
employees through a section 401(h) account that is a part of 
such plan. A qualified transfer of excess assets of a defined 
benefit pension plan (other than a multiemployer plan) into a 
section 401(h) account that is a part of such plan does not 
result in plan disqualification and is not treated as a 
reversion to the employer or a prohibited transaction. 
Therefore, the transferred assets are not includible in the 
gross income of the employer and are not subject to the excise 
tax on reversions.
    Qualified transfers are subject to amount and frequency 
limitations, use requirements, deduction limitations, vesting 
requirements and minimum benefit requirements. Excess assets 
transferred in a qualified transfer may not exceed the amount 
reasonably estimated to be the amount that the employer will 
pay out of such account during the taxable year of the transfer 
for qualified current retiree health liabilities. No more than 
one qualified transfer with respect to any plan may occur in 
any taxable year.
    The transferred assets (and any income thereon) must be 
used to pay qualified current retiree health liabilities 
(either directly or through reimbursement) for the taxable year 
of the transfer. Transferred amounts generally must benefit all 
pension plan participants, other than key employees, who are 
entitled upon retirement to receive retiree medical benefits 
through the section 401(h) account. Retiree health benefits of 
key employees may not be paid (directly or indirectly) out of 
transferred assets. Amounts not used to pay qualified current 
retiree health liabilities for the taxable year of the transfer 
are to be returned at the end of the taxable year to the 
general assets of the plan. These amounts are not includible in 
the gross income of the employer, but are treated as an 
employer reversion and are subject to a 20-percent excise tax.
    No deduction is allowed for (1) a qualified transfer of 
excess pension assets into a section 401(h) account, (2) the 
payment of qualified current retiree health liabilities out of 
transferred assets (and any income thereon) or (3) a return of 
amounts not used to pay qualified current retiree health 
liabilities to the general assets of the pension plan.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer.
    The minimum benefit requirement requires each group health 
plan under which applicable health benefits are provided to 
provide substantially the same level of applicable health 
benefits for the taxable year of the transfer and the following 
4 taxable years. The level of benefits that must be maintained 
is based on benefits provided in the year immediately preceding 
the taxable year of the transfer. Applicable health benefits 
are health benefits or coverage that are provided to (1) 
retirees who, immediately before the transfer, are entitled to 
receive such benefits upon retirement and who are entitle 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.\23\
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    \23\ 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 
participant 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 
throughSeptember 30, 2009\24\. 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 of 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 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.
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    \24\ In addition to amendments to the Internal Revenue Code, the 
provision makes conforming amendments to the applicable sections of the 
ERISA. That is, the provision provides that, for purposes of the 
applicable sections of ERISA, a qualified transfer is defined as under 
section 420 of the Internal Revenue Code, as in effect on January 1, 
2000.
---------------------------------------------------------------------------

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 minimum benefit requirement continues to apply to 
qualified transfers before the effective date, and the minimum 
cost requirement applies to transfers after the effective date. 
For example, suppose an employer (with a calendar year taxable 
year) made a qualified transfer in 1998. The minimum benefit 
requirement must be satisified for calendar years 1998, 1999, 
2000, 2001, and 2002. Suppose the employer also makes a 
qualified transfer in 2001. Then, both the minimum cost and 
benefit requirement must be satisfied in 2001 and 2002, and the 
minimum cost requirement must be satisfied in 2003, 2004, and 
2005.

8. Impose limitation on prefunding of certain employee benefits (sec. 
        408 of the bill and secs. 419A and 4976 of the Code)

Present law

    Under present law, contributions to a welfare benefit fund 
generally are deductible when paid, but only to the extent 
permitted under the rules of Code sections 419 and 419A. The 
amount of an employer's deducation 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 serverance pay benefits, of life 
insurance benefits.
    The account limit for a qualified asset account for a 
taxable year is generally the amount reasonably and actuarially 
necessary to fund claims incurred but unpaid (as of the close 
of the taxable year) for benefits with respect to which the 
account is maintained and the administrative costs incurred 
with respect to those claims. Specific additional reserves are 
allowed for future provision of post-retirement medical and 
life insurance benefits.
    The present-law deduction limits for contributions to 
welfare benefit funds do not apply in the case of certain 10-
or-more employer plans. A plan is a 10-or-more employer plan if 
(1) more than one employer contributes to it, (2) no employer 
is normally required to contribute more than 10 percent of the 
total contributions under the plan by all employees, 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 
exployer.

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-
employment 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 arrangments. 
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 group-term life insurance benefits which do not provide for 
any cash surrender value or other money that can be paid, 
assigned, borrowed or pledged for collateral of a loan. This 
exception is no longer available with respect to plans that 
provide supplemental unemployment compensation, severance pay 
and life insurance (other than group-term life) benefits. Thus, 
the generally applicable deducation 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 that for which the contributions 
were made (including cash payments to employees upon 
termination of the fund), 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.
    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 after the date of enactment.

9. Modify installment method and prohibit its use by accrual method 
        taxpayers (sec. 409 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 
the recognition of income from the disposition of certain 
property until payment is received. Sales to customers in the 
ordinary course of business are not eligible for the 
installment methods, except for sales of property 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 \25\ 
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.
---------------------------------------------------------------------------
    \25\ 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 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.
    The Committee recognizes that special considerations exist 
in the disposition of property that is used or produced in the 
trade or business of farming, as well as certain dispositions 
of timeshares and residential lots where an election is made to 
pay interest on deferred taxes. The Committee does not believe 
that the rules applicable to such situations should be modified 
at this time.

Explanation of provision

            Use of the installment method for accrual method 
                    dispositions
    The installment method of accounting generally may not be 
used for dispositions of property that otherwise would be 
reported for Federal income tax purposes using an accrual 
method of accounting. The bill 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 bill also does not change present law 
regarding the availability of the installment method for 
dispositions of timeshares and residential lots if the taxpayer 
elects to pay interest under section 453(l).
    The bill does not change the ability of a cash method 
taxpayer to use the installment method. For example, a cash 
method individual who owns all of the stock of a closely held 
accrual method corporation sells his stock for cash, a ten year 
note, and a percentage of the gross revenues of the company for 
next ten years. Because the individual would otherwise report 
the disposition of the stock on the cash method, his ability to 
use the installment method in reporting the gain on the sale of 
the stock is not changed.
            Modify pledge rule
    The bill also 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 ofproperty 
for an installment note. The disposition is properly reported using the 
installment method. The taxpayer only recognizes gain as it receives 
the deferred payments. However, were the taxpayer to pledge the 
installment note as security for a loan, the taxpayer 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 bill, 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 not 
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 only applies to 
installment sales where the pledge rule of present law applies. 
Accordingly, the modified pledge rule does not apply to 
installment method sales made by a dealer in timeshares and 
residential lost where the taxpayer elects to pay interest 
under section 453(1)(2)(B), to sales of property used or 
produced in the trade or business of farming, or to 
dispositions where the sales price does not exceed $150,000, 
because such sales are not subject to the pledge rule under 
present law.

Effective date

    The provision is effective for sales or dispositions on or 
after the date of enactment.

10. Add certain vaccines against streptococcus pneumoniae to the list 
        of taxable vaccines (sec. 410 of the bill and sec. 4132 of the 
        Code)

Present law

    A manufacturer's excise tax is imposed at the rate of 75 
cents per dose (sec. 4131) on the following vaccines 
recommended for routine administration to children: diphtheria, 
pertussis, tentanus, measles, mumps, rubella, polio, HIB 
(haemophilus 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 to 
finance compensation awards under the Federal Vaccine Injury 
Compensation Program for individuals who suffer certain 
injuries following administration of the taxable vaccines. This 
program provides a substitute Federal, ``no fault'' insurance 
system for the State-law tort and private liability insurance 
systems otherwise applicable to vaccine manufacturers and 
physicians. All persons immunized after September 30, 1988, 
with covered vaccines must pursue compensation under this 
Federal program before bringing civil tort actions under State 
law.

Reasons for change

    Streptococcus pneumoniae (often referred to as 
pneumococcus) is a bacteria that can cause bacterial 
meningitis, a brain or spinal cord infection, bacteremia, a 
bloodstream infection, and otitis media (ear infection). The 
Committee understands that each year in the United States, 
pneumococcal disease accounts for an estimated 3,000 cases of 
bacterial meningitis, 50,000 cases of bacteremia, 500,000 cases 
of pneumonia, and 7 million cases of otitis media among all age 
groups. The Committee understands that, while there currently 
is a vaccine effective in preventing pneumococcal diseases in 
adults, that vaccine, a polysaccaride vaccine, does not induce 
an adequate immune response in young children and therefore 
does not protect children against these diseases. The Committee 
further understands that the Food and Drug Administration's 
(the ``FDA'') is expected to approve a new, 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 Injury Compensation 
Trust Fund, greater application of the vaccine will be 
promoted. The Committee, therefore, believes it is appropriate 
to add the conjugate vaccine against steprococcus pneumoniae to 
the list of taxable vaccines.

Explanation of provision

    The bill adds any conjugate vaccine against streptococcus 
pneumoniae to the list of taxable vaccines.

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 conjugated streptococcus pneumonia 
vaccines to children for which delivery is made after such 
date, the delivery date is deemed to be the sale date.

                    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 revenue 
provisions of S. 1134 as reported.

                              ESTIMATED BUDGET EFFECTS OF THE ``AFFORDABLE EDUCATION ACT OF 1999,'' AS APPROVED BY THE SENATE COMMITTEE ON FINANCE ON MAY 19, 1999
                                                                        [Fiscal Years 2000-2009, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                           Provision                             Effective    2000     2001     2002      2003       2004      2005     2006     2007     2008     2009    2000-2004   2000-2009
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Education Relief Provisions:
1. Education IRAs--increase the annual contribution limit to    tyba 12/31/     -50     -164     -251       -337       -355     -290     -278     -257     -226     -179      -1,156      -2,387
 $2,000; expand the definition of qualified education expenses         99
 to include qualified elementary and secondary education
 expenses; sunset 12/31/03; allow education IRA contributions
 for special needs beneficiaries above the age of 18; allow
 corporations and other entities to contribute to education
 IRAs; allow contributions until April 15 of the following
 year; and allow a taxpayer to exclude ED IRA distributions
 from gross income and claim the HOPE or Lifetime Learning
 credits as long as they are not used for the same expenses;
 coordination with HOPE/Lifetime Learning credits sunsets 12/
 31/03 (thereafter earnings withdrawn do not receive tax-free
 treatment if HOPE/Lifetime Learning credit is claimed).......
    2. Qualified Tuition Plans--tax-free distributions from     tyba 12/31/      -6      -22      -38        -57        -76      -94     -123     -152     -180     -209        -200        -959
     State plans; and allow private institutions to offer              99
     prepaid tuition plans, tax-deferred in 2000, with tax-
     free distributions beginning in 2004; allow a taxpayer to
     exclude State plan distributions from gross income and
     claim the HOPE or Lifetime Learning credits as long as
     they are not used for the same expenses; coordination
     with HOPE/Lifetime learning credits sunsets 12/31/03
     (thereafter earnings withdrawn do not receive tax-free
     treatment if HOPE/Lifetime Learning credit is claimed....
3. Employer Provided Assistance--extend the exclusion for         -1/1/00      -254     -510     -598       -637       -455     -122        -        -        -        -      -2,454      -2,577
 undergraduate courses through 6/30/04; add the exclusion for
 graduate level courses from 1/1/00 through 6/30/04...........
4. Student Loan Interest--eliminate the 60 month rule for       ipa 12/31/      -16      -64      -69        -71        -74      -77      -78      -79      -87      -94        -295        -709
 interest paid after 12/31/99.................................         99
    5. Eliminate the tax on awards under the National Health    tyba 12/31/      -2       -1       -1         -1      (\1\)    (\1\)       -1       -1       -1       -1          -5          -8
     Corps Scholarship program and F. Edward Hebert Armed              93
     Forces Health Professions Scholarship program............
    6. Increase arbitrage rebate exception for governmental     tyba 12/31/   (\1\)       -2       -4         -5        -13      -14      -14      -15      -16      -17         -25        -102
     bonds used to finance qualified school construction from          99
     $10 million to $15 million...............................
    7. Issuance of tax-exempt private activity bonds for        bia 12/31/       -4      -16      -33        -52        -76     -103     -133     -163     -192     -220        -181        -992
     qualified education facilities with annual volume cap the         99
     greater of $10 per resident or $5 million................
    8. Allow Federal Home Loan Bank to guarantee school         bia 12/31/    (\1\)       -1       -1         -1         -2       -2       -3       -3       -3       -3          -5         -19
     construction bonds, capped at $500 million annually......         99
                                                                           ---------------------------------------------------------------------------------------------------------------------
      Total of Education Relief Provisions....................  ..........     -332     -780     -995     -1,161     -1,051     -702     -630     -670     -705     -723      -4,321      -7,753
                                                                           =====================================================================================================================
Possible Revenue Offset Provisions:
    1. 1-year carryback of foreign tax tax credits and 7-year    cai tyba   .......  .......       94        596        533      496      464      431      295      269       1,233       3,178
     carryforward.............................................   12/31/01
    2. Limit use of non-accrual experience method of             tyea DOE        12       77       60         33         28       10       12       14       16       18         210         280
     accounting to amounts to be received for the performance
     of qualified professional services.......................
    3. Information reporting on cancellation of indebtedness    coda 12/31/ .......        7        7          7          7        7        7        7        7        7          28          63
     by non-bank financial institutions.......................         99
    4. Extension of IRS user fees through 9/30/09 \2\.........    9/30/03   .......  .......  .......  .........         50       53       56       59       61       64          50         343
    5. Clarify the meaning of ``subject to'' liabilities under  to/a 10/19/      19       14       16         18         20       22       24       26       28       30          87         217
     section 357(c)...........................................         98
    6. Deny deduction for charitable spit dollar life               (\3\)        13       13       14         15         15       16       17       18       19       20          70         159
     insurance................................................
    7. Allow employers to transfer excess defined benefit plan   tmi tyba   .......       19       38         39         40       41       42       42       43       44         136         348
     assets to a special account for health benefits of          12/31/00
     retirees (through 9/30/09)...............................
    8. Impose limitation on pre-funding of certain employee       cpa DOE        81      141      147        149        140      129      118      105       90       74         659       1,175
     benefits.................................................
    9. Repeal installment method for most accrual basis           iseio/a       477      677      406        257         72        8       21       35       48       62       1,889       2,063
     taxpayers; adjust pledge rules...........................        DOE
  10. Include the Streptococcus Pneumonia vaccine in the            (\4\)         4        7        9         10         10       10       10       10       10       11          39          91
   Federal vaccine insurance program..........................
                                                                           ---------------------------------------------------------------------------------------------------------------------
      Total of Possible Revenue Offset Provisions.............  ..........      606      955      791      1,124        915      792      771      747      617      599       4,391       7,917
                                                                           =====================================================================================================================
      Net Total...............................................  ..........      274      175     -204        -37       -136       90      141       77       -8     -124          70        164
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Loss of less than $500,000.
\2\Estimate provided by the Congressional Budget Office.
\3\Effective for transfers made after 2/8/99 and for premiums paid after the date of enactment.
\4\Effective for vaccine purchases the day after the date on which the Centers for Disease Control make final recommendation for routine administration of conjugated Streptococcus Pneumonia
  vaccines to children.

Legend for ``Effective'' column; bia=bonds issued after; cai=credits arising in; codea=cancellation of indebtedness after; cpa=contributions paid after; DOE=date of enactment; ipa=interest
  paid after; iseio/a=installment sales entered into on or after; tmi=transfers made in; to/a=transfer on or after; tyba=taxable years beginning after; tyea=taxable years ending after.

 Note.--Details may not add 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 revenue provisions of the bill as 
reported involve no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part III. A., above), and that the revenue offset provisions 
(other than the foreign tax credit carryover, information 
reporting, IRS user fees, and vaccine provisions) of the bill 
involve reduced tax expenditures (see Part III. A., above).

              C. Consultation Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 25, 1999.
Hon. William V. Roth, Jr.
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Affordable 
Education Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Hester 
Grippand.
            Sincerely,
                                          Barry B. Anderson
                                      for Dan L. Crippen, Director.
    Enclosure.

               Congressional Budget Office Cost Estimate

S. 1134--The Affordable Education Act of 1999

    Summary: The Affordable Education Act of 1999 would amend 
the Internal Revenue Code to provide various tax incentives for 
education. The Joint Committee on Taxation (JCT) and the 
Congressional Budget Office (CBO) have estimated that this bill 
would increase revenues by $274 million in fiscal year 2000 and 
by $70 million over the 2000-2004 period. CBO estimates that 
the bill would increase direct spending by $3 million over the 
2000-2004 period. Because the legislation would affect revenues 
and direct spending, pay-as-you-go procedures would apply.
    The bill contains one intergovernmental mandate as defined 
in the Unfunded Mandates Reform Act (UMRA). JCT estimates the 
cost of the new intergovernmental mandate would be less than 
$50 million in each fiscal year through the 2000-2004 period. 
The bill would impose eight new private-sector mandates. The 
costs of the new mandates would exceed the threshold ($100 
million in 1996, adjusted annually for inflation) specified in 
UMRA in fiscal years 2000-2004.
    Description of major provisions: The Affordable Education 
Act of 1999 would modify education individual retirement 
accounts (IRAs) through provisions that would:
          Expand the definition of qualified education expenses 
        to include elementary and secondary schools through 
        December 31, 2003;
          Increase the annual contribution limit to $2,000 
        through December 31, 2003;
          Allow contributions for special needs beneficiaries 
        above the age of 18;
          Allow corporations and tax-exempt entities to make 
        contributions;
          Allow contributions until the time prescribed by law 
        for filing a return for such a taxable year;
          Allow taxpayers to claim a HOPE or Lifetime Learning 
        credit and to exclude amounts distributed from gross 
        income through December 31, 2003; and
          Repeal the excise tax on contributions made during 
        any taxable year in which contributions are also made 
        to a qualified state tuition program on behalf of the 
        same beneficiary.
    The bill would modify qualified tuition programs to:
          Expand the definition of ``qualified tuition 
        program'' to allow private institutions to provide 
        prepaid tuition plans;
          Exclude from gross income distributions made after 
        December 31, 1999, from qualified state tuition 
        programs and after December 31, 2003, distributions 
        made by any qualified tuition program; and
          Allow distributions from qualified tuition programs 
        to be made on behalf of a student if a HOPE or Lifetime 
        Learning Credit is claimed for that student.
    The bill also contains other education tax incentives that 
would:
          Extend the tax exclusion of employer-provided 
        assistance for undergraduate courses through June 30, 
        2004, and allow the exclusion for graduate courses 
        beginning on January 1, 2000, through June 30, 2004;
          Eliminate the limit on the number of months for which 
        interest paid on qualified education loans is 
        deductible effective December 31, 1999;
          Eliminate the tax on awards under the National Health 
        Corps Scholarship program and the F. Edward Herbert 
        Armed Forces Health Professions Scholarship program;
          Increase the arbitrage rebate exemption from $10 
        million to $15 million on government bonds used to 
        finance qualified school construction;
          Allow the issuance of tax-exempt private activity 
        bonds for public school facilities; and
          Allow the Federal Housing Board to guarantee up to 
        $500 million annually in school construction bonds 
        through the Federal Home Loan Banks.
    The bill contains revenue offsets that would:
          Reduce the carryback period for foreign tax credits 
        to one year and extend the foreign tax credit 
        carryforward to 7 years;
          Limit the use of the non-accrual experience method of 
        accounting;
          Expand the reporting of cancellation of indebtedness 
        income to non-bank financial institutions;
          Extnd IRS user fees through September 30, 2009;
          Clarify the definition of ``subject to'' liabilities 
        under section 357(c) of the Internal Revenue Code;
          Deny charitable contribution deductions for transfers 
        associated with split-dollar insurance arrangements;
          Allow employers to transfer excess defined benefit 
        plan assets to a special account for the health 
        benefits of retirees through September 30, 2009;
          Impose a limitation on prefunding of certain employee 
        benefits;
          Repeal the installment method for most accrual basis 
        taxpayers; and
          Include the streptococcus pneumonia vaccine in the 
        list of taxable vaccines.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the Affordable Education Act of 1999 is 
shown in the following table. The exclusion of employer-
provided tuition assistance would affect social security taxes, 
which are off-budget.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By fiscal year, in millions of dollars
                                                     ---------------------------------------------------------------------------------------------------
                                                       1999     2000     2001     2002     2003      2004      2005     2006     2007     2008     2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   CHANGES IN REVENUES

Educational provisions:
    On-budget.......................................       0     -237     -590     -772      -923      -881     -656     -630     -670     -705     -723
    Off-budget......................................       0      -95     -190     -223      -238      -170      -46        0        0        0        0
                                                     ---------------------------------------------------------------------------------------------------
      Subtotal......................................       0     -332     -780     -995    -1,161    -1,051     -702     -630     -670     -705     -723
Revenue offset provisions...........................       0      606      955      791     1,124       915      792      771      747      617      599
All revenue provisions:
    On-budget.......................................       0      369      365       19       201        35      136      141       77      -88     -124
    Off-budget......................................       0      -95     -190     -223      -238      -170      -46        0        0        0        0
                                                     ---------------------------------------------------------------------------------------------------
      Total.........................................       0      274      175     -204       -37      -136      -90      141       77      -88     -124

                                                               CHANGES IN DIRECT SPENDING

IRS user fees.......................................       0        0        0        0         0         3        3        3        3        3        3

                                                                   CHANGES IN SURPLUS

On-budget...........................................       0      369      365       19       201        32      133      138       74      -91     -127
Off-budget..........................................       0      -95     -190     -223      -238      -170      -46        0        0        0        0
                                                     ---------------------------------------------------------------------------------------------------
      Total.........................................       0      274      175     -204       -37      -139       87      138       74      -91     -127
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Joint Committee on Taxation and Congressional Budget Office.

    Basis of estimate: The bill would extend through fiscal 
year 2009 the authority of the Internal Revenue Service (IRS) 
to charge taxpayers fees for certain rulings by the office of 
the chief counsel and by the office for employee plans and 
exempt organizations. CBO estimates that the extension of the 
IRS's authority to charge fees for such services, which is set 
to expire at the end of fiscal year 2003, would increase 
governmental receipts by $343 million over fiscal years 2004 
through 2009, net of income and payroll tax offsets. CBO based 
its estimate on recent collections data and on information from 
the IRS. Because the IRS can retain and spend a portion of 
these fees without further appropriation action, CBO estimates 
that extending the authority would also increase direct 
spending by $18 million over fiscal years 2004 through 2009. 
All other estimates were provided by JCT.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficient Control Act sets up pay-as-you-go 
procedures for legislation affecting direct spending or 
receipts. The net changes in governmental recipes and outlays 
that are subject to pay-as-you-go procedures are shown in the 
following table. Only changes affecting on-budget outlays and 
receipts (that is, those in non-Social Security programs) 
affect the pay-as-you-go scorecard. For the purposes of 
enforcing pay-as-you-go procedures, only the effects in the 
current year, the budget year, and the succeeding four years 
are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         By fiscal year, in millions of dollars
                                                               -----------------------------------------------------------------------------------------
                                                                 1999    2000    2001    2002    2003    2004    2005    2006    2007    2008     2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in receipts...........................................       0     369     365      19     201      35     136     141      77     -88      -124
Changes in outlays............................................       0       0       0       0       0       3       3       3       3       3         3
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated impact on State, local, and tribal governments: 
JCT has determined the provision in the Affordable Education 
Act of 1999 that would add streptococcus pneumonia to the list 
of taxable vaccines would impose a federal intergovernmental 
mandate on state, local, and tribal governments as defined in 
the Unfunded Mandates Reform Act (UMRA). JCT estimates that the 
direct costs of complying with this intergovernmental mandate 
will not exceed $50 million in any fiscal year through the 
2000-2004 period. CBO and JCT have determined that the 
remaining provisions of the bill do not contain 
intergovernmental mandates as defined in UMRA.
    Estimated impact on the private sector: JCT has determined 
that the Affordable Education Act of 1999 contains eight new 
private-sector mandates through provisions that would:
          Reduce the carryback period for foreign tax credits 
        to one year and extend the foreign tax credit 
        carryforward to 7 years;
          Limit the use of the non-accrual experience method of 
        accounting;
          Expand the reporting of cancellation of indebtedness 
        income to non-bank financial institutions;
          Clarify the definiton of ``subject to'' liabilities;
          Deny charitable contribution deductions for transfers 
        associated with split-dollar insurance arrangements;
          Impose a limitation on prefunding of certain employee 
        benefits;
          Repeal the installment method for most accrual basis 
        taxpayers; and
          Include the streptococcus pneumonia vaccine in the 
        list of taxable vaccines.
    The direct costs of the new mandates would exceed the 
statutory threshold ($100 million in 1996, adjusted annual for 
inflation) established in UMRA in each of fiscal years 2000 
though 2004. CBO and JCT have determined that the remaining 
provisions of the bill do not contain private-sector mandates 
as defined in UMRA.

                                    ESTIMATED COST OF PRIVATE-SECTOR MANDATES
----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                           -----------------------------------------------------
                                                              1999     2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
Cost to the private sector................................        0      606      936      753    1,085      825
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.

    Estimate prepared by: Federal receipts: Hester Grippando; 
Federal spending: John Righter; Impact on Private sector: Keith 
Mattrick; Impact on State, Local, and Tribal Governments: Leo 
Lex.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis; G. Thomas Woodward, Assistant 
Director for Tax Analysis.

                       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 S. 1134.

Motion to report the bill

    The bill (S. 1134) was ordered favorably reported, by a 
rollcall vote of 11 yeas and 5 nays (12-8, including proxy 
votes) on May 19, 1999. The vote, with a quorum present, was as 
follows:
    Yeas.--Senators Roth, Grassley, Hatch, Murkowski, Nickles, 
Gramm, Lott, Mack, Thompson, Breaux, Graham, Kerry (proxy).
    Nays.--Senators Chafee, Jeffords, Moynihan (proxy), Baucus, 
Rockefeller (proxy), Conrad, Bryan (proxy), Robb.

Votes on other amendments

    An amendment by Senators Robb and Conrad to allow tax 
credits for holders of qualified school modernization bonds was 
defeated on a roll call vote of 8 yeas and 12 nays. The vote 
was as follows.
    Yeas.--Senators Moynihan (proxy), Baucus, Rockefeller 
(proxy), Conrad, Graham, Bryan, Kerrey (Proxy), Robb.
    Nays.--Senators Roth, Chafee, Grassley, Hatch, Murkowski, 
Nickles, Gramm, Lott, Jeffords, Mack, Thompson, Breaux.

                 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 amended.

Impact on individuals and businesses

    The bill increases the annual contribution limit for 
education IRAs from $500 to $2,000 (for taxable years beginning 
after 1999 and before 2004), expands the definition of 
qualified education expenses to include qualified elementary 
and secondary education expenses (including after-school 
programs), allows education IRA contributions for special needs 
beneficiaries above age 18, allows corporations and other 
entities to contribute to education IRAs, and makes certain 
technical corrections to the education IRS provisions.
    The bill provides an exclusion from gross income for 
distributions from qualified State tuition programs to the 
extent the distribution is used to pay for college and 
vocational school tuition, fees, tutoring, books, supplies, 
equipment and special needs services and room and board 
expenses in cases where the student is at least a half-time 
student. The bill permits private institutions to offer prepaid 
tuition plans.
    The bill expands the section 127 exclusion from gross 
income for employer-provided educational benefits so that the 
exclusion also is available for graduate courses, and extends 
the section 127 exclusion through June 30, 2004.
    The bill eliminates the 60-month limit for purposes of the 
deduction for interest paid on qualified student loans. The 
provision is effective for interest paid after December 31, 
1999.
    The bill provides an exclusion from gross income for awards 
under the National Health Corps Scholarship program and the F. 
Edward Hebert Armed Forces Health Professions Scholarship 
program, effective for taxable years beginning after December 
31, 1993.
    The bill increases the arbitrage rebate exception for 
governmental bonds used to finance qualified school 
construction from $10 million to $15 million, effective for 
bonds issued after December 31, 1999.
    The bill permits the issuance of tax-exempt private 
activity bonds for qualified education facilities with an 
annual volume cap of the greater of $10 per resident or $5 
million, effective for bonds issued after December 31, 1999.
    The bill allows the Federal Home Loan Bank to guarantee up 
to $500 million annually for school construction bonds, 
effective for bonds issued after December 31, 1999.
    The bill provides for the following revenue offsets to pay 
for the above-mentioned provisions: (1) reduce the carryback 
period for excess foreign tax credits from two years to one 
year, and extend the carryforward period for excess foreign tax 
credits from five years to seven years, effective for foreign 
tax credits arising in taxable years beginning after December 
31, 2001; (2) limit the use of the non-accrual experience 
method of accounting to amounts to be received for the 
performance of qualified professional services, effective for 
taxable years ending after the date of enactment; (3) provide 
for information reporting on cancellation of indebtedness by 
non-bank financial institutions, effective for cancellation of 
indebtedness after December 31, 1999; (4) extend IRS use fees 
through September 30, 2009; (5) clarify the meaning of 
``subject to'' liabilities under section 357(c), effective for 
transfers on or after October 19, 1998; (6) deny a charitable 
contribution deduction for charitable split dollar insurance, 
effective for transfers made after February 8, 1999, and for 
premiums paid after the date of enactment; (7) extend through 
September 30, 2009, the present-law provision allowing 
employers to transfer excess defined benefit plan assets to a 
special account for health benefits of retirees; (8) impose 
limitations on the prefunding of certain employee benefits, 
effective for contributions paid after the date of enactment; 
(9) repeal the installment method for most accrual basis 
taxpayers, effective for sales and other dispositions on or 
after the date of enactment; and (10) include the Streptococcus 
Pneumonia vaccine as a taxable vaccine in the Federal vaccine 
insurance program, effective for vaccine purchases the day 
after the date on which the Centers for Disease Control make 
final recommendation for routine administration of conjugated 
Streptococcus Pneumonia vaccines to children.
    The revenue offset provisions will increase the tax burden 
on the affected taxpayers. The other provisions will reduce the 
tax burden on individuals utilizing educational IRAs, qualified 
State tuition programs, private prepaid tuition plans, 
employer-provided educational assistance programs, student loan 
interest, and National Health Service Corps and F. Edward 
Hebert Armed Forces Health Professions Scholarships. The 
increase in the arbitrage exception for public school bonds 
issued by certain State and local governments will reduce the 
burden of paying certain arbitrate rebates to the Federal 
Government.

Impact on personal privacy and paperwork

    The bill should not have any adverse impact on personal 
privacy. By expanding the eligibility of qualified education 
expenses, the bill will result in certain additional taxpayers 
having to keep track of qualified elementary and secondary 
education expenses and special needs expense in connection with 
maintaining education IRA records. The bill also clarifies that 
corporations and tax-exempt entities are permitted to make 
contributions to education IRAs. The bill makes certain 
technical corrections to the education IRA provisions to 
clarify the application of the provisions.
    The expansion of the section 127 exclusion for employer-
provided educational benefits to graduate courses will involve 
some additional recordkeeping concerning students taking 
graduate-level courses.

                     b. unfunded mandates statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee on Finance has reviewed the provisions of the 
bill as approved by the Committee on May 19, 1999. In 
accordance with the requirements of Public Law 104-4, the 
Committee has determined that the following provisions of the 
bill contain Federal private sector mandates:
          The carryback period for excess foreign tax credits 
        is reduced from two years to one year, and the 
        carryforward period for excess foreign tax credits is 
        extended from five years to seven years.
          The use of the non-accrual experience method of 
        accounting is limited to amounts to be received for the 
        performance of qualified professional services.
          Information reporting is required with respect to 
        cancellation of indebtedness by non-bank financial 
        institutions.
          The meaning of ``subject to'' liabilities under 
        section 357(c) is clarified.
          A charitable contribution deduction is denied for 
        charitable split-dollar insurance.
          Limitations are imposed on the prefunding of certain 
        employee benefits.
          The installment method of accounting is repealed for 
        most accrual basis taxpayers.
          The Streptococcus Pneumonia vaccine is subject to the 
        vaccine excise tax.
    The provision to impose the vaccine excise tax on the 
Streptococcus Pneumonia vaccine will impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments of less than $50 million in the first fiscal year 
and in each of the four fiscal years following the first fiscal 
year.
    The Committee has determined that it is necessary to 
include these provisions in the bill to provide revenue offsets 
for the education tax incentives approved by the Committee.

                       c. tax 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 Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
(the ``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).

                          VII. MINORITY VIEWS

    The undersigned Members of the Committee on Finance opposed 
the Affordable Education Act of 1999, as reported by the 
Finance Committee on May 19, 1999. We opposed the bill because, 
as explained below, we believe its central feature--the 
proposal to expand education IRAs--is seriously flawed. We were 
also troubled by the Committee's failure to comprehensively 
address in this bill the pressing need for improved school 
infrastructure in the states.

                employer provided educational assistance

    The bill includes an extension of the Internal Revenue Code 
Section 127, employer provided educational assistance, which we 
strongly support. Section 127 is one of the most successful 
Federal education policies in place today. Approximately one 
million persons per year participate in employer educational 
assistance programs; about a quarter of those are enrolled in 
graduate-level courses. Employers benefit substantially from 
the ability to send employees to school to acquire additional 
skills. In a world of continuing education, where science and 
technology change constantly, Section 127 permits employers to 
provide education benefits to employees, who then bring new 
skills back into the workplace and earn more income. The 
Federal Treasury in turn receives more tax revenue. This is a 
program that works, and it administers itself.
    The Finance Committee and Senate versions of the Taxpayer 
Relief Act of 1997 made Section 127 permanent for both 
undergraduate and graduate study. However, the Senate language 
was dropped in conference, leaving only undergraduate study 
eligible under the Code. We believe that the Committee has 
acted appropriately in once again seeking to extend the benefit 
of this provision to graduate students, and in extending the 
entire provision until June 30, 2004. We hope this position is 
sustained in the Senate bill, and in conference with the House.

                        qualified tuition plans

    We are also pleased that the bill reported by the Committee 
includes a provision to expand the tax benefits accorded to 
qualified State tuition plans. These programs have been adopted 
by, or are being considered in, each of the States, to provide 
a vehicle whereby parents and students can save for the costs 
of college. The Congress recognized the importance of these 
programs in the Small Business Job Protection Act of 1996 by 
enacting rules designed to clarify that the programs are tax-
exempt and that the beneficiaries of the plans should not be 
taxed until funds are withdrawn from the plans. The prepaid 
tuition plan rules were further modified in the Taxpayer Relief 
Act of 1997.
    The proposal in the Committee bill to exclude certain 
distributions from qualified tuition plans from gross income 
would contribute to tax simplification. Parents and students 
would be able to participate in the programs and withdraw funds 
for college expenses without having to determine which portion 
of the withdrawal represents earnings versus a return of 
contributions.

                             student loans

    We also applaud the Committee for including a proposal to 
repeal the limit on the number of months during which interest 
paid on a student loan is deductible. Enactment of this 
proposal will eliminate significant complexity and 
administrative burden on the part of financial institutions, 
borrowers and the Internal Revenue Service.

                             education iras

    We appreciate the good intentions of the proponents of 
expanding the availability of education IRAs. However, the 
proposed changes to current law included in the Committee bill 
are fraught with serious policy and technical defects. The 
Secretary of the Treasury and the Secretary of Education 
expressed strong opposition to the education IRA provisions in 
this bill, and indicated that they will recommend that the 
President veto a bill that contains such provisions. In a 
letter to members of the Finance Committee dated May 18, 1999, 
Secretaries Rubin and Riley argued that the provisions would 
disproportionately benefit the most affluent families and 
provide little or no benefit to lower and middle-income 
families. In addition, they indicated that the provisions 
``would create significant compliance problems.''
    Previous Treasury analyses conclude that seventy percent of 
the tax benefits from this provision would go to the top twenty 
percent of all taxpayers. The staff of the Joint Committee on 
Taxation estimates that the average tax benefit to families 
with students attending public elementary and secondary schools 
would be $5.00 per year.
    We therefore believe that the bill will not result in 
greater opportunity for middle and lower income families to 
send their children to private schools, as supporters contend. 
Instead, it will merely provide new tax breaks to families 
already able to afford private schools for their children. Nor 
do we believe that expansion of the contribution limit and tax-
free withdrawal opportunities for education IRAs will lead to 
increased savings. In our view, these changes will provide 
further incentives for taxpayers to shift money to tax-favored 
accounts, and to spend funds that would otherwise be used for 
retirement.
    Further, we are concerned about the additional complexity 
these changes would add to the Internal Revenue Code. At a time 
when calls for simplifying, and even abolishing, the income tax 
grow ever louder, enactment of the proposed changes to the 
education IRA provisions would add a maze of new rules and 
unanswered questions with which taxpayers and the IRS would be 
forced to contend.
    Taxpayers and the IRS will have difficulty interpreting the 
definition of a ``qualified education expense.'' For example, 
such expenses are defined in the bill to include computers and 
related software and services in connection with the enrollment 
or attendance of the beneficiary of an education IRA at a 
school providing elementary or secondary education. Yet the 
bill provides no guidance for the IRS to determine whether a 
computer (or use of the Internet) is used by a child for 
educational purposes or for entertainment, or by the child's 
parents for unrelated purposes.
    The proposal would also add significant complexity by 
requiring taxpayers to make sophisticated financial 
calculations each time a withdrawal from the education IRA is 
made. For instance, after 2003, withdrawals for elementary and 
secondary education expenses can be made--but only from 
contributions made during the period from 2000 to 2003 (and 
from earnings on such contributions). The law already includes 
complicated rules for taxpayers to determine the portion of a 
withdrawal that represents earnings, and the portion that 
represents a return of contributions. This bill would create 
different tax consequences depending on whether a withdrawal 
relates to contributions from three time periods (1999, 2000-
2003, and post-2003), and from earnings on such contributions.

                         school infrastructure

    The bill includes a $5 million increase in the small 
government issuer exception to the arbitrage rebate 
requirement, provided the proceeds are used for school 
construction. In addition, the bill promotes public-private 
partnerships in school construction by allowing tax-exempt 
private activity bonds to be issued for public school 
facilities. While we applaud the inclusion of these provisions, 
they alone will not provide the financing tools to facilitate 
the school construction and modernization needs of our nation's 
school districts.
    We believe that the amendment offered by Senator Robb and 
Senator Conrad in the Committee, to establish school 
modernization bonds, would provide substantial resources to 
address the pressing needs of school construction and repair. 
The proposal would authorize up to $25 billion in qualified 
school modernization bonds, holders of which would receive tax 
credits in lieu of an interest payment from the issuer of the 
bond. This proposal targets aid to the public schools with the 
greatest needs: those that are over-crowded and those that are 
in drastic need of repair. A portion of the bonds would benefit 
school districts with the highest percentage of low-income 
students. States would allocate the remaining bonds in a manner 
to efficiently leverage the tax incentive and maximize the 
number of districts able to build and repair schools.
    Ninety percent of the students of this country attend 
public schools. The benefits of the K-12 education IRA proposal 
included in the bill would accrue principally to wealthier 
families whose children attend private schools. The Committee 
should have focused our limited resources on the public school 
system. The needs for school construction and modernization, 
including helping schools provide students with access to 
computers, are too great to ignore. We remain committed to 
identifying and pursuing solutions to this critical problem.
                                   Daniel P. Moynihan.
                                   Max Baucus.
                                   John D. Rockefeller.
                                   Kent Conrad.
                                   Richard Bryan.
                                   Charles Robb.

                                  
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