Changes in Existing Law

Articles by Alvin Brown
Tax Preparation
Offer In Compromise
State Offers in Compromise
Levy
IRS Tax Liens
IRS Tax Liens - continued
IRS Tax Liens - continued 2
Levy - continued
Audit Techniques Guide
Congressional Contacts
Criminal Investigation
D.O.J Criminal Tax Manual
Tax Litigation
Penalty
Installment Agreements
Statute of Limitations
Frivolous Tax Argument
Interest Abatement
IRS Misconduct
IRS Abuses
Tax Fraud
Fraud Statutes
Bankruptcy
Tax Reform Legislation
Tax Shelters
Tax Court
Trust Fund Penalty
Legislation
Innocent Spouse Relief
Important Links

Changes in Existing Law

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In the opinion of the Committee, in order to expedite the business of the Senate, it is necessary to dispense with the requirements of the Senate of paragraph 12 of Rule XXVI of the Standing Rules of the Senate (relating to the showing of changes in existing law made by the bill as reported by the Committee).

¹ Report of the National Commission on Restructuring the Internal Revenue Service, A Vision for a New IRS , June 25, 1997.

² The House Committee on Ways and Means reported H.R. 2676 on October 31, 1997 (H. Rept. 105-364). H.R. 2676 was amended by the House to include (as new Title VI) the provisions of H.R. 2645 ("Tax Technical Corrections Act of 1997") as reported by the House Committee on Ways and Means on October 29, 1997 (H. Rept. 105-356).

³ Code sec. 7801(a).

⁴ The prohibition on receipt of compensation applies regardless of whether the services are performed by the Federal employee or someone else. For example, it would preclude a Federal employee from sharing in the compensation received by a partner of the Federal employee with respect to covered matters.

⁵ More stringent rules apply to regular Federal Government employees. Such employees cannot receive compensation for representational services (whether rendered by the individual or another) in matters in which the United States is a party or has a direct and substantial interest before any department, agency or court. In addition, a Federal Government employee cannot act as agent or attorney (whether or not for compensation) for prosecuting any claim against the United States or act as agent or attorney for anyone before any department, agency, or court in which the United States is a party or has a direct and substantial interest.

⁶ All Federal Government employees are permanently prohibited from representing a party other than the government in connection with a particular matter (1) in which the government is a party or has an interest, (2) in which the individual participated personally and substantially, and (3) which involved a specific party or parties at the time of their participation. In addition, Federal employees cannot, within 2 years after terminating employment, represent any person other than the United States in connection with any matter (1) in which the government is a party or has a direct and substantial interest, (2) which the person knows or reasonably should know was actually pending under his or her official responsibility within one year before termination of employment, and (3) which involved a specific party or parties at the time it was pending

⁷ The provision does not affect the Secretary's (or Deputy Secretary's) or the Commissioner's access to section 6103 information or the application of the anti-browsing rules to the Secretary (or Deputy Secretary) or the Commissioner.

⁸ Certain limitations to this exception to the otherwise applicable ethical rules would apply. For example, this exception would not apply if the matter was one in which the Board member personally and substantially participated. Similarly, the Board member could not act with respect to a matter in which he or she has a personal financial interest, including the potential to receive a share in compensation as a result of another's representation.

⁹ Certain limitations on this exception would apply. For example, the rules relating to bribery would continue to apply. In addition, the employee representative would be precluded from acting on a matter in which he or she has a financial interest.

¹⁰ Code sec. 7802(a).

¹¹ Treasury Order 150-10 ( April 22, 1982 ).

¹² See, e.g., Treasury Order 111-2 (March 16, 1981), which delegates to the Assistant Secretary (Tax Policy) the exclusive authority to make the final determination of the Treasury Department's position with respect to issues of tax policy arising in connection with regulations, published Revenue Rulings and Revenue Procedures, and tax return forms and to determine the time, form and manner for the public communication of such position.

¹³ Code section 7802(b).

¹⁴ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104 (1974).

¹⁵ Code section 7802(b)(2).

¹⁶ The Treasury Department organization includes the Departmental offices as well as the Bureau of Alcohol, Tobacco and Firearms ("ATF"), the Office of the Comptroller of the Currency ("OCC"), the U.S. Customs Service ("Customs"), the Bureau of Engraving and Printing, the Federal Law Enforcement Training Center, the Financial Management Service, the U.S. Mint, the Bureau of the Public Debt, the U.S. Secret Service ("Secret Service"), the Office of Thrift Supervision, and the IRS .

¹⁷ The first MOU was entered into in 1990 and the second in 1994.

¹⁸ Treasury Directive 40-01 (September 21, 1992) reiterates that the Treasury IG is responsible for investigating alleged misconduct on the part of IRS employees at the grade 15 level and above, all employees of the Office of the Chief Inspector. In addition, Treasury Directive 40-01 states that the Treasury IG is responsible for investigating alleged misconduct on the part of Office of Chief Counsel employees (excluding employees of the National Director, Office of Appeals).

¹⁹ Welch v. Helvering, 290 U.S. 111, 115 (1933).

²⁰ Danville Plywood Corp. v. U.S. , U.S. Cl. Ct., 63 AFTR 2d 89-1036, 1043 (1989); citations omitted.

²¹ Public Law 95-600 (November 6, 1978), as amended by section 1122 of the Small Business Job Protection Act of 1996 (Public Law 104-188; August 20, 1996).

²² Cooperation also includes providing English translations, as reasonably requested by the Secretary.

²³ See e.g., Sec. 6001 and Treas. Reg. sec. 1.6001-1 requiring every person liable for any tax imposed by this Title to keep such records as the Secretary may from time to time prescribe, and secs. 6038 and 6038A requiring United States persons to furnish certain information the Secretary may prescribe with respect to foreign businesses controlled by the U.S. person.

²⁴ Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.

²⁵ See e.g., Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-5T, and 1.274-5A.

²⁶ For example, sec. 905(b) of the Code provides that foreign tax credits shall be allowed only if the taxpayer establishes to the satisfaction of the Secretary all information necessary for the verification and computation of the credit. Instructions for meeting that requirement are set forth in Treas. Reg. sec. 1.905-2.

²⁷ If, however, the taxpayer can demonstrate that he had maintained the required substantiation but that it was destroyed or lost through no fault of the taxpayer, such as by fire or flood, existing tax rules regarding reconstruction of those records would continue to apply.

²⁸ See McLarty v. United States, 6 F.2d 545 (8th Cir. 1993) (holding that the taxpayer may not recover fees and costs) and Huckaby v. United States Department of Treasury, 804 F.2d 297 (5th Cir. 1986) (holding that the taxpayer may recover fees and costs).

²⁹ A judgment pursuant to a stipulation or a settlement will not be treated as a judgment for this purpose.

³⁰ The Committee anticipates that the Tax Court will determine whether the issuer's provision of notice to the bondholders comported with the statutory requirements. Notice provided pursuant to this provision has no effect on any notice that may be required pursuant to any other provision of law.

³¹ For example, provisions requiring the filing of a joint return in order to claim a credit such as section 21(e)(2) (dependant care credit), section 22(e)(1) (credit for the elderly and permanently disabled), section 23(f)(1) (adoption credit), section 25A(f)(6) (Hope and lifetime learning credits) and section 32(d) (earned income credit) would not apply under this provision. Section 221(f)(2) (deductions for interest on education loans) would be an example of a rule disallowing a deduction that would not apply.

³² Code sec. 6402

³³ Pursuant to TBOR2 (1996), the Secretary conducted a study of the manner in which the IRS has implemented the netting of interest on overpayments and underpayments and the policy and administrative implications of global netting. The legislative history to the General Agreement on Trade and Tariffs ( GATT ) (1994) stated that the Secretary should implement the most comprehensive crediting procedures that are consistent with sound administrative practice, and should do so as rapidly as is practicable. A similar statement was included in the Conference Report to the Omnibus Budget Reconciliation Act of 1990.

³⁴ For this purpose, a return filed before the due date is considered to be filed on the due date.

³⁵ IRM 57(10)(10).1

³⁶ This provision does not affect the ability of the IRS to reject an offer in compromise made by a taxpayer (other than a low-income taxpayer) because the amount offered is too low.

³⁷ 44 U.S.C. sec. 2904.

³⁸ 5 U.S.C. sec. 552a(b)(6).

³⁹ 44 U.S.C. sec. 3105.

⁴⁰ 44 U.S.C. sec. 2905.

⁴¹ 44 U.S.C. sec. 2904(c)(7).

⁴² 44 U.S.C. sec. 3303.

⁴³ 44 U.S.C. sec. 2906.

⁴⁴ American Friends Service Committee v. Webster, 720 F.2d 29 (D.C. Cir. 1983).

⁴⁵ 44 U.S.C. sec. 2108.

⁴⁶ 44 U.S.C. sec. 2108.

⁴⁷ Department of Justice, Office of Legal Counsel, Memorandum to Richard K. Willard, Assistant Attorney General (Civil Division) (February 27, 1986).

⁴⁸ S. Rept. 94-938, p. 317 (1976).

⁴⁹ FOIA does not require disclosure of records or information that would frustrate law enforcement efforts. 5 U.S.C. sec. 552(b)(7).

⁵⁰ While the rules of section 83 may govern the income inclusion, section 404 governs the deduction if the amount involved is deferred compensation.

⁵¹ See, e.g., the legislative history to the Omnibus Budget Reconciliation Act of 1987.

⁵² Nevertheless, under the rules below, if the REITs partnership interest increases as a result of the contribution, a portion of each of the partnership's real estate interests, reflecting the proportionate increase in the partnership interest, will be treated as a nonqualified real property interest.

⁵³ The provision does not apply to a stapled REIT's ownership of a corporate subsidiary, although the REIT would be subject to the normal restrictions on a REIT's ownership of stock in a corporation.

⁵⁴ Treas. reg. sec. 1.475(c)-1(b), issued December 23, 1996; the "customer paper election."

⁵⁵ It is understood that there is also a stacking rule under which the income tax liability limitation applies between the nonrefundable personal credits, including the nonrefundable portion of the child credit. Generally, the nonrefundable portion of the child credit and the other nonrefundable personal credits which do not provide a carryforward are grouped together and stacked first followed by the nonrefundable personal credits which provide a carryforward for purposes of applying the income tax liability limitation. Therefore, if the sum of the taxpayer's nonrefundable credits exceeds the difference between the taxpayer's regular income tax liability and the taxpayer's tentative minimum tax (determined without regard to the alternative minimum foreign tax credit) then the nonrefundable personal credits which do not provide a carryforward would be applied to reduce the income tax liability for that year first and any excess credits which allow a carryforward would be available to reduce the taxpayer's income tax liability in future years.

⁵⁶ However, education IRAs are subject to the unrelated business income tax ("UBIT") imposed by section 511.

⁵⁷ This 10-percent additional tax does not apply if a distribution from an education IRA is made on account of the death, disability, or scholarship received by the designated beneficiary.

⁵⁸ For example, if an education IRA has a total balance of $10,000, of which $4,000 represents principal (i.e., contributions) and $6,000 represents earnings, and if a distribution of $2,000 is made from such an account, then $800 of that distribution will be treated as a return of principal (which under no event is includible in the gross income of the distributee) and $1,200 of the distribution will be treated as accumulated earnings. In such a case, if qualified higher education expenses of the beneficiary during the year of the distribution are at least equal to the $2,000 total amount of the distribution (i.e., principal plus earnings), then the entire earnings portion of the distribution will be excludible under section 530, provided that a Hope credit or Lifetime Learning credit is not claimed for that same taxable year on behalf of the beneficiary. If, however, the qualified higher education expenses of the beneficiary for the taxable year are less than the total amount of the distribution, then only a portion of the earnings will be excludable from gross income under section 530. Thus, in the example discussed above, if the beneficiary incurs only $1,500 of qualified higher education expenses in the year that a $2,000 distribution is made, then only $900 of the earnings will be excludable from gross income under section 530 (i.e., an exclusion will be provided for the pro-rata portion of the earnings, based on the ratio that the $1,500 of qualified higher education expenses bears to the $2,000 distribution) and the remaining $300 of the earnings portion of the distribution will be includible in the distributee's gross income.

⁵⁹ H. Rept. 105-220, p. 374.

⁶⁰ The Treasury Department will set the credit rate each month at a rate estimated to allow issuance of qualified zone academy bonds without discount and without interest cost to the issuer.

⁶¹ See Rev. Proc. 98-9, which sets forth the maximum face amount of qualified zone academy bonds that may be issued for each State during 1998; IRS Proposed Rules ( REG -119449-97), which provides guidance to holders and issuers of qualified zone academy bonds.

⁶² If the conversion is accomplished by means of a withdrawal and a rollover into a Roth IRA, the 4-year rule applies if the withdrawal is made during 1998 and the rollover occurs within 60 days of the withdrawal. In such a case, the 4-year period begins with the year in which the withdrawal was made. For purposes of this discussion, such conversions are treated as occurring in 1998.

⁶³ The otherwise available exceptions to the early withdrawal tax, e.g., for distributions after age 59-1/2, would apply.

⁶⁴ For example, assume an individual has $300,000 gain from the sale of qualified stock in a small business corporation and assume that section 1202(b) limits the gain that may be taken into account under section 1202(a) to $240,000. $120,000 of the gain (50 percent of $240,000) is excluded from gross income under section 1202(a). The $180,000 of gain that is included in gross income is included in the computation of net capital gain, and $120,000 of that gain is taken into account under section 1(h)(5)(i)( III ), as added by the bill, in computing 28-percent rate gain. The maximum effective regular tax rate on the $240,000 of gain to which the 50-percent section 1202 exclusion applies is 14 percent and the maximum rate on the remaining $60,000 of gain is 20 percent.

⁶⁵ In the case of a disposition of a partnership interest held more than 18 months, the amount of the individual's long-term capital gain which would be treated as ordinary income under section 751(a) if section 1250 applied to all depreciation, will be taken into account in computing unrecaptured section 1250 gain.

⁶⁶ Any loss treated as a long-term capital loss by reason of section 1233(d) or 1092(f) will be taken into account in computing 28-percent rate gain where the property causing such loss to be treated as a long-term capital loss was held not more than 18 months on the applicable date.

⁶⁷ Thus, the maximum rate under the minimum tax will be 17.92% (.64 times 28%).

⁶⁸ The term "estate" is intended to include both the estate of a decedent and the estate of an individual in bankruptcy.

⁶⁹ The gross receipts for 1999 must be annualized under section 448(c)(3)(B) if the 1999 taxable year is less than 12 months.

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

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

⁷² Thus, current Treas. reg. sec. 1.1059(e)-1(a) will not result in gain recognition with respect to distributions within a consolidated group to the extent such distribution results in the creation or increase of an excess loss account under the consolidated return regulations.

⁷³ This exception (as certain other exceptions) does not apply if the stock held before the acquisition was acquired pursuant to a plan (or series of related transactions) to acquire a 50-percent or greater interest in the distributing or a controlled corporation.

⁷⁴ The 1997 Act does not limit the otherwise applicable Treasury regulatory authority under section 336(e) of the Code. Nor does it limit the otherwise applicable provisions of section 1367 with respect to the effect on shareholder stock basis of gain recognized by an S corporation under this provision.

⁷⁵ S. 1173, as passed by the Senate, and H.R. 2400, as passed by the House, would delay the effective date of this requirement for two years, until July 1, 2000.

⁷⁶ The exception also applies in the case of a joint-life policy or contract under which the sole insureds are a 20-percent owner and the spouse of the 20-percent owner. A joint-life contract under which the sole insureds are a 20-percent owner and his or her spouse is the only type of policy or contract with more than one insured that comes within the exception.

⁷⁷ Treasury regulations under section 751(b) provide for a similar bifurcation of assets among potential ordinary income amounts and other amounts in applying the definition of "unrealized receivables" for purposes of that section. Treas. Reg. 1.751-1(c)(4).

⁷⁸ The 1997 Act increased the amount of net losses from businesses, computed separately with respect to sole proprietorships (other than farming), sole proprietorships in farming, and other businesses disregarded from 50 percent to 75 percent.

⁷⁹ Under section 501(d), the requirement of a "common treasury" or "community treasury" is satisfied when all of the income generated from property owned by the organization is placed into a common fund that is maintained by such organization and is used for the maintenance and support of its members, with all members having equal, undivided interests in this common fund, but no right to claim title to any part thereof. See Twin Oaks Community, Inc. v. Commissioner, 87 T.C. 1233, at 1254 (1986). See also Rev. Rul. 78-100, 1978-1 C.B. 162 (sec. 501(d) entity must be supported by internally operated business activities rather than merely being supported by wages of members who are engaged in outside employment).