IRS Restructuring and Reform Act of
1998
Senate
Report page7
 
2.
Clarification of the small business exemption (sec.
6006(a) of the bill, sec. 401 of the 1997 Act, and
sec. 55 of the Code)
Present
Law
The corporate alternative minimum tax is repealed
for small corporations for taxable years beginning
after December 31, 1997. A small corporation is one
that had average gross receipts of $5 million or
less for a prior three-year period. A corporation
that meets the $5 million gross receipts test will
continue to be treated as a small corporation exempt
from the alternative minimum tax so long as its
average gross receipts do not exceed $7.5 million.
Explanation
of Provision
The provision clarifies the application of the $5
million and $7.5 million gross receipts tests that a
corporation must meet to be a small corporation
exempt from the AMT. Under the provision, in order
for a corporation to qualify as a small corporation
exempt from the AMT for a taxable year, the
corporation's average gross receipts for all
3-taxable-year periods beginning after December 31,
1993 and ending before such taxable year must be
$7.5 million or less. The $7.5 million amount is
reduced to $5 million for the corporation's first
3-taxable-year period (or portion thereof) beginning
after December 31, 1993, and ending before the
taxable year for which the exemption is claimed.
If a corporation's first taxable year beginning
after December 31, 1997 (the first year the
exemption is available) is its first taxable year
(and the corporation does not lose its status as a
small corporation because it is aggregated with one
or more corporations under section 448(c)(2) or
treated as having a predecessor corporation under
section 448(c)(3)(D)), the corporation will be
treated as an exempt small corporation for such year
regardless of its gross receipts for such year.
The operation of the gross receipts tests for the
small corporation AMT exemption is demonstrated by
the following examples.
Example 1. --Assume a calendar-year
corporation was in existence on January 1, 1994. In
order to qualify as a small corporation for 1998
(the first year the exemption is available), (1) the
corporation's average gross receipts for the
3-taxable-year period 1994 through 1996 must be $5
million or less and (2) the corporation's average
gross receipts for the 1995 through 1997 period must
be $7.5 million or less. If the corporation
qualifies for 1998, the corporation will qualify for
1999 if its average gross receipts for the
3-taxable-year period 1996 through 1998 also is $7.5
million or less. If the corporation does not qualify
for 1998, the corporation cannot qualify for 1999 or
any subsequent year.
Example 2. --Assume a calendar-year
corporation is first incorporated in 1999 and is
neither aggregated with a related, existing
corporation under section 448(c)(2) nor treated as
having a predecessor corporation under section
448(c)(3)(D). The corporation will qualify as a
small corporation for 1999 regardless of its gross
receipts for such year. In order to qualify as a
small corporation for 2000, the corporation's gross
receipts for 1999 must be $5 million or less.69
If the corporation qualifies for 2000, the
corporation also will qualify for 2001 if its
average gross receipts for the 2-taxable-year period
1999 through 2000 is $7.5 million or less. If the
corporation does not qualify for 2000, the
corporation cannot qualify for 2001 or any
subsequent year. If the corporation qualifies for
2001, the corporation will qualify for 2002 if its
average gross receipts for the 3-taxable-year period
1999 through 2001 is $7.5 million or less.
Effective
Date
The provision is effective for taxable years
beginning after December 31, 1997.
F.
Amendments to Title V of the 1997 Act Relating to
Estate and Gift Taxes 1. Clarification of phaseout
range for 5-percent surtax to phase out the benefits
of the unified credit and graduated rates (sec.
6007(a)(1) of the bill, sec. 501 of the 1997 Act,
and sec. 2001(c)(2) of the Code)
Present
Law
Prior to the 1997 Act, a 5-percent surtax was
imposed upon cumulative taxable transfers between
$10 million and $21,040,000 to phase out the
benefits of the graduated rates and the unified
credit. The 1997 Act increased the unified credit
beginning in 1998, from an effective exemption of
$600,000 to an effective exemption of $1,000,000 in
2006. A conforming amendment was made to the
5-percent surtax provision in section 2001(c)(2)
that was intended to reflect the increased unified
credit. However, the conforming amendment was
drafted in a manner that had the effect of phasing
out the benefits of the graduated rates but not the
unified credit.
Explanation
of Provision
The provision clarifies section 2001(c)(2) to
properly phase out the benefits of both the
graduated rates and the unified credit.
Effective
Date
The provision is effective for decedents dying, and
gifts made, after December 31, 1997.
2.
Clarification of effective date for indexing of
generation-skipping exemption (sec. 6007(a)(2) of
the bill, secs. 501(d) and (f) of the 1997 Act, and
sec. 2631(c) of the Code)
Present
Law
The 1997 Act provided for the indexation of the $1
million exemption from generation-skipping transfers
effective for decedents dying after December 31,
1998.
Explanation
of Provision
The provision clarifies that the indexing of the
exemption from generation-skipping transfers is
effective with respect to all generation-skipping
transfers (i.e., direct skips, taxable terminations,
and taxable distributions) made after 1998.
With respect to existing trusts, transferors are
permitted to make a late allocation of any
additional GST exemption amount attributable to
indexing adjustments in accordance with the
present-law rules applicable to late allocations as
set forth in sections 2632 and 2642, and the
regulations promulgated thereunder. For example,
assume an individual transferred $2 million to a
trust in 1995, and allocated his entire $1 million
GST exemption to the trust at that time (resulting
in an inclusion ratio of .50). Assume further that
in 2001, the GST exemption has increased to
$1,100,000 as the result of indexing, and that the
value of the trust assets is now $3 million. If the
individual is still alive in 2001, he is permitted
to make a late allocation of $100,000 of GST
exemption to the trust, resulting in a new inclusion
ratio of 1-(($1,500,000§100,000)/$3,000,000), or
.467.
Effective
Date
The provision is effective for generation-skipping
transfers (i.e., direct skips, taxable terminations,
and taxable distributions) made after December 31,
1998.
3.
Conversion of qualified family-owned business
exclusion into a deduction (sec. 6007(b)(1)(A) of
the bill, sec. 502 of the 1997 Act, and redesignated
sec. 2057 of the Code)
Present
Law
The qualified family-owned business provision in the
1997 Act provides an exclusion from estate taxes for
certain qualified family-owned business interests.
It is unclear whether the provision provides an
exclusion of value or an exclusion of property from
the estate, and thus it is unclear how the new
provision interacts with other provisions in the
Internal Revenue Code (e.g., secs. 1014, 2032A,
2056, 2612, and 6166).
Explanation
of Provision
The provision converts the qualified family-owned
business exclusion into a deduction, and
redesignates section 2033A as section 2057. Except
as provided below, the requirements of the qualified
family-owned business provision otherwise remain
unchanged. The qualified family-owned business
deduction is not available for generation-skipping
transfer tax purposes.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
4.
Coordination between unified credit and family-owned
business provision (sec. 6007(b)(1)(B) and
6007(b)(4) of the bill, sec. 502 of the 1997 Act,
and redesignated sec. 2057(a) of the Code)
Present
Law
The 1997 Act effectively increased the amount of
lifetime gifts and transfers at death that are
exempt from unified estate and gift tax from
$600,000 to $1,000,000 over the period 1997 to 2006,
through increases in an individual's unified credit.
In addition, the 1997 Act provided a limited
exclusion for certain family-owned business
interests. The exclusion for family-owned business
interests may be taken only to the extent that the
exclusion for family-owned business interests, plus
the amount effectively exempted by the unified
credit, does not exceed $1.3 million. As a result,
for years after 1998, the maximum amount of
exclusion for family-owned business interests is
reduced by increases in the dollar amount of
transfers effectively exempted through the unified
credit.
Because the structure of the 1997 Act increases the
unified credit over time (until 2006) while
decreasing over the same period the benefit of the
closely-held business exclusion, the estate tax on
estates with family-owned businesses increases over
time until 2006. This increase in estate tax results
from the fact that increases in the unified credit
provide a benefit at the decedent's lowest estate
tax brackets, while the exclusion for family-owned
businesses provides a benefit at the decedent's
highest estate tax brackets.
Explanation
of Provision
Under the provision, if an executor elects to
utilize the qualified family-owned business
deduction, the estate tax liability is calculated as
if the estate were allowed a maximum qualified
family-owned business deduction of $675,000 and an
applicable exclusion amount under section 2010
(i.e., the amount exempted by the unified credit) of
$625,000, regardless of the year in which the
decedent dies. If the estate includes less than
$675,000 of qualified family-owned business
interests, the applicable exclusion amount is
increased on a dollar-for-dollar basis, but only up
to the applicable exclusion amount generally
available for the year of death.
For example, assume the decedent dies in 2005, when
the applicable exclusion amount under section 2010
is $800,000. If the estate includes qualified
family-owned business interests valued at $675,000
or more, the estate tax liability is calculated as
if the estate were allowed a qualified family-owned
business deduction of $675,000, and the applicable
exclusion amount under section 2010 is limited to
$625,000. If the estate includes qualified
family-owned business interests of $500,000 or less,
all of the qualified family-owned business interests
could be deducted from the estate, and the
applicable exclusion amount under section 2010 is
$800,000. If the estate includes qualified
family-owned business interests valued between
$500,000 and $675,000, all of the qualified
family-owned business interests could be deducted
from the estate, and the applicable exclusion amount
under section 2010 is calculated as the excess of
$1.3 million over the amount of qualified
family-owned business interests. (For example, if
the qualified family-owned business interests were
valued at $600,000, the applicable exclusion amount
under section 2010 is $700,000.)
If a recapture event occurs with respect to any
qualified family-owned business interest, the total
amount of estate taxes potentially subject to
recapture is calculated as the difference between
the actual amount of estate tax liability for the
estate, and the amount of estate taxes that would
have been owed had the qualified family-owned
business election not been made.
Effective
Date
The provision is effective for decedents dying after
December 31, 1997.
5.
Clarification of businesses eligible for
family-owned business provision (sec. 6007(b)(2) of
the bill, sec. 502 of the 1997 Act, and redesignated
sec. 2057(b)(3) of the Code)
Present
Law
In order to be eligible to exclude from the gross
estate a portion of the value of a family-owned
business, the sum of (1) the adjusted value of
family-owned business interests includible in the
decedent's estate, and (2) the amount of gifts of
family-owned business interests to family members of
the decedent that are not included in the decedent's
gross estate, must exceed 50 percent of the
decedent's adjusted gross estate.
Explanation
of Provision
The provision clarifies the formula for determining
the amount of gifts of family-owned business
interests made to members of the decedent's family
that are not otherwise includible in the decedent's
gross estate.
Effective
Date
The provision is effective with respect to decedents
dying after December 31, 1997.
6.
Clarification of "trade or business"
requirement for family-owned business provision
(sec.
6007(b)(5)
of the bill, sec. 502 of the Act, and redesignated
secs. 2057(e)(1) and 2057(f) of the Code)
Present
Law
A qualified family-owned business interest is
defined as any interest in a trade or business that
meets certain requirements --e.g., the decedent and
members of his family must own certain percentages
of the trade or business, the decedent or members of
his family must have materially participated in the
trade or business for five of the eight years
preceding the decedent's death, and the qualified
heir or members of his family must materially
participate in the trade or business for at least
five years of any eight-year period within 10 years
following the decedent's death.
Explanation
of Provision
The provision clarifies that an individual's
interest in property used in a trade or business may
qualify for the qualified family-owned business
provision as long as such property is used in a
trade or business by the individual or a member of
the individual's family. Thus, for example, if a
brother and sister inherit farmland upon their
father's death, and the sister cash-leases her
portion to her brother, who is engaged in the trade
or business of farming, the "trade or
business" requirement is satisfied with respect
to both the brother and the sister. Similarly, if a
father cash-leases farmland to his son, and the son
materially participates in the trade or business of
farming the land for at least five of the eight
years preceding his father's death, the pre-death
material participation and "trade or
business" requirements are satisfied with
respect to the father's interest in the farm.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
7.
Clarification that interests eligible for
family-owned business provision must be passed to a
qualified heir (secs. 6007(b)(1)(B) of the bill,
sec. 502 of the Act, and redesignated sec.
2057(a)(1) of the Code)
Present
Law
The 1997 Act provided a new exclusion for qualified
family-owned business interests. One of the
requirements for the exclusion is that such
interests must pass to a "qualified heir,"
which includes members of the decedent's family and
any individual who has been actively employed by the
trade or business for at least 10 years prior to the
date of the decedent's death.
Explanation
of Provision
The provision clarifies that qualified family-owned
business interests must pass to a qualified heir in
order to qualify for the deduction. For this
purpose, if all beneficiaries of a trust are
qualified heirs (and in such other circumstances as
the Secretary of the Treasury may provide), property
passing to the trust may be treated as having passed
to a qualified heir.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
8.
Other modifications to the qualified family-owned
business provision (secs. 6007(b)(3), 6007(b)(6),
and 6007(b)(7) of the bill, sec. 502 of the 1997
Act, and redesignated sec. 2057 of the Code)
Present
Law
The qualified family-owned business provision
incorporates by cross-reference several other
provisions of the Code, including a number of
provisions in section 2032A and the personal holding
company rules of section 543(a).
Explanation
of Provision
The provision modifies section 2033A(g) (relating to
the security requirements for noncitizen qualified
heirs) by deleting the cross-reference to section
2033A(i)(3)(M), which does not appear to be
appropriate. The provision also makes rules similar
to those set forth in section 2032A(h) and (i)
(relating to conversions and exchanges of property
under sections 1031 and 1033) applicable for
purposes of section 2033A. Finally, the provision
clarifies that, in identifying assets that produce
(or are held for the production of) income of a type
described in section 543(a), section 543(a) is
applied without regard to section 543(a)(2)(B) (the
dividend requirement for corporate entities).
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
9.
Clarification of interest on installment payment of
estate tax on holding companies (sec. 6007(c) of the
bill, sec. 503 of the 1997 Act, and secs.
6166(b)(7)(A) and 6166(b)(8)(A) of the Code)
Present
Law
If certain conditions are met, a decedent's estate
may elect to pay the estate tax attributable to
certain closely-held businesses over a 14-year
period. The 1997 Act provided for a 2-percent
interest rate on the estate tax on first $1 million
in value of interests in qualified closely-held
businesses, and a rate equal to 45 percent of the
regular deficiency rate on the amount in excess of
the portion eligible for the 2-percent rate, but
also provided that none of interest on the deferred
payment of estate taxes is deductible for income or
estate tax purposes. Interests in holding companies
and non-readily-tradeable business interests are not
eligible for the 2-percent rate.
Explanation
of Provision
The provision clarifies that deferred payments of
estate tax on holding companies and
non-readily-tradable business interests do not
qualify for the 2-percent interest rate, but instead
are subject to a rate of 45 percent of the regular
deficiency rate. Such interest payments are not
deductible for income or estate tax purposes.
Effective
Date
The provision generally is effective for decedents
dying after December 31, 1997.
10.
Clarification on declaratory judgment jurisdiction
of U.S. Tax Court regarding installment payment of
estate tax (sec. 6007(d) of the bill, sec. 505 of
the 1997 Act, and sec. 7479(a) of the Code)
Present
Law
If certain conditions are met, a decedent's estate
may elect to pay estate tax attributable to certain
closely-held business over a 14-year period. The
1997 Act provided that the U.S. Tax Court would have
jurisdiction to determine whether the estate of a
decedent qualifies for the 14-year installment
payment of estate tax.
Explanation
of Provision
The provision clarifies that the jurisdiction of the
U.S. Tax Court to determine whether an estate
qualifies for installment payment of estate tax on
closely-held businesses extends to determining which
businesses in an estate are eligible for the
deferral.
Effective
Date
The provision is effective for decedents dying after
the date of enactment of the 1997 Act.
11.
Clarification of rules governing revaluation of
gifts (sec. 6007(e) of the bill, sec. 506 of the
1997 Act, and sec. 2504(c) of the Code)
Present
Law
The valuation of a gift becomes final for gift tax
purposes after the statute of limitations on any
gift tax assessed or paid has expired. The 1997 Act
extended that rule to apply for estate tax purposes,
provided for a lengthened statute of limitations for
gift tax purposes if certain information is not
disclosed with the gift tax return, and provided
jurisdiction to the U.S. Tax Court to determine the
value of any gift.
Explanation
of Provision
The provision clarifies that in determining the
amount of taxable gifts made in preceding calendar
periods, the value of prior gifts is the value of
such gifts as finally determined, even if no gift
tax was assessed or paid on that gift. For this
purpose, final determinations include, e.g., the
value reported on the gift tax return (if not
challenged by the IRS prior to the expiration of the
statute of limitations), the value determined by the
IRS (if not challenged in court by the taxpayer),
the value determined by the courts, or the value
agreed to by the IRS and the taxpayer in a
settlement agreement.
Effective
Date
The provision is effective with respect to gifts
made after the date of enactment of the 1997 Act.
12.
Clarification with respect to post-mortem
conservation easements (sec. 6007(g) of the bill,
sec. 506 of the 1997 Act, and sec. 2031(c) of the
Code)
Present
Law
A deduction is allowed for estate tax purposes for a
contribution of a qualified real property interest
to a charity (or other qualified organization)
exclusively for conservation purposes (sec.
2055(f)). The 1997 Act also provided an election to
exclude from the taxable estate 40 percent of the
value of any land subject to a qualified
conservation easement that meets certain
requirements. The 1997 Act provided that the
executor of the decedent's estate, or the trustee of
a trust holding the land, could grant a qualifying
easement after the decedent's death, as long as the
easement is granted prior to the date of the
election (generally, within nine months after the
date of the decedent's death).
Explanation
of Provision
The provision clarifies that, in the case of a
qualified conservation contribution made after the
date of the decedent's death, an estate tax
deduction is allowed under section 2055(f). However,
no income tax deduction is allowed to the estate or
the qualified heirs with respect to such post-mortem
conservation easements.
Effective
Date
The provision is effective with respect to estates
of decedents dying after December 31, 1997.
G.
Amendments to Title VII of the 1997 Act Relating to
Incentives for the District of Columbia (sec. 6008
of the bill, sec. 701 of the 1997 Act, and secs.
1400, 1400B and 1400C of the Code)
Present
Law
Designation of D.C. Enterprise Zone
Certain economically depressed census tracts within
the District of Columbia are designated as the
"D.C. Enterprise Zone," within which
businesses and individual residents are eligible for
special tax incentives. The census tracts that
compose the D.C. Enterprise Zone for purposes of the
wage credit, expensing, and tax-exempt financing
incentives include all census tracts that presently
are part of the D.C. enterprise community and census
tracts within the District of Columbia where the
poverty rate is not less than 20 percent. The D.C.
Enterprise Zone designation generally will remain in
effect for five years for the period from January 1,
1998, through December 31, 2002.
Empowerment
zone wage credit, expensing, and tax-exempt
financing
The following tax incentives generally are available
in the D.C. Enterprise Zone: (1) a 20-percent wage
credit for the first $15,000 of wages paid to D.C.
residents who work in the D.C. Enterprise Zone; (2)
an additional $20,000 of expensing under Code
section 179 for qualified zone property placed in
service by a "qualified D.C. Zone
business"; and (3) special tax-exempt financing
for certain zone facilities.
Qualified
D.C. Zone business
For purposes of the increased expensing under
section 179, as well as for purposes of the zero
percent capital gains rate (described below), a
corporation or partnership is a qualified D.C. Zone
business if: (1) the sole trade or business of the
corporation or partnership is the active conduct of
a "qualified business" (defined below)
within the D.C. Zone; (2) at least 50 percent (80
percent for purposes of the zero percent capital
gains rate) of the total gross income of such entity
is derived from the active conduct of a qualified
business within the D.C. Zone; (3) a substantial
portion of the use of the entity's tangible property
(whether owned or leased) is within the D.C. Zone;
(4) a substantial portion of the entity's intangible
property is used in the active conduct of such
business; (5) a substantial portion of the services
performed for such entity by its employees are
performed within the D.C. Zone; and (6) less than 5
percent of the average of the aggregate unadjusted
bases of the property of such entity is attributable
to (a) certain financial property, or (b)
collectibles not held primarily for sale to
customers in the ordinary course of an active trade
or business. Similar rules apply to a qualified
business carried on by an individual as a
proprietorship.
In general, a "qualified business" means
any trade or business. However, a "qualified
business" does not include any trade or
business that consists predominantly of the
development or holding of intangibles for sale or
license. In addition, a qualified business does not
include any private or commercial golf course,
country club, massage parlor, hot tub facility,
suntan facility, racetrack or other facility used
for gambling, liquor store, or certain large farms
(so-called "excluded businesses"). The
rental of residential real estate is not a qualified
business. The rental of commercial real estate is a
qualified business only if at least 50 percent of
the gross rental income from the real property is
from qualified D.C. Zone businesses. The rental of
tangible personal property to others also is not a
qualified business unless at least 50 percent of the
rental of such property is by qualified D.C. Zone
businesses or by residents of the D.C. Zone.
For purposes of the tax-exempt financing provisions,
the term "D.C. Zone business" generally is
defined as for purposes of the increased expensing
under section 179. However, a qualified D.C. Zone
business for purposes of the tax-exempt financing
provisions includes a business located in the D.C.
Zone that would qualify as a D.C. Zone business if
it were separately incorporated. In addition, under
a special rule applicable only for purposes of the
tax-exempt financing rules, a business is not
required to satisfy the requirements applicable to a
D.C. Zone business until the end of a startup period
if, at the beginning of the startup period, there is
a reasonable expectation that the business will be a
qualified D.C. Zone business at the end of the
startup period and the business makes bona fide
efforts to be such a business. With respect to each
property financed by a bond issue, the startup
period ends at the beginning of the first taxable
year beginning more than two years after the later
of (1) the date of the bond issue financing such
property, or (2) the date the property was placed in
service (but in no event more than three years after
the date of bond issuance). In addition, if a
business satisfies certain requirements applicable
to a qualified D.C. Zone business for a three-year
testing period following the end of the start-up
period and thereafter continues to satisfy certain
business requirements, then it will be treated as a
qualified D.C. Zone business for all years after the
testing period irrespective of whether it satisfies
all of the requirements of a qualified D.C. Zone
business.
Zero-percent
capital gains rate
A zero-percent capital gains rate applies to capital
gains from the sale of certain qualified D.C. Zone
assets held for more than five years. For purposes
of the zero-percent capital gains rate, the D.C.
Enterprise Zone is defined to include all census
tracts within the
District of Columbia
where the poverty rate is not less than 10 percent.
Only capital gain that is attributable to the
10-year period beginning January 1, 1998, and ending
December 31, 2007, is eligible for the zero-percent
rate.
In general, qualified "D.C. Zone assets"
mean stock or partnership interests held in, or
tangible property held by, a D.C. Zone business.
Such assets must generally be acquired after
December 31, 1997, and before January 1, 2003.
However, under a special rule, qualified D.C. Zone
assets include property that was a qualified D.C.
Zone asset in the hands of a prior owner, provided
that at the time of acquisition, and during
substantially all of the subsequent purchaser's
holding period, either (1) substantially all of the
use of the property is in a qualified D.C. Zone
business, or (2) the property is an ownership
interest in a qualified D.C. Zone business.
First-time
homebuyer tax credit
First-time homebuyers of a principal residence in
the District are eligible for a tax credit of up to
$5,000 of the amount of the purchase price, except
that the credit phases out for individual taxpayers
with adjusted gross income ("AGI") between
$70,000 and $90,000 ($110,000-$130,000 for joint
filers). The credit is available with respect to
property purchased after the date of enactment and
before January 1, 2001. Any excess credit may be
carried forward indefinitely to succeeding taxable
years.
Explanation
of Provisions
Eligible
census tracts
The bill clarifies that the determination of whether
a census tract in the District of Columbia satisfies
the applicable poverty criteria for inclusion in the
D.C. Enterprise Zone for purposes of the wage
credit, expensing, and special tax-exempt financing
incentives (poverty rate of not less than 20
percent) or for purposes of the zero-percent capital
gains rate (poverty rate of not less than 10
percent) is based on 1990 decennial census data.
Thus, data from the 2000 decennial census would not
result in the expansion or other reconfiguration of
the D.C. Enterprise Zone.
Qualified
D.C. Zone business
The bill modifies section 1400B(c) to clarify that a
proprietorship can constitute a D.C. Zone business
for purposes of the zero-percent capital gains rate.
The bill also clarifies that qualified D.C. Zone
businesses that take advantage of the special
tax-exempt financing incentives do not become
subject to a 35-percent zone resident requirement
after the close of the testing period.
Zero-percent
capital gains rate
The bill clarifies that there is no requirement that
D.C. Zone business property be acquired by a
subsequent purchaser prior to January 1, 2003, to be
eligible for the special rule applicable to
subsequent purchasers.
In addition, the bill clarifies that the termination
of the D.C. Enterprise Zone designation at the end
of 2002 will not, by itself, result in property
failing to be treated as a qualified D.C. Zone asset
for purposes of the zero-percent capital gains rate,
provided that the property otherwise continues to
qualify were the D.C. Zone designation in effect.
First-time
homebuyer credit
The bill clarifies that, for purposes of the
first-time homebuyer credit, a "first-time
homebuyer" means any individual if such
individual (and, if married, such individual's
spouse) did not have a present ownership interest in
a principal residence in the District of Columbia
during the one-year period ending on the date of the
purchase of the principal residence to which the
credit applies.
The bill also clarifies that the phaseout of the
credit for individual taxpayers with adjusted gross
income between $70,000 and $90,000
($110,000-$130,000 for joint filers) applies only in
the year the credit is generated, and does not apply
in subsequent years to which the credit may be
carried over.
In addition, the bill clarifies that the term
"purchase price" means the adjusted basis
of the principal residence on the date the residence
is purchased. Newly constructed residences are
treated as purchased by the taxpayer on the date the
taxpayer first occupies such residence.
The bill clarifies that the first-time homebuyer
credit is a nonrefundable personal credit and would
provide that the first-time homebuyer credit is
claimed after the credits described in Code sections
25 (credit for interest on certain home mortgages)
and 23 (adoption credit).
Finally, the bill clarifies that the first-time
homebuyer credit would be available only for
property purchased after August 4, 1997, and before
January 1, 2001. Thus, the credit is available to
first-time home purchasers who acquire title to a
qualifying principal residence on or after August 5,
1997, and on or before December 31, 2000,
irrespective of the date the purchase contract was
entered into.
Effective
Date
The provision s are effective as of August 5, 1997,
the date of enactment of the 1997 Act.
H.
Amendments to Title IX of the 1997 Act Relating to
Miscellaneous Provisions 1. Clarification of effect
of certain transfers to Highway Trust Fund (sec.
6009(a) of the bill, sec. 901 of the 1997 Act, and
sec. 9503 of the Code)70
Present
Law
The 1997 Act provided for the transfer of an
additional 4.3 cents per gallon of the highway motor
fuels tax revenues from the General Fund to the
Highway Trust Fund, and provided that revenues
transferred to the Trust Fund under this provision
could not be used in a manner resulting in changes
in direct spending. The 1997 Act further changed the
dates by which certain taxes would be required to be
deposited with the Treasury in fiscal year 1998.
Explanation
of Provision
The bill clarifies that the tax deposit delays
included in the provisions affecting transfers to
the Highway Trust Fund, like the revenue transfers
themselves, do not affect direct spending from the
Trust Fund.
Effective
Date
The provision is effective as if included in the
1997 Act. 2. Clarification of Mass Transit Account
portions of highway motor fuels taxes (sec. 6009(b)
of the bill, sec. 907 of the 1997 Act, and sec. 9503
of the Code)71
Present
Law
The 1997 Act provided for the transfer to the
Highway Trust Fund of revenues attributable to a
General Fund fuels tax rate of 4.3 cents per gallon.
That Act further enacted reduced rates, based on
energy content, for propane, liquefied natural tax,
compressed natural gas, and methanol produced from
natural gas. When deposited in the Highway Trust
Fund, revenues from the taxes on each of these
products are divided between the Trust Fund's
Highway Account and the Mass Transit Account.
Explanation
of Provision
The bill clarifies that the Mass Transit Account
portion of the highway motor fuels taxes generally
is 2.86 cents per gallon and that taxes on the four
fuels eligible for reduced rates are divided between
the Highway Account and the Mass Transit Account in
the same proportion as is the tax on gasoline.
Effective
Date
The provision is effective as if included in the
1997 Act.
3.
Clarification of qualification for reduced rate of
excise tax on certain hard ciders (sec. 6009(c) of
the bill, sec. 908 of the 1997 Act, and sec. 5041 of
the Code)
Present
Law
Distilled spirits are taxed at a rate of $13.50 per
proof gallon; beer is taxed at a rate of $18 per
barrel (approximately 58 cents per gallon); and
still wines of 14 percent alcohol or less are taxed
at a rate of 1.07 per wine gallon. The Code defines
still wines as wines containing not more than 0.392
gram of carbon dioxide per hundred milliliters of
wine. Higher rates of tax are applied to wines with
greater alcohol content, to sparkling wines (e.g.,
champagne), and to artificially carbonated wines.
Certain small wineries may claim a credit against
the excise tax on wine of 90 cents per wine gallon
on the first 100,000 gallons of still wine produced
annually (i.e., net tax rate of 17 cents per wine
gallon on wines with an alcohol content of 14
percent or less). No credit is allowed on sparkling
wines. Certain small breweries pay a reduced tax of
$7.00 per barrel (approximately 22.6 cents per
gallon) on the first 50,000 barrels of beer produced
annually.
Hard cider is a wine fermented solely from apples or
apple concentrate and water, containing no other
fruit product and containing at least one-half of
one percent and less than 7 percent alcohol by
volume. Once fermented, eligible hard cider may not
be altered by the addition of other fruit juices,
flavor, or other ingredients that alter the flavor
that results from the fermentation process. The 1997
Act provided a lower excise tax rate of 22.6 cents
per gallon on hard cider. Qualifying small producers
that produce 250,000 gallons or less of hard cider
and other wines in a calendar year may claim a
credit of 5.6 cents per wine gallon on the first
100,000 gallons of hard cider produced. This credit
produces an effective tax rate of 17 cents per
gallon, the same effective rate as that applied to
small producers of still wines having an alcohol
content of 14 percent or less. This credit is phased
out for production in excess of 100,000 gallons but
less than 250,000 gallons annually.
Explanation
of Provision
The bill clarifies that the 22.6-cents-per-gallon
tax rate applies only to apple cider that otherwise
would be a still wine subject to a tax rate of $1.07
per wine gallon, i.e., still wines having an alcohol
content of 14 percent or less.
Effective
Date
The provision is effective as if included in the
1997 Act.
4.
Combined employment tax reporting demonstration
project (sec. 6009(f) of the bill, sec. 976 of the
1997 Act, and sec. 6103 of the Code)
Present
Law
Traditionally, Federal tax forms are filed with the
Federal Government and State tax forms are filed
with individual states. This necessitates
duplication of items common to both returns. Some
States have recently been working with the IRS to
implement combined State and Federal reporting of
certain types of items on one form as a way of
reducing the burdens on taxpayers. The State of
Montana
and the IRS have cooperatively developed a system to
combine State and Federal employment tax reporting
on one form. The one form would contain exclusively
Federal data, exclusively State data, and
information common to both: the taxpayer's name,
address, TIN, and signature.
The Internal Revenue Code prohibits disclosure of
tax returns and return information, except to the
extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized disclosure is
a felony punishable by a fine not exceeding $5,000
or imprisonment of not more than five years, or both
(sec. 7213). An action for civil damages also may be
brought for unauthorized disclosure (sec. 7431). No
tax information may be furnished by the Internal
Revenue Service ("IRS") to another agency
unless the other agency establishes procedures
satisfactory to the IRS for safeguarding the tax
information it receives (sec. 6103(p)).
Implementation of the combined Montana-Federal
employment tax reporting project had been hindered
because the IRS interprets section 6103 to apply
that provision's restrictions on disclosure to
information common to both the State and Federal
portions of the combined form, although these
restrictions would not apply to the State with
respect to the State's use of State-requested
information if that information were supplied
separately to both the State and the IRS.
The 1997 Act permits implementation of a
demonstration project to assess the feasibility and
desirability of expanding combined reporting in the
future. There are several limitations on the
demonstration project. First, it is limited to the
State of
Montana
and the IRS. Second, it is limited to employment tax
reporting. Third, it is limited to disclosure of the
name, address, TIN, and signature of the taxpayer,
which is information common to both the
Montana
and Federal portions of the combined form. Fourth,
it is limited to a period of five years.
Explanation
of Provision
The provision permits
Montana
to use this information as if it had collected it
separately by eliminating Federal penalties for
disclosure of this information. The provision also
corrects a cross-reference to the provision.
Effective
Date
The provision is effective as of the date of
enactment of the 1997 Act (August 5, 1997), and will
expire on the date five years after the date of
enactment of the 1997 Act.
5.
Election for 1987 partnerships to continue exception
from treatment of publicly traded partnerships as
corporations (sec. 6009(d) of the bill, sec. 964 of
the 1997 Act, and sec. 7704 of the Code)
Present
Law
In
general
In the case of an electing 1987 partnership that
elects to be subject to a 3.5-percent tax on gross
income from the active conduct of a trade or
business, the general rule treating a publicly
traded partnership as a corporation does not apply.
The 3.5-percent tax was intended to approximate the
corporate tax the partnership would pay if it were
treated as a corporation for Federal tax purposes.
Tax
on partnership
The 3.5-percent tax is imposed on the electing 1987
partnership under the provision (sec. 7704(g)(3)).
The provision does not specifically make
inapplicable, however, the general rule that a
partnership as such is not subject to income tax,
but rather, the partners are liable for the tax in
their separate or individual capacities (sec. 701).
Estimated
tax payments
The provision does not specifically make applicable
the requirements for payment of estimated tax that
apply generally to payments of corporate tax.
Explanation
of Provisions
Tax
on partnership
The technical correction clarifies that the
3.5-percent tax is paid by the partnership. The
general rule of section 701(a) that a partnership as
such is not subject to income tax, but rather, the
partners are liable for the tax in their separate or
individual capacities does not apply to the payment
of the 3.5-percent tax by the partnership.
Estimated
tax payments
The technical correction provides that the corporate
estimated tax payment rules of section 6655 are
applied to the 3.5-percent tax payable by an
electing 1987 partnership in the same manner as if
the partnership were a corporation and the tax were
imposed under section 11 (relating to corporate tax
rates). References in section 11 to taxable income
are to be applied for this purpose as if they were
references to gross income of the partnership for
the taxable year from the active conduct of trades
and businesses by the partnership.
Effective
Date
Tax
on partnership
The provision is effective as if enacted with the
1997 Act.
Estimated
tax payments
The provision is effective for taxable years
beginning after the date of enactment.
6.
Depreciation limitations for electric vehicles (sec.
6009(e) of the bill, sec. 971 of the 1997 Act, and
sec. 280F of the Code)
Present
Law
Annual depreciation deductions with respect to
passenger automobiles are limited to specified
dollar amounts, indexed for inflation. Any cost not
recovered during the 6-year recovery period of such
vehicles may be recovered during the years
succeeding the recovery period, subject to similar
limitations. The recovery-period limitations are
trebled for vehicles that are propelled primarily by
electricity.
Explanation
of Provision
The depreciation limitations applicable to
post-recovery periods under section 280F are trebled
for vehicles that are propelled primarily by
electricity.
Effective
Date
The provision is effective for property placed in
service after August 5, 1997 and before January 1,
2005.
7.
Modification of operation of elective carryback of
existing net operating losses of the National
Railroad Passenger Corporation ("Amtrak")
(sec. 6009(g) of the bill and sec. 977 of the 1997
Act)
Present
Law
The 1997 Act provides elective procedures that allow
Amtrak to consider the tax attributes of its
predecessors (i.e., those railroads that were
relieved of their responsibility to provide
intercity rail passenger service as a result of the
Rail Passenger Service Act of 1970) in the use of
Amtrak's net operating losses. The benefit allowable
under these procedures is limited to the least of:
(1) 35 percent of Amtrak's existing qualified
carryovers, (2) the net tax liability for the
carryback period, or (3) $2,323,000,000. One half of
the amount so calculated will be treated as a
payment of the tax imposed by chapter 1 of the
Internal Revenue Code of 1986 for Amtrak's taxable
year ending December 31, 1997, and a similar amount
for Amtrak's taxable year ending December 31, 1998.
The availability of the elective procedures is
conditioned on Amtrak (1) agreeing to make payments
of one percent of the amount it receives to each of
the non-Amtrak States to offset certain
transportation related expenditures and (2) using
the balance for certain qualified expenses.
Non-Amtrak States are those States that are not
receiving Amtrak service at any time during the
period beginning on the date of enactment and ending
on the date of payment.
Explanation
of Provision
The provision provides that the term "
non-Amtrak
State
" means any State that is not receiving
intercity passenger rail service from Amtrak as of
the date of enactment of the 1997 Act (August 5,
1997). Thus, a State will not lose its status as a
non-Amtrak
State
with respect to any payment by reason of acquiring
Amtrak service with any payment from Amtrak under
the 1997 Act provision.
Effective
Date
The provision is effective as if included in section
977 of the 1997 Act.
I.
Amendments to Title X of the 1997 Act Relating to
Revenue-Raising Provisions 1. Exception from
constructive sales rules for certain debt positions
(sec. 6010(a)(1) of the bill, sec. 1001(a) of the
1997 Act, and sec. 1259(b)(2) of the Code)
Present
Law
A taxpayer is required to recognize gain (but not
loss) upon entering into a constructive sale of an
"appreciated financial position," which
generally includes an appreciated position with
respect to any stock, debt instrument or partnership
interest. An exception is provided for positions
with respect to debt instruments that have an
unconditionally payable principal amount, that are
not convertible into the stock of the issuer or a
related person, and the interest on which is either
fixed, payable at certain variable rates or based on
certain interest payments on a pool of mortgages.
Explanation
of Provision
The provision clarifies that, to qualify for the
exception for positions with respect to debt
instruments, the position would either have to meet
the requirements as to unconditional principal
amount, non-convertibility and interest terms or,
alternatively, be a hedge of a position meeting
these requirements. A hedge for purposes of the
provision includes any position that reduces the
taxpayer's risk of interest rate or price changes or
currency fluctuations with respect to another
position.
Effective
Date
The provision is generally effective for
constructive sales entered into after June 8, 1997.
2.
Definition of forward contract under constructive
sales rules (sec. 6010(a)(2) of the bill, sec.
1001(a) of the 1997 Act, and sec. 1259(d)(1) of the
Code)
Present
Law
A constructive sale of an appreciated financial
position generally results when the taxpayer enters
into a forward contact to deliver the same or
substantially identical property. A forward contract
for this purpose is defined as a contract that
provides for delivery of a substantially fixed
amount of property at a substantially fixed price.
Explanation
of Provision
The provision clarifies that the definition of a
forward contract includes a contract that provides
for cash settlement with respect to a substantially
fixed amount of property at a substantially fixed
price.
Effective
Date
The provision is generally effective for
constructive sales entered into after June 8, 1997.
3.
Treatment of mark-to-market gains of electing
traders (sec. 6010(a)(3) of the bill, sec. 1001(b)
of the 1997 Act, and sec. 475(f)(1)(D) of the Code)
Present
Law
Securities and commodities traders may elect
application of the mark-to-market accounting rules.
Gain or loss recognized by an electing taxpayer
under these rules is treated as ordinary gain or
loss.
Under the Self-Employment Contributions Act ("SECA"),
a tax is imposed on an individual's net earnings
from self-employment ("NESE"). Gain or
loss from the sale or exchange of a capital asset is
excluded from NESE.
A publicly-traded partnership generally is treated
as a corporation for Federal tax purposes. An
exception to this rule applies if 90 percent or more
of the partnership's gross income consists of
passive-type income, which includes gain from the
sale or disposition of a capital asset.
Explanation
of Provision
The provision clarifies that gain or loss of a
securities or commodities trader that is treated as
ordinary solely by reason of election of
mark-to-market treatment is not treated as other
than gain or loss from a capital asset for purposes
of determining NESE for SECA tax purposes,
determining whether the passive-type income
exception to the publicly-traded partnership rules
is met or for purposes of any other Code provision
specified by the Treasury Department in regulations.
Effective
Date
The provision applies to taxable years of electing
securities and commodities traders ending after the
date of enactment of the 1997 Act.
4.
Special effective date for constructive sale rules
(sec. 6010(a)(4) of the bill, sec. 1001(d) of the
1997 Act, and sec. 1259 of the Code)
Present
Law
The constructive sales rules contain a special
effective date provision for decedents dying after
June 8, 1997, if (1) a constructive sale of an
appreciated financial position occurred before such
date, (2) the transaction remains open for not less
than two years, (3) the transaction remains open at
any time during the three years prior to the
decedent's death, and (4) the transaction is not
closed within the 30-day period beginning on the
date of enactment of the 1997 Act. If the
requirements of the special effective date provision
are met, both the appreciated financial position and
the transaction resulting in the constructive sale
are generally treated as property constituting
rights to receive income in respect of a decedent
under section 691. However, gain with respect to a
position in a constructive sale transaction that
accrues after the transaction is closed is not
included in income in respect of a decedent.
Explanation
of Provision
The provision clarifies the special effective date
rule to provide that the rule does not apply if the
constructive sale transaction is closed at any time
prior to the end of the 30th day after the date of
enactment of the 1997 Act.
Effective
Date
The provision is effective for decedents dying after
June 8, 1997.
5.
Gain recognition for certain extraordinary dividends
(sec. 6010(b) of the bill, sec. 1011 of the 1997
Act, and sec. 1059 of the Code)
Present
Law
A corporate shareholder generally can deduct at
least 70 percent of a dividend received from another
corporation. This dividends received deduction is 80
percent if the corporate shareholder owns at least
20 percent of the distributing corporation and
generally 100 percent if the shareholder owns at
least 80 percent of the distributing corporation.
Section 1059 of the Code requires a corporate
shareholder that receives an "extraordinary
dividend" to reduce the basis of the stock with
respect to which the dividend was received by the
nontaxed portion of the dividend. Whether a dividend
is "extraordinary" is determined, among
other things, by reference to the size of the
dividend in relation to the adjusted basis of the
shareholder's stock. In addition, dividends
resulting from non pro rata redemptions, partial
liquidations, and certain other redemptions are
extraordinary dividends. Pursuant to a provision of
the 1997 Act, gain is recognized to the extent the
reduction in basis of stock exceeds the basis in the
stock with respect to which an extraordinary
dividend is received. Prior to the 1997 Act, the
recognition of such gain generally was deferred
until the stock to which the adjustment related was
sold or disposed of.
The consolidated return regulations provide basis
adjustment rules with respect to dividends paid
within a consolidated group of corporations. These
rules provide that a dividend paid from one member
of a group to its parent reduces the parent's basis
in the stock of the payor and if such reduction
exceeds the parent's basis, an "excess loss
account" is created or increased. Excess loss
accounts generally are not restored to income until
the occurrence of certain specified events (e.g.,
when the corporation to which the excess loss
account relates leaves the consolidated group).
Legislative history indicates that, except as
provided in regulations, the extraordinary dividend
provisions do not apply to result in a double
reduction in basis in the case of distributions
between members of an affiliated group filing
consolidated returns or in the double inclusion of
earnings and profits.
Explanation
of Provision
The provision provides the Treasury Department
regulatory authority to coordinate the basis
adjustment rules of section 1059 and the
consolidated return regulations. It is expected that
these rules generally would provide that, except as
provided in regulations to be issued,72
section 1059 will not cause current gain recognition
to the extent that the consolidated return
regulations require the creation or increase of an
excess loss account with respect to a distribution.
Effective
Date
The provision generally is effective for
distributions after May 3, 1995.
6.
Treatment of certain corporate distributions (sec.
6010(c) of the bill, sec. 1012 of the 1997 Act, and
secs. 355(e)(3)(A)(iv) and 358(c) of the Code)
Present
Law
The 1997 Act (sec. 1012(a)) requires a distributing
corporation ("distributing") to recognize
corporate level gain on the distribution of stock of
a controlled corporation ("controlled")
under section 355 of the Code if, pursuant to a plan
or series of related transactions, one or more
persons acquire a 50-percent or greater interest
(defined as 50 percent or more of the voting power
or value of the stock) of either the distributing or
controlled corporation (Code sec. 355(e)). Certain
transactions are excepted from the definition of
acquisition for this purpose, including, under
section 355(e)(3)(A)(iv), the acquisition by a
person of stock in a corporation if shareholders
owning directly or indirectly stock possessing more
than 50 percent of the voting power and more than 50
percent of the value of the stock in distributing or
any controlled corporation before such acquisition
own directly or indirectly stock possessing such
vote and value in such distributing or controlled
corporation after such acquisition.73
In the case of a 50-percent or more acquisition of
either the distributing corporation or the
controlled corporation, the amount of gain
recognized is the amount that the distributing
corporation would have recognized had the stock of
the controlled corporation been sold for fair market
value on the date of the distribution. The
Conference Report to the 1997 Act states that no
adjustment to the basis of the stock or assets of
either corporation is allowed by reason of the
recognition of the gain.74
The 1997 Act (sec. 1012(b)(1)) also provides that,
except as provided in regulations, section 355 shall
not apply to the distribution of stock from one
member of an affiliated group of corporations (as
defined in section 1504(a)) to another member of
such group (an intragroup spin-off) if such
distribution is part of a such a plan or series of
related transactions pursuant to which one or more
persons acquire stock representing a 50-percent or
greater interest in a distributing or controlled
corporation, determined after the application of the
rules of section 355(e).
In addition, the 1997 Act (sec. 1012(b)(2)) provides
that in the case of any distribution of stock of one
member of an affiliated group of corporations to
another member under section 355, the Treasury
Department has regulatory authority under section
358(g) to provide adjustments to the basis of any
stock in a corporation which is a member of such
group, to reflect appropriately the proper treatment
of such distribution.
The 1997 Act (sec. 1012(c)) also modified certain
rules for determining control immediately after a
distribution in the case of certain divisive
transactions in which a controlled corporation is
distributed and the transaction meets the
requirements of section 355. In such cases, under
section 351 and modified section 368(a)(2)(H) with
respect to reorganizations under section
368(a)(1)(D), those shareholders receiving stock in
the distributed corporation are treated as in
control of the distributed corporation immediately
after the distribution if they hold stock
representing a greater than 50 percent interest in
the vote and value of stock of the distributed
corporation.
The effective date (Act section 1012(d)(1)) states
that the forgoing provisions of the 1997 Act apply
to distributions after April 16, 1997, pursuant to a
plan (or series of related transactions) which
involves an acquisition occurring after such date
(unless certain transition provisions apply).
Explanation
of Provision
Acquisition
of a 50-percent or greater interest
The bill clarifies that the acquisitions described
in Code section 355(e)(3)(A) are disregarded in
determining whether there has been an acquisition of
a 50-percent or greater interest in a corporation.
However, other transactions that are part of a plan
or series of related transactions could result in an
acquisition of a 50-percent or greater interest.
In the case of acquisitions under section 355(e)(3)(A)(iv),
the provision clarifies that the acquisition of
stock in the distributing corporation or any
controlled corporation is disregarded to the extent
that the percentage of stock owned directly or
indirectly in such corporation by each person owning
stock in such corporation immediately before the
acquisition does not decrease.
Example : Shareholder A owns 10 percent of
the vote and value of the stock of corporation D
(which owns all of corporation C). There are nine
other equal shareholders of D. A also owns 100
percent of the vote and value of the stock of
unrelated corporation P. D distributes C to all the
shareholders of D. Thereafter, pursuant to a plan or
series of related transactions, D (worth 100x)
merges with corporation P (worth 900x). After the
merger, each of the former shareholders of
corporation D owns stock of the merged entity
reflecting the vote and value attributable to that
shareholder's respective 10 percent former stock
ownership of D. Each of the former shareholders of D
owns 1 percent of the stock of the merged
corporation, except that shareholder A (who owned
100 percent of corporation P and 10 percent of
corporation D before the merger) now owns 91 percent
of the stock of the merged corporation. In
determining whether a 50-percent or greater interest
in D has been acquired, the interest of each of the
continuing shareholders is disregarded only to the
extent there has been no decrease in such
shareholder's direct or indirect ownership. Thus,
the 10 percent interest of A, and the 1 percent
interest of each of the nine other former
shareholder of D, is not counted. The remaining 81
percent ownership of the merged corporation,
representing a decrease of nine percent in the
interests of each of the nine former shareholders
other than A, is counted in determining the extent
of an acquisition. Therefore, a 50-percent or
greater interest in D has been acquired.
Treasury
regulatory authority
The bill also clarifies that the regulatory
authority of the Treasury Department under section
358(c) applies to distributions after April 16,
1997, without regard to whether a distribution
involves a plan (or series of related transactions)
which involves an acquisition. As stated in the
Conference Report to the 1997 Act, with respect to
the Treasury Department regulatory authority under
section 358(c) as applied to intragroup spin-off
transactions that are not part of a plan or series
of related transactions that involve an acquisition
of a 50-percent or greater interest under new
section 355(f), it is expected that any Treasury
regulations will be applied prospectively, except in
cases to prevent abuse.
Section
351(c) and section 368(a)(2)(H) "control
immediately after" requirement
In general, the 1997 Act modifications to the
control immediately after requirement of Section
351(c) and section 368(a)(2)(H) were intended to
minimize certain differences in the results of a
transaction involving a contribution of assets to
controlled corporation prior to a section 355
spin-off that could occur depending on whether the
distributing or controlled corporation were acquired
subsequent to the spin-off.
The bill clarifies that in the case of certain
divisive transactions in which a corporation
contributes assets to a controlled corporation and
then distributes the stock of the controlled
corporation in a transaction that meets the
requirements of section 355 (or so much of section
356 as relates to section 355), solely for purposes
of determining the tax treatment of the transfers of
property to the controlled corporation by the
distributing corporation, the fact that the
shareholders of the distributing corporation dispose
of part or all of the distributed stock shall not be
taken into account for purposes of the control
immediately after requirement of section 351(a) or
368(a)(1)(D). For purposes of determining the tax
treatment of transfers of property to the controlled
corporation by parties other than the distributing
corporation, the disposition of part or all of the
distributed stock continues to be taken into
account, as under prior law, in determining whether
the control immediately after requirement is
satisfied.
Example 1 : Distributing corporation D
transfers appreciated business X to subsidiary C in
exchange for 100 percent of C stock. D distributes
its stock of C to D shareholders. As part of a plan
or series of related transactions, C merges into
unrelated acquiring corporation A, and the C
shareholders receive 25 percent of the vote or value
of A stock. If the requirements of section 355 are
met with respect to the distribution, then the
control immediately after requirement will be
satisfied solely for purposes of determining the tax
treatment of the transfers of property by D to C.
Accordingly, the business X assets transferred to C
and held by A after the merger will have a carryover
basis from D. Section 355(e) will require D to
recognize gain as if the C stock had been sold at
fair market value.
Example 2 : Distributing corporation D
transfers appreciated business X to subsidiary C in
exchange for 85 percent of C stock. Unrelated
persons transfer appreciated assets to C in exchange
for the remaining 15 percent of C stock. D
distributes all its stock of C to D shareholders. As
part of a plan or series of related transactions, C
merges into acquiring corporation A; and the
interests attributable to the D shareholders'
receipt of C stock with respect to their D stock in
the distribution represent 25 percent of the vote
and value of A stock. If the requirements of section
355 are met with respect to the distribution, then
the control immediately after requirement will be
satisfied solely for purposes of determining the tax
treatment of the transfers of property by D to C.
Section 355(e) will require recognition of gain as
if the C stock had been sold for fair market value.
The business X assets transferred to C and held by A
after the merger will have a carryover basis from D.
The persons other than D who transferred assets to C
for 15 percent of C stock will recognize gain on the
appreciation in their assets transferred to C if the
control immediately after requirement is not
satisfied after taking into account any
post-spin-off dispositions that would have been
taken into account under prior law.
Example 3 : The facts are the same as in
example 2, except that the interests attributable to
the D shareholders' receipt of C stock with respect
to their D stock in the distribution represent 55
percent of the vote and value of A stock in the
merger. If the requirements of section 355 are met
with respect to the distribution, then the control
immediately after requirement will be satisfied
solely for purposes of determining the tax treatment
of the transfers by D to C. The business X assets in
C (and in A after the merger) will therefore have a
carryover basis from D. Because the D shareholders
retain more than 50 percent of the stock of A,
section 355(e) will not apply. The persons other
than D who transferred property for the 15 percent
of C stock will recognize gain on the appreciation
in their assets transferred to C if the control
immediately after requirement is not satisfied after
taking into account any post-spin-off dispositions
that would have been taken into account under prior
law.
Effective
Date
The provision generally is effective for
distributions after April 16, 1997.
7.
Certain preferred stock treated as "boot"
--statute of limitations (sec. 6010(e)(2) of the
bill, sec. 1014 of the 1997 Act, and sec. 354(a) of
the Code)
Present
law
Under the 1997 Act, certain preferred stock received
in otherwise tax-free transactions is treated as
"other property." Exchanges of stock in
certain recapitalizations of family-owned
corporations are excepted from this rule. A
family-owned corporation is defined as any
corporation if at least 50 percent of the total
voting power and value of the stock of such
corporation is owned by the same family for five
years preceding the recapitalization. In addition, a
recapitalization does not qualify for the exception
if the same family does not own 50 percent of the
total voting power and value of the stock throughout
the three-year period following the
recapitalization.
Explanation
of Provision
The bill provides that the statutory period for the
assessment of any deficiency attributable to a
corporation failing to be a family-owned corporation
shall not expire before the expiration of three
years after the date the Secretary of the Treasury
is notified by the corporation (in such manner as
the Secretary may prescribe) of such failure, and
such deficiency may be assessed before the
expiration of such three-year period notwithstanding
the provisions of any other law or rule of law which
would otherwise prevent such assessment.
Effective
Date
The provision applies to transactions after June 8,
1997.
8.
Certain preferred stock treated as "boot"
--treatment of transferor (sec. 6010(e)(1) of the
bill, sec. 1014 of the 1997 Act, and sec. 351(g) of
the Code)
Present
Law
The 1997 Act amended section 351 of the Code to
provide that in the case of a person who transfers
property to a controlled corporation and receives
nonqualified preferred stock, section 351(b) will
apply to such person. Section 351(b) provides that
if section 351(a) of the Code would apply to an
exchange but for the fact that there is received, in
addition to stock permitted to be received under
section 351(a), other property or money, then gain
but no loss to such recipient shall be recognized.
The Conference Report to the 1997 Act states that if
nonqualified preferred stock is received, gain but
not loss shall be recognized.
Explanation
of Provision
The bill clarifies that section 351(b) applies to a
transferor who transfers property in a section 351
exchange and receives nonqualified preferred stock
in addition to stock that is not treated as
"other property" under that section. Thus,
if a transferor received only nonqualified preferred
stock but the transaction in the aggregate otherwise
qualified as a section 351 exchange, such a
transferor would recognize loss and the basis of the
nonqualified preferred stock and of the property in
the hands of the transferee corporation would
reflect the transaction in the same manner as if
that particular transferor had received solely
"other property" of any other type. As
under the 1997 Act, the nonqualified preferred stock
continues to be treated as stock received by a
transferor for purposes of qualification of a
transaction under section 351(a), unless and until
regulations may provide otherwise.
Effective
Date
The provision applies to transactions after June 8,
1997.
9.
Application of section 304 to certain international
transactions (sec. 6010(d) of the bill, sec. 1013 of
the 1997 Act, and sec. 304 of the Code)
Present
Law
Under section 304, if one corporation purchases
stock of a related corporation, the transaction
generally is recharacterized as a redemption. Under
section 304(a), as amended by the 1997 Act, to the
extent that a section 304 transaction is treated as
a distribution under section 301, the transferor and
the acquiring corporation are treated as if (1) the
transferor had transferred the stock involved in the
transaction to the acquiring corporation in exchange
for stock of the acquiring corporation in a
transaction to which section 351(a) applies, and (2)
the acquiring corporation had then redeemed the
stock it is treated as having issued. In the case of
a section 304 transaction, both the amount which is
a dividend and the source of such dividend is
determined as if the property were distributed by
the acquiring corporation to the extent of its
earnings and profits and then by the issuing
corporation to the extent of its earnings and
profits (sec. 304(b)(2)). Section 304(b)(5), as
added by the 1997 Act, provides special rules that
apply if the acquiring corporation in a section 304
transaction is a foreign corporation. Under section
304(b)(5), the earnings and profits of the acquiring
corporation that are taken into account are limited
to the portion of such earnings and profits that (1)
is attributable to stock of such acquiring
corporation held by a corporation or individual who
is the transferor (or a person related thereto) and
who is a U.S. shareholder (within the meaning of
section 951(b)) of such corporation and (2) was
accumulated during periods in which such stock was
owned by such person while such acquiring
corporation was a controlled foreign corporation.
For purposes of this rule, except as otherwise
provided by the Secretary of the Treasury, the rules
of section 1248(d) (relating to certain exclusions
from earnings and profits) apply. The Secretary is
to prescribe regulations as appropriate, including
regulations determining the earnings and profits
that are attributable to particular stock of the
acquiring corporation.
For foreign tax credit purposes, under section 902,
a
U.S.
corporation that receives a dividend from a foreign
corporation in which it owns at least 10 percent of
the voting stock is treated as if it had paid the
foreign income taxes paid by the foreign corporation
which are attributable to such dividend. The
Internal Revenue Service issued rulings providing
that a domestic corporation that is a transferor in
a section 304 transaction may compute foreign taxes
deemed paid under section 902 on the dividends from
both a foreign acquiring corporation and a foreign
issuing corporation. Rev. Rul. 92-86, 1992-2 C.B.
199; Rev. Rul. 91-5, 1991-1 C.B. 114. Both rulings
involve section 304 transactions in which both the
domestic transferor and the foreign acquiring
corporation are wholly owned by a domestic parent
corporation.
Explanation
of Provision
Under the provision, in the case of a section 304
transaction in which the acquiring corporation or
the issuing corporation is a foreign corporation,
the Secretary of the Treasury is to prescribe
regulations providing rules to prevent the multiple
inclusion of an item of income and to provide
appropriate basis adjustments, including rules
modifying the application of sections 959 and 961 in
the case of a section 304 transaction. It is
expected that such regulations will provide for an
exclusion from income for distributions from
earnings and profits of the acquiring corporation
and the issuing corporation that represent
previously taxed income under subpart F. It further
is expected that such regulations will provide for
appropriate adjustments to the basis of stock held
by the corporation treated as receiving the
distribution or by the corporation that had the
prior inclusion with respect to the previously taxed
income. No inference is intended regarding the
treatment of previously taxed income in a section
304 transaction under present law. The 1997 Act
amendments to section 304, including the
modifications under this provision, are not intended
to change the foreign tax credit results reached in
Rev. Rul. 92-86 and 91-5.
The provision also eliminates the cross-reference to
the rules of section 1248(d) for purposes of
determining the earnings and profits to be taken
into account under section 304(b)(5).
Effective
Date
The provision generally is effective for
distributions or acquisitions after June 8, 1997.
10.
Establish IRS continuous levy and improve debt
collection (sec. 6010(f) of the bill, secs. 1024,
1025, and 1026 of the 1997 Act, and secs. 6331 and
6334 of the Code)
Present
Law
If any person is liable for any internal revenue tax
and does not pay it within 10 days after notice and
demand by the IRS, the IRS may then collect the tax
by levy upon all property and rights to property
belonging to the person, unless there is an explicit
statutory restriction on doing so. A levy is the
seizure of the person's property or rights to
property. A levy on salary and wages is continuous
from the date it is first made until the date it is
fully paid or becomes unenforceable.
The 1997 Act provides that a continuous levy is also
applicable to non-means tested recurring Federal
payments and specified wage replacement payments.
Explanation
of Provision
The provision clarifies that the IRS must approve
the use of a continuous levy before it may take
effect.
Effective
Date
The provision is effective for levies issued after
the date of enactment of the 1997 Act (August 5,
1997).
11.
Clarification regarding aviation gasoline excise tax
(sec. 6010(g) of the bill, sec. 1031 of the 1997
Act, and sec. 6421 of the Code)
Present
Law
Before enactment of the 1997 Act, aviation gasoline
was subject to a 19.3-cents-per-gallon tax rate,
with 15 cents per gallon being deposited in the
Airport and Airway Trust Fund and 4.3 cents per
gallon being retained in the General Fund. The 1997
Act extended the 15-cents-per-gallon rate for 10
years, through September 30, 2007, and expanded
deposits to the Trust Fund to include revenues from
the 4.3-cents-per-gallon rate. The tax does not
apply to fuel used in flight segments outside the
United States
or to flight segments from the
United States
to foreign countries.
Explanation
of Provision
The bill clarifies the application of the gasoline
tax refund provisions to aviation gasoline used in
flight segments outside the
United States
and to flight segments from the
United States
to foreign countries.
Effective
Date
The provision is effective as if included in the
1997 Act.
12.
Clarification of requirement that registered fuel
terminals offer dyed fuel (sec. 6010(h) of the bill,
sec. 1032 of the 1997 Act and sec. 4101 of the Code)
75
Present
Law
The 1997 Act provides that fuel terminals are
eligible to register to handle non-tax-paid diesel
fuel and kerosene only if the terminal operator
offers both undyed (taxable) and dyed (nontaxable)
fuel.
Explanation
of Provision
The bill clarifies that the Code requires terminals
eligible to handle non-tax-paid diesel to offer dyed
diesel fuel and terminals eligible to handle
non-tax-paid kerosene (including diesel fuel #1 and
kerosene-type aviation fuel) to offer dyed kerosene.
The bill does not require that a terminal offer for
sale kerosene as a condition of receiving diesel
fuel on a non-tax-paid basis. Similarly, the
proposal does not require terminals that sell only
kerosene to offer diesel fuel as a condition of
receiving non-tax-paid kerosene.
Effective
Date
The provision is effective as if included in the
1997 Act.
13.
Clarification of treatment of prepaid telephone
cards (sec. 6010(i) of the bill, sec. 1034 of the
1997 Act, and sec. 4251 of the Code)
Present
Law
A 3-percent excise tax is imposed on amounts paid
for local and toll (long-distance) telephone service
and teletypewriter exchange service. The tax is
collected by the provider of the service from the
consumer. In the case of so-called "prepaid
telephone cards", the tax is treated as paid
when the card is transferred by any
telecommunications carrier to any person who is not
a telecommunications carrier.
A "prepaid telephone card" is defined as
any card or other similar arrangement which permits
its holder to obtain communications services and pay
for such services in advance.
Explanation
of Provision
The bill inserts the word "any" prior to
"other similar arrangement" to clarify
that payment to a telecommunications carrier from a
third party such as a joint venture credit card
company is treated as payment made by the holder of
the credit card to obtain communication services and
the tax is treated as paid in a manner similar to
that applied to prepaid telephone cards. The tax
applies to payments if the rights to telephone
service for which payments are made can be used in
whole or in part for telephone service that, if
purchased directly, would be subject to the
3-percent excise tax on telephone service. Also, the
tax applies without regard to whether telephone
service ultimately is provided pursuant to the
transferred rights.
Effective
Date
The provision is effective as if included in the
1997 Act.
14.
Modify UBIT rules applicable to second-tier
subsidiaries (sec. 6010(j) of the bill, sec. 1041 of
the 1997 Act, and sec. 512(b)(13) of the Code)
Present
Law
In general, interest, rents, royalties and annuities
are excluded from the unrelated business income
("UBI") of tax-exempt organizations.
However, section 512(b)(13) treats otherwise
excluded rent, royalty, annuity, and interest income
as UBI if such income is received from a taxable or
tax-exempt subsidiary that is controlled by the
parent tax-exempt organization.
Under the provision, interest, rent, annuity, or
royalty payments made by a controlled entity to a
tax-exempt organization are subject to the unrelated
business income tax to the extent the payment
reduces the net unrelated income (or increases any
net unrelated loss) of the controlled entity. In
this regard, section 512(b)(13)(B)(i)(I) cross
references a non-existent Code section.
The provision generally applies to taxable years
beginning after the date of enactment. However, the
provision does not apply to payments made during the
first two taxable years beginning on or after the
date of enactment if such payments are made pursuant
to a binding written contract in effect as of June
8, 1997, and at all times thereafter before such
payment.
Explanation
of Provision
The bill clarifies that rent, royalty, annuity, and
interest income that would otherwise be excluded
from UBI is included in UBI under section 512(b)(13)
if such income is received or accrued from a taxable
or tax-exempt subsidiary that is controlled by the
parent tax-exempt organization. The bill further
clarifies that the provision does not apply to any
payment received or accrued during the first two
taxable years beginning on or after the date of
enactment if such payment is received or accrued
pursuant to a binding written contract in effect on
June 8, 1997, and at all times thereafter before
such payment (but not pursuant to any contract
provision that permits optional accelerated
payments).
Effective
Date
The provision is effective as of August 5, 1997, the
date of enactment of the 1997 Act.
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