RRA 1998 Senate Report p8

RRA 1998 Senate Report Page 8

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IRS Restructuring and Reform Act of 1998

Senate Report page8

15. Application of foreign tax credit holding period rule to RICs (sec. 6010(k) of the bill, sec. 1053 of the 1997 Act, and secs. 853 and 901 of the Code)

Present Law

Section 01(k), as added by the 1997 Act, generally imposes a holding period requirement for claiming foreign tax credits with respect to dividends. Under section 901(k), foreign tax credits with respect to a dividend from a foreign corporation or a regulated investment company (a "RIC") are disallowed if the shareholder has not held the stock for more than 15 days in the case of common stock or more than 45 days in the case of preferred stock. This disallowance applies both to foreign tax credits for foreign withholding taxes that are paid on the dividend where the dividend-paying stock is not held for the required period and to indirect foreign tax credits for taxes paid by a lower-tier foreign corporation or a RIC where any of the stock in the required chain of ownership is not held for the required period. Foreign taxes for which credits are disallowed under section 901(k) may be deducted.

Under section 853, a RIC may elect to flow through to its shareholders the foreign tax credits for foreign taxes paid by the RIC. Under this election, the RIC is not entitled to a deduction or credit for foreign taxes paid; the shareholders of an electing RIC are treated as having paid their proportionate shares of the foreign taxes paid by the RIC. Accordingly, foreign tax credits are claimed at the shareholder level and not at the RIC level.

Explanation of Provision

Under the provision, the flow-through election of section 853 does not apply to any foreign taxes paid by the RIC for which a credit is disallowed under section 901(k) because the RIC did not satisfy the applicable holding period. Accordingly, such taxes are deductible at the RIC level. The election of section 853 applies only to foreign taxes with respect to which the RIC has satisfied any applicable holding period requirement.

Effective Date

The provision is effective for dividends paid or accrued more than 30 days after the date of enactment of the 1997 Act.

16. Clarification of provision expanding the limitations on deductibility of premiums and interest with respect to life insurance, endowment and annuity contracts (sec. 6010(o) of the bill, sec. 1084 of the 1997 Act, and sec. 264 of the Code)

Present Law

Master contracts

The 1997 Act provided limitations on the deductibility of interest and premiums with respect to life insurance, endowment and annuity contracts. Under the pro rata interest disallowance provision added by the Act, an exception is provided for any policy or contract owned by an entity engaged in a trade or business, covering an individual who is an employee, officer or director of the trade or business at the time first covered. The exception applies to any policy or contract owned by an entity engaged in a trade or business, which covers one individual who (at the time first insured under the policy or contract) is (1) a 20-percent owner of the entity, or (2) an individual (who is not a 20-percent owner) who is an officer, director or employee of the trade or business.⁷⁶ The provision is silent as to the treatment of coverage of such an individual under a master contract.

Reporting

The provision does not apply to any policy or contract held by a natural person; however, if a trade or business is directly or indirectly the beneficiary under any policy or contract, the policy or contract is treated as held by the trade or business and not by a natural person. In addition, the provision includes a reporting requirement. Specifically, the provision provides that the Treasury Secretary shall require such reporting from policyholders and issuers as is necessary to carry out the rule applicable when the trade or business is directly or indirectly the beneficiary under any policy or contract held by a natural person. Any report required under this reporting requirement is treated as a statement referred to in Code section 6724(d)(1) (relating to information returns). The provision does not specifically refer to Code section 6724(d)(2) (relating to payee statements).

Additional covered lives

The 1997 Act provision limiting the deductibility of certain interest and premiums is effective generally with respect to contracts issued after June 8, 1997. To the extent of additional covered lives under a contract after June 8, 1997, the contract is treated as a new contract.

Explanation of Provision

Master contracts

The technical correction clarifies that if coverage for each insured individual under a master contract is treated as a separate contract for purposes of sections 817(h), 7702, and 7702A of the Code, then coverage for each such insured individual is treated as a separate contract, for purposes of the exception to the pro rata interest disallowance rule for a policy or contract covering an individual who is a 20-percent owner, employee, officer or director of the trade or business at the time first covered. A master contract does not include any contract if the contract (or any insurance coverage provided under the contract) is a group life insurance contract within the meaning of Code section 848(e)(2). No inference is intended that coverage provided under a master contract, for each such insured individual, is not treated as a separate contract for each such individual for other purposes under present law.

Reporting

The technical correction clarifies that the required reporting to the Treasury Secretary is an information return (within meaning of sec. 6724(d)(1)), and any reporting required to be made to any other person is a payee statement (within the meaning of sec. 6724(d)(2)). Thus, the $50-per-report penalty imposed under sections 6722 and 6723 of the Code for failure to file or provide such an information return or payee statement apply. It is clarified that the Treasury Secretary may require reporting by the issuer or policyholder of any relevant information either by regulations or by any other appropriate guidance (including but not limited to publication of a form).

Additional covered lives

The technical correction clarifies that the treatment of additional covered lives under the effective date of the 1997 Act provision applies only with respect to coverage provided under a master contract, provided that coverage for each insured individual is treated as a separate contract for purposes of Code sections 817(h), 7702 and 7702A, and the master contract or any coverage provided thereunder is not a group life insurance contract within the meaning of Code section 848(e)(2).

Effective Date

The provision s are effective as if included in the 1997 Act.

17. Clarification of allocation of basis of properties distributed to a partner by a partnership (sec. 6010(m) of the bill, sec. 1061 of the 1997 Act, and sec. 732(c) of the Code)

Present Law

Present law, as amended by the 1997 Act, provides rules for allocating basis to property in the hands of a partner that receives a distribution from a partnership. Under these rules, basis is first allocated to unrealized receivables and inventory items in an amount equal to the partnership's adjusted basis in each property. If the basis to be allocated is less than the sum of the adjusted bases of the properties in the hands of the partnership, then, to the extent a decrease is required to make the total adjusted bases of the properties equal the basis to be allocated, the decrease is allocated (as described below) for adjustments that are decreases. To the extent of any basis not allocated to inventory and unrealized receivables under the above rules, basis is allocated to other distributed properties, first to the extent of each distributed property's adjusted basis to the partnership. Any remaining basis adjustment, if an increase, is allocated among properties with unrealized appreciation in proportion to their respective amounts of unrealized appreciation (to the extent of each property's appreciation), and then in proportion to their respective fair market values. If the remaining basis adjustment is a decrease, it is allocated among properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation (to the extent of each property's depreciation), and then in proportion to their respective adjusted bases (taking into account the adjustments already made).

For purposes of these rules, "unrealized receivables" has the meaning set forth in section 751(c) (as provided in sec. 732(c)(1)(A)(i)). Section 751(c) provides that the term "unrealized receivables" includes certain accrued but unreported income. In addition, the last two sentences of section 751(c) provide that for purposes of certain specified partnership provisions (sections 731, 741 and 751), the term "unrealized receivables" includes certain property the sale of which will give rise to ordinary income (for example, depreciation recapture under sections 1245 or 1250), but only to the extent of the amount that would be treated as ordinary income on a sale of that property at fair market value.

Explanation of Provision

The technical correction clarifies that for purposes of the allocation rules of section 732(c), "unrealized receivables" has the meaning in section 751(c) including the last two sentences of section 751(c), relating to items of property that give rise to ordinary income. Thus, in applying the allocation rules of section 732(c) to property listed in the last two sentences of section 751(c), such as property giving rise to potential depreciation recapture, the amount of unrealized appreciation in any such property does not include any amount that would be treated as ordinary income if the property were sold at fair market value, because such amount is treated as a separate asset for purposes of the basis allocation rules.⁷⁷

For example, assume that a partnership has 3 partners, A, C and D. The partnership has 6 assets. Three are capital assets each with adjusted basis equal to fair market value of $20,000. The other three are depreciable equipment each with adjusted basis of $5,000 and fair market value of $30,000. Each of the pieces of equipment would have $25,000 of depreciation recapture if sold by the partnership for its $30,000 value. A has a basis in its partnership interest of $60,000. Assume that one of the capital assets and one of the pieces of equipment is distributed to A in liquidation of its interest. A is treated as receiving three assets: (1) depreciation recapture (an unrealized receivable) with a basis to the partnership of zero and a value of $25,000; (2) a piece of equipment with a basis to the partnership of $5,000 and a value of $5,000 (its $30,000 value reduced by the $25,000 of depreciation recapture); and (3) a capital asset with a basis to the partnership of $20,000 and a value of $20,000.

Under the provision, as clarified by the technical correction, A's $60,000 basis in its partnership interest is allocated as follows. First, basis is allocated to the depreciation recapture, an unrealized receivable, in an amount equal to the partnership's adjusted basis in it, or zero (sec. 732(c)(1)(A)(i)). Then basis is allocated to the extent of each of the other distributed properties' adjusted basis to the partnership, or $5,000 to the equipment (not including the depreciation recapture), and $20,000 to the capital asset. A's remaining $35,000 of basis is allocated next among properties (other than inventory and unrealized receivables) with unrealized appreciation, in proportion to their respective amounts of unrealized appreciation (to the extent of each property's appreciation), but neither of the distributed properties to which basis may be allocated has unrealized appreciation. Basis is then allocated then in proportion to the properties' respective fair market values ($5,000 for the equipment and $20,000 for the capital asset). Thus, of the remaining $35,000, $7,000 is allocated to the equipment, so that its total basis in the partner's hands is $12,000; and $28,000 is allocated to the capital asset, so that its total basis in the partner's hands is $48,000.

Effective Date

The provision is effective as if enacted with the 1997 Act.

18. Clarification to the definition of modified adjusted gross income for purposes of the earned income credit phaseout (sec. 6010(p) of the bill, sec. 1085(d) of the 1997 Act, and sec. 32(c) of the Code)

Present Law

The earned income credit ("EIC") is phased out above certain income levels. For individuals with earned income (or modified adjusted gross income ("modified AGI"), if greater) in excess of the beginning of the phaseout range, the maximum credit amount is reduced by the phaseout rate multiplied by the amount of earned income (or modified AGI, if greater) in excess of the beginning of the phaseout range. For individuals with earned income (or modified AGI, if greater) in excess of the end of the phaseout range, no credit is allowed. The definition of modified AGI used for the phase out of the earned income credit is the sum of: (1) AGI with certain losses disregarded, and (2) certain nontaxable amounts not generally included in AGI. The losses disregarded are: (1) net capital losses (if greater than zero); (2) net losses from trusts and estates; (3) net losses from nonbusiness rents and royalties; (4) 75 percent of the net losses from business, computed separately with respect to sole proprietorships (other than in farming), sole proprietorships in farming, and other businesses.⁷⁸ The nontaxable amounts included in modified AGI which are generally not included in AGI are: (1) tax-exempt interest; and (2) nontaxable distributions from pensions, annuities, and individual retirement arrangements (but only if not rolled over into similar vehicles during the applicable rollover period).

Explanation of Provision

The bill clarifies that the two nontaxable amounts that are added to adjusted gross income to compute modified AGI for purposes of the EIC phaseout are additions to adjusted gross income and not disregarded losses.

Effective Date

The provision is effective for taxable years beginning after December 31, 1997.

J. Amendments to Title XI of the 1997 Act Relating to Foreign Provisions 1. Application of attribution rules under PFIC provisions (sec. 6011(b)(2) of the bill, sec. 1121 of the 1997 Act, and sec. 1298 of the Code)

Present Law

Special attribution rules apply to the extent that the effect is to treat stock of a passive foreign investment company ("PFIC") as owned by a U.S. person. In general, if 50 percent or more in value of the stock of a corporation is owned (directly or indirectly) by or for any person, such person is considered as owning a proportionate part of the stock owned directly or indirectly by or for such corporation, determined based on the person's proportionate interest in the value of such corporation's stock. However, this 50-percent limitation does not apply in the case of a corporation that is a PFIC. Accordingly, a person that is a shareholder of a PFIC is considered as owning a proportionate part of the stock owned directly or indirectly by or for such PFIC, without regard to whether such shareholder owns at least 50 percent of the PFIC's stock by value.

A corporation is not treated as a PFIC with respect to a shareholder during the qualified portion of the shareholder's holding period for the stock of such corporation. The qualified portion of the shareholder's holding period generally is the portion of such period which is after the effective date of the 1997 Act and during which the shareholder is a United States shareholder (as defined in sec. 951(b)) and the corporation is a controlled foreign corporation.

If a corporation is not treated as a PFIC with respect to a shareholder for the qualified portion of such shareholder's holding period, it is unclear whether the attribution rules that apply with respect to stock owned by or for such corporation apply without regard to the requirement that the shareholder own 50 percent or more of the corporation's stock.

Explanation of Provision

The provision clarifies that the attribution rules apply without regard to the provision that treats a corporation as a non-PFIC with respect to a shareholder for the qualified portion of the shareholder's holding period. Accordingly, stock owned directly or indirectly by or for a corporation that is not treated as a PFIC for the qualified portion of the shareholder's holding period nevertheless will be attributed to such shareholder, regardless of the shareholder's ownership percentage of such corporation.

Effective Date

The provision is effective for taxable years of U.S. persons beginning after December 31, 1997 and taxable years of foreign corporations ending with or within such taxable years of U.S. persons.

2. Treatment of PFIC option holders (sec. 6011(b)(1) of the bill, sec. 1121 of the 1997 Act, and secs. 1297 and 1298 of the Code)

Present Law

Under the provisions of subpart F, a controlled foreign corporation (a "CFC") is defined generally as any foreign corporation if U.S. persons own more than 50 percent of the corporation's stock (measured by vote or value), taking into account only those U.S. persons that own at least 10 percent of the stock (measured by vote only) (sec. 957). Stock ownership includes not only stock owned directly, but also stock owned indirectly through a foreign entity or constructively (sec. 958). Pursuant to the constructive ownership rules, a person that has an option to acquire stock generally is treated as owning such stock (secs. 958(b) and 318(a)(4)).

The U.S. 10-percent shareholders of a CFC are subject to current U.S. tax on their pro rata shares of certain income of the CFC and their pro rata shares of the CFC's earnings invested in certain U.S. property (sec. 951). For purposes of determining the U.S. shareholder's includible pro rata share of the CFC's income and earnings, only stock held directly or indirectly through a foreign entity (and not stock held constructively) is taken into account (secs. 951(b) and 958(a)).

A foreign corporation is a passive foreign investment company (a "PFIC") if it satisfies a passive income test or a passive assets test for the taxable year (sec. 1297). A U.S. shareholder of a PFIC generally is subject to U.S. tax, plus an interest charge, on distributions from a PFIC and gain realized upon a disposition of PFIC stock (sec. 1291). Alternatively, the U.S. shareholder may elect either to be subject to current U.S. tax on the shareholder's share of the PFIC's earnings or, in the case of PFIC stock that is marketable, to mark to market the PFIC stock (secs. 1293 and 1296). For purposes of the PFIC provisions, constructive ownership rules apply (sec. 1298(a)). Under these rules, an option to acquire stock is treated as stock for purposes of applying the interest charge regime to a disposition of such option, and the holding period for stock acquired pursuant to the exercise of an option includes the holding period for such option (sec. 1298(a)(4) and prop. Treas. reg. secs. 1.1291-1(d) and (h)(3)).

A corporation that is a CFC is also a PFIC if it meets the passive income test or the passive assets test. Under section 1297(e), as added by the 1997 Act, a corporation is not treated as a PFIC with respect to a shareholder during the period after December 31, 1997 in which the corporation is a CFC and the shareholder is a U.S. shareholder (within the meaning of section 951(b)) thereof. Under this rule eliminating the overlap between the PFIC and CFC provisions, a shareholder that is subject to the subpart F rules with respect to a corporation is not also subject to the PFIC rules with respect to such corporation.

Explanation of Provision

Under the provision, the elimination of the overlap between the PFIC and the CFC provisions generally does not apply to a U.S. person with respect to PFIC stock that such person is treated as owning by reason of an option to acquire such stock. Accordingly, for example, the PFIC rules continue to apply to a U.S. person that holds only an option on stock of a corporation that is a CFC because such person does not own stock of such corporation directly or indirectly through a foreign entity and therefore is not subject to the current inclusion rules of subpart F with respect to such corporation. However, under the provision, the elimination of the overlap will apply to a U.S. person that holds an option on stock if such stock is held by a person that is subject to the current inclusion rules of subpart F with respect to such stock and is not a tax-exempt person. Accordingly, an option holder is not subject to the PFIC rules with respect to an option if the option is on stock that is held by a non-tax-exempt person that is subject to the current inclusion rules of subpart F with respect to such stock.

Effective Date

The provision is effective for taxable years of U.S. persons beginning after December 31, 1997 and taxable years of foreign corporations ending with or within such taxable years of U.S. persons.

3. Application of PFIC mark-to-market rules to RICs (sec. 6011(c)(3) of the bill, sec. 1122 of the 1997 Act, and sec. 1296 of the Code)

Present Law

Under section 1296, as added by the 1997 Act, a shareholder of a passive foreign investment company (a "PFIC") may make a mark-to-market election with respect to the stock of the PFIC, provided that such stock is marketable. Under this election, the shareholder includes in income each year an amount equal to the excess, if any, of the fair market value of the PFIC stock as of the close of the taxable year over the shareholder's adjusted basis in such stock. The shareholder is allowed a deduction for the excess, if any, of the shareholder's adjusted basis in the PFIC stock over its fair market value as of the close of the taxable year, but only to the extent of any net mark-to-market gains with respect to such stock included by the shareholder under section 1296 for prior years.

The mark-to-market election of section 1296 is effective for taxable years of U.S. persons beginning after December 31, 1997 and taxable years of foreign corporations ending with or within such taxable years of U.S. persons. Prior to the enactment of section 1296, a proposed Treasury regulation provided for a mark-to-market election with respect to PFIC stock held by certain regulated investment companies ("RICs") (prop. Treas. reg. sec. 1.1291-8). Under this mark-to-market election, gains but not losses were recognized.

Section 1296(j) provides rules applicable in the case of a shareholder that makes a mark-to-market election under section 1296 later than the beginning of the shareholder's holding period for the PFIC stock. Special rules apply in the case of a RIC that makes such a mark-to-market election under section 1296 with respect to PFIC stock that the RIC had previously marked to market under the proposed Treasury regulation.

Explanation of Provision

Under the provision, for purposes of determining allowable deductions for any excess of the shareholder's adjusted basis in PFIC stock over the fair market value of the stock as of the close of the taxable year, deductions are allowed to the extent not only of prior mark-to-market inclusions under section 1296 but also of prior mark-to-market inclusions under the proposed Treasury regulation applicable to a RIC that holds stock in a PFIC.

Effective Date

The provision is effective for taxable years of U.S. persons beginning after December 31, 1997 and taxable years of foreign corporations ending with or within such taxable years of U.S. persons.

4. Interaction between the PFIC provisions and other mark-to-market rules (sec. 6011(c)(2) of the bill, sec. 1122 of the 1997 Act, and secs. 1291 and 1296 of the Code)

Present Law

A U.S. shareholder of a passive foreign investment company (a "PFIC") generally is subject to U.S. tax, plus an interest charge, on distributions from a PFIC and gain realized upon a disposition of PFIC stock (sec. 1291). As an alternative to this interest charge regime, the U.S. shareholder may elect to be subject to current U.S. tax on the shareholder's share of the PFIC's earnings (sec. 1293). Section 1296, as added by the 1997 Act, provides another alternative available in the case of a PFIC the stock of which is marketable; under section 1296, a U.S. shareholder of a PFIC may make a mark-to-market election with respect to the stock of the PFIC.

The interest charge regime generally does not apply to distributions from, and dispositions of stock of, a PFIC for which the U.S. shareholder has made either a mark-to-market election under section 1296 or an election to include the PFIC's earnings in income currently (sec. 1291(d)(1)). However, special coordination rules provide for limited application of the interest charge regime in the case of a U.S. shareholder that makes a mark-to-market election under section 1296 later than the beginning of the shareholder's holding period for the PFIC stock (sec. 1296(j)).

Under section 475(a), a dealer in securities is required to mark to market certain securities held by the dealer. Under section 475(f), as added by the 1997 Act, a trader in securities may elect to mark to market securities held in connection with the person's trade or business as a trader in securities. Other provisions similarly allow stock to be marked to market (e.g., sec. 1092(b)(1) and temp. Treas. reg. Sec. 1.1092-4T).

Explanation of Provision

Under the provision, the interest charge regime generally does not apply to distributions from, and dispositions of stock of, a PFIC where the U.S. shareholder has marked to market such stock under section 475 or any other provision (in the same manner that such regime does not apply where the shareholder has marked to market such stock under section 1296). In addition, under the provision, coordination rules like those provided in section 1296(j) apply in the case of a U.S. shareholder that marks to market PFIC stock under section 475 or any other provision later than the beginning of the shareholder's holding period for the PFIC stock.

Effective Date

The provision is effective for taxable years of U.S. persons beginning after December 31, 1997 and taxable years of foreign corporations ending with or within such taxable years of U.S. persons. No inference is intended regarding the treatment of PFIC stock that was marked to market prior to the effective date of the provision.

K. Amendments to Title XII of the 1997 Act Relating to Simplification Provisions 1. Travel expenses of Federal employees participating in a Federal criminal investigation (sec. 6012(a) of the bill, sec. 1204 of the 1997 Act, and sec. 162 of the Code)

Present Law

Unreimbursed ordinary and necessary travel expenses paid or incurred by an individual in connection with temporary employment away from home (e.g., transportation costs and the cost of meals and lodging) are generally deductible, subject to the two-percent floor on miscellaneous itemized deductions. Travel expenses paid or incurred in connection with indefinite employment away from home, however, are not deductible. A taxpayer's employment away from home in a single location is indefinite rather than temporary if it lasts for one year or more; thus, no deduction is permitted for travel expenses paid or incurred in connection with such employment (sec. 162(a)). If a taxpayer's employment away from home in a single location lasts for less than one year, whether such employment is temporary or indefinite is determined on the basis of the facts and circumstances.

The 1997 Act provided that the one-year limitation with respect to deductibility of expenses while temporarily away from home does not include any period during which a Federal employee is certified by the Attorney General (or the Attorney General's designee) as traveling on behalf of the Federal Government in a temporary duty status to investigate or provide support services to the investigation of a Federal crime. Thus, expenses for these individuals during these periods are fully deductible, regardless of the length of the period for which certification is given (provided that the other requirements for deductibility are satisfied).

Explanation of Provision

The provision clarifies that prosecuting a Federal crime or providing support services to the prosecution of a Federal crime is considered part of investigating a Federal crime.

Effective Date

The provision is effective for amounts paid or incurred with respect to taxable years ending after the date of enactment of the 1997 Act.

2. Effective date for provisions relating to electing large partnerships, partnership returns required on magnetic media, and treatment of partnership items of individual retirement arrangements (sec. 6012(d) of the bill and sec. 1226 of the 1997 Act)

Present Law

Rules for simplified flowthrough and simplified audit procedures for electing large partnerships, as well as a March 15 due date for furnishing information to partners of an electing large partnership, were added to present law by the 1997 Act. The 1997 Act also added a rule providing that partnership returns are required on magnetic media, and modified the treatment of partnership items of individual retirement arrangements. The 1997 Act statement of managers provided that these provisions apply to partnership taxable years beginning after December 31, 1997. The statute provided that the rules for simplified flowthrough for electing large partnerships apply to partnership taxable years beginning after December 31, 1997 (Act sec. 1221(c)), although the statute also provided that all the provisions apply to partnership taxable years ending on or after December 31, 1997 (Act sec. 1226).

Explanation of Provision

The technical correction provides that these provisions apply to partnership taxable years beginning after December 31, 1997.

Effective Date

The provision is effective as if enacted in the 1997 Act.

3. Modification of distribution rules for REITs (sec. 6012(f) of the bill, sec. 1256 of the 1997 Act, and sec. 857 of the Code)

Present Law

In general, a real estate investment trust ("REIT") is an entity that receives most of its income from passive real estate investments and meets certain other requirements. A REIT receives conduit treatment (i.e., one level of tax) for income distributed to its shareholders. A REIT generally must distribute 95 percent of its earnings (sec. 857(a)(1)). An entity loses its status as a REIT if it retains non-REIT earnings and profits (sec. 857(a)(2)). A REIT simplification provision in the 1997 Act provides that any distribution from a REIT will be deemed to first come from the earliest earnings and profits of the entity. As a result, in the case of a REIT with accumulated REIT earnings and profits that inherits subsequently earned non-REIT earnings and profits (e.g., by way of merger with a C corporation), that the entity must distribute both the accumulated REIT earnings and profits as well as the inherited non-REIT earnings and profits under the 1997 Act provision in order to retain its REIT status.

Explanation of Provision

The provision amends the simplification provision to provide that any distribution from a REIT will be deemed to first come from earnings and profits that were generated when the entity did not qualify as a REIT. The provision does not change the requirement that a REIT must distribute 95 percent of its REIT earnings, or any other requirement.

Effective Date

The provision is effective for taxable years beginning after August 5, 1997.

L. Amendments to Title XIII of the 1997 Act Relating to Estate, Gift

and Trust Simplification

1. Clarification of treatment of revocable trusts for purposes of the generation-skipping transfer tax (sec. 6013(a) of the bill, sec. 1305 of the 1997, Act and secs. 2652 and 2654 of the Code)

Present Law

The 1997 Act provided an irrevocable election to treat a qualified revocable trust as part of the decedent's estate for Federal income tax purposes. For this purpose, a qualified revocable trust is any trust (or portion thereof) which was treated as owned by the decedent with respect to whom the election is being made, by reason of a power in the grantor (i.e., trusts that are treated as owned by the decedent solely by reason of a power in a nonadverse party would not qualify). A conforming change was also made to section 2652(b) for generation-skipping transfer tax purposes.

Explanation of Provision

The provision clarifies that the election to treat a qualified revocable trust as part of the decedent's estate would apply for generation-skipping transfer tax purposes only with respect to the application of section 2654(b) (describing when a single trust may be treated as two or more trusts). The election has no other effect for generation-skipping transfer tax purposes.

Effective Date

The provision applies to decedents dying after the date of enactment of the 1997 Act.

2. Provision of regulatory authority for simplified reporting of funeral trusts terminated during the taxable year (sec. 6013(b) of the bill, sec. 1309 of the 1997 Act and sec. 685(f) of the Code)

Present Law

The 1997 Act provided an election which allows the trustee of a qualified pre-need funeral trust to elect special tax treatment for such a trust, to the extent the trust would otherwise be treated as a grantor trust. As part of this provision, the Secretary of the Treasury was granted regulatory authority to prescribe rules for simplified reporting of all trusts having a single trustee.

Explanation of Provision

The provision clarifies that a pre-need funeral trust may continue to qualify for these special rules for the 60-day period after the decedent's death, even though the trust ceases to be a grantor trust during that time. In addition, the provision extends the Secretary's regulatory authority to include rules providing for the inclusion of trusts terminated during the year (e.g., in the event of the death of the beneficiary) in the simplified reporting.

Effective Date

The provision applies to decedents dying after the date of enactment of the 1997 Act.

M. Amendment to Title XIV of the 1997 Act Relating to Excise Tax Simplification 1. Clarify that the provision allowing wine imported in bulk to be transferred to a U.S. winery without payment of tax (sec. 6014(a) of the bill, sec. 1422 of the 1997 Act, and sec. 5364 of the Code)

Present Law Wine is subject to an excise tax ranging from $1.07 per gallon to $3.40 per gallon, depending on its alcohol content. Distilled spirits are subject to excise tax at a rate of $13.50 per proof gallon. A tax credit equal to the difference between the distilled spirits tax rate and the wine tax rate is allowed for wine that is blended into distilled spirits products (sec. 5010). The wine excise tax is imposed on removal of the beverage from a winery, or on importation. The 1997 Act included a provision allowing wine to be imported in bulk and transferred to a U.S. winery without payment of tax (generally until the wine is removed from the winery).

U.S. law defines wine generally as alcohol that is derived from fruit or fruit residues ("natural wine"). Natural wine may not be fortified with grain or other non-fruit derived alcohol if produced in the U.S. Certain other countries allow wine that is marketed as a natural wine to be fortified with alcohol from other sources. U.S. law follows the laws of the country of origin in classifying imported wine.

Explanation of Provision

The provision clarifies that the provision of the 1997 Act liberalizing rules for bulk importation of wine applies only to alcohol that would qualify as a natural wine if produced in the United States .

Effective Date

The provision is effective as if included in the 1997 Act.

N. Amendment to Title XV of the 1997 Act Relating to Pensions and Employee Benefits

1. Treatment of certain disability payments to public safety employees (sec. 6015(c) of the bill, sec. 1529 of the 1997 Act, and sec. 104 of the Code)

Present Law

Under present law, certain payments made on behalf of full-time employees of any police or fire department organized and operated by a State (or any political subdivision, agency, or instrumentality thereof) are excludable from income. This treatment applies to payments made on account of heart disease or hypertension of the employee and that were received in 1989, 1990, or 1991 pursuant to a State law as amended on May 19, 1992, which irrebuttably presumed that heart disease and hypertension are work-related illnesses (but only for employees separating from service before July 1, 1992). Claims for refund or credit for overpayments resulting from the provision may be filed up to 1 year after August 5, 1997, without regard to the otherwise applicable statute of limitations.

Explanation of Provision

In order to address problems taxpayers are encountering with the IRS in seeking refunds under the present-law provision, the bill clarifies the scope of the provision.

The bill provides that payments made on account of heart disease or hypertension of the employee and that were received in 1989, 1990, or 1991 pursuant to a State law as described under present law, or received by an individual referred to in such State law under any other statute, ordinance, labor agreement, or similar provision as a disability pension payment or in the nature of a disability pension payment attributable to employment as a police officer or as a fireman will be excludable from income.

Effective Date

The provision is effective as if included in the Taxpayer Relief Act.

O. Amendments to Title XVI of the 1997 Act Relating to Technical Corrections 1. Application of requirements for SIMPLE IRAs in the case of mergers and acquisitions (sec. 6016(a)(1) of the bill, sec. 1601(d)(1) of the 1997 Act, and sec. 408(p)(2) of the Code)

Present Law

If an employer maintains a qualified plan and a SIMPLE IRA in the same year due to an acquisition, disposition or similar transaction the SIMPLE IRA is treated as a qualified salary reduction arrangement for the year of the transaction and the following calendar year provided rules similar to the special coverage rules of section 410(b)(6)(C) apply. There is a similar provision with respect to an employer who, because of an acquisition, disposition or similar transaction, fails to be an eligible employer because such employer employs more than 100 employees. In this situation, the employer is treated as an eligible employer for two years following the transaction provided rules similar to the coverage rules of section 410(b)(6)(C)(i) apply.

Explanation of Provision

The bill conforms the treatment applicable to SIMPLE IRAs upon acquisition, disposition or similar transaction for purposes of (1) the 100 employee limit, (2) the exclusive plan requirement, and (3) the coverage rules for participation. In the event of such a transaction, the employer will be treated as an eligible employer and the arrangement will be treated as a qualified salary reduction arrangement for the year of the transaction and the two following years, provided rules similar to the rules of section 410(b)(6)(C)(i)(II) are satisfied and the arrangement would satisfy the requirements to be a qualified salary reduction arrangement after the transaction if the trade or business that maintained the arrangement prior to the transaction had remained a separate employer.

Effective Date

The provision is effective as if included in the Small Business Job Protection Act of 1996.

2. Treatment of Indian tribal governments under section 403(b) (sec. 6016(a)(2) of the bill, sec. 1601(d)(4)(A) of the 1997 Act, and sec. 403(b) of the Code)

Present Law

Any 403(b) annuity contract purchased in a plan year beginning before January 1, 1995, by an Indian tribal government is treated as purchased by an entity permitted to maintain a tax-sheltered annuity plan. Such contracts may be rolled over into a section 401(k) plan maintained by the Indian tribal government in accordance with the rollover rules of section 403(b)(8). An employee participating in a 403(b) annuity contract of the Indian tribal government may roll over amounts from such contract to a section 401(k) plan maintained by the Indian tribal government whether or not the annuity contract is terminated.

Explanation of Provision

The bill clarifies that an employee participating in a 403(b)(7) custodial account of the Indian tribal government may roll over amounts from such account to a section 401(k) plan maintained by the Indian tribal government.

Effective Date

The provision is effective as if included in the Small Business Job Protection Act of 1996.

TECHNICAL CORRECTIONS TO OTHER TAX LEGISLATION

A. Treatment of Adoption Tax Credit Carryovers (sec. 6017 of the bill, sec. 1807(a) of the Small Business Job Protection Act of 1996, and sec. 23 of the Code)

Present Law

Under present law taxpayers are allowed a maximum nonrefundable credit against income tax liability of $5,000 per child for qualified adoption expenses paid or incurred by the taxpayer. In the case of a special needs adoption, the maximum credit amount is $6,000 ($5,000 in the case of a foreign special needs adoption). To the extent the otherwise allowable credit exceeds the tax liability limitation of section 26 (reduced by other personal credits) the excess is carried forward as an adoption credit into the next taxable year, up to a maximum of five taxable years.

The credit is phased out ratably for taxpayers with modified adjusted gross income (AGI) above $75,000, and is fully phased out at $115,000 of modified AGI. For these purposes modified AGI is computed by increasing the taxpayer's AGI by the amount otherwise excluded from gross income under Code sections 911, 931, or 933 (relating to the exclusion of income of U.S. citizens or residents living abroad; residents of Guam , American Samoa , and the Northern Mariana Islands, and residents of Puerto Rico , respectively).

Explanation of Provision

The bill clarifies that the AGI phaseout only applies in the year that the credit is generated and is not reapplied to further reduce any carryforward amounts.

Effective Date

The provision is effective as if included in the Small Business Job Protection Act of 1996.

B. Disclosure Requirements for Apostolic Organizations (sec. 6018 of the bill, sec. 1313 of the Taxpayer Bill of Rights 2, and sec. 6104 of the Code)

Present Law

Section 501(d) provides tax-exempt status to certain religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year.⁷⁹ Any amount so included in the gross income of a member is treated as a dividend received. The effect of section 501(d) is to exempt the religious and apostolic associations or corporations which conduct communal activities (such as farming) from the Federal corporate-level income tax and the undistributed-profits tax, provided that members claim their shares of the corporation's income on their own individual returns.

Section 6033 generally requires tax-exempt organizations to file annual information returns, and such information returns are available for public inspection under sections 6104(b) and 6104(e), except that public disclosure is not required of the identity of contributors to an organization. Section 501(d) entities must include with their annual information return (Form 1065) a Schedule K-1 that identifies the members of the association or corporation and their ratable portions of net income and expenses.

Explanation of Provision

The provision amends sections 6104(b) and 6104(e) to provide that public disclosure is not required of a Schedule K-1 filed by a religious or apostolic organization described in section 501(d).

Effective Date

The provision is effective on the date of enactment.

C. Allow Deduction for Unused Employer Social Security Credit (sec. 6019 of the bill, sec. 13443 of the Omnibus Budget Reconciliation Act of 1993, and sec. 196 of the Code)

Present Law

The general business credit ("GBC") consists of various individual tax credits (including the employer social security credit of Code section 45B) allowed with respect to certain qualified expenditures and activities. In general, the various individual tax credits contain provisions that prohibit "double benefits," either by denying deductions in the case of expenditure-related credits or by requiring income inclusions in the case of activity-related credits. Unused credits may be carried back one year and carried forward 20 years. Section 196 allows a deduction to the extent that certain portions of the GBC expire unused after the end of the carry forward period. Section 196 does not allow a deduction to the extent that the portion of the GBC that expires unused after the end of the carry forward period relates to the employer social security credit.

Explanation of Provision

The provision allows a deduction to the extent that the portion of the GBC relating to the employer social security credit expires unused after the end of the carry forward period.

Effective Date

The provision is effective as if included in the Omnibus Budget Reconciliation Act of 1993.

D. Earned Income Credit Qualification Rules (sec. 6020 of the bill, sec. 11111(a) of the Omnibus Budget Reconciliation Act of 1990, as amended by sec. 742 of the Uruguay Round Agreements Act and sec. 451(a) of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, and sec. 32 of the Code)

Present Law

In general

In order to claim the earned income credit ("EIC"), an individual must be an eligible individual. To be an eligible individual, an individual must include a taxpayer identification number ("TIN") for the taxpayer and the taxpayer's spouse and must either have a qualifying child or meet other requirements. In order to claim the EIC without a qualifying child, an individual must not be a dependent and must be over age 24 and under age 65.

Qualifying child

A qualifying child must meet a relationship test, an age test, an identification test, and a residence test. Under the relationship and age tests, an individual is eligible for the EIC with respect to another person only if that other person: (1) is a son, daughter, or adopted child (or a descendent of a son, daughter, or adopted child); a stepson or stepdaughter; or a foster child of the taxpayer (a foster child is defined as a person whom the individual cares for as the individual's child; it is not necessary to have a placement through a foster care agency); and (2) is under the age of 19 at the close of the taxable year (or is under the age of 24 at the end of the taxable year and was a full-time student during the taxable year), or is permanently and totally disabled. Also, if the qualifying child is married at the close of the year, the individual may claim the EIC for that child only if the individual may also claim that child as a dependent.

To satisfy the identification test, an individual must include on their tax return the name, age, and "TIN" of each qualifying child.

The residence test requires that a qualifying child must have the same principal place of abode as the taxpayer for more than one-half of the taxable year (for the entire taxable year in the case of a foster child), and that this principal place of abode must be located in the United States . For purposes of determining whether a qualifying child meets the residence test, the principal place of abode shall be treated as in the United States for any period during which a member of the Armed Forces is stationed outside the United States while serving on extended active duty.

Explanation of Provision

The bill clarifies that the identification requirement is a requirement for claiming the EIC, rather than an element of the definitions of "eligible individual" and "qualifying child."

Effective Date

The provision is effective as if included in the originally enacted related legislation.

III. BUDGET EFFECTS OF THE BILL

A. Committee Estimates

In compliance with paragraph 11(a) of Rule XXVI of the Standing Rules of the Senate, the following table is presented concerning the estimated budget effects of the bill as reported.

[Insert revenue table]

B. Budget Authority and Tax Expenditures

Budget authority

In compliance with section 308(a)(1) of the Budget Act, the Committee states that three provisions (expansion of authority to award costs and certain fees at prevailing rate, civil damages with respect to unauthorized collection actions, elimination of interest rate differential on overlapping periods of interest on income tax overpayments and underpayments, and increase refund interest rate to individuals) involve outlay effects (budget authority) totalling $989 million for fiscal years 1998-2007.

Tax expenditures

In compliance with section 308(a)(2) of the Budget Act, the Committee states that the bill does not involve changes in tax expenditures.

C. Consultation with Congressional Budget Office

The statement from the Congressional Budget Office has not been received at the time of filing of this report.

IV. VOTES OF THE COMMITTEE

In compliance with paragraph 7(b) of Rule XXVI of the Standing Rules of the Senate, the following statements are made concerning the roll call votes in the Committee's consideration of H.R. 2676 on March 31, 1998.

Motion to report the bill

The bill (H.R. 2676) was ordered favorably reported, as amended by the Chairman's amendment in the nature of a substitute, by a roll call vote of 12 yeas and 0 nays (20-0, including proxy votes). The vote, with a quorum present, was as follows:

Yeas. --Senators Roth, Chafee (proxy), Grassley, Hatch (proxy), D'Amato (proxy), Murkowski (proxy), Nickles, Gramm (proxy), Lott (proxy), Jeffords (proxy), Mack, Moynihan, Baucus, Rockefeller, Breaux, Conrad (proxy), Graham, Moseley-Braun, Bryan, and Kerrey.

Nays. --None.

Votes on other amendments

(1) An amendment by Senator Grassley to add a representative of the organization that represents a substantial number of IRS employees to the IRS Oversight board was approved by a roll call vote of 12 yeas and 8 nays. The vote was as follows:

Yeas. --Senators Grassley, D'Amato, Jeffords, Moynihan, Baucus, Rockefeller (proxy), Breaux, Conrad, Graham, Moseley-Braun, Bryan, and Kerrey.

Nays. --Senators Roth, Chafee, Hatch (proxy), Murkowski, Nickles, Gramm, Lott, and Mack.

(2) An amendment by Senator Moynihan to include the Secretary of the Treasury on the IRS Oversight Board was approved by a roll call vote of 12 yeas and 8 nays. The vote was as follows:

Yeas. --Senators Chafee, D'Amato, Jeffords, Moynihan, Baucus, Rockefeller (proxy), Breaux, Conrad, Graham, Moseley-Braun, Bryan, and Kerrey.

Nays. --Senators Roth, Grassley, Hatch (proxy), Murkowski, Nickles, Gramm, Lott, and Mack.

(3) An amendment by Senator D'Amato to guarantee coverage of inpatient hospital care for breast cancer was defeated by a roll call vote of 8 yeas and 10 nays. (The Chairman ruled this amendment non-germane.) The vote was as follows:

Yeas. --Senators Grassley, D'Amato, Murkowski, Moynihan, Breaux, Moseley-Braun, Bryan, and Kerrey.

Nays. --Senators Roth, Chafee, Nickles, Gramm, Lott, Jeffords, Mack, Baucus, Conrad, and Graham.

(4) An amendment by Senator Kerrey to substitute the language of the House-passed bill for the Chairman's Mark was defeated by a roll call vote of 8 yeas and 12 nays. The vote was as follows:

Yeas. --Senators Moynihan, Baucus, Rockefeller (proxy), Breaux, Conrad, Moseley-Braun, Bryan, and Kerrey.

Nays. --Senators Roth, Chafee (proxy), Grassley, Hatch, D'Amato (proxy), Murkowski, Nickles, Gramm, Lott (proxy), Jeffords (proxy), Mack, and Graham.

(5) An amendment by Senator Grassley to authorize State tax agencies to participate in the Federal program of refund offsets was approved by a roll call vote of 14 yeas and 6 nays. The vote was as follows:

Yeas. --Senators Chafee (proxy), Grassley, Hatch, D'Amato (proxy), Jeffords (proxy), Moynihan, Baucus, Rockefeller (proxy), Breaux, Conrad, Graham, Moseley-Braun, Bryan , and Kerrey.

Nays. --Senators Roth, Murkowski, Nickles, Gramm, Lott (proxy), and Mack.

(6) An amendment by Senator Conrad to strike the burden of proof provision of the Chairman's Mark was defeated by a roll call vote of 5 yeas and 15 nays. The vote was as follows:

Yeas. --Senators Moynihan, Baucus, Rockefeller (proxy), Conrad, and Graham.

Nays. --Senators Roth, Chafee (proxy), Grassley, Hatch, D'Amato (proxy), Murkowski (proxy), Nickles, Gramm, Lott (proxy), Jeffords (proxy), Mack, Breaux, Moseley-Braun, Bryan, and Kerrey.

(7) An amendment by Senators Graham and Moynihan to implement a tobacco tax increase of 5 cents per pack of cigarettes and accelerate a 15-cents-per-pack increase, and also to reduce the period for collecting taxes from 10 to 6 years, increase the refund claim period from 3 to 6 years, and to extend such periods to all taxes was defeated on a roll call vote of 8 yeas and 12 nays. The vote was as follows:

Yeas. --Senators Moynihan, Baucus, Rockefeller, Conrad (proxy), Graham, Moseley-Braun, Bryan, and Kerrey.

Nays. --Senators Roth, Chafee (proxy), Grassley, Hatch (proxy), D'Amato (proxy), Murkowski (proxy), Nickles, Gramm (proxy), Lott (proxy), Jeffords (proxy), Mack, and Breaux.

(8) An amendment by Senator Rockefeller to modify the privilege of practitioner-client confidentiality provision in the Chairman's Mark was defeated by a roll call vote of 3 yeas and 17 nays. The vote was as follows:

Yeas. --Senators Moynihan, Baucus, and Rockefeller.

Nays. --Senators Roth, Chafee (proxy), Grassley, Hatch (proxy), D'Amato (proxy), Murkowski (proxy), Nickles, Gramm (proxy), Lott (proxy), Jeffords (proxy), Mack, Breaux, Conrad (proxy), Graham, Moseley-Braun, Bryan, and Kerrey.

V. REGULATORY IMPACT AND OTHER MATTERS

A. Regulatory Impact

Pursuant to paragraph 11(b) of Rule XXVI of the Standing Rules of the Senate, the Committee makes the following statement concerning the regulatory impact that might be incurred in carrying out the provisions of the bill as reported.

Impact on individuals and businesses

The bill as reported makes numerous changes designed to improve the management of the IRS, encourage electronic filing, protect taxpayer rights, improve Congressional oversight of the IRS, and provide necessary technical corrections to recent tax legislation.

Title I of the bill provides for restructuring of the IRS to improve management accountability and to improve taxpayer service.

Title II encourages electronic filing of tax and information returns, and requires a Treasury study of the feasibility of a return-free system for individuals.

Title III provides for additional protection of taxpayer rights, including relief for innocent spouses, and revises certain interest and penalty provisions. Title III also requires studies of the administration of penalties and interest and confidentiality of tax return information.

Title IV requires annual IRS reports to the Congressional tax committees on the sources of complexity in the Federal tax laws, and for the Joint Committee on Taxation to provide a "Tax Complexity Analysis" on tax legislation that has widespread applicability to individuals or small businesses.

Title V provides revenue offsets to the cost of the other provisions of the bill: (1) revises the deduction for vacation and severance pay (overruling Schmidt Baking); (2) modifies the foreign tax credit carryover rules; (3) clarifies and expands the mathematical error procedures; (4) freezes the grandfathered status of stapled REITs; (5) makes certain trade receivables ineligible for mark-to-market treatment; and (6) adds vaccines against rotavirus gastroenteritis to the list of taxable vaccines.

Title VI makes necessary technical corrections to the Taxpayer Relief Act of 1997 and certain other recent tax legislation.

Impact on personal privacy and paperwork

The provision s of the bill should not have any adverse impact on personal privacy. The bill modifies Code section 6103 to allow the tax committees to obtain information from IRS employees regarding IRS employee and taxpayer abuse.

B. Unfunded Mandates Statement

This information is provided in accordance with section 423 of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).

The Committee has reviewed the provisions of the bill as reported. In accordance with the requirements of Public Law 104-4, the Committee has determined that the following provisions of the bill contain Federal private sector mandates.

Repeal of Schmidt Baking with respect to the employer deduction for vacation and severance pay (bill sec. 5001);

Modification of the foreign tax credit carryover rules (bill sec. 5002);

Freezing of grandfathered status of stapled REITs (bill sec. 5004);

Certain trade receivables made ineligible for mark-to-market treatment (bill sec. 5005); and

Adding vaccines against rotavirus gastroenteritis to the list of taxable vaccines (bill sec. 5006).

As indicated in the revenue table (III.A., above), these provisions are estimated to increase tax revenues by $6,449 million in fiscal years 1998-2002 and $9,330 million in fiscal years 1998-2007, which are no greater than the aggregate estimated amounts that the private sector will be required to pay in order to comply with the Federal private sector mandates under the bill.

These provisions will not impose a Federal intergovernmental mandate on State, local, or tribal governments.

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).