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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).
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