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
.
| 
