Revenue Reconciliation Act p1

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

Revenue Reconciliation Act page1

Senate Finance Committee Report on the Revenue Reconciliation Act of 1997

June 25, 1997

105th Congress

[SRepNo 105-33, PubLNo 105-34] 105th Congress SENATE Report 1st Session 105-33

REVENUE RECONCILIATION ACT OF 1997

(AS REPORTED BY THE COMMITTEE ON FINANCE)

S. 949

COMMITTEE ON FINANCE

UNITED STATES SENATE

[Including cost estimate of the Congressional Budget Office]

June 20, 1997. --Ordered to be printed

I. LEGISLATIVE BACKGROUND

II. EXPLANATION OF THE BILL

TITLE I. CHILD TAX CREDIT AND OTHER FAMILY TAX RELIEF

A. Child Tax Credit For Children Under Age 17(sec. 101 of the bill and new sec. 24 of the Code)

B. Increase Exemption Amounts Applicable to Individual Alternative Minimum Tax (sec. 102 of the bill and sec. 55 of the Code)

TITLE II. EDUCATION TAX INCENTIVES

A. Tax Benefits Relating to Education Expenses

1. HOPE credit for higher education tuition expenses (sec. 201 of the bill and new sec. 25A of the Code)

2. Exclusion from gross income for amounts distributed from qualified tuition programs and education IRAs to cover qualified higher education expenses (secs. 211, 212, and 213 of the bill and sec. 529 and new sec. 530 of the Code)

3. Deduction for student loan interest (sec. 202 of the bill and new sec. 221 of the Code)

4. Penalty-free withdrawals from IRAs for higher education expenses (sec. 203 of the bill and sec. 72(t) of the Code)

B. Other Education-Related Tax Provisions

1. Extension of exclusion for employer-provided educational assistance (sec. 221 of the bill and sec. 127 of the Code)

2. Modification of $150 million limit on qualified 501(c)(3) bonds other than hospital bonds (sec. 222 of the bill and sec. 145(b) of the Code)

3. Expansion of arbitrage rebate exception for certain bonds (sec. 223 of the bill and sec. 148 of the Code)

4. Certain teacher education expenses not subject to 2 percent limit on miscellaneous itemized deductions (sec. 224 of the bill and sec. 67(b) of the Code)

TITLE III . SAVINGS AND INVESTMENT INCENTIVES

A. Individual Retirement Arrangements (secs. 301-304 of the bill and secs. 72 and 408 of the Code and new sec. 408A of the Code)

B. Capital Gains Provisions

1. Maximum rate of tax on net capital gain of individuals (sec. 311 of the bill and sec. 1(h) of the Code)

2. Small business stock (secs. 312 and 313 of the bill and secs. 1045 and 1202 of the Code)

3. Exclusion of gain on sale of principal residence (sec. 314 of the bill and secs. 121 and 1034 of the Code)

TITLE IV. ESTATE, GIFT , AND GENERATION-SKIPPING TAX PROVISIONS

A. Increase in Estate and Gift Tax Unified Credit(sec. 401(a) of the bill and sec. 2010 of the Code)

B. Indexing of Certain Other Estate and Gift Tax Provisions (sec. 401(b)-(e) of the bill and secs. 2032A, 2503, 2631, and 6601(j) of the Code)

C. Estate Tax Exclusion for Qualified Family-Owned Businesses(sec. 402 of the bill and new sec. 2033A of the Code)

D. Reduction in Estate Tax for Certain Land Subject to Permanent Conservation Easement (sec. 403 of the bill and sec. 2031 of the Code)

E. Installment Payments of Estate Tax Attributable to Closely HeldBusinesses (secs. 404 and 405 of the bill and secs. 6601(j) and 6166 of the Code)

F. Estate Tax Recapture from Cash Leases of Specially-ValuedProperty (sec. 406 of the bill and sec. 2032A of the Code)

G. Modification of Generation-Skipping Transfer Tax for Transfers to Individuals with Deceased Parents (sec. 407 of the bill and sec. 2651 of the Code)

TITLE V. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS

A. Research Tax Credit (sec. 501 of the bill and sec. 41 of the Code)

B. Contributions of Stock to Private Foundations (sec. 502 of the bill and sec. 170(e)(5) of the Code)

C. Work Opportunity Tax Credit (sec. 503 of the bill and sec. 51 of the Code)

D. Orphan Drug Tax Credit (sec. 504 of the bill and sec. 45C of the Code)

TITLE VI. DISTRICT OF COLUMBIA TAX INCENTIVES (secs. 601 and 602 of the bill and new secs. 1400-1400B of the Code)

TITLE VII . MISCELLANEOUS PROVISIONS

A. Excise Tax Provisions

1. Repeal excise tax on diesel fuel used in recreational motorboats (sec. 701 of the bill and secs. 4041 and 6427 of the Code)

2. Create Intercity Passenger Rail Fund (sec. 702 of the bill and new sec. 9901 of the Code)

3. Provide a lower rate of alcohol excise tax on certain hard ciders (sec. 703 and sec. 5041 of the Code)

4. Transfer of General Fund highway fuels tax to the Highway Trust Fund (sec. 704 of the bill and sec. 9503 of the Code)

5. Tax certain alternative fuels based on energy equivalency to gasoline (sec. 705 of the bill and sec. 4041 of the Code)

6. Study feasibility of moving collection point for distilled spirits excise tax (sec. 706 of the bill)

7. Extend and modify tax benefits for ethanol (sec.707 of the bill and secs. 40, 4041, 4081, 4091, and 6427 of the Code)

8. Codify Treasury Department regulations regulating wine labels (sec. 708 of the bill and sec. 5388 of the Code)

B. Provisions Relating to Pensions

1. Treatment of multiemployer plans under section 415 (sec. 711 of the bill and sec. 415(b) of the Code)

2. Modification of partial termination rules (sec. 712 of the bill and sec. 552 of the Deficit Reduction Act of 1984)

3. Increase in full funding limit (sec. 713 of the bill and sec. 412 of the Code)

4. Spousal consent required for distributions from section 401(k) plans (sec. 714 of the bill and secs. 411 and 417 of the Code)

5. Contributions on behalf of a minister to a church plan (sec. 715 of the bill and sec. 414(e) of the Code)

6. Exclusion of ministers from discrimination testing of certain non-church retirement plans (sec. 715 of the bill and sec. 414(e) of the Code)

7. Repeal application of UBIT to ESOPs of S corporations (sec. 716 of the bill andsec. 512 of the Code)

C. Provisions Relating to Disasters

1. Treatment of livestock sold on account of weather-related conditions (sec. 721 of the bill and secs. 451 and 1033 of the Code)

2. Rules relating to denial of earned income credit on basis of disqualified income (sec. 722 of the bill and sec. 32(i) of the Code)

D. Provisions Relating to Small Business

1. Delay imposition of penalties for failure to make payments electronically through EFTPS until after June 30, 1998 (sec. 731 of the bill and sec. 6302 of the Code)

2. Repeal installment method adjustment for farmers (sec. 732 of the bill and sec. 56 of the Code)

E. Foreign Tax Provisions

1. Eligibility of licenses of computer software for foreign sales corporation benefits(sec. 741 of the bill and sec. 927 of the Code)

2. Regulations to limit treaty benefits for payments to hybrid entities (sec. 742 of the bill and sec. 894 of the Code)

3. Treatment of certain securities positions under the subpart F investment in U.S. property rules (sec. 743 of the bill and sec. 956 of the Code)

4. Exception from foreign personal holding company income under subpart F for active financing income (sec. 744 of the bill and sec. 954 of the Code)

5. Treat service income of nonresident alien individuals earned on foreign ships as foreign source income and disregard the U.S. presence of such individuals (sec. 745 of the bill and secs. 861, 863, 872, 3401, and 7701 of the Code)

6. Modification of passive foreign investment company provisions to eliminate overlap with subpart F and to allow mark-to-market election (secs. 751-753 of the bill and secs. 1291-1297 of the Code)

F. Other Provisions

1. Tax-exempt status for certain State workmen's compensation act companies (sec. 761 of the bill and sec. 501(c)(27) of the Code)

2. Election to continue exception from treatment of publicly traded partnerships as corporations (sec. 762 of the bill and sec. 7704 of the Code)

3. Exclusion from UBIT for certain corporate sponsorship payments (sec. 763 of the bill and sec. 513 of the Code)

4. Timeshare associations (sec. 764 of the bill and sec. 528 of the Code)

5. Deduction for business meals for individuals operating under Department of Transportation hours of service limitations and certain seafood processors (sec. 765 of the bill and sec. 274(n) of the Code)

6. Provide above-the-line deduction for certain business expenses (sec. 766 of the bill and sec. 62 of the Code)

7. Increase in standard mileage rate for purposes of computing charitable deduction (sec. 767 of the bill and sec. 170(i) of the Code)

8. Expensing of environmental remediation costs ("brownfields") (sec. 768 of the bill and sec. 162 of the Code)

9. Combined employment tax reporting demonstration project (sec. 769 of the bill)

10. Qualified small-issue bonds (sec. 770 of the bill and sec. 144(a) of the Code)

11. Extend production credit for electricity produced from wind and "closed loop" biomass (sec. 771 of the bill and sec. 45 of the Code)

12. Suspension of net income property limitation for production from marginal wells (sec. 772 of the bill and sec. 613(a) of the Code)

13. Purchasing of receivables by tax-exempt hospital cooperative service organizations (sec. 773 of the bill and sec. 501(e) of the Code)

14. Treatment of bonds issued by the Federal Home Loan Bank Board under the Federal guarantee rules (sec. 774 of the bill and sec. 149 of the Code)

15. Increased period of deduction of traveling expenses while working away from home on qualified construction projects (sec. 775 of the bill and sec. 162 of the Code)

16. Charitable contribution deduction for certain expenses incurred in support of Native Alaskan subsistence whaling (sec. 776 of the bill and sec. 170 of the Code)

17. Modification of empowerment zone and enterprise community criteria in the event of future designations of additional zones and communities (sec. 777 of the bill and sec. 1392 of the Code)

18. Deductibility of meals provided for the convenience of the employer (sec. 778 of the bill and sec. 132 of the Code)

19. Clarification of standard to be used in determining tax status of retail securities brokers(sec. 779 of the bill)

TITLE VIII. REVENUE-INCREASE PROVISIONS

A. Financial Products

1. Require recognition of gain on certain appreciated positions in personal property (sec. 801(a) of the bill and new sec. 1259 of the Code)

2. Election of mark to market for securities traders and for traders and dealers in commodities (sec. 801(b) of the bill and new sec. 475(d) of the Code)

3. Limitation on exception for investment companies under section 351 (sec. 802 of the bill and sec. 351(e) of the Code)

4. Gains and losses from certain terminations with respect to property (sec. 803 of the bill and sec. 1234A of the Code)

B. Corporate Organizations and Reorganizations

1. Require gain recognition for certain extraordinary dividends (sec. 811 of the bill and sec. 1059 of the Code)

2. Require gain recognition on certain distributions of controlled corporation stock (sec. 812 of the bill and secs. 355, 351(c), and 368(a)(2)(H) of the Code)

3. Reform tax treatment of certain corporate stock transfers (sec. 813 of the bill and secs. 304 and 1059 of the Code)

4. Modify holding period for dividends-received deduction (sec. 814 of the bill and sec. 246(c) of the Code

C. Other Corporate Provisions

1. Registration of confidential corporate tax shelters and substantial understatement penalty (sec. 821 of the bill and secs. 6111 and 6662 of the Code)

2. Treat certain preferred stock as "boot" (sec. 822 of the bill and secs. 351, 354, 355, 356 and 1036 of the Code)

D. Administrative Provisions

1. Information reporting on persons receiving contract payments from certain Federal agencies (sec. 831 of the bill and sec. 6041A of the Code)

2. Disclosure of tax return information for administration of certain veterans programs (sec. 832 of the bill and sec. 6103 of the Code)

3. Consistency rule for beneficiaries of trusts and estates (sec. 833 of the bill and sec. 6034A of the Code)

4. Establish IRS continuous levy and improve debt collection (secs. 834, 835, and 836 of the bill and secs. 6331 and 6334 of the Code) 174 E. Excise Tax Provisions

1. Extension and modification of Airport and Airway Trust Fund excise taxes (sec. 841 of the bill and secs. 4081, 4091, and 4261 of the Code)

2. Reinstate Leaking Underground Storage Tank Trust Fund excise tax (sec. 842 of the bill and secs. 4041(d), 4081(a)(2), and 4081(d)(2) of the Code)

3. Application of communications tax to longdistance prepaid telephone cards (sec. 843 of the bill and sec. 4251 of the Code)

4. Uniform rate of excise tax on vaccines (sec. 844 of the bill and secs. 4131 and 4132 of the Code)

5. Modify treatment of tires under the heavy highway vehicle retail excise tax (sec. 845 of the bill and sec. 4071 of the Code)

6. Increase tobacco excise taxes (sec. 846 of the bill and sec. 5701 of the Code)

F. Provisions Relating to Tax-Exempt Entities

1. Extend UBIT rules to second-tier subsidiaries and amend control test (sec. 851 of the bill and sec. 512(b)(13) of the Code)

2. Limitation on increase in basis of property resulting from sale by tax-exempt entity to related person (sec. 852 of the bill and sec. 1061 of the Code)

3. Repeal grandfather rule with respect to pension business of insurer (sec. 853 of the bill and sec. 1012(c) of the Tax Reform Act of 1986)

G. Foreign Provisions

1. Inclusion of income from notional principal contracts and stock lending transactions under subpart F (sec. 861 of the bill and sec. 954 of the Code)

2. Restrict like-kind exchange rules for certain personal property (sec. 862 of the bill and sec. 1031 of the Code)

3. Holding period requirement for certain foreign taxes (sec. 863 of the bill and new sec. 901(k) of the Code)

4. Treatment of income from certain sales of inventory as U.S. source (sec. 864 of the bill and sec. 865 of the Code)

5. Interest on underpayment reduced by foreign tax credit carryback (sec. 865 of the bill and secs. 6601 and 6611 of the Code)

6. Determination of period of limitations relating to foreign tax credits (sec. 866 of the bill and sec. 6511(d) of the Code)

7. Modify foreign tax credit carryover rules (sec. 867 of the bill and sec. 904 of the Code)

8. Repeal special exception to foreign tax credit limitation for alternative minimumtax purposes (sec. 868 of the bill and sec. 59 of the Code)

H. Other Revenue-Increase Provisions

1. Phase out suspense accounts for certain large farm corporations (sec. 871 of the bill and sec. 477 of the Code)

2. Modify net operating loss carryback and carryforward rules (sec. 872 of the bill and sec. 172 of the Code)

3. Expand the limitations on deductibility of premiums and interest with respect to life insurance, endowment and annuity contracts (sec. 873 of the bill and sec. 264 of the Code)

4. Allocation of basis of properties distributed to a partner by a partnership (sec. 874 of the bill and sec. 732(c) of the Code)

5. Treatment of inventory items of a partnership (sec. 875 of the bill and sec. 751 of the Code)

6. Eligibility for income forecast method (sec. 876 of the bill and secs. 167 and 168 of the Code)

7. Modify the exception to the related party rule of section 1033 for individuals to only provide an exception for de minimis amounts (sec. 877 of the bill and sec. 1033 of the Code)

8. Repeal of exception for certain sales by manufacturers to dealer (sec. 878 of the bill and sec. 811(c)(9) of the Tax Reform Act of 1986 (P.L. 99-514))

9. Cash out of certain accrued benefits (sec. 879 of the bill and secs. 411 and 417 of the Code)

10. Election to receive taxable cash compensation in lieu of nontaxable parking benefits (sec. 880 of the bill and sec. 132 of the Code)

11. Extension of Federal unemployment surtax (sec. 881 of the bill and sec. 3301 of the Code)

12. Repeal of excess distribution and excess retirement accumulation taxes (sec. 882 of the bill and sec. 4980A of the Code)

13. Treatment of charitable remainder trusts with greater than 50 percent annual payout (sec. 883 of the bill and sec. 664 of the Code)

14. Tax on prohibited transactions (sec. 884 of the bill and sec. 4975 of the Code)

15. Basis recovery rules (sec. 885 of the bill and sec. 72 of the Code)

TITLE IX. FOREIGN RELATED SIMPLIFICATION PROVISIONS

1. General provisions affecting treatment of controlled foreign corporations (secs. 911-913 of the bill and secs. 902, 904, 951, 952, 959, 960, 961, 964, and 1248 of the Code)

2. Simplify formation and operation of international joint ventures (secs. 921, 931-935, and 941 of the bill and secs. 367, 721, 1491-1494, 6031, 6038, 6038B, 6046A, and 6501 of the Code)

3. Modification of reporting threshold for stock ownership of a foreign corporation (sec. 936 of the bill and sec. 6046 of the Code)

4. Simplify translation of foreign taxes (sec. 902 of the bill and secs. 905(c) and 986 of the Code)

5. Election to use simplified foreign tax credit limitation for alternative minimum tax purposes (sec. 903 of the bill and sec. 59 of the Code)

6. Simplify stock and securities trading safe harbor (sec. 952 of the bill and sec. 864(b)(2)(A) of the Code)

7. Simplify foreign tax credit limitation for individuals (sec. 901 of the bill and sec. 904 of the Code)

8. Simplify treatment of personal transactions in foreign currency (sec. 904 of the bill and sec. 988 of the Code)

9. Transition rule for certain trusts (sec. 951 of the bill and sec. 7701(a)(30) of the Code)

10. Clarification of determination of foreign taxes deemed paid (sec. 953(a) of the bill and sec. 902 of the Code)

11. Clarification of foreign tax credit limitation for financial services income (sec. 953(b) of the bill and sec. 904 of the Code)

TITLE X. SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND BUSINESSES

A. Provisions Relating to Individuals

1. Modifications to standard deduction of dependents; AMT treatment of certain minor children (sec. 1001 of the bill and secs. 59(j) and 63(c)(5) of the Code)

2. Increase de minimis threshold for estimated tax to $1,000 for individuals (sec. 1002 of the bill and sec. 6654 of the Code)

3. Treatment of certain reimbursed expenses of rural letter carriers' vehicles (sec. 1003 of the bill and sec. 162 of the Code)

4. Travel expenses of Federal employees participating in a Federal criminal investigation (sec. 1004 of the bill and sec. 162 of the Code)

B. Provisions Relating to Businesses Generally

1. Modifications to look-back method for long-term contracts (sec. 1011 of the bill and secs. 460 and 167(g) of the Code)

2. Minimum tax treatment of certain property and casualty insurance companies (sec. 1012 of the bill and sec. 56(g)(4)(B) of the Code)

3. Shrinkage for inventory accounting (sec. 1013 of the bill and sec. 471 of the Code)

4. Treatment of construction allowances provided to lessees (sec. 1014 of the bill and new sec. 110 of the Code)

C. Partnership Simplification Provisions

1. General provisions

2. Other partnership audit rules

3. Closing of partnership taxable year with respect to deceased partner (sec. 1046 of the bill and sec. 706(c)(2)(A) of the Code)

D. Modifications of Rules for Real Estate Investment Trusts(secs. 1051-1063 of the bill and secs. 856 and 857 of the Code)

E. Repeal of the 30-percent ("Short-short") Test for Regulated Investment Companies (sec. 1071 of the Bill and sec. 851(b)(3) of the Code)

F. Taxpayer Protections

1. Provide reasonable cause exception for additional penalties (sec. 1081 of the bill and secs. 6652, 6683, 7519 of the Code)

2. Clarification of period for filing claims for refunds (sec. 1082 of the bill and sec. 6512 of the Code)

3. Repeal of authority to disclose whether a prospective juror has been audited (sec. 1083 of the bill and sec. 6103 of the Code)

4. Clarify statute of limitations for items from pass-through entities (sec. 1084 of the bill and sec. 6501 of the Code)

5. Prohibition on browsing (secs. 1084 and 1085 of the bill and secs. 7213A and 7431 of the Code)

TITLE XI. ESTATE, GIFT , AND TRUST TAX SIMPLIFICATION

1. Eliminate gift tax filing requirements for gifts to charities (sec. 1101 of the bill and sec. 6019 of the Code)

2. Clarification of waiver of certain rights of recovery (sec. 1102 of the bill and secs. 2207A and 2207B of the Code)

3. Transitional rule under section 2056A (sec. 1103 of the bill and sec. 2056A of the Code)

4. Treatment for estate tax purposes of short-term obligations held by nonresident aliens (sec. 1104 of the bill and sec. 2105 of the Code)

5. Distributions during first 65 days of taxable year of estate (sec. 1105 of the bill and sec. 663(b) of the Code)

6. Separate share rules available to estates (sec. 1106 of the bill and sec. 663(c) of the Code)

7. Executor of estate and beneficiaries treated as related persons for disallowance of losses (sec. 1107 of the bill and secs. 267(b) and 1239(b) of the Code)

8. Simplified taxation of earnings of pre-need funeral trusts (sec. 1108 of the bill and sec. 684 of the Code)

9. Adjustments for gifts within three years of decedent's death (sec. 1109 of the bill and secs. 2035 and 2038 of the Code)

10. Clarify relationship between community property rights and retirement benefits (sec. 1110 of the bill and sec. 2056(b)(7)(C) of the Code)

11. Treatment under qualified domestic trust rules of forms of ownership which are not trusts (sec. 1111 of the bill and sec. 2056A(c) of the Code)

12. Opportunity to correct certain failures under section 2032A (sec. 1112 of the bill and sec. 2032A of the Code)

13. Authority to waive requirement of U.S. trustee for qualified domestic trusts (sec. 1113 of the bill and sec. 2056A(a)(1)(A) of the Code)

TITLE XII. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS

A. Increase De Minimis Limit for After-Market Alterations Subject to Heavy Truckand Luxury Automobile Excise Taxes (sec. 1201 of the bill and secs. 4001 and 4051 of the Code)

B. Simplification of Excise Taxes on Distilled Spirits, Wine, and Beer (secs. 1211-1222 of the bill and secs. 5008, 5053, 5055, 5115, 5175, and 5207, and new secs. 5222 and 5418 of the Code)

C. Other Excise Tax Provisions

1. Authority for Internal Revenue Service to grant exemptions from excise tax registration requirements (sec. 1231 of the bill and sec. 4222 of the Code)

2. Repeal of excise tax deadwood provisions (sec. 1232 of the bill and secs. 4051, 4495-4498, and 4681-4682 of the Code)

3. Modifications to excise tax on certain arrows (sec. 1233 of the bill and sec. 4161 of the Code)

4. Modifications to heavy highway vehicle retail excise tax (sec. 1234 of the bill and sec. 4051 of the Code)

5. Treatment of skydiving flights as noncommercial aviation (sec. 1235 of the bill and sec. 4081 and 4261 of the Code)

6. Eliminate double taxation of certain aviation fuels sold to producers by "fixed base operators" (sec. 1236 of the bill and sec. 4091 of the Code)

D. Tax-Exempt Bond Provisions

1. Repeal of $100,000 limitation on unspent proceeds under 1-year exception from rebate (sec. 1241 of the bill and sec. 148 of Code)

2. Exception from rebate for earnings on bona fide debt service fund under construction bond rules (sec. 1242 of the bill and sec. 148 of the Code)

3. Repeal of debt service-based limitation on investment in certain nonpurpose investments (sec. 1243 of the bill and sec. 148 of the Code)

4. Repeal of expired provisions relating to student loan bonds (sec. 1244 of the bill and sec. 148 of the Code)

E. Tax Court Procedures

1. Overpayment determinations of Tax Court (sec. 1251 of the bill and sec. 6512 of the Code)

2. Redetermination of interest pursuant to motion (sec. 1252 of the bill and sec. 7481 of the Code)

3. Application of net worth requirement for awards of litigation costs (sec. 1253 of the bill and sec. 7430 of the Code)

4. Tax Court jurisdiction for determination of employment status (sec. 1254 of the bill and new sec. 7435 of the Code)

F. Other Provisions

1. Due date for first quarter estimated tax payments by private foundations (sec. 1261 of the bill and sec. 6655(g)(3) of the Code)

2. Withholding of Commonwealth income taxes from the wages of Federal employees (sec. 1262 of the bill and sec. 5517 of title 5, United States Code)

3. Certain notices disregarded under provision increasing interest rate on large corporate underpayments (sec. 1263 of the bill and sec. 6621 of the Code)

TITLE XIII. PENSION SIMPLIFICATION

1. Matching contributions of self-employed individuals not treated as elective deferrals (sec. 1301 of the bill and sec. 402(g) of the Code)

2. Contributions to IRAs through payroll deductions (sec. 1302 of the bill)

3. Plans not disqualified merely by accepting rollover contributions (sec. 1303 of the bill and sec. 401(a) of the Code)

4. Modification of prohibition on assignment or alienation (sec. 1304 of the bill, sec. 401(a)(13) of the Code)

5. Elimination of paperwork burdens on plans (sec. 1305 of the bill and sec. 101 of ERISA)

6. Modification of section 403(b) exclusion allowance to conform to section 415 modifications (sec. 1306 of the bill and sec. 403(b) of the Code)

7. New technologies in retirement plans (sec. 1307 of the bill)

8. Permanent moratorium on application of nondiscrimination rules to governmental plans (sec. 1308 of the bill and secs. 401 and 403(b) of the Code)

9. Clarification of certain rules relating to employee stock ownership plans of S corporations (sec. 1309 of the bill and sec. 409 of the Code)

10. Modification of 10-percent tax on nondeductible contributions (sec. 1310 of the bill and sec. 4972 of the Code)

11. Modify funding requirements for certain plans (sec. 1311 of the bill and sec. 412 of the Code)

TITLE XIV. TECHNICAL CORRECTION PROVISIONSI. TECHNICAL CORRECTIONS TO THE SMALL BUSINESSJOB PROTECTION ACT OF 1996

A. Small Business-Related Provisions

1. Returns relating to purchases of fish (sec. 1401(a)(1) of the bill and sec. 6050R(c)(1) of the Code)

2. Charitable remainder trusts not eligible to be electing small business trusts (sec. 1402(c)(1) of the bill and sec. 1361(c)(1)(B) of the Code)

3. Clarify the effective date for post-termination transition period provision (sec. 1401(c)(2) of the bill)

4. Treatment of qualified subchapter S subsidiaries (sec. 1401(c)(3) of the bill and sec. 1361(b)(3) of the Code)

B. Pension Provisions

1. Salary reduction simplified employee pensions ("SARSEPS") (sec. 1401(d)(1)(B) of the bill and sec. 408(k)(6) of the Code)

2. SIMPLE retirement plans (secs. 1401(d)(1)(A) and (d)(1)(C)-(F) and 1401(d)(2) of the bill)

C. Foreign Provisions

1. Measurement of earnings of controlled foreign corporations (sec. 1401(e) of the bill, subtitle E of the Act, and section 956 of the Code)

2. Transfers to foreign trusts at fair market value (sec. 1401(i)(2) of the bill, sec. 1903 of the Act, and sec. 679 of the Code

3. Treatment of trust as U.S. person (sec. 1401(i)(3) of the bill, sec. 1907 of the Act, and secs. 641 and 7701(a)(30) of the Code)

D. Other Provisions

1. Treatment of certain reserves of thrift institutions (sec. 1401(f)(5) of the bill and secs. 593(e) and 1374 of the Code)

2. "FASIT" technical corrections (sec. 1401(f)(6) of the bill and sec. 860L of the Code)

3. Qualified State tuition plans (sec. 1401(h)(1) of the bill and sec. 529 of the Code)

4. Adoption credit (sec. 1401(h)(2) of the bill, sec. 1807 of the Small Business Act, and sec. 23 of the Code)

5. Phaseout of adoption assistance exclusion (sec. 1401(h)(2) of the bill, sec. 1807 of the Small Business Act, and sec. 137 of the Code)

II. HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

1. Medical savings accounts (sec. 1402(a) of the bill and sec. 220 of the Code)

2. Definition of chronically ill individual under a qualified long-term care insurance contract (sec. 1402(b) of the bill and sec. 7702B(c)(2) of the Code)

3. Deduction for long-term care insurance of self-employed individuals (sec. 1402(c) of the bill and sec. 162(l)(2) of the Code)

4. Applicability of reporting requirements of long-term care contracts and accelerated death benefits (sec. 1402(d) of the bill and sec. 6050Q of the Code)

5. Consumer protection provisions for long-term care insurance contracts (sec. 1402(e) of the bill and sec. 7702B(g)(4)(b) of the Code)

6. Insurable interests under the COLI provision (sec. 1402(f)(1) of the bill and sec. 264(a)(4) of the Code)

7. Applicable period for purposes of applying the interest rate for a variable rate contract under the COLI rules (sec. 1402(f)(2) of the bill and sec. 264(d)(2)(B)(ii) of the Code)

8. Definition of 20-percent owner for purposes of key person exception under COLI rule (sec. 1402(f)(3) of the bill and sec. 264(d)(4) of the Code)

9. Effective date of interest rate cap on key persons and pre-1986 contracts under the COLI rule (sec. 1402(f)(4) of the bill and sec. 501(c) of HIPA)

10. Clarification of contract lapses under effective date provisions of the COLI rule (sec. 1402(f)(5) of the bill and sec. 501(d)(2) of HIPA)

11. Requirement of gain recognition on certain exchanges (sec. 1402(g)(1) and (2) of the bill, sec. 511 of the Act, and sec. 877(d)(2) of the Code)

12. Suspension of 10-year period in case of substantial diminution of risk of loss (sec. 1402(g)(3) of the bill, sec. 511 of the Act, and sec. 877(d)(3) of the Code)

13. Treatment of property contributed to certain foreign corporations (sec. 1402(g)(4) of the bill, sec. 511 of the Act, and sec. 877(d)(4) of the Code)

14. Credit for foreign estate tax (sec. 1402(g)(6) of the bill, sec. 511 of the Act, and sec. 2107(c) of the Code)

III . TECHNICAL CORRECTIONS TO THE TAXPAYER BILL OF RIGHTS 2

1. Reasonable cause abatement for first-tier intermediate sanctions excise tax (sec. 1403(a) of the bill and section 4962 of the Code)

2. Reporting by public charities with respect to intermediate sanctions and certain other excise tax penalties (sec. 1403(b) of the bill and sec. 6033 of the Code)

IV. TECHNICAL CORRECTIONS TO OTHER ACTS

1. Correction of GATT interest and mortality rate provisions in the Retirement Protection Act (sec. 1404(b)(3) of the bill and sec. 1449(a) of the Small Business Act)

2. Related parties determined by reference to section 267 (sec. 1404(d) of the bill and sec. 267(f) of the Code)

III . BUDGET EFFECTS OF THE BILL

IV. VOTES OF THE COMMITTEE

V. REGULATORY IMPACT AND OTHER MATTERS

105th Congress SENATE Report 1st Session 105-33

REVENUE RECONCILIATION ACT OF 1997

June 20 (legislative day, June --, 1997. Ordered to be printed

Mr. Roth, from the Committee on Finance, submitted the

following

REPORT

[To accompany S. 949]

[Including cost estimate of the Congressional Budget Office]

The Committee on Finance, to which was referred the bill (S. 949) to provide for revenue reconciliation pursuant to section 104(b) of the concurrent resolution on the budget for fiscal year 1998, having considered the same, reports favorably thereon without amendment and recommends that the bill do pass.

I. LEGISLATIVE BACKGROUND

Overview

The Senate Committee on Finance (the "Committee") marked up revenue reconciliation provisions on June 19, 1997, and approved the provisions by a roll call vote of 18 yeas and 2 noes. The Committee's revenue reconciliation recommendations are in response to the instructions in the Fiscal Year 1998 Budget Resolution (H. Con. Res. 84) to provide net tax reductions of not more than $85 billion for fiscal years 1998-2002, and not more than $250 billion for fiscal years 1998-2007. (For details on estimated budget effects of the revenue reconciliation provisions as approved by the Committee, see Part III , below.)

Committee hearings

The Committee and subcommittees held public hearings during the 105th Congress on various topics related to the provisions included in the Committee's revenue reconciliation recommendations.

Full committee hearings

The Committee held hearings on the following topics:

Status of the Airport and Airway Trust Fund (February 4, 1997)

Administration's Fiscal Year 1998 Budget Proposal (February 12-13, 1997)

IRA Proposals (March 6, 1997)

Capital Gains and Losses (March 13, 1997)

Estate and Gift Taxes (April 10, 1997)

"Tax Freedom Day" (April 14, 1997)

Education Tax Proposals (April 16, 1997)

Revenue Proposals in the Administration's Fiscal Year 1998 Budget (April 17, 1997)

Amtrak Financing (April 23, 1997)

Children's Access to Health Care (April 30, 1997).

Subcommittee hearings

Subcommittee hearings were held on the following topics:

Administration's Fiscal Year 1998 Health-Related

Budget Proposals (Subcommittee on Health, February 12, 1997 )

Small Business Tax Proposals (Subcommittee on Taxation and Oversight of the IRS , June 5, 1997 ).

II. EXPLANATION OF THE BILL

TITLE I. CHILD TAX CREDIT AND OTHER FAMILY TAX RELIEF

A. Child Tax Credit For Children Under Age 17 (sec. 101 of the bill and new sec. 24 of the Code)

Present Law

In general

Present law does not provide tax credits based solely on the taxpayer's number of dependent children. Taxpayers with dependent children, however, generally are able to claim a personal exemption for each of these dependents. The total amount of personal exemptions is subtracted (along with certain other items) from adjusted gross income (" AGI ") in arriving at taxable income. The amount of each personal exemption is $2,650 for 1997, and is adjusted annually for inflation. In 1997, the amount of the personal exemption is phased out for taxpayers with AGI in excess of $121,200 for single taxpayers, $151,500 for heads of household, and $181,800 for married couples filing joint returns. These phaseout thresholds are adjusted annually for inflation.

Reasons for Change

The Committee believes that the individual income tax structure does not reduce tax liability by enough to reflect a family's reduced ability to pay taxes as family size increases. In part, this is because over the last 50 years the value of the dependent personal exemption has declined in real terms by over one-third. The Committee believes that a tax credit for families with dependent children will reduce the individual income tax burden of those families, will better recognize the financial responsibilities of raising dependent children, and will promote family values. In addition, the Committee believes that the credit is an appropriate vehicle to encourage taxpayers to save for their children's education.

Explanation of Provision

The bill allows taxpayers a maximum nonrefundable tax credit of $500 (pro rata amount of $250 in 1997 for children under the age of 13) for each qualifying child under the age of 17. For taxable years beginning after December 31, 2002, the credit is allowed for each qualifying child under the age of 18. A qualifying child is defined as an individual for whom the taxpayer can claim a dependency exemption and who is a son or daughter of the taxpayer (or a descendent of either), a stepson or stepdaughter of the taxpayer or an eligible foster child of the taxpayer. The credit amount is not indexed for inflation.

In the case of each child age 13 to 16 (13 to 17 for taxable years beginning after December 31, 2002), the credit is available only for amounts contributed to savings for education with respect to that child. Specifically, the credit is allowed only to the extent of the net amount deposited into a qualified tuition program or an education IRA (as described below) on or before April 15 of the year following the year with respect to which the credit is claimed. Generally, if amounts are withdrawn, other than for qualified educational expenses, on or before April 15 of the second year following the year with respect to which the credit is claimed, the credit is subject to a 100-percent recapture. Exceptions from the 100-percent recapture are provided in certain circumstances including withdrawals made due to death, disability, and receipt of certain scholarships by the beneficiary.

For taxpayers with AGI in excess of certain thresholds, the otherwise allowable child credit is phased out. Specifically, the otherwise allowable child credit is reduced by $25 for each $1,000 of modified AGI (or fraction thereof) in excess of the threshold ("the modified AGI phase-out"). 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). For married taxpayers filing joint returns, the threshold is $110,000. For taxpayers filing single or head of household returns, the threshold is $75,000. For married taxpayers filing separate returns, the threshold is $55,000. These thresholds are not indexed for inflation.

The maximum amount of the child credit for each taxable year can not exceed an amount equal to the excess of: (1) the taxpayer's regular income tax liability (net of applicable credits) over (2) the sum of the taxpayer's tentative minimum tax liability (determined without regard to the alternative minimum foreign tax credit) and one-half of the earned income credit allowed.

Effective Date

The child tax credit is effective July 1, 1997 , for taxable years beginning after December 31, 1996 .

B. Increase Exemption Amounts Applicable to Individual Alternative Minimum Tax (sec. 102 of the bill and sec. 55 of the Code)

Present Law

Present law imposes a minimum tax on an individual to the extent the taxpayer's minimum tax liability exceeds his or her regular tax liability. This alternative minimum tax is imposed upon individuals at rates of (1) 26 percent on the first $175,000 of alternative minimum taxable income in excess of a phased-out exemption amount and (2) 28 percent on the amount in excess of $175,000. The exemptions amounts are $45,000 in the case of married individuals filing a joint return and surviving spouses; $33,750 in the case of other unmarried individuals; and $22,500 in the case of married individuals filing a separate return. These exemption amounts are phased-out by an amount equal to 25 percent of the amount that the individual's alternative minimum taxable income exceeds a threshold amount. These threshold amounts are $150,000 in the case of married individuals filing a joint return and surviving spouses; $112,500 in the case of other unmarried individuals; and $75,000 in the case of married individuals filing a separate return, estates, and trusts. The exemption amounts, the threshold phase-out amounts, and the $175,000 break-point amount are not indexed for inflation.

Reasons for Change

The Committee is concerned about the projected trend that significantly more individuals without tax preferences or adjustments will become subject to the alternative minimum tax in the near future. This trend is projected, in part, because the exemption amounts applicable to the individual alternative minimum tax are not increased for inflation, while the standard deduction, personal exemptions, rate brackets and other features of the regular tax are so increased.

Explanation of Provision

For taxable years beginning after 2000 and before 2003, the exemption amounts of the individual alternative minimum tax are increased as follows in each year: (1) by $600 in the case of married individuals filing a joint return and surviving spouses; (2) by $450 in the case of other unmarried individuals; and (3) by $300 in the case of married individuals filing separate returns. For taxable years beginning after 2003, the exemption amounts of the individual alternative minimum tax are increased as follows in each year: (1) by $950 in the case of married individuals filing a joint return and surviving spouses; (2) by $700 in the case of other unmarried individuals; and (3) by $475 in the case of married individuals filing separate returns.

Effective Date

The provision is effective for taxable years beginning after December 31, 2000 .

TITLE II. EDUCATION TAX INCENTIVES

A. Tax Benefits Relating to Education Expenses

1. HOPE credit for higher education tuition expenses (sec. 201 of the bill and new sec. 25A of the Code)

Present Law

Deductibility of education expenses

Taxpayers generally may not deduct education and training expenses. However, a deduction for education expenses generally is allowed under section 162 if the education or training (1) maintains or improves a skill required in a trade or business currently engaged in by the taxpayer, or (2) meets the express requirements of the taxpayer's employer, or requirements of applicable law or regulations, imposed as a condition of continued employment (Treas. Reg. sec. 1.162-5). However, education expenses are not deductible if they relate to certain minimum educational requirements or to education or training that enables a taxpayer to begin working in a new trade or business. In the case of an employee, education expenses (if not reimbursed by the employer) may be claimed as an itemized deduction only if such expenses meet the above-described criteria for deductibility under section 162 and only to the extent that the expenses, along with other miscellaneous deductions, exceed 2 percent of the taxpayer's adjusted gross income ( AGI ).

Exclusion for employer-provided educational assistance

A special rule allows an employee to exclude from gross income for income tax purposes and from wages for employment tax purposes up to $5,250 annually paid by his or her employer for educational assistance (sec. 127). In order for the exclusion to apply certain requirements must be satisfied, including a requirement that not more than 5 percent of the amounts paid or incurred by the employer during the year for educational assistance under a qualified educational assistance program can be provided for the class of individuals consisting of more than 5-percent owners of the employer and the spouses or dependents of such more than 5-percent owners. This special rule for employer-provided educational assistance expires with respect to courses beginning after June 30, 1997 (and does not apply to graduate level courses beginning after June 30, 1996 ).

For purposes of the special exclusion, educational assistance means the payment by an employer of expenses incurred by or on behalf of the employee for education of the employee including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment. Educational assistance also includes the provision by the employer of courses of instruction for the employee (including books, supplies, and equipment). Educational assistance does not include tools or supplies which may be retained by the employee after completion of a course or meals, lodging, or transportation. The exclusion does not apply to any education involving sports, games, or hobbies.

In the absence of the special exclusion, employer-provided educational assistance is excludable from gross income and wages as a working condition fringe benefit (sec. 132(d)) only to the extent the education expenses would be deductible under section 162.

Exclusion for interest earned on savings bonds

Another special rule (sec. 135) provides that interest earned on a qualified U.S. Series EE savings bond issued after 1989 is excludable from gross income if the proceeds of the bond upon redemption do not exceed qualified higher education expenses paid by the taxpayer during the taxable year.¹ "Qualified higher education expenses" include tuition and fees (but not room and board expenses) required for the enrollment or attendance of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer at certain colleges, universities, or vocational schools. The exclusion provided by section 135 is phased out for certain higher-income taxpayers, determined by the taxpayer's modified AGI during the year the bond is redeemed. For 1996, the exclusion was phased out for taxpayers with modified AGI between $49,450 and $64,450 ($74,200 and $104,200 for joint returns). To prevent taxpayers from effectively avoiding the income phaseout limitation through issuance of bonds directly in the child's name, section 135(c)(1)(B) provides that the interest exclusion is available only with respect to U.S. Series EE savings bonds issued to taxpayers who are at least 24 years old.

Qualified scholarships

Section 117 excludes from gross income amounts received as a qualified scholarship by an individual who is a candidate for a degree and used for tuition and fees required for the enrollment or attendance (or for fees, books, supplies, and equipment required for courses of instruction) at a primary, secondary, or post-secondary educational institution. The tax-free treatment provided by section 117 does not extend to scholarship amounts covering regular living expenses, such as room and board. There is, however, no dollar limitation for the section 117 exclusion, provided that the scholarship funds are used to pay for tuition and required fees. In addition to the exclusion for qualified scholarships, section 117 provides an exclusion from gross income for qualified tuition reductions for education below the graduate level provided to employees of certain educational organizations. Section 117(c) specifically provides that the exclusion for qualified scholarships does not apply to any amount received by a student that represents payment for teaching, research, or other services by the student required as a condition for receiving the scholarship.