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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.

Student loan forgiveness

In the case of an individual, section 108(f) provides that gross income subject to Federal income tax does not include any amount from the forgiveness (in whole or in part) of certain student loans, provided that the forgiveness is contingent on the student's working for a certain period of time in certain professions for any of a broad class of employers (e.g., providing health care services to a nonprofit organization). Student loans eligible for this special rule must be made to an individual to assist the individual in attending an education institution that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where its education activities are regularly carried on. Loan proceeds may be used not only for tuition and required fees, but also to cover room and board expenses (in contrast to tax-free scholarships under section 117, which are limited to tuition and required fees). In addition, the loan must be made by (1) the United States (or an instrumentality or agency thereof), (2) a State (or any political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a State, county, or municipal hospital and whose employees have been deemed to be public employees under State law, or (4) an educational organization that originally received the funds from which the loan was made from the United States, a State, or a tax-exempt public benefit corporation. Thus, loans made with private, nongovernmental funds are not qualifying student loans for purposes of the section 108(f) exclusion. As with section 117, there is no dollar limitation for the section 108(f) exclusion.

Qualified State prepaid tuition programs

Reasons for Change

To assist low- and middle-income families and students in paying for the costs of post-secondary education, the Committee believes that taxpayers should be allowed to a claim a credit (referred to as a "HOPE" credit) against Federal income taxes for certain tuition and related expenses incurred during a student's first two years of attendance (on at least a half-time basis) at a college, university, or certain vocational schools.

Explanation of Provision

In general

Under the bill, individual taxpayers are allowed to claim a non-refundable HOPE credit against Federal income taxes up to $1,500 per student per year for 50 percent of qualified tuition and related expenses (but not room and board expenses) paid for the first two years of the student's post-secondary education in a degree or certificate program. In the case of a student attending a community college (i.e., a so-called "two-year" or "junior" college) or vocational school, the maximum HOPE credit equals 75 percent (rather than 50 percent) of qualified tuition and related expenses, subject to a maximum credit of $1,500 per student per year.³ The qualified tuition and related expenses must be incurred on behalf of the taxpayer, the taxpayer's spouse, or a dependent. The HOPE credit will be available with respect to an individual student for two taxable years, provided that the student has not completed the first two years of post-secondary education. Beginning in 1999, the maximum HOPE credit amount of $1,500 will be indexed for inflation, rounded down to the closest multiple of $50.⁴

The HOPE credit amount that a taxpayer may otherwise claim will be phased out ratably for taxpayers with modified AGI between $40,000 and $50,000 ($80,000 and $100,000 for joint returns). Modified AGI includes amounts otherwise excluded with respect to income earned abroad (or income from Puerto Rico or U.S. possessions). Beginning in 2001, the income phase-out ranges will be indexed for inflation, rounded down to the closest multiple of $5,000.

The HOPE credit will be available for the taxable year in which the expenses are paid, subject to the requirement that the education commence or continue during that year or during the first three months of the next year. Qualified tuition expenses paid with the proceeds of a loan generally will be eligible for the HOPE credit (rather than repayment of the loan itself).⁵

Dependent students

A taxpayer may claim the HOPE credit with respect to an eligible student who is not the taxpayer or the taxpayer's spouse (e.g., in cases where the student is the taxpayer's child) only if the taxpayer claims the student as a dependent for the taxable year for which the credit is claimed. If a student is claimed as a dependent by the parent or other taxpayer, the eligible student him- or herself is not entitled to claim a HOPE credit for that taxable year on the student's own tax return. If a parent (or other taxpayer) claims a student as a dependent, any qualified tuition and related expenses paid by the student are treated as paid by the parent (or other taxpayer) for purposes of the provision.

Election of HOPE credit or proposed exclusion for distributions from a qualified tuition program or education IRA

For a taxable year, a taxpayer may elect with respect to an eligible student either the HOPE credit (assuming that all the requirements of the HOPE credit are satisfied) or the exclusion for distributions from a qualified tuition program or education IRA used to cover qualified higher education expenses (described below).⁶ If a child is not claimed as a dependent by the parent (or by any other taxpayer) for the taxable year, then the child him- or herself will have the option of electing either the HOPE credit or proposed exclusion for distributions from a qualified tuition program or education IRA used to cover qualified higher education expenses.

Qualified tuition and related expenses

The HOPE credit is available for "qualified tuition and related expenses," meaning tuition, fees, and books required for the enrollment or attendance of an eligible student at an eligible educational institution. Charges and fees associated with meals, lodging, student activities, athletics, insurance, transportation, and similar personal, living or family expenses are not eligible for the HOPE credit. The expenses of education involving sports, games, or hobbies are not qualified tuition expenses unless this education is part of the student's degree program.

Qualified tuition and related expenses generally include only out-of-pocket expenses. Qualified tuition expenses do not include expenses covered by educational assistance that is not required to be included in the gross income of either the student or the taxpayer claiming the credit. Thus, total tuition and related expenses are reduced by scholarship or fellowship grants excludable from gross income under present-law section 117, as well as any other tax-free educational benefits, such as employer-provided educational assistance that is excludable from the employee's gross income under section 127. No reduction of qualified tuition expenses is required for a gift, bequest, devise, or inheritance within the meaning of section 102(a). Under the bill, a HOPE credit will not be allowed with respect to any education expenses for which a deduction is claimed under section 162 or any other section of the Code.⁷

Eligible student

An eligible student is an individual who is enrolled in a degree, certificate, or other program (including a program of study abroad approved for credit by the institution at which such student is enrolled) leading to a recognized educational credential at an eligible educational institution. The student must pursue a course of study on at least a half-time basis. (In other words, for at least one academic period which begins during the taxable year, the student must carry at least one-half the normal full-time work load for the course of study the student is pursuing.) An eligible student is required to have earned a high-school diploma (or equivalent degree) prior to attending any post-secondary classes with respect to which a HOPE credit is claimed, with the exception of students who did not receive a high-school degree by reason of enrollment in an early admission program to an eligible educational institution. An eligible student may not have been convicted of a Federal or State felony consisting of the possession or distribution of a controlled substance.

Eligible educational institution

Under the bill, eligible educational institutions are defined by reference to section 481 of the Higher Education Act of 1965. Such institutions generally are accredited post-secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also are eligible educational institutions. The institution must be eligible to participate in Department of Education student aid programs.

Regulations

The Secretary of the Treasury (in consultation with the Secretary of Education) will have authority to issue regulations to implement the provision, including regulations providing appropriate rules for recordkeeping and information reporting. These regulations will address the information reports that eligible educational institutions will be required to file to assist students and the IRS in calculating the amount of the HOPE credit potentially available.

Effective Date

The provision applies to expenses paid after December 31, 1997 , for education furnished in academic periods beginning after such date.

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)

Present Law

Deductibility of education expenses

Exclusion for employer-provided educational assistance

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.⁸ "Qualified higher education expenses" include tuition andfees (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

Student loan forgiveness

Qualified State prepaid tuition programs

Section 529 (enacted as part of the Small Business Job Protection Act of 1996) provides tax-exempt status to "qualified State tuition programs," meaning certain programs established and maintained by a State (or agency or instrumentality thereof) under which persons may (1) purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the beneficiary to a waiver or payment of qualified higher education expenses of the beneficiary, or (2) make contributions to an account that is established for the purpose of meeting qualified higher education expenses of the designated beneficiary of the account. "Qualified higher education expenses" are defined as tuition, fees, books, supplies, and equipment required for the enrollment or attendance at a college or university (or certain vocational schools). Qualified higher education expenses do not include room and board expenses. Section 529 also provides that no amount shall be included in the gross income of a contributor to, or beneficiary of, a qualified State tuition program with respect to any distribution from, or earnings under, such program, except that (1) amounts distributed or educational benefits provided to a beneficiary (e.g., when the beneficiary attends college) will be included in the beneficiary's gross income (unless excludable under another Code section) to the extent such amounts or the value of the educational benefits exceed contributions made on behalf of the beneficiary, and (2) amounts distributed to a contributor (e.g., when a parent receives a refund) will be included in the contributor's gross income to the extent such amounts exceed contributions made by that person.⁹

Contributions made to a qualified State tuition program are treated as incomplete gifts for Federal gift tax purposes (sec. 529(c)(2)). Thus, any Federal gift tax consequences are determined at the time that a distribution is made from an account under the program. The waiver (or payment) of qualified higher education expenses of a designated beneficiary by (or to) an educational institution under a qualified State tuition program is treated as a qualified transfer for purposes of present-law section 2503(e). Amounts contributed to a qualified State tuition program (and earnings thereon) are includible in the contributor's estate for Federal estate tax purposes in the event that the contributor dies before such amounts are distributed under the program (sec. 529(c)(4)).

Individual retirement arrangements ("IRAs")

An individual may make deductible contributions to an individual retirement arrangement ("IRA") for each taxable year up to the lesser of $2,000 or the amount of the individual's compensation for the year if the individual is not an active participant in an employer-sponsored qualified retirement plan (and, if married, the individual's spouse also is not an active participant). Contributions may be made to an IRA for a taxable year up to April 15th of the following year. An individual who makes excess contributions to an IRA, i.e., contributions in excess of $2,000, is subject to an excise tax on such excess contributions unless they are distributed from the IRA before the due date for filing the individual's tax return for the year (including extensions). If the individual (or his or her spouse, if married) is an active participant, the $2,000 limit is phased out between $40,000 and $50,000 of adjusted gross income (" AGI ") for married couples and between $25,000 and $35,000 of AGI for single individuals.

Present law permits individuals to make nondeductible contributions (up to $2,000 per year) to an IRA to the extent an individual is not permitted to (or does not) make deductible contributions. Earnings on such contributions are includible in gross income when withdrawn.

An individual generally is not subject to income tax on amounts held in an IRA, including earnings on contributions, until the amounts are withdrawn from the IRA. Amounts withdrawn from an IRA are includible in gross income (except to the extent of nondeductible contributions). In addition, a 10-percent additional tax generally applies to distributions from IRAs made before age 59-1/2, unless the distribution is made (1) on account of death or disability, (2) in the form of annuity payments, (3) for medical expenses of the individual and his or her spouse and dependents that exceed 7.5 percent of AGI , or (4) for medical insurance of the individual and his or her spouse and dependents (without regard to the 7.5 percent of AGI floor) if the individual has received unemployment compensation for at least 12 weeks, and the withdrawal is made in the year such unemployment compensation is received or the following year.

Reasons for Change

To encourage families and students to save for future education expenses, the Committee believes that tax-exempt status should be granted to certain prepaid tuition programs operated by States or private educational institutions and to certain education investment accounts (referred to as "education IRAs") established by taxpayers on behalf of future students. The Committee further believes that distributions from such programs and accounts should not be subject to Federal income tax to the extent that the amounts distributed are used to pay for qualified higher education expenses of an undergraduate or graduate student who is attending a college, university, or certain vocational schools on at least a half-time basis.

Explanation of Provision

In general

Under the bill, amounts distributed from qualified tuition programs and certain education investment accounts (referred to as "education IRAs") are excludable from gross income to the extent that the amounts distributed do not exceed qualified higher education expenses of an eligible student incurred during the year the distribution is made.¹⁰ An exclusion is not allowed under the bill with respect to an otherwise eligible student if the HOPE credit (as described previously) is claimed with respect to that student for the taxable year the distribution is made.¹¹

Under the bill, distributions from a qualified tuition program or education IRA generally will be deemed to consist of distributions of principal (which, under all circumstances, are excludable from gross income) and earnings (which may be excludable from gross income under the bill) by applying the ratio that the aggregate amount of contributions to the program or account for the beneficiary bears to the total balance (or value) of the program or account for the beneficiary at the time the distribution is made.¹² If the qualified higher education expenses of the student for the year are at least equal to the total amount of the distribution (i.e., principal and earnings combined) from a qualified tuition program or education IRA, then the earnings in their entirety will be excludable from gross income. If, on the other hand, the qualified higher education expenses of the student for the year are less than the total amount of the distribution (i.e., principal and earnings combined) from a qualified tuition program or education IRA, then the qualified higher education expenses will be deemed to be paid from a pro-rata share of both the principal and earnings components of the distribution. Thus, in such a case, only a portion of the earnings will be excludable under the bill (i.e., a portion of the earnings based on the ratio that the qualified higher education expenses bear to the total amount of the distribution) and the remaining portion of the earnings will be includible in the gross income of the distributee.¹³

Eligible students

To be an eligible student under the bill, an individual must be at least a half-time student in a degree or certificate undergraduate or graduate program at an eligible educational institution. For this purpose, a student is at least a half-time student if he or she is carrying at least one-half the normal full-time work load for the course of study the student is pursuing. An eligible student may not have been convicted of a Federal or State felony consisting of the possession or distribution of a controlled substance.

Eligible educational institution

Under the bill, eligible educational institutions are defined by reference to section 481 of the Higher Education Act of 1965. Such institutions generally are accredited post-secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, a graduate-level or professional degree, or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also are eligible institutions. The institution must be eligible to participate in Department of Education student aid programs.

Qualified higher education expenses

Under the bill, the definition of "qualified higher education expenses" include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible education institution, as well as room and board expenses (meaning the minimum room and board allowance applicable to the student as determined by the institution in calculating costs of attendance for Federal financial aid programs under sec. 472 of the Higher Education Act of 1965) for any period during which the student is at least a half-time student. Qualified higher education expenses include expenses with respect to undergraduate or graduate-level courses.

Qualified higher education expenses generally include only out-of-pocket expenses. Qualified higher education expenses do not include expenses covered by educational assistance that is not required to be included in the gross income of either the student or the taxpayer claiming the credit. Thus, total qualified higher education expenses are reduced by scholarship or fellowship grants excludable from gross income under present-law section 117, as well as any other tax-free educational benefits, such as employer-provided educational assistance that is excludable from the employee's gross income under section 127. In addition, qualified higher education expenses do not include expenses paid with amounts that are excludible under section 135. No reduction of qualified higher education expenses is required for a gift, bequest, devise, or inheritance within the meaning of section 102(a). If education expenses for a taxable year are deducted under section 162 or any other section of the Code, then such expenses are not qualified higher education expenses under the bill.

Qualified tuition programs and education IRAs

Under the bill, a "qualified tuition program" means any qualified State-sponsored tuition program, defined under section 529 (as modified by the bill), as well as any program established and maintained by one or more eligible educational institutions (which could be private institutions) that satisfy the requirements under section 529 (other than present-law State ownership rule). An "education IRA" means a trust (or custodial account) which is created or organized in the United States exclusively for the purpose of paying the qualified higher education expenses of the account holder and which satisfies certain other requirements.

Contributions to qualified tuition programs or education IRAs may be made only in cash.¹⁴ Such contributions may not be made after the designated beneficiary or accountholder reaches age 18. Annual contributions to a qualified tuition program not maintained by a State (i.e., a qualified tuition program operated by one or more private schools) or to an education IRA are limited to $2,000 per beneficiary or account holder, plus the amount of any child credit (as provided for by the bill and described above) that is allowed for the taxable year with respect to the beneficiary or account holder.¹⁵ Thus, in the case of any child with respect to whom the maximum $500 child credit is allowed for the taxable year, the contribution limit with respect to such child for the year will be $2,500.¹⁶ Trustees of qualified tuition programs not maintained by a State and trustees of education IRAs are prohibited from accepting contributions to any account on behalf of a beneficiary in excess of $2,500 for any year (except in cases involving certain tax-free rollovers, as described below).¹⁷

If any balance remaining in an education IRA is not distributed by the time that the account holder becomes 30 years old, then the account will be deemed to be an IRA Plus account (as provided for by the bill and described below) established on behalf of the same account holder.¹⁸ The bill allows (but does not require) tax-free transfers or rollovers of account balances from a qualified tuition program to an IRA Plus account when the beneficiary becomes 30 years old, provided that the funds from the qualified tuition program account are deposited in the IRA Plus account within 60 days after being distributed from the qualified tuition program.¹⁹ In addition, the bill allows tax-free transfers or rollovers of credits or account balances from one qualified tuition program or education IRA account benefiting one beneficiary to another program or account benefiting another beneficiary (as well as redesignations of the named beneficiary), provided that the new beneficiary is a member of the family of the old beneficiary.²⁰

Qualified tuition programs and education IRAs (as separate legal entities) will be exempt from Federal income tax, other than taxes imposed under the present-law unrelated business income tax (UBIT) rules.²¹

Under the bill, an additional 10-percent penalty tax will be imposed on any distribution from a qualified tuition program not maintained by a State or from an education IRA to the extent that the distribution exceeds qualified higher education expenses incurred by the taxpayer (and is not made on account of the death, disability, or scholarship received by the designated beneficiary or account holder).²²

Estate and gift tax treatment

Contributions to qualified tuition programs and education IRAs will not be considered taxable gifts for Federal gift tax purposes, and in no event will distributions from a qualified tuition programs or education IRAs be treated as a taxable gifts.²³ For estate tax purposes, the value of any interest in a qualified tuition program or education IRA will be includible in the estate of the designated beneficiary. In no event will such an interest be includible in the estate of the contributor.

Effective Date

The provision applies to distributions made, and qualified higher education expenses paid, after December 31, 1997 , for education furnished in academic periods beginning after such date. The provisions governing contributions to, and the tax-exempt status of, qualified tuition plans and education IRAs generally apply after December 31, 1997 . The gift tax provisions are effective for contributions (or transfers) made after the date of enactment, and the estate tax provisions are effective for decedents dying after June 8, 1997 .

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

Present Law

The Tax Reform Act of 1986 repealed the deduction for personal interest. Student loan interest generally is treated as personal interest and thus is not allowable as an itemized deduction from income.

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). 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 relate to the employee's current job and only to the extent that the expenses, along with other miscellaneous deductions, exceed two percent of the taxpayer's adjusted gross income ( AGI ).

Reasons for Change

The Committee is aware that many students incur considerable debt in the course of obtaining undergraduate and graduate education. The Committee believes that permitting a deduction for interest on certain student loans will help to ease the financial burden that such obligations represent.

Explanation of Provision

Under the bill, certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses, up to a maximum deduction of $2,500 per year. The deduction is allowed only with respect to interest paid on a qualified education loan during the first 60 months in which interest payments are required. Months during which the qualified education loan is in deferral or forbearance do not count against the 60-month period. No deduction is allowed to an individual if that individual is claimed as a dependent on another taxpayer's return for the taxable year. Beginning in 1999, the maximum deduction of $2,500 is indexed for inflation, rounded down to the closest multiple of $50.

A qualified education loan generally is defined as any indebtedness incurred to pay for the qualified higher education expenses of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred in attending (1) post-secondary educational institutions and certain vocational schools defined by reference to section 481 of the Higher Education Act of 1965, or (2) institutions conducting internship or residency programs leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility conducting postgraduate training. Qualified higher education expenses are defined as the student's cost of attendance as defined in section 472 of the Higher Education Act of 1965 (generally, tuition, fees, room and board, and related expenses), reduced by (1) any amount excluded from gross income under section 135 (i.e., United States savings bonds used to pay higher education tuition and fees), (2) any amount distributed from a qualified tuition program or education investment account and excluded from gross income (under the provision described above), and (3) the amount of any scholarship or fellowship grants excludable from gross income under present-law section 117, as well as any other tax-free educational benefits, such as employer-provided educational assistance that is excludable from the employee's gross income under section 127. Such expenses must be paid or incurred within a reasonable period before or after the indebtedness is incurred, and must be attributable to a period when the student is at least a half-time student.

The deduction is phased out ratably for taxpayers with modified adjusted gross income ( AGI ) between $40,000 and $50,000 ($80,000 and $100,000 for joint returns). Modified AGI includes amounts otherwise excluded with respect to income earned abroad (or income from Puerto Rico or U.S. possessions), and is calculated after application of section 86 (income inclusion of certain Social Security benefits), section 219 (deductible IRA contributions), and section 469 (limitation on passive activity losses and credits).²⁴ Beginning in 2001, the income phase-out ranges are indexed for inflation, rounded down to the closest multiple of $5,000.

Any person in a trade or business or any governmental agency that receives $600 or more in qualified education loan interest from an individual during a calendar year must provide an information report on such interest to the IRS and to the payor.

Effective Date

The provision is effective for payments of interest due after December 31, 1996 , on any qualified education loan. Thus, in the case of already existing qualified education loans, interest payments qualify for the deduction to the extent that the 60-month period has not expired. For purposes of counting the 60 months, any qualified education loan and all refinancing (that is treated as a qualified education loan) of such loan are treated as a single loan.

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

Present Law

An individual may make deductible contributions to an individual retirement arrangement ("IRA") for each taxable year up to the lesser of $2,000 or the amount of the individual's compensation for the year if the individual is not an active participant in an employer-sponsored qualified retirement plan (and, if married, the individual's spouse also is not an active participant). In the case of a married couple, deductible IRA contributions of up to $2,000 can be made for each spouse (including, for example, a homemaker who does not work outside the home) if the combined compensation of both spouses is at least equal to the contributed amount.

If the individual (or the individual's spouse) is an active participant in an employer-sponsored retirement plan, the $2,000 deduction limit is phased out over certain adjusted gross income (" AGI ") levels. The limit is phased out between $40,000 and $50,000 of AGI for married taxpayers, and between $25,000 and $35,000 of AGI for single taxpayers. An individual may make nondeductible IRA contributions to the extent the individual is not permitted to make deductible IRA contributions. Contributions cannot be made to an IRA after age 70-1/2.

Amounts held in an IRA are includible in income when withdrawn (except to the extent the withdrawal is a return of nondeductible contributions). Amounts withdrawn prior to attainment of age 59-1/2 are subject to an additional 10-percent early withdrawal tax, unless the withdrawal is due to death or disability, is made in the form of certain periodic payments, is used to pay medical expenses in excess of 7.5 percent of AGI , or is used to purchase health insurance of an unemployed individual.

Reasons for Change

The Committee believes that it is both appropriate and important to allow individuals to withdraw amounts from their IRAs for purposes of paying higher education expenses without incurring an additional 10-percent early withdrawal tax.

Explanation of Provision

The bill provides that the 10-percent early withdrawal tax does not apply to distributions from IRAs (including IRA Plus accounts created by the bill) if the taxpayer uses the amounts to pay qualified higher education expenses (including those related to graduate-level courses) of the taxpayer, the taxpayer's spouse, or any child, or grandchild of the taxpayer or the taxpayer's spouse.

The penalty-free withdrawal is available for "qualified higher education expenses," meaning tuition, fees, books, supplies, equipment required for enrollment or attendance, and room and board at a post-secondary educational institution (defined by reference to sec 481 of the Higher Education Act of 1965). Qualified higher education expenses are reduced by any amount excludable from gross income under section 135 relating to the redemption of a qualified U.S. savings bond and certain scholarships and veterans benefits.

Effective Date

The provision is effective for distributions after December 31, 1997 , with respect to expenses paid after such date for education furnished in academic periods beginning after such date.

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)

Present Law

Under present law, an employee's gross income and wages do not include amounts paid or incurred by the employer for educational assistance provided to the employee if such amounts are paid or incurred pursuant to an educational assistance program that meets certain requirements. This exclusion is limited to $5,250 of educational assistance with respect to an individual during a calendar year. The exclusion does not apply to graduate level courses beginning after June 30, 1996 . The exclusion expires with respect to courses beginning after June 30, 1997 .²⁵ In the absence of the exclusion, educational assistance is excludable from income only if it is related to the employee's current job.

Reasons for Change

The Committee believes that the exclusion for employer-provided educational assistance has enabled millions of workers to advance their education and improve their job skills without incurring additional taxes and a reduction in take-home pay. In addition, the exclusion lessens the complexity of the tax laws. Without the special exclusion, a worker receiving educational assistance from his or her employer is subject to tax on the assistance, unless the education is related to the worker's current job. Because the determination of whether particular educational assistance is job-related is based on the facts and circumstances, it may be difficult to determine with certainty whether the educational assistance is excludable from income. This uncertainty may lead to disputes between taxpayers and the Internal Revenue Service.

The Committee believes that reinstating the exclusion for graduate-level employer-provided educational assistance will enable more individuals to seek higher education, and that a permanent extension of the exclusion is important. The past experience of allowing the exclusion to expire and subsequently retroactively extending it has created burdens for employers and employees. Employees may have difficulty planning for their educational goals if they do not know whether their tax bills will increase. For employers, the fits and starts of the legislative history of the provision have caused severe administrative problems. Uncertainty about the exclusion's future may discourage some employers from providing educational benefits.

Explanation of Provision

The bill permanently extends the exclusion for employer-provided educational assistance. Beginning in 1997, the exclusion applies to graduate-level courses as well as undergraduate courses.

Effective Date

The extension of the exclusion with respect to undergraduate courses applies to taxable years beginning after December 31, 1996 . The extension of the exclusion to graduate-level courses applies to courses of instruction beginning after December 31, 1996 .

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)

Present Law

Interest on State and local government bonds generally is excluded from income if the bonds are issued to finance activities carried out and paid for with revenues of these governments. Interest on bonds issued by these governments to finance activities of other persons, e.g., private activity bonds, is taxable unless a specific exception is included in the Code. One such exception is for private activity bonds issued to finance activities of private, charitable organizations described in Code section 501(c)(3) ("section 501(c)(3) organizations") when the activities do not constitute an unrelated trade or business.

Present law treats section 501(c)(3) organizations as private persons; thus, bonds for their use may only be issued as private activity "qualified 501(1)(3) bonds," subject to the restrictions of Code section 145. The most significant of these restrictions limits the amount of outstanding bonds from which a section 501(c)(3) organization may benefit to $150 million. In applying this "$150 million limit," all section 501(c)(3) organizations under common management or control are treated as a single organization. The limit does not apply to bonds for hospital facilities, defined to include only acute care, primarily inpatient, organizations.

Reasons for Change

The Committee believes a distinguishing feature of American society is the singular degree to which the United States maintains a private, non-profit sector of private higher education and other charitable institutions in the public service. The Committee believes it is important to assist these private institutions in their advancement of the public good. The Committee finds particularly inappropriate the restrictions of present law which place these section 501(c)(3) organizations at a financial disadvantage relative to substantially identical governmental institutions. For example, a public university generally has unlimited access to tax-exempt bond financing, while a private, non-profit university is subject to a $150 million limitation on outstanding bonds from which it may benefit. The Committee is concerned that this and other restrictions inhibit the ability of America 's private, non-profit institutions to modernize their educational facilities. The Committee believes the tax-exempt bond rules should treat more equally State and local governments and those private organizations which are engaged in similar actions advancing the public good.

Explanation of Provision

The $150 million limit is repealed for bonds issued after the date of enactment to finance capital expenditures incurred after date of the enactment.

Effective Date

The provision is effective for bonds issued after the date of enactment to finance capital expenditures incurred after the date of enactment.

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

Present Law

Generally, all arbitrage profits earned on investments unrelated to the purpose of the borrowing ("nonpurpose investments") when such earnings are permitted must be rebated to the Federal Government.

An exception is provided for bonds issued by governmental units having general taxing powers if the governmental unit (and all subordinate units) issues $5 million or less of governmental bonds during the calendar year ("the small-issuer exception"). This exception does not apply to private activity bonds.

Reasons for Change

The Committee recognizes the need for additional monies to address the needs of our crumbling public school infrastructure. It believes that this provision will reduce the compliance costs of issuers of tax-exempt debt issued for public school construction.

Explanation of Provision

The bill provides that up to $5 million dollars of bonds used to finance public school capital expenditures incurred after December 31, 1997 , are excluded from application of the present-law $5 million limit. Thus, small issuers will continue to benefit from the small issue exception from arbitrage rebate if they issue no more than $10 million in governmental bonds per calendar year and no more than $5 million of the bonds is used to finance expenditures other than for public school capital expenditures.

Effective Date

The provision is effective for bonds issued after December 31, 1997 .

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)

Present Law

In general, taxpayers are not permitted to deduct education expenses. However, employees may deduct the cost of certain work-related education. For costs to be deductible, the education must either be required by the taxpayer's employer or by law to retain taxpayer's current job or be necessary to maintain or improve skills required in the taxpayer's current job. Expenses incurred for education that is necessary to meet minimum education requirements of an employee's present trade or business or that can qualify an employee for a new trade or business are not deductible.

An employee is allowed to deduct work-related education and other business expenses only to the extent such expenses (together with other miscellaneous itemized deductions) exceed 2 percent of the taxpayer's adjusted gross income.

Reasons for Change

The Committee believes that, in addition to making higher education accessible and affordable through various tax incentives, it is important to encourage elementary and secondary school teachers to obtain the necessary academic skills and training to prepare their students successfully to pursue higher education.

Explanation of Provision

Under the bill, qualified professional development expenses incurred by an elementary or secondary school teacher ²⁶ with respect to certain courses of instruction are not subject to the 2 percent floor on miscellaneous itemized deductions. Qualified professional development expenses mean expenses for tuition, fees, books, supplies, equipment and transportation required for enrollment or attendance in a qualified course, provided that such expenses are otherwise deductible under present law section 162. A qualified course of instruction means a course at an institution of higher education (as defined in section 481 of the Higher Education Act of 1965) which is part of a program of professional development that is approved and certified by the appropriate local educational agency as furthering the individual's teaching skills. Effective Date

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