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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
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.2
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
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.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
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
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 teacher26
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
.
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