Revenue Reconciliation Act
page10
 
3.
Qualified State tuition plans (sec. 1401(h)(1) of
the bill and sec. 529 of the Code)
Present
Law
Section 529 provides tax-exempt status to certain
qualified State tuition programs and provides rules
governing the tax treatment of distributions from
such programs. Section 529 was effective on the date
of enactment of the Small Business Job Protection
Act of 1996, but a special transition rule provides
that if (1) a State maintains (on the date of
enactment) a program under which persons may
purchase tuition credits on behalf of, or make
contributions for educational expenses of, a
designated beneficiary, and (2) such program meets
the requirements of a qualified State tuition
program before the later of (a) one year after the
date of enactment, or (b) the first day of the first
calendar quarter after the close of the first
regular session of the State legislature that begins
after the date of enactment, then the provisions of
the Small Business Act will apply to contributions
(and earnings allocable thereto) made before the
date the program meets the requirements of a
qualified State tuition program, without regard to
whether the requirements of a qualified State
tuition program are satisfied with respect to such
contributions and earnings (e.g., even if the
interest in the tuition or educational savings
program covers not only qualified higher education
expenses but also room and board expenses).
Explanation
of Provision
The provision clarifies that, if a State program
under which persons may purchase tuition credits
comes into compliance with the requirements of a
"qualified State tuition program" as
defined in section 529 within a specified time
period, then such program will be treated as a
qualified State tuition program with respect to any
contributions (and earnings allocable thereto) made
pursuant to a contract entered into under the
program before the date on which the program comes
into compliance with the present-law requirements of
a qualified State tuition program under section 529.
4.
Adoption credit (sec. 1401(h)(2) of the bill, sec.
1807 of the Small Business Act, and sec. 23 of the
Code)
Present
Law
Taxpayers are allowed a maximum nonrefundable tax
credit against income tax liability of $5,000 per
child for qualified adoption expenses ($6,000 in the
case of certain domestic adoptions) paid or incurred
by the taxpayer. Qualified adoption expenses are
reasonable and necessary adoption fees, court costs,
attorneys' fees, and other expenses that are
directly related to the legal adoption of an
eligible child.
Otherwise qualified adoption expenses paid or
incurred in one taxable year are not taken into
account for purposes of the credit until the next
taxable year unless the expenses are paid or
incurred in the year the adoption becomes final.
Explanation
of Provision
The technical correction conforms the treatment of
otherwise qualified adoption expenses paid or
incurred in years after the year the adoption
becomes final to the treatment of expenses paid or
incurred in the year the adoption becomes final.
Another technical correction repeals as
"deadwood" an ordering rule inadvertently
included in the credit.
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)
Present
Law
The adoption tax credit and the exclusion for
employer provided adoption assistance are generally
phased out ratably for taxpayers with modified
adjusted gross income (AGI) above $75,000, and are
fully phased out at $115,000 of modified AGI. For
these purposes modified AGI is computed by
increasing the taxpayer's AGI by the amount
otherwise excluded from gross income under Code
sections 911, 931, or 933 (relating to the exclusion
of income of
U.S.
citizens or residents living abroad; residents of
Guam
,
American Samoa
, and the Northern Mariana Islands, and residents of
Puerto Rico
, respectively).
Explanation
of Provision
The technical correction conforms the phaseout range
of the adoption assistance exclusion to the phaseout
range of the credit for qualified adoption expenses.
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)
a.
Additional tax on distributions not used for medical
purposes
Present
Law
Under present law, distributions from a medical
savings account ("MSA") that are not used
for medical expenses are includible in gross income
and subject to a 15-percent additional tax unless
the distribution is after age 65 or death or on
account of disability. A similar additional
10-percent tax is imposed on early withdrawals from
individual retirement arrangements and qualified
pension plans. The 10-percent additional tax on
early withdrawals is not treated as tax liability
for purposes of the minimum tax. No such rule
applies to the 15-percent additional tax applicable
to MSAs.
Explanation
of Provision
The bill provides that the 15-percent tax on
nonmedical withdrawals from an MSA is not treated as
tax liability for purposes of the minimum tax.
b.
Definition of permitted coverage
Present
Law
Under present law, in order to be eligible to have
an MSA an individual must be covered under a high
deductible health plan and no other health plan,
except for plans that provide certain permitted
coverage. Medicare supplemental plans are one of the
types of permitted coverage, even though an
individual covered by Medicare is not eligible to
have an MSA.
Explanation
of Provision
Under the bill, Medicare supplemental plans would be
deleted from the types of permitted coverage an
individual may have and still qualify for an MSA.
c.
Taxation of distributions
Present
Law
Under present law, in order to be eligible to have a
medical savings account ("MSA") an
individual must be covered under a high deductible
health plan and no other health plan, except for
plans that provide certain permitted coverage and
must be either (1) a self-employed individual, or
(2) employed by a small employer. Distributions from
an MSA for the medical expenses of the MSA account
holder and his or her spouse or dependents are
generally excludable from income. However, in any
year for which a contribution is made to an MSA,
withdrawals from the MSA are excludable from income
only if the individual for whom the expenses were
incurred was an eligible individual for the month in
which the expenses were incurred. This rule is
designed to ensure that MSAs are used in conjunction
with a high deductible plan and that they are not
primarily used by other individuals who have health
plans that are not high deductible plans.
Explanation
of Provision
The bill would clarify that, in any year for which a
contribution is made to an MSA, withdrawals from the
MSA are excludable from income only if the
individual for whom the expenses were incurred was
covered under a high deductible health plan (and no
other health plan except for plans that provide
certain permitted coverage) in the month in which
the expenses were incurred. That is, the individual
for whom the expenses were incurred does not have to
be self employed or employed by a small employer in
order for a withdrawal for medical expenses to be
excludible.
d.
Penalty for failure to provide required reports
Present
Law
Trustees of an MSA are required to provide such
reports to the Secretary and the account holder as
the Secretary may require. A penalty of $50 applies
with respect to each failure to provide a required
report. Under present law, separate penalties apply
to information returns required by the Code.
Explanation
of Provision
The bill provides that the $50 penalty does not
apply to information returns.
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)
Present
Law
Under the long-term care insurance rules, a
chronically ill individual is one who has been
certified within the previous 12 months by a
licensed health care practitioner as (1) being
unable to perform (without substantial assistance)
at least 2 activities of daily living for at least
90 days due to a loss of functional capacity, (2)
having a level of disability similar (as determined
under regulations prescribed by the Secretary in
consultation with the Secretary of Health and Human
Services) to the level of disability described
above, or (3) requiring substantial supervision to
protect the individual from threats to health and
safety due to severe cognitive impairment. A
contract is not treated as a qualified long-term
care insurance contract unless the determination of
whether an individual is a chronically ill
individual takes into account at least 5 of such
activities.
Explanation
of Provision
The technical correction clarifies that the
five-activity requirement --i.e., that the number of
activities of daily living that are taken into
account not be less than five --applies only for
purposes of the first of three alternative
definitions of a chronically ill individual (Code
sec. 7702B(c)(2)(A)(i)), that is, by reason of the
individual being unable to perform (without
substantial assistance) at least 2 activities of
daily living for at least 90 days due to a loss of
functional capacity. Thus, the requirement does not
apply to the determination of whether an individual
is a chronically ill individual either (1) by virtue
of severe cognitive impairment, or (2) if the
insured satisfies a standard (if any) that is not
based upon activities of daily living, as determined
under regulations.
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)
Present
Law
Present law provides that the deduction for health
insurance expenses of a self-employed individual is
not available for a month for which the individual
is eligible to participate in any subsidized health
plan maintained by any employer of the individual or
the individual's spouse. Present law also provides
that in the case of a qualified long-term care
insurance contract, only eligible long-term care
premiums (as defined for purposes of the medical
expense deduction) are taken into account in
determining the deduction for health insurance
expenses of a self-employed individual.
Explanation
of Provision
The technical correction applies the rules for the
deduction for health insurance expenses of a
self-employed individual separately with respect to
(1) plans that include coverage for qualified
long-term care services or that are qualified
long-term care insurance contracts, and (2) plans
that do not include such coverage and are not such
contracts. Thus, the provision clarifies that the
fact that an individual is eligible for
employer-subsidized health insurance does not affect
the ability of such an individual to deduct
long-term care insurance premiums, so long as the
individual is not eligible for employer-subsidized
long-term care insurance.
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)
Present
Law
Present law provides that amounts (other than
policyholder dividends or premium refunds) received
under a long-term care insurance contract generally
are excludable as amounts received for personal
injuries and sickness, subject to a dollar cap on
per diem contracts only. If the aggregate amount of
periodic payments under all qualified long-term care
contracts exceeds the dollar cap for the period,
then the amount of such excess payments is
excludable only to the extent of the individual's
costs (that are not otherwise compensated for by
insurance or otherwise) for long-term care services
during the period.
Present law also provides an exclusion from gross
income as an amount paid by reason of the death of
an insured for (1) amounts received under a life
insurance contract and (2) amounts received for the
sale or assignment of any portion of the death
benefit under a life insurance contract to a
qualified viatical settlement provider, provided
that the insured under the life insurance contract
is either terminally ill or chronically ill (the
accelerated death benefit rules).
A payor of long-term care benefits (defined for this
purpose to include any amount paid under a product
advertised, marketed or offered as long-term care
insurance), and a payor of amounts treated as
subject to reporting under the accelerated death
benefit rules, is required to report to the IRS the
aggregate amount of such benefits paid to any
individual during any calendar year, and the name,
address and taxpayer identification number of such
individual. A payor is also required to report the
name, address, and taxpayer identification number of
the chronically ill individual on account of whose
condition the amounts are paid, and whether the
contract under which the amount is paid is a per
diem-type contract. A copy of the report must be
provided to the payee by January 31 following the
year of payment, showing the name of the payor and
the aggregate amount of benefits paid to the
individual during the calendar year. Failure to file
the report or provide the copy to the payee is
subject to the generally applicable penalties for
failure to file similar information reports.
Explanation
of Provision
The technical correction clarifies that the
reporting requirements include the need to report
the address and phone number of the information
contact. This conforms these reporting requirements
to the requirements of the Taxpayer Bill of Rights
2.
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)
Present
Law
The long-term care insurance rules of present law
include consumer protection provisions (sec.
7702B(g)). Among these provisions is a requirement
that the issuer of a contract offer to the
policyholder a nonforfeiture provision that meets
certain requirements. The requirements include a
rule that the nonforfeiture provision shall provide
for a benefit available in the event of a default in
the payment of any premiums and the amount of the
benefit may be adjusted subsequent to being
initially granted only as necessary to reflect
changes in claims, persistency, and interest as
reflected in changes in rates for premium paying
policies approved by the Secretary for the same
contract form.
Explanation
of Provision
The technical correction clarifies that the
nonforfeiture provision shall provide for a benefit
available in the event of a default in the payment
of any premiums and the amount of the benefit may be
adjusted subsequent to being initially granted only
as necessary to reflect changes in claims,
persistency, and interest as reflected in changes in
rates for premium paying policies approved by the
appropriate State regulatory authority (not by the
Secretary) for the same contract form.
6.
Insurable interests under the COLI provision (sec.
1402(f)(1) of the bill and sec. 264(a)(4) of the
Code)
Present
Law
No deduction is allowed for interest paid or accrued
on any indebtedness with respect to one or more life
insurance policies or annuity or endowment contracts
owned by the taxpayer covering any individual who is
(1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by
the taxpayer (the COLI rule). An exception is
provided for interest on indebtedness with respect
to life insurance policies covering up to 20 key
persons, subject to an interest rate cap.
Explanation
of Provision
The technical correction is intended to prevent
unintended avoidance of the COLI rule by clarifying
that the rule relates to life insurance policies or
annuity or endowment contracts covering any
individual who (1) is or was an officer or employee
of, or (2) is or was financially interested in, any
trade or business carried on currently or formerly
by the taxpayer. Thus, for example, the provision
would clarify the treatment of interest on debt with
respect to contracts covering former employees of
the taxpayer. As another example, the provision
would clarify the treatment of interest on debt with
respect to a business formerly conducted by the
taxpayer and transferred to an affiliate of the
taxpayer. No inference is intended as the
interpretation of this provision under prior law.
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)
Present
Law
No deduction is allowed for interest paid or accrued
on any indebtedness with respect to one or more life
insurance policies or annuity or endowment contracts
owned by the taxpayer covering any individual who is
(1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by
the taxpayer. An exception is provided for interest
on indebtedness with respect to life insurance
policies covering up to 20 key persons, subject to
an interest rate cap.
This provision generally does not apply to interest
on debt with respect to contracts purchased on or
before June 20, 1986. If the policy loan interest
rate under such a contract does not provide for a
fixed rate of interest, then interest on such a
contract paid or accrued after December 31, 1995, is
allowable only to the extent the rate of interest
for each fixed period selected by the taxpayer does
not exceed Moody's Corporate Bond Yield Average
--Monthly Average Corporates, for the third month
preceding the first month of the fixed period. The
fixed period must be 12 months or less.
Explanation
of Provision
The technical correction provides that an election
of an applicable period for purposes of applying the
interest rate for a variable rate contract can be
made no later than the 90th date after the date of
enactment of the proposal, and applies to the
taxpayer's first taxable year ending on or after
October 13, 1995. If no election is made, the
applicable period is the policy year. The policy
year is the 12-month period beginning on the
anniversary date of the policy.
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)
Present
Law
No deduction is allowed for interest paid or accrued
on any indebtedness with respect to one or more life
insurance policies or annuity or endowment contracts
owned by the taxpayer covering any individual who is
(1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by
the taxpayer. An exception is provided for interest
on indebtedness with respect to life insurance
policies covering up to 20 key persons, subject to
an interest rate cap.
A key person is an individual who is either an
officer or a 20-percent owner of the taxpayer. The
number of individuals that can be treated as key
persons may not exceed the greater of (1) 5
individuals, or (2) the lesser of 5 percent of the
total number of officers and employees of the
taxpayer, or 20 individuals. Employees are to be
full-time employees, for this purpose. A 20-percent
owner is an individual who directly owns 20 percent
or more of the total combined voting power of the
corporation. If the taxpayer is not a corporation,
the statute states that a 20-percent owner is an
individual who directly owns 20 percent or more of
the capital or profits interest of the employer.
Explanation
of Provision
The technical correction clarifies that, in
determining a key person, if the taxpayer is not a
corporation, a 20-percent owner is an individual who
directly owns 20 percent or more of the capital or
profits interest of the taxpayer.
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)
Present
Law
No deduction is allowed for interest paid or accrued
on any indebtedness with respect to one or more life
insurance policies or annuity or endowment contracts
owned by the taxpayer covering any individual who is
(1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by
the taxpayer. An exception is provided for interest
on indebtedness with respect to life insurance
policies covering up to 20 key persons, subject to
an interest rate cap.
This provision generally does not apply to interest
on debt with respect to contracts purchased on or
before June 20, 1986. If the policy loan interest
rate under such a contract does not provide for a
fixed rate of interest, then interest on such a
contract paid or accrued after December 31, 1995, is
allowable only to the extent the rate of interest
for each fixed period selected by the taxpayer does
not exceed Moody's Corporate Bond Yield Average
--Monthly Average Corporates, for the third month
preceding the first month of the fixed period. The
fixed period must be 12 months or less.
The interest rate cap on key persons and pre-1986
contracts is effective with respect to interest paid
or accrued for any month beginning after December
31, 1995. Another part of the provision provides
that the interest rate cap on key employees and
pre-1986 contracts applies to interest paid or
accrued after October 13, 1995.
Explanation
of Provision
The technical correction clarifies that, under the
COLI rule, the interest rate cap on key persons and
pre-1986 contracts applies to interest paid or
accrued for any month beginning after December 31,
1995. This technical correction eliminates the
discrepancy between the October and the December
dates in the grandfather rule for pre-1986
contracts.
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)
Present
Law
No deduction is allowed for interest paid or accrued
on any indebtedness with respect to one or more life
insurance policies or annuity or endowment contracts
owned by the taxpayer covering any individual who is
(1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by
the taxpayer. An exception is provided for interest
on indebtedness with respect to life insurance
policies covering up to 20 key persons, subject to
an interest rate cap.
Additional limitations are imposed on the
deductibility of interest with respect to single
premium contracts, and interest on debt incurred or
continued to purchase or carry a life insurance,
endowment, or annuity contract pursuant to a plan of
purchase that contemplates the systematic direct or
indirect borrowing of part or all of the increases
in the cash value of the contract. An exception to
the latter rule is provided, permitting
deductibility of interest on bona fide debt that is
part of such a plan, if no part of 4 of the annual
premiums due during the first 7 years is paid by
means of debt (the "4-out-of-7" rule).
Present law provides that the COLI rule is phased
in. In connection with the phase-in rule, a
transition rule provides that any amount included in
income during 1996, 1997, or 1998, that is received
under a contract described in the provision on the
complete surrender, redemption or maturity of the
contract or in full discharge of the obligation
under the contract that is in the nature of a refund
of the consideration paid for the contract, is
includable ratably over the first 4 taxable years
beginning with the taxable year the amount would
otherwise have been includable. The lapse of a
contract after October 13, 1995, due to nonpayment
of premiums does not cause interest paid or accrued
prior to January 1, 1999, to be nondeductible solely
by reason of (1) failure to meet the 4-out-of-7 rule
of present law, or (2) causing the contract to be
treated as a single premium contract within the
meaning of section 264(b)(1). This lapse provision
states that the relief is provided in the following
case: solely by reason of no additional premiums
being received by reason of a lapse.
Explanation
of Provision
The technical correction clarifies that, under the
transition relief provided under the COLI rule, the
4-out-of-7 rule and the single premium rule of
present law are not to apply solely by reason of a
lapse occurring by reason of no additional premiums
being received under the contract after October 13,
1995.
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)
Present
Law
Under the expatriation tax provisions in section
877, special tax treatment applies to certain former
U.S.
citizens and former long-term
U.S.
residents for 10 years following the date of loss of
U.S.
citizenship or
U.S.
residency status. Gain recognition is required on
certain exchanges of property following loss of
U.S.
citizenship or
U.S.
residency status, unless a gain recognition
agreement is entered into. In addition, regulatory
authority is granted to apply this rule to the
15-year period beginning 5 years before the loss of
U.S.
citizenship or
U.S.
residency status.
Explanation
of Provision
The technical correction clarifies that the period
to which the general rule requiring gain recognition
on certain exchanges applies is the 10-year period
that begins on the date of loss of
U.S.
citizenship or
U.S.
residency status. In addition, the technical
correction clarifies that in the case of an exchange
occurring during the 5-year period before the loss
of
U.S.
citizenship or
U.S.
residency status, any gain required to be recognized
under regulations is to be recognized immediately
after the date of such loss of
U.S.
citizenship.
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)
Present
Law
Under the expatriation tax provisions in section
877, special tax treatment applies to certain former
U.S.
citizens and former long-term
U.S.
residents for 10 years following the date of loss of
U.S.
citizenship or
U.S.
residency status. The running of this period with
respect to gain on the sale or exchange of any
property is suspended for any period during which
the individual's risk of loss with respect to the
property is substantially diminished.
Explanation
of Provision
The technical correction clarifies that the period
to which the rule suspending such period in the case
of a substantial diminution of risk of loss applies
is the 10-year period that begins on the date of
loss of
U. S.
citizenship or
U.S.
residency status.
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)
Present
Law
Under the expatriation tax provisions in section
877, special tax treatment applies to certain former
U.S.
citizens and former long-term
U.S.
residents for 10 years following the date of loss of
U.S.
citizenship or
U.S.
residency status. Special rules apply in the case of
certain contributions of
U.S.
property by such an individual to a foreign
corporation during such period.
Explanation
of Provision
The technical correction clarifies that the period
to which the rule regarding certain contributions to
foreign corporations applies is the 10-year period
that begins on the date of loss of
U.S.
citizenship or
U.S.
residency status. The technical correction also
clarifies that the rule applies in the case of
property the income from which, immediately before
the contribution, was from
U.S.
sources.
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)
Present
Law
Under the expatriation tax provisions in section
2107, special estate tax treatment applies to
certain former
U.S.
citizens and former long-term
U.S.
residents who die within 10 years following the date
of loss of
U.S.
citizenship or
U.S.
residency status. Special rules provide a credit
against the
U.S.
estate tax for foreign estate taxes paid with
respect to property that is includible in the
decedent's
U.S.
estate solely by reason of the expatriation estate
tax provisions.
Explanation
of Provision
The technical correction clarifies the formula for
determining the amount of the foreign tax credit
allowable against
U.S.
estate taxes on property includible in the
decedent's
U.S.
estate solely by reason of the expatriation estate
tax provisions. The credit for the estate taxes paid
to any foreign country generally is limited to the
lesser of (1) the foreign estate taxes attributable
to the property includible in the decedent's U.S.
estate solely by reason of the expatriation estate
tax provisions or (2) the U.S. estate tax
attributable to property that is subject to estate
tax in such foreign country and is includible in the
decedent's U.S. estate solely by reason of the
expatriation tax provisions. The amount of taxes
attributable to such property is determined on a pro
rata basis.
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)
Present
Law
Section 4958 imposes penalty excise taxes as an
intermediate sanction in cases where organizations
exempt from tax under sections 501(c)(3) or
501(c)(4) (other than private foundations) engage in
an "excess benefit transaction." The
excise tax may be imposed on certain disqualified
persons (i.e., insiders) who improperly benefit from
an excess benefit transaction and on organization
managers who participate in such a transaction
knowing that it is improper.
A disqualified person who benefits from an excess
benefit transaction is subject to a first-tier
penalty tax equal to 25 percent of the amount of the
excess benefit. Organization managers who
participate in an excess benefit transaction knowing
that it is improper are subject to a first-tier
penalty tax of 10 percent of the amount of the
excess benefit. Additional second-tier taxes equal
to 200 percent of the amount of the excess benefit
may be imposed on a disqualified person if there is
no correction of the transaction within a specified
time period.
Under section 4962, the IRS has the authority to
abate certain first-tier taxes if the taxable event
was due to reasonable cause and not to willful
neglect and the event was corrected within the
applicable correction period. First-tier taxes which
may be abated include, among others, the taxes
imposed under sections 4941 (on acts of self-dealing
between private foundations and disqualified
persons), 4942 (for failure by private foundations
to distribute a minimum amount of income), and 4943
(on private foundations with excess business
holdings).
In enacting the new excise taxes on excess benefit
transactions, Congress explicitly intended to
provide the IRS with abatement authority under
section 4962.150
However, the abatement rules of section 4962 apply
only to qualified first-tier taxes imposed by
subchapter A or C of Chapter 42. The section 4958
excise tax is located in subchapter D of Chapter 42.
The failure to cross reference subchapter D in
section 4962 means that IRS does not have such
abatement authority with respect to the section 4958
excise taxes.
Explanation
of Provision
The bill amends section 4962(b) to include a
cross-reference to first-tier taxes imposed by
subchapter D (i.e., the section 4958 excise taxes on
excess benefit transactions). Thus, the IRS has
authority to abate the first-tier excise taxes on
excess benefit transactions in cases where it is
established that the violation was due to reasonable
cause and not due to willful neglect and the
transaction at issue was corrected within the
specified period.
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)
Present
Law
Section 4958 imposes penalty excise taxes as an
intermediate sanction in cases where organizations
exempt from tax under sections 501(c)(3) or
501(c)(4) (other than private foundations) engage in
an "excess benefit transaction." The
excise tax may be imposed on certain disqualified
persons (i.e., insiders) who improperly benefit from
an excess benefit transaction and on organization
managers who participate in such a transaction
knowing that it is improper. No tax is imposed on
the organization itself with respect under section
4958.
Section 4911 imposes an excise tax penalty on excess
lobbying expenditures made by public charities. The
tax is imposed on the organization itself. Section
4912 imposes a penalty excise tax on certain public
charities that make disqualifying lobbying
expenditures and section 4955 imposes a penalty
excise tax on political expenditures of section
501(c)(3) organizations. Both of these penalty taxes
are imposed not only on the affected organization,
but also on organization managers who agree to an
expenditure knowing that it is improper.
Under section 4962, the IRS has the authority to
abate certain first-tier taxes if the taxable event
was due to reasonable cause and not to willful
neglect and the event was corrected within the
applicable correction period. First-tier taxes which
may be abated include, among others, the taxes
imposed under section 4955.151
Under section 6033(b)(10), 501(c)(3) organizations
are required to report annually on Form 990 any
amounts paid by the organization under section 4911,
4912, and 4955. Thus, although sections 4912 and
4955 impose excise taxes on organization managers,
organizations technically are not required to report
any such excise taxes paid by such managers.
In addition, under section 6033(b)(11), an
organization exempt from tax under section 501(c)(3)
must report on Form 990 any amount of excise tax on
excess benefit transactions paid by the
organization, or any disqualified person with
respect to such organization, during the taxable
year. The Code does not explicitly require the
reporting of any excess benefit excise taxes paid by
an organization manager solely in his or her
capacity as such (i.e., an organization manager
might also be a disqualified person with respect to
an excess benefit transaction, in which case any tax
paid would be reported).
Explanation
of Provision
The bill makes the reporting requirements of section
6033(b)(10) and (11) consistent with the excise tax
penalty provisions to which they relate. Thus,
section 6033(b)(10) is amended to require 501(c)(3)
organizations to report any amounts of tax imposed
under sections 4911, 4912, and 4955 on the
organization or any organization manager of the
organization. In addition, the bill requires
reporting with respect to any reimbursements paid by
an organization with respect to taxes imposed under
sections 4912 or 4955 on any organization manager of
the organization. Section 6033(b)(11) is amended to
require 501(c)(3) organizations to report any
amounts of tax imposed under section 4958 on any
organization manager or any disqualified person, as
well as any reimbursements of section 4958 excise
tax liability paid by the organization to such
organization managers or disqualified persons.
In addition, the bill clarifies that no reporting is
required under sections 6033(b)(10) or (11) in the
event a first-tier penalty excise tax imposed under
section 4955 or section 4958 is abated by the IRS
pursuant to its authority under section 4962.
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)
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