Revenue Reconciliation Act
page3
 
5. Tax certain alternative fuels based on energy equivalency
to gasoline (sec. 705 of the bill and sec. 4041 of
the Code)
Present
Law
Excise taxes are imposed on gasoline, diesel fuel,
and special motor fuels used in highway vehicles.
4.3 cents per gallon of each of these taxes is
retained in the General Fund, with the balance of
the revenues being dedicated to one or more Trust
Funds. The tax on gasoline is 18.3 cents per gallon;
the tax on diesel fuel is 24.3 cents per gallon; and
the tax on special motor fuels generally is 18.3
cents per gallon. Taxable special motor fuels
include liquefied petroleum gas
("propane"), liquefied natural gas
("LNG"), methanol from natural gas, and
compressed natural gas ("CNG"). Special
rates apply to methanol from natural gas (exempt
from 7 cents of the 14-cents-per-gallon Highway
Trust Fund component of the special motor fuels
tax), and compressed natural gas (exempt from the
entire Highway Trust Fund component of the tax).
In general, these four special motor fuels contain
less energy (i.e., fewer Btu's) per gallon than does
gasoline.
Reasons
for Change
The largest portion of the excise tax on propane,
LNG, and methanol from natural gas is imposed to
finance Federal highway programs through the Highway
Trust Fund. A basic principle of the highway taxes
is that users of the highway system should be taxed
in relation to their use of the system. Adjusting
the tax rates on these three special motor fuels is
consistent with that principle because consumers
must purchase more gallons of these
lower-energy-content fuels than gallons of gasoline
to travel the same number of miles
Explanation
of Provision
The tax rates on propane, LNG, and methanol from
natural gas are adjusted to reflect the respective
energy equivalence of the fuels to gasoline. The
revised tax rates on these fuels are: propane, 13.6
cents per gallon; LNG 11.9 cents per gallon, and
methanol from natural gas, 9.15 cents per gallon.
Effective
Date
The provision is effective for fuels sold or used
after
September 30, 1997
.
6.
Study feasibility of moving collection point for
distilled spirits excise tax (sec. 706 of the bill)
Present
Law
Distilled spirits are subject to tax at $13.50 per
proof gallon. (A proof gallon is a liquid gallon
consisting of 50 percent alcohol.) In the case of
domestically produced distilled spirits and
distilled spirits imported in to the
United States
in bulk containers for domestic bottling, the tax is
imposed on removal of the beverage from the
distillery (without regard to whether a sale occurs
at that time). Bottled distilled spirits that are
imported into the
United States
comprise approximately 15 percent of the current
market for these beverages; tax is imposed on these
imports when the distilled spirits are removed from
the first customs bonded warehouse in which they are
deposited upon entry into the
United States
.
In the case of certain distilled spirits products, a
tax credit for alcohol derived from fruit is
allowed. This credit reduces the effective tax paid
on those beverages. The credit is determined when
the tax is paid (i.e., at the distillery or on
importation).
Explanation
of Provision
The Treasury Department is directed to study options
for changing the point at which the distilled
spirits excise tax is collected. One of the options
evaluated should be collecting the tax at the point
at which the distilled spirits are removed from
registered wholesale warehouses. As part of this
study, the Treasury is to focus on administrative
issues associated with the identified options,
including the effects on tax compliance. For
example, the Treasury is to evaluate the actual
compliance record of wholesale dealers that
currently paid the excise tax on imported bottled
distilled spirits, and the compliance effects of
allowing additional wholesale dealers to be
distilled spirts taxpayers. The study also is to
address the number of taxpayers involved, the types
of financial responsibility requirements that might
be needed, any special requirements regarding
segregation of non-tax-paid distilled spirits from
other products carried by the potential new
taxpayers. The study further is to review the
effects of the options on Treasury staffing and
other budgetary resources as well as projections of
the time between when tax currently is collected and
the time when tax otherwise would be collected.
The study is required to be completed and
transmitted to the Committee on Finance and the
Committee on Ways and Means no later than
January 31, 1998
.
7.
Extend and modify tax benefits for ethanol (sec.707
of the bill and secs. 40, 4041, 4081, 4091, and 6427
of the Code)
Present
Law
Present law provides a 54-cents-per-gallon income
tax credit for ethanol and a 60-cents-per-gallon
income tax credit for methanol produced from
renewable sources (e.g., biomass) that are used as a
motor fuel or that are blended with other fuels
(e.g., gasoline) for such a use. As an alternative
to claiming the income tax credits directly, these
tax benefits may be claimed as a reduction in the
amount of excise tax paid on gasoline or diesel fuel
with which the ethanol or renewable source methanol
are blended or as a reduction in the special motor
fuels rate applicable to "neat" ethanol or
renewable source methanol fuels. The excise tax
delivery of the benefits occurs either through
reduced tax rate sales to registered blenders of
e.g., gasoline or diesel fuel, or through expedited
refunds of gasoline or diesel fuel tax paid.
In addition to these general ethanol benefits, a
separate 10-cents-per-gallon credit is provided for
small ethanol producers, defined generally as
persons whose production does not exceed 15 million
gallons per year and whose production capacity does
not exceed 30 million gallons per year. No
comparable small producer credit is provided for
small renewable source methanol producers.
Treasury Department regulations provide that ethyl
tertiary butyl ether ("ETBE"), which is
made using ethanol, qualifies for the blender income
tax credit and the excise tax exemption.
The alcohol fuels tax benefits are scheduled to
expire after
December 31, 2000
. The provision allowing the ethanol blender
benefits to be claimed through the motor fuels
excise tax system is scheduled to expire after
September 30, 2000
.
Reasons
for Change
The Committee believes that continued assurance of
tax benefits for ethanol are an important signal to
encourage the use of alternative fuels..
Explanation
of Provision
The bill extends the 54-cents-per-gallon income tax
credit for ethanol through
December 31, 2007
, and the excise tax provisions allowing that
benefit to be claimed through reduced-tax-rate
gasoline sales (or expedited refunds of gasoline tax
paid) through
September 30, 2007
. In addition, the bill phases down the rates of the
benefits during the period 2001 through 2007. Under
the bill, the tax benefit per gallon of ethanol will
be --
2001 and 2002 53 cents per gallon
2003 and 2004 52 cents per gallon
2005, 2006, and 2007 51 cents per gallon.
Effective
Date
The provision is effective on the date of enactment.
8.
Codify Treasury Department regulations regulating
wine labels (sec. 708 of the bill and sec. 5388 of
the Code)
Present
Law
The Code includes provisions regulating the labeling
of wine when it is removed from a winery for
marketing. In general, the regulations under these
provisions allow the use of semi-generic names for
wine that reflect geographic identifications
understood in the industry, provided that the labels
include clear indication of any deviation from that
which is generally understood in the source of the
grapes or the process by which the wine is produced.
Reasons
for Change
The Committee determined that the Treasury
Department regulations governing the use of
semi-generic designations such as
"Chablis" and "burgundy" in wine
labeling should be codified to add clarity to the
existing Code provisions.
Explanation
of Provision
The current Treasury Department regulations
governing the use of semi-generic wine designations
which reflect geographic origin are codified into
the Code's wine labeling provisions.
Effective
Date
The provision is effective on the date of enactment.
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)
Present
Law
Present law imposes limits on contributions and
benefits under qualified plans based on the type of
plan. In the case of defined benefit pension plans,
the limit on the annual retirement benefit is the
lesser of (1) 100 percent of compensation or (2)
$125,000 (indexed for inflation).
Reasons
for Change
The limits on contributions and benefits create
unique problems for multiemployer defined benefit
pension plans.
Explanation
of Provision
The bill eliminates the application of the 100
percent of compensation limitation for multiemployer
defined benefit pension plans. Such plans will only
be subject to the dollar limitation.
Effective
Date
The provision is effective for years beginning after
December 31, 1997
.
2.
Modification of partial termination rules (sec. 712
of the bill and sec. 552 of the Deficit Reduction
Act of 1984)
Present
Law
Under the Internal Revenue Code, pension plan
benefits are required to become fully vested upon
termination or partial termination of the plan. The
plan document is required to contain a provision
reflecting this rule. Under section 552 of the
Deficit Reduction Act of 1984 ("DEFRA"),
for purposes of this rule, a partial termination is
treated as not occurring if (1) the partial
termination is a result of a decline in plan
participation which occurs by reason of the
completion of the Trans-Alaska Oil Pipeline
construction project and occurred after
December 31, 1975
, and before
January 1, 1980
, with respect to participants employed in Alaska;
(2) no discrimination occurred with respect to the
partial termination; and (3) it is established to
the satisfaction of the Secretary of the Treasury
that the benefits of the provision will not accrue
to the employers under the plan.
Reasons
for Change
The Committee is concerned that section 552 of DEFRA
has not operated as intended because of a conflict
between section 552 and the requirement that a plan
document provide that plan benefits become
nonforfeitable upon a full or partial plan
termination. The Committee bill eliminates this
conflict by clarifying that section 552 of DEFRA
applies notwithstanding any other provision of law
or of the plan or trust.
Explanation
of Provision
The bill clarifies that section 552 of DEFRA applies
for the Code, any other provision of law, and any
plan or trust provision.
Effective
Date
The provision is effective as if included in section
552 of DEFRA.
3.
Increase in full funding limit (sec. 713 of the bill
and sec. 412 of the Code)
Present
Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements. In
addition, there is a maximum limit on contributions
that can be made to a plan, called the full funding
limit. The full funding limit is the lesser of a
plan's accrued liability and 150 percent of current
liability. In general, current liability is all
liabilities to plan participants and beneficiaries.
Current liability represents benefits accrued to
date, whereas the accrued liability full funding
limit is based on projected benefits.
Reasons
for Change
The 150-percent of full funding limit was enacted to
limit and allocate efficiently the Federal tax
revenue associated with the special tax treatment
provided to tax-qualified plans. However, the
Committee believes that the 150-percent of current
liability full funding limit unduly restricts
funding.
Explanation
of Provision
The bill increases the 150-percent of full funding
limit as follows: 155 percent for plan years
beginning in 1999 or 2000, 160 percent for plan
years beginning in 2001 or 2002, 165 percent for
plan years beginning in 2003 and 2004, and 170
percent for plan years beginning in 2005 and
thereafter.
Effective
Date
The provision is effective for plan years beginning
after
December 31, 1998
.
4.
Spousal consent required for distributions from
section 401(k) plans (sec. 714 of the bill and secs.
411 and 417 of the Code)
Present
Law
Under present law, pension plans that provide
automatic survivor benefits (i.e., joint and
survivor annuities and preretirement survivor
annuities) require spousal consent to the payment of
a participant's benefit in a form other than a
survivor annuity. A qualified cash or deferred
arrangement (a "section 401(k) plan") is
not subject to the automatic survivor benefit rules
if the plan provides that the spouse of a
participant is the beneficiary of the participant's
entire account under the plan, the participant's
benefit is not paid in the form or an annuity, and
the participant's account does not include amounts
transferred from another plan that was subject to
the automatic survivor benefit rules. In general,
spousal consent is not required for an involuntary
cash-out of a participant's benefit or distributions
made to satisfy the minimum distribution rules.
Reasons
for Change
The Committee believes that spouses of participants
in 401(k) plans who are entitled to benefits under
the plan should be afforded similar protection as
spouses in pension plans that provide automatic
survivor benefits.
Explanation
of Provision
The bill provides that written spousal consent is
required for all distributions, including plan
loans, from plans containing a qualified cash or
deferred arrangement. As under present law, spousal
consent is not required for an involuntary cash-out
of a participant's benefit or for the payment of
distributions required under the minimum
distribution rules. If spousal consent is not
obtained, the benefit must be distributed in equal
periodic payments over the life (or life expectancy)
of the participant, the lives (or life expectancies)
of the participant and beneficiary, or over a period
of 10 years or more. A plan which complies with the
spousal consent requirement will not be treated as
failing to satisfy the anti-cutback rules related to
optional forms of benefit. The bill also will make
the corresponding changes to the Employment Income
Security Act of 1974, as amended ("ERISA").
Effective
Date
The provision is effective for plan years beginning
after
December 31, 1998
.
5.
Contributions on behalf of a minister to a church
plan (sec. 715 of the bill and sec. 414(e) of the
Code)
Present
Law
Under present law, contributions made to retirement
plans by ministers who are self-employed are
deductible to the extent such contributions do no
exceed certain limitations applicable to retirement
plans. These limitations include the limit on
elective deferrals, the exclusion allowance, and the
limit on annual additions to a retirement plan.
Reasons
for Change
The Committee believes that the unique
characteristics of church plans and the procedures
associated with contributions made by ministers who
are self-employed create particular problems with
respect to plan administration.
Explanation
of Provision
The bill provides that in the case of a contribution
made on behalf of a minister who is self-employed to
a church plan, the contribution will be excludable
from the income of the minister to the extent that
the contribution would be excludable if the minister
was an employee of a church and the contribution was
made to the plan.
Effective
Date
The provision is effective for years beginning after
December 31, 1997
.
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)
Present
Law
Under present law ministers who are employed by an
organization other than a church are treated as if
employed by the church and may participate in the
retirement plan sponsored by the church. If the
organization also sponsors a retirement plan, such
plan does not have to include the ministers as
employees for purposes of satisfying the
nondiscrimination rules applicable to qualified
plans provided the organization is not eligible to
participate in the church plan.
Reasons
for Change
The Committee believes it is appropriate to extend
the same relief to other non-church organizations
that may be eligible to participate in a church plan
but elect not to do so. Such organizations will not
be required to treat ministers as employees for
purposes of satisfying the nondiscrimination rules
applicable to their retirement plan.
Explanation
of Provision
The bill provides that if a minister is employed by
an organization other than a church and the
organization is not otherwise participating in the
church plan then, the minister does not have to be
included as an employee under the retirement plan of
the organization for purposes of the
nondiscrimination rules.
Effective
Date
The provision is effective for years beginning after
December 31, 1997
.
7.
Repeal application of UBIT to ESOPs of S
corporations (sec. 716 of the bill and sec. 512 of
the Code)
Present
Law
Under present law, for taxable years beginning after
December 31, 1997
, certain tax-exempt organizations, including
employee stock ownership plans ("ESOPs")
can be a shareholder of an S corporation. Items of
income or loss of the S corporation will flow
through to qualified tax-exempt shareholders as
unrelated business taxable income ("UBTI"),
regardless of the source of the income.
Reasons
for Change
The Committee believes that treating S corporation
income as UBTI is not appropriate because such
amounts would be subject to tax at the ESOP level,
and also again when benefits are distributed to ESOP
participants.
Explanation
of Provision
The bill repeals the provision treating items of
income or loss of an S corporation as unrelated
business taxable income in the case of an employee
stock ownership plan that is an S corporation
shareholder.
Effective
Date
The provision is effective for taxable years
beginning after
December 31, 1997
.
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)
Present
Law
In general, cash-method taxpayers report income in
the year it is actually or constructively received.
However, present law contains two special rules
applicable to livestock sold on account of drought
conditions. Code section 451(e) provides that a
cash-method taxpayer whose principal trade or
business is farming who is forced to sell livestock
due to drought conditions may elect to include
income from the sale of the livestock in the taxable
year following the taxable year of the sale. This
elective deferral of income is available only if the
taxpayer establishes that, under the taxpayer's
usual business practices, the sale would not have
occurred but for drought conditions that resulted in
the area being designated as eligible for Federal
assistance. This exception is generally intended to
put taxpayers who receive an unusually high amount
of income in one year in the position they would
have been in absent the drought.
In addition, the sale of livestock (other than
poultry) that is held for draft, breeding, or dairy
purposes in excess of the number of livestock that
would have been sold but for drought conditions is
treated as an involuntary conversion under section
1033(e). Consequently, gain from the sale of such
livestock could be deferred by reinvesting the
proceeds of the sale in similar property within a
two-year period.
Reasons
for Change
The Committee believes that the present-law
exceptions to gain recognition for livestock sold on
account of drought should apply to livestock sold on
account of floods and other weather-related
conditions as well.
Explanation
of Provision
The bill amends Code section 451(e) to provide that
a cash-method taxpayer whose principal trade or
business is farming and who is forced to sell
livestock due not only to drought (as under present
law), but also to floods or other weather-related
conditions, may elect to include income from the
sale of the livestock in the taxable year following
the taxable year of the sale. This elective deferral
of income is available only if the taxpayer
establishes that, under the taxpayer's usual
business practices, the sale would not have occurred
but for the drought, flood or other weather-related
conditions that resulted in the area being
designated as eligible for Federal assistance.
In addition, the bill amends Code section 1033(e) to
provide that the sale of livestock (other than
poultry) that are held for draft, breeding, or dairy
purposes in excess of the number of livestock that
would have been sold but for drought (as under
present law), flood or other weather-related
conditions is treated as an involuntary conversion.
Effective
Date
The provision applies to sales and exchanges after
December 31, 1996
.
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)
Present
Law
For taxable years beginning after
December 31, 1995
, an individual is not eligible for the earned
income credit if the aggregate amount of
"disqualified income" of the taxpayer for
the taxable year exceeds $2,200. This threshold is
indexed for inflation. Disqualified income is the
sum of:
(1) interest (taxable and tax-exempt);
(2) dividends;
(3) net rent and royalty income (if greater than
zero);
(4) capital gain net income and;
(5) net passive income (if greater than zero) that
is not self-employment income.
Reasons
for Change
The Committee believes that lower-income farmers
should not be disqualified from the earned income
credit due to certain sales of livestock.
Explanation
of Provision
The bill clarifies that gain or loss from the sale
of livestock (as defined under section 1231(b)(3) of
the Code) is disregarded for purposes of the
calculation of capital gain net income under the
disqualified income test of the earned income
credit.
Effective
Date
The provision is effective for taxable years
beginning after
December 31, 1995
.
3.
Mortgage financing for residences located in
Presidentially declared disaster areas (sec. 723 of
the bill and sec. 143 of the Code)
Present
Law
Qualified mortgage bonds are private activity
tax-exempt bonds issued by States and local
governments acting as conduits to provide mortgage
loans to first-time home buyers who satisfy
specified income limits and who purchase homes that
cost less than statutory maximums.
Present law waives the three buyer targeting
requirements for a portion of the loans made with
proceeds of a qualified mortgage bond issue if the
loans are made to finance homes in statutorily
prescribed economically distressed areas.
Reasons
for Change
The Committee believes that availability of mortgage
subsidy financing may help survivors of
Presidentially declared disasters rebuild their
homes.
Explanation
of Provision
The bill waives the first time homebuyer
requirement, the income limits, and the purchase
price limits for loans to finance homes in certain
Presidentially declared disaster areas. The waiver
applies only during the one-year period following
the date of the disaster declaration.
Effective
Date
The provision applies to loans financed with bonds
issued after
December 31, 1996
, and before
January 1, 1999
.
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)
Present
Law
Employers are required to withhold income taxes and
FICA taxes from wages paid to their employees.
Employers also are liable for their portion of FICA
taxes, excise taxes, and estimated payments of their
corporate income tax liability.
The Code requires the development and implementation
of an electronic fund transfer system to remit these
taxes and convey deposit information directly to the
Treasury (Code sec. 6302(h)53
). The Electronic Federal Tax Payment System ("EFTPS")
was developed by Treasury in response to this
requirement.54
Employers must enroll with one of two private
contractors hired by the Treasury. After enrollment,
employers generally initiate deposits either by
telephone or by computer.
The new system is phased in over a period of years
by increasing each year the percentage of total
taxes subject to the new EFTPS system. For fiscal
year 1994, 3 percent of the total taxes are required
to be made by electronic fund transfer. These
percentages increased gradually for fiscal years
1995 and 1996. For fiscal year 1996, the percentage
was 20.1 percent (30 percent for excise taxes and
corporate estimated tax payments). For fiscal year
1997, these percentages increased significantly, to
58.3 percent (60 percent for excise taxes and
corporate estimated tax payments). The specific
implementation method required to achieve the target
percentages is set forth in Treasury regulations.
Implementation began with the largest depositors.
Treasury had originally implemented the 1997
percentages by requiring that all employers who
deposit more than $50,000 in 1995 must begin using
EFTPS by January 1, 1997. The Small Business Job
Protection Act of 1996 provided that the increase in
the required percentages for fiscal year 1997
(which, pursuant to Treasury regulations, was to
take effect on January 1, 1997) will not take effect
until July 1, 1997.55
This was done to provide additional time prior to
implementation of the 1997 requirements so that
employers could be better informed about their
responsibilities.
On June 2, 1997, the
IRS
announced56
that it will not impose penalties through December
31, 1997, on businesses that make timely deposits
using paper federal tax deposit coupons while
converting to the EFTPS system.
Reasons
for Change
The Committee believes that it is necessary to
provide small businesses with additional time prior
to implementation of the requirements so that these
employers may be better informed about their
responsibilities.
Explanation
of Provision
The bill provides that no penalty shall be imposed
solely by reason of a failure to use EFTPS prior to
July 1, 1998
, if the taxpayer was first required to use the
EFTPS system on or after
July 1, 1997
.
Effective
Date
The provision is effective on the date of enactment.
2.
Repeal installment method adjustment for farmers
(sec. 732 of the bill and sec. 56 of the Code)
Present
Law
The installment method allows gain on the sale of
property to be recognized as payments are received.
Under the regular tax, dealers in personal property
are not allowed to defer the recognition of income
by use of the installment method on the installment
sale of such property. For this purpose, dealer
dispositions do not include sales of any property
used or produced in the trade or business of
farming. For alternative minimum tax purposes, the
installment method is not available with respect to
the disposition of any property that is the stock in
trade of the taxpayer or any other property of a
kind which would be properly included in the
inventory of the taxpayer if held at year end, or
property held by the taxpayer primarily for sale to
customers. No explicit exception is provided for
installment sales of farm property under the
alternative minimum tax.
Reasons
for Change
The Committee understands that the Internal Revenue
Service ("
IRS
") takes the position that the installment
method may not be used for sales of property
produced on a farm for alternative minimum tax
purposes. The Committee further understands that the
IRS
has announced that it generally will not enforce
this position for taxable years beginning before
January 1, 1997
, so long as the farmer changes its method of
accounting for installment sales for taxable years
beginning after
December 31, 1996
.57
The Committee disagrees with the
IRS
position and believes that this issue should be
clarified in favor of the farmer.
Explanation
of Provision
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