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Revenue Reconciliation Act page3

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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