Revenue Reconciliation Act
page8
 
Clarification
of limitation on maximum number of shareholders
(sec. 1051 of the bill and secs. 856(k), 857(a), and
857(f) of the Code)
The bill replaces the rule that disqualifies a REIT
for any year in which the REIT failed to comply with
Treasury regulations to ascertain its ownership,
with an intermediate penalty for failing to do so.
The penalty would be $25,000 ($50,000 for
intentional violations) for any year in which the
REIT did not comply with the ownership regulations.
The REIT also is required, when requested by the
IRS, to send curative demand letters.
In addition, a REIT that complied with the Treasury
regulations for ascertaining its ownership, and
which did not know, or have reason to know, that it
was so closely held as to be classified as a
personal holding company, is treated as meeting the
requirement that it not be a personal holding
company.
De
minimis rule for tenant service income (sec. 1052 of
the bill and sec. 856(d) of the Code)
The bill permits a REIT to render a de minimis
amount of impermissible services to tenants, or in
connection with the management of property, and
still treat amounts received with respect to that
property as rent. The value of the impermissible
services may not exceed one percent of the gross
income from the property. For these purposes, the
services may not be valued at less than 150 percent
of the REIT's direct cost of the services.
Attribution
rules applicable to tenant ownership (sec. 1053 of
the bill and sec, 856(d)(5) of the Code)
The bill modifies the application of section
318(a)(3)(A) (attribution to partnerships) for
purposes of defining rent in section 856(d)(2), so
that attribution occurs only when a partner owns a
25 percent or greater interest in the partnership.
Credit
for tax paid by REIT on retained capital gains (sec.
1054 of the bill and sec. 857(b)(3) of the Code)
The bill permits a REIT to elect to retain and pay
income tax on net long-term capital gains it
received during the tax year, just as a RIC is
permitted under present law. Thus, if a REIT made
this election, the REIT shareholders would include
in their income as long-term capital gains their
proportionate share of the undistributed long-term
capital gains as designated by the REIT. The
shareholder would be deemed to have paid the
shareholder's share of the tax, which would be
credited or refunded to the shareholder. Also, the
basis of the shareholder's shares would be increased
by the amount of the undistributed long-term capital
gains (less the amount of capital gains tax paid by
the REIT) included in the shareholder's long-term
capital gains.
Repeal
of 30-percent gross income requirement (sec. 1055 of
the bill and sec. 856(c) of the Code
The bill repeals the rule that requires less than 30
percent of a REIT's gross income be derived from
gain from the sale or other disposition of stock or
securities held for less than one year, certain real
property held less than four years, and property
that is sold or disposed of in a prohibited
transaction.
Modification
of earnings and profits for determining whether REIT
has earnings and profits from non-REIT year (sec.
1056 of the bill and sec. 857(d) of the Code
The bill changes the ordering rule for purposes of
the requirement that newly-electing REITs distribute
earnings and profits that were accumulated in non-REIT
years. Under the bill, distributions of accumulated
earnings and profits generally are treated as made
from the entity's earliest accumulated earnings and
profits, rather than the most recently accumulated
earnings and profits. These distributions are not
treated as distributions for purposes of calculating
the dividends paid deduction. Treatment of
foreclosure property (sec. 1057 of the bill and sec.
856(e) of the Code
The bill lengthens the original grace period for
foreclosure property until the last day of the third
full taxable year following the election. The grace
period also could be extended for an additional
three years by filing a request to the IRS. Under
the bill, a REIT could revoke an election to treat
property as foreclosure property for any taxable
year by filing a revocation on or before its due
date for filing its tax return.
In addition, the bill conforms the definition of
independent contractor for purposes of the
foreclosure property rule (sec. 856(e)(4)(C)) to the
definition of independent contractor for purposes of
the general rules (sec. 856(d)(2)(C)).
Payments
under hedging instruments (sec. 1058 of the bill and
sec. 856(c)(5)(G) of the Code
The bill treats income from all hedges that reduce
the interest rate risk of REIT liabilities, not just
from interest rate swaps and caps, as qualifying
income under the 95-percent test. Thus, payments to
a REIT under an interest rate swap, cap agreement,
option, futures contract, forward rate agreement or
any similar financial instrument entered into by the
REIT to hedge its indebtedness incurred or to be
incurred (and any gain from the sale or other
disposition of these instruments) are treated as
qualifying income for purposes of the 95-percent
test.
Excess
noncash income (sec. 1059 of the bill and sec.
857(e)(2) of the Code
The bill (1) expands the class of excess noncash
items that are not subject to the distribution
requirement to include income from the cancellation
of indebtedness and (2) extends the treatment of
original issue discount and coupon interest as
excess noncash items to REITs that use an accrual
method of taxation.
Prohibited
transaction safe harbor (sec. 1060 of the bill and
sec. 856(b)(6)(C) of the Code)
The bill excludes from the prohibited sales rules
property that was involuntarily converted.
Shared
appreciation mortgages (sec. 10-61 of the bill and
sec. 856(j) of the Code)
The bill provides that interest received on a shared
appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject
to the mortgage is sold within 4 years of the REIT's
acquisition of the mortgage pursuant to a bankruptcy
plan of the mortgagor unless the REIT acquired the
mortgage knew or had reason to know that the
property subject to the mortgage would be sold in a
bankruptcy proceeding.
Wholly-owned
REIT subsidiaries (sec. 1062 of the bill and sec.
856(i)(2)of the Code)
The bill permits any corporation wholly-owned by a
REIT to be treated as a qualified subsidiary,
regardless of whether the corporation had always
been owned by the REIT. Where the REIT acquired an
existing corporation, the bill treats any such
corporation as being liquidated as of the time of
acquisition by the REIT and then reincorporated
(thus, any of the subsidiary's pre-REIT built-in
gain would be subject to tax under the normal rules
of section 337). In addition, any pre-REIT earnings
and profits of the subsidiary must be distributed
before the end of the REIT's taxable year.
Effective
Date
The bill is effective for taxable years beginning
after the date of enactment.
E.
Repeal of the 30-percent ("Short-short")
Test for Regulated Investment Companies (sec. 1071
of the Bill and sec. 851(b)(3) of the Code)
Present
Law
To qualify as a Regulated Investment Company (RIC),
a company must derive less than 30 percent of its
gross income from the sale or other disposition of
stock or securities held for less than 3 months (the
"30-percent test" or "short-short
rule").
Reasons
for Change
The short-short rule restricts the investment
flexibility of RICs. The rule can, for example,
limit a RIC's ability to "hedge" its
investments (e.g., to use options to protect against
adverse market moves).
The rule also burdens a RIC with significant
recordkeeping, compliance, and administration costs.
The RIC must keep track of the holding periods of
assets and the relative percentages of short-term
gain that it realizes throughout the year. The
committee believes that the short-short test places
unnecessary limitations upon a RIC's activities.
Explanation
of Provision
The 30-percent test (or short-short rule) is
repealed.
Effective
Date
The provision is effective for taxable years
beginning after the December 31, 1997.
F.
Taxpayer Protections
1.
Provide reasonable cause exception for additional
penalties (sec. 1081 of the bill and secs. 6652,
6683, 7519 of the Code)
Present
Law
Many penalties in the Code may be waived if the
taxpayer establishes reasonable cause. For example,
the accuracy-related penalty (sec. 6662) may be
waived with respect to any item if the taxpayer
establishes reasonable cause for his treatment of
the item and that he acted in good faith (sec.
6664(c)).
Reasons
for Change
The Committee believes that it is appropriate to
provide a reasonable cause exception for several
additional penalties where one does not currently
exist.
Explanation
of Provision
The bill provides that the following penalties may
be waived if the failure is shown to be due to
reasonable cause and not willful neglect:
(1) the penalty for failure to make a report in
connection with deductible employee contributions to
a retirement savings plan (sec. 6652(g));
(2) the penalty for failure to make a report as to
certain small business stock (sec. 6652(k));
(3) the penalty for failure of a foreign corporation
to file a return of personal holding company tax
(sec. 6683); and
(4) the penalty for failure to make required
payments for entities electing not to have the
required taxable year (sec. 7519).
Effective
Date
The provision is effective for taxable years
beginning after the date of enactment.
2.
Clarification of period for filing claims for
refunds (sec. 1082 of the bill and sec. 6512 of the
Code)
Present
Law
The Code contains a series of limitations on tax
refunds. Section 6511 of the Code provides both a
limitation on the time period in which a claim for
refund can be made (section 6511(a)) and a
limitation on the amount that can be allowed as a
refund (section 6511(b)). Section 6511(a) provides
the general rule that a claim for refund must be
filed within 3 years of the date of the return or 2
years of the date of payment of the taxes at issue,
whichever is later. Section 6511(b) limits the
refund amount that can be covered: if a return was
filed, a taxpayer can recover amounts paid within 2
years before the claim. Section 6512(b)(3)
incorporates these rules where taxpayers who
challenge deficiency notices in Tax Court are found
to be entitled to refunds.
In Commissioner v. Lundy, 116 S. Ct. 647
(1996), the taxpayer had not filed a return, but
received a notice of deficiency within 3 years after
the date the return was due and challenged the
proposed deficiency in Tax Court. The Supreme Court
held that the taxpayer could not recover
overpayments attributable to withholding during the
tax year, because no return was filed and the 2-year
"look back" rule applied. Since
overwithheld amounts are deemed paid as of the date
the taxpayer's return was first due (i.e.,
more than 2 years before the notice of deficiency
was issued), such overpayments could not be
recovered. By contrast, if the same taxpayer had
filed a return on the date the notice of deficiency
was issued, and then claimed a refund, the 3-year
"look back" rule would apply, and the
taxpayer could have obtained a refund of the
overwithheld amounts.
Reasons
for Change
The Committee believes that it is appropriate to
eliminate this disparate treatment.
Explanation
of Provision
The bill permits taxpayers who initially fail to
file a return, but who receive a notice of
deficiency and file suit to contest it in Tax Court
during the third year after the return due date, to
obtain a refund of excessive amounts paid within the
3-year period prior to the date of the deficiency
notice.
Effective
Date
The provision applies to claims for refund with
respect to tax years ending after the date of
enactment.
3.
Repeal of authority to disclose whether a
prospective juror has been audited (sec. 1083 of the
bill and sec. 6103 of the Code)
Present
Law
In connection with a civil or criminal tax
proceeding to which the United States is a party,
the Secretary must disclose, upon the written
request of either party to the lawsuit, whether an
individual who is a prospective juror has or has not
been the subject of an audit or other tax
investigation by the Internal Revenue Service (sec.
6103(h)(5)).
Reasons
for Change
This disclosure requirement, as it has been
interpreted by several recent court decisions, has
created significant difficulties in the civil and
criminal tax litigation process. First, the
litigation process can be substantially slowed. It
can take the Secretary a considerable period of time
to compile the information necessary for a response
(some courts have required searches going back as
far as 25 years). Second, providing early release of
the list of potential jurors to defendants (which
several recent court decisions have required, to
permit defendants to obtain disclosure of the
information from the Secretary) can provide an
opportunity for harassment and intimidation of
potential jurors in organized crime, drug, and some
tax protester cases. Third, significant judicial
resources have been expended in interpreting this
procedural requirement that might better be spent
resolving substantive disputes. Fourth, differing
judicial interpretations of this provision have
caused confusion. In some instances, defendants
convicted of criminal tax offenses have obtained
reversals of those convictions because of failures
to comply fully with this provision.
Explanation
of Provision
The bill repeals the requirement that the Secretary
disclose, upon the written request of either party
to the lawsuit, whether an individual who is a
prospective juror has or has not been the subject of
an audit or other tax investigation by the Internal
Revenue Service.
Effective
Date
The provision is effective for judicial proceedings
commenced after the date of enactment.
4.
Clarify statute of limitations for items from
pass-through entities (sec. 1084 of the bill and
sec. 6501 of the Code)
Present
Law
Pass through entities (such as S corporations,
partnerships, and certain trusts) generally are not
subject to income tax on their taxable income.
Instead, these entities file information returns and
the entities' shareholders (or beneficial owners)
report their pro rata share of the gross income and
are liable for any taxes due.
Some believe that, prior to 1993, it may have been
unclear as to whether the statute of limitations for
adjustments that arise from distributions from
passthrough entities should be applied at the entity
or individual level (i.e., whether the 3-year
statute of limitations for assessments runs from the
time that the entity files its information return or
from the time that a shareholder timely files his or
her income tax return). In 1993, the Supreme Court
held that the limitations period for assessing the
income tax liability of an S corporation shareholder
runs from the date the shareholder's return is filed
(Bufferd v. Comm., 113 S. Ct. 927 (1993)).
Reasons
for Change
Uncertainty regarding the correct statute of
limitations hinders the resolution of factual and
legal issues and creates needless litigation over
collateral matters.
Explanation
of Provision
The bill clarifies that the return that starts the
running of the statute of limitations for a taxpayer
is the return of the taxpayer and not the return of
another person from whom the taxpayer has received
an item of income, gain, loss, deduction, or credit.
Effective
Date
The provision is effective for taxable years
beginning after the date of enactment.
5.
Prohibition on browsing (secs. 1084 and 1085 of the
bill and secs. 7213A and 7431 of the Code)
Present
Law
The Internal Revenue Code prohibits disclosure of
tax returns and return information, except to the
extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized willful
disclosure is a felony punishable by a fine not
exceeding $5,000 or imprisonment of not more than
five years, or both (sec. 7213). An action for civil
damages also may be brought for unauthorized
disclosure (sec. 7431).
There is no explicit criminal penalty in the
Internal Revenue Code for unauthorized inspection
(absent subsequent disclosure) of tax returns and
return information. Such inspection is, however,
explicitly prohibited by the Internal Revenue
Service ("IRS").140
In a recent case, an individual was convicted of
violating the Federal wire fraud statute (18 U.S.C.
1343 and 1346) and a Federal computer fraud statute
(18 U.S.C. 1030) for unauthorized inspection.
However, the
U.S.
First Circuit Court of Appeals overturned this
conviction.141
Unauthorized inspection of information of any
department or agency of the United States (including
the IRS) via computer was made a crime under 18
U.S.C. 1030 by the Economic Espionage Act of 1996.142
This provision does not apply to unauthorized
inspection of paper documents.
Reasons
for Change
The Committee believes that it is important to have
a criminal penalty in the Internal Revenue Code to
punish this type of behavior. The Committee also
believes that it is appropriate to provide for civil
damages for unauthorized inspection parallel to
civil damages for unauthorized disclosure.
Explanation
of Provisions
Criminal
penalties
The bill creates a new criminal penalty in the
Internal Revenue Code. The penalty is imposed for
willful inspection (except as authorized by the
Code) of any tax return or return information by any
Federal employee or IRS contractor. The penalty also
applies to willful inspection (except as authorized)
by any State employee or other person who acquired
the tax return or return information under specific
provisions of section 6103. Upon conviction, the
penalty is a fine in any amount not exceeding
$1,000,143
or imprisonment of not more than 1 year, or both,
together with the costs of prosecution. In addition,
upon conviction, an officer or employee of the
United States
would be dismissed from office or discharged from
employment.
The Congress views any unauthorized inspection of
tax returns or return information as a very serious
offense; this new criminal penalty reflects that
view. The Congress also believes that unauthorized
inspection warrants very serious personnel sanctions
against IRS employees who engage in unauthorized
inspection, and that it is appropriate to fire
employees who do this.
Civil
damages
The bill amends the provision providing for civil
damages for unauthorized disclosure by also
providing for civil damages for unauthorized
inspection. Damages are available for unauthorized
inspection that occurs either knowingly or by reason
of negligence. Accidental or inadvertent inspection
that may occur (such as, for example, by making an
error in typing in a TIN) would not be subject to
damages because it would not meet this standard. The
bill also provides that no damages are available to
a taxpayer if that taxpayer requested the inspection
or disclosure.
The bill also requires that, if any person is
criminally charged by indictment or information with
inspection or disclosure of a taxpayer's return or
return information in violation of section 7213(a)
or (b), section 7213A (as added by the bill), or 18
USC section 1030(a)(2)(B), the Secretary notify that
taxpayer as soon as practicable of the inspection or
disclosure.
Effective
Date
The bill is effective for violations occurring on or
after the date of enactment.
TITLE
XI. ESTATE, GIFT, AND TRUST TAX SIMPLIFICATION
1.
Eliminate gift tax filing requirements for gifts to
charities (sec. 1101 of the bill and sec. 6019 of
the Code)
Present
Law
A gift tax generally is imposed on lifetime
transfers of property by gift (sec. 2501). In
computing the amount of taxable gifts made during a
calendar year, a taxpayer generally may deduct the
amount of any gifts made to a charity (sec. 2522).
Generally, this charitable gift deduction is
available for outright gifts to charity, as well as
gifts of certain partial interests in property (such
as a remainder interest). A gift of a partial
interest in property must be in a prescribed form in
order to qualify for the deduction.
Individuals who make gifts in excess of $10,000 to
any one donee during the calendar year generally are
required to file a gift tax return (sec. 6019). This
filing requirement applies to all gifts, whether
charitable or noncharitable, and whether or not the
gift qualifies for a gift tax charitable deduction.
Thus, under current law, a gift tax return is
required to be filed for gifts to charity in excess
of $10,000, even though no gift tax is payable on
the transfer.
Reasons
for Change
Because a charitable gift does not give rise to a
gift tax liability, many donors are unaware of the
requirement to file a gift tax return for charitable
gifts in excess of $10,000. Failure to file a gift
tax return under these circumstances could expose
the donor to penalties. The bill eliminates this
potential trap for the unwary.
Explanation
of Provision
The bill provides that gifts to charity are not
subject to the gift tax filing requirements of
section 6019, as long as the entire value of the
transferred property qualifies for the gift tax
charitable deduction under section 2522. The filing
requirements for gifts of partial interests in
property remain unchanged.
Effective
Date
The provision is effective for gifts made after the
date of enactment.
2.
Clarification of waiver of certain rights of
recovery (sec. 1102 of the bill and secs. 2207A and
2207B of the Code)
Present
Law
For estate and gift tax purposes, a marital
deduction is allowed for qualified terminable
interest property (QTIP). Such property generally is
included in the surviving spouse's gross estate upon
his or her death. The surviving spouse's estate is
entitled to recover the portion of the estate tax
attributable to inclusion of QTIP from the person
receiving the property, unless the spouse directs
otherwise by will (sec. 2207A). For this purpose, a
will provision specifying that all taxes shall be
paid by the estate is sufficient to waive the right
of recovery.
A decedent's gross estate includes the value of
previously transferred property in which the
decedent retains enjoyment or the right to income
(sec. 2036). The estate is entitled to recover from
the person receiving the property a portion of the
estate tax attributable to the inclusion (sec.
2207B). This right may be waived only by a provision
in the will (or revocable trust) specifically
referring to section 2207B.
Reasons
for Change
It is understood that persons utilizing standard
testamentary language often inadvertently waive the
right of recovery with respect to QTIP. Similarly,
persons waiving a right to contribution are unlikely
to refer to the code section granting the right.
Accordingly, allowing the right of recovery (or
right of contribution) to be waived only by specific
reference should simplify the drafting of wills by
better conforming with the testator's likely intent.
Explanation
of Provision
The bill provides that the right of recovery with
respect to QTIP is waived only to the extent that
language in the decedent's will or revocable trust
specifically so indicates (e.g., by a specific
reference to QTIP, the QTIP trust, section 2044, or
section 2207A). Thus, a general provision specifying
that all taxes be paid by the estate is no longer
sufficient to waive the right of recovery.
The bill also provides that the right of
contribution for property over which the decedent
retained enjoyment or the right to income is waived
by a specific indication in the decedent's will or
revocable trust, but specific reference to section
2207B is no longer required.
Effective
Date
The provision applies to decedents dying after the
date of enactment.
3.
Transitional rule under section 2056A (sec. 1103 of
the bill and sec. 2056A of the Code)
Present
Law
A "marital deduction" generally is allowed
for estate and gift tax purposes for the value of
property passing to a spouse. The Technical and
Miscellaneous Revenue Act of 1988 ("TAMRA")
denied the marital deduction for property passing to
an alien spouse outside a qualified domestic trust
("QDT"). An estate tax generally is
imposed on corpus distributions from a QDT.
TAMRA defined a QDT as a trust that, among other
things, required all trustees be
U.S.
citizens or domestic corporations. This provision
was modified in the Omnibus Budget Reconciliation
Acts of 1989 and 1990 to require that at least one
trustee be a U.S. citizen or domestic corporation
and that no corpus distribution be made unless such
trustee has the right to withhold any estate tax
imposed on the distribution (the "withholding
requirement").
Reasons
for Change
Wills drafted under the TAMRA rules must be revised
to conform with the withholding requirement, even
though both the TAMRA rule and its successor ensure
that a
U.S.
trustee is personally liable for the estate tax on a
QDT. Reinstatement of the TAMRA rule for wills
drafted in reliance upon it reduces the number of
will revisions necessary to comply with statutory
changes, thereby simplifying estate planning.
Explanation
of Provision
Certain trusts created before the enactment of the
Omnibus Budget Reconciliation Act of 1990 are
treated as satisfying the withholding requirement if
the governing instruments require that all trustees
be
U.S.
citizens or domestic corporations.
Effective
Date
The provision applies as if included in the Omnibus
Budget Reconciliation Act of 1990.
4.
Treatment for estate tax purposes of short-term
obligations held by nonresident aliens (sec. 1104 of
the bill and sec. 2105 of the Code)
Present
Law
The
United States
imposes estate tax on assets of noncitizen
nondomiciliaries that were situated in the
United States
at the time of the individual's death. Debt
obligations of a
U.S.
person, the
United States
, a political subdivision of a State, or the
District of Columbia
are considered property located within the
United States
if held by a nonresident not a citizen of the
United States
(sec. 2014(c)).
Special rules apply to treat certain bank deposits
and debt instruments the income from which qualifies
for the bank deposit interest exemption and the
portfolio interest exemption as property from
without the United States despite the fact that such
items are obligations of a U.S. person, the United
States, a political subdivision of a State, or the
District of Columbia (sec. 2105(b)). Income from
such items is exempt from
U.S.
income tax in the hands of the nonresident recipient
(secs. 871(h) and 871(i)(2)(A)). The effect of these
special rules is to exclude these items from the
U.S.
gross estate of a nonresident not a citizen of the
United States
. However, because of an amendment to section 871(h)
made by the Tax Reform Act of 1986, these special
rules no longer cover obligations that generate
short-term OID income despite the fact that such
income is exempt from U.S. income tax in the hands
of the nonresident recipient (sec. 871(g)(1)(B)(i)).
Reasons
for Change
The Committee believes that the income and estate
tax treatments of short-term OID obligations held by
nonresident aliens should conform. A purpose of
exempting short-term OID income derived by
nonresident aliens from
U.S.
income tax is to enhance the ability of
U.S.
borrowers to raise funds from foreign lenders, and
such purpose is hindered by the lack of a
corresponding exemption for
U.S.
estate tax. Moreover, to the extent the interest
from such an obligation is exempt from
U.S.
income tax, the inclusion of the instrument in the
nonresident noncitizen's
U.S.
estate would be a trap for the unwary.
Explanation
of Provision
The bill provides that any debt obligation, the
income from which would be eligible for the
exemption for short-term OID under section
871(g)(1)(B)(i) if such income were received by the
decedent on the date of his death, is treated as
property located outside of the United States in
determining the U.S. estate tax liability of a
nonresident not a U.S. citizen. No inference is
intended with respect to the estate tax treatment of
such obligations under present law.
Effective
Date
The provision is effective for estates of decedents
dying after the date of enactment.
5.
Distributions during first 65 days of taxable year
of estate (sec. 1105 of the bill and sec. 663(b) of
the Code)
Present
Law
In general, trusts and estates are treated as
conduits for Federal income tax purposes; income
received by a trust or estate that is distributed to
a beneficiary in the trust or estate's taxable year
"ending with or within" the taxable year
of the beneficiary is taxable to the beneficiary in
that year; income that is retained by the trust or
estate is initially taxable to the trust or estate.
In the case of distributions of previously
accumulated income by trusts (but not estates),
there may be additional tax under the so-called
"throwback" rules if the beneficiary to
whom the distributions were made has marginal rates
higher than those of the trust. Under the
"65-day rule," a trust may elect to treat
distributions paid within 65 days after the close of
its taxable year as paid on the last day of its
taxable year. The 65-day rule is not applicable to
estates.
Reasons
for Change
In order to minimize the tax differences between
estates and revocable trusts, the Committee believes
that the 65-day rule should be allowed to estates as
well as to trusts.
Explanation
of Provision
The bill extends application of the 65-day rule to
distributions by estates. Thus, an executor can
elect to treat distributions paid within 65 days
after the close of the estate's taxable year as
having been paid on the last day of such taxable
year.
Effective
Date
The provision applies to taxable years beginning
after the date of enactment.
6.
Separate share rules available to estates (sec. 1106
of the bill and sec. 663(c) of the Code)
Present
Law
Trusts with more than one beneficiary must use the
"separate share" rule in order to provide
different tax treatment of distributions to
different beneficiaries to reflect the income earned
by different shares of the trust's corpus.144
Treasury regulations provide that "[t]he
application of the separate share rule . . . will
generally depend upon whether distributions of the
trust are to be made in substantially the same
manner as if separate trusts had been created....
Separate share treatment will not be applied to a
trust or portion of a trust subject to a power to
distribute, apportion, or accumulate income or
distribute corpus to or for the use of one or more
beneficiaries within a group or class of
beneficiaries, unless the payment of income,
accumulated income, or corpus of a share of one
beneficiary cannot affect the proportionate share of
income, accumulated income, or corpus of any shares
of the other beneficiaries, or unless substantially
proper adjustment must thereafter be made under the
governing instrument so that substantially separate
and independent shares exist." (Treas. Reg.
sec. 1.663(c)-3). The separate share rule presently
does not apply to estates.
Reasons
for Change
The Committee understands that estates typically do
not have separate shares. Nonetheless, where
separate shares do exist in an estate, the
inapplicability of the separate share rule to
estates may result in one beneficiary or class of
beneficiaries being taxed on income payable to, or
accruing to, a separate beneficiary or class of
beneficiaries. Accordingly, the Committee believes
that a more equitable taxation of an estate and its
beneficiaries would be achieved with the application
of the separate share rule to an estate where, under
the provisions of the decedent's will or applicable
local law, there are separate shares in the estate.
Explanation
of Provision
The bill extends the application of the separate
share rule to estates. There are separate shares in
an estate when the governing instrument of the
estate (e.g., the will and applicable local law)
creates separate economic interests in one
beneficiary or class of beneficiaries such that the
economic interests of those beneficiaries (e.g.,
rights to income or gains from specified items of
property) are not affected by economic interests
accruing to another separate beneficiary or class of
beneficiaries. For example, a separate share in an
estate would exist where the decedent's will
provides that all of the shares of a closely-held
corporation are devised to one beneficiary and that
any dividends paid to the estate by that corporation
should be paid only to that beneficiary and any such
dividends would not affect any other amounts which
that beneficiary would receive under the will. As in
the case of trusts, the application of the separate
share rule is mandatory where separate shares exist.
Effective
Date
The provision applies to decedents dying after the
date of enactment.
7.
Executor of estate and beneficiaries treated as
related persons for disallowance of losses (sec.
1107 of the bill and secs. 267(b) and 1239(b) of the
Code)
Present
Law
Section 267 disallows a deduction for any loss on
the sale of an asset to a person related to the
taxpayer. For the purposes of section 267, the
following parties are related persons: (1) a trust
and the trust's grantor, (2) two trusts with the
same grantor, (3) a trust and a beneficiary of the
trust, (4) a trust and a beneficiary of another
trust, if both trusts have the same grantor, and (5)
a trust and a corporation the stock of which is more
than 50 percent owned by the trust or the trust's
grantor.
Section 1239 disallows capital gain treatment on the
sale of depreciable property to a related person.
For purposes of section 1239, a trust and any
beneficiary of the trust are treated as related
persons, unless the beneficiary's interest is a
remote contingent interest.
Neither section 267 or section 1239 presently treat
an estate and a beneficiary of the estate as related
persons.
Reasons
for Change
The Committee believes that the disallowance rules
under sections 267 and 1239 with respect to
transactions between related parties should apply to
an estate and a beneficiary of that estate for the
same reasons that such rules apply to a trust and a
beneficiary of that trust.
Explanation
of Provision
Under the bill, an estate and a beneficiary of that
estate are treated as related persons for purposes
of sections 267 and 1239, except in the case of a
sale or exchange in satisfaction of a pecuniary
bequest.
Effective
Date
The provision applies to taxable years beginning
after the date of enactment.
8.
Simplified taxation of earnings of pre-need funeral
trusts (sec. 1108 of the bill and sec. 684 of the
Code)
Present
Law
A pre-need funeral trust is an arrangement where an
individual purchases funeral or burial services or
merchandise from a funeral home or cemetery in
advance of the individual's death. The individual
enters into a contract with the provider of such
services or merchandise whereby the individual
selects the services or merchandise to be provided
upon his or her death, and agrees to pay for them in
advance of his or her death. Such amounts (or a
portion thereof) are held in trust during the
individual's lifetime and are paid to the seller
upon the individual's death.
Under present law, pre-need funeral trusts generally
are treated as grantor trusts, and the annual income
earned by such trusts is taxed to the
purchaser/grantor of the trust. Rev. Rul. 87-127.
Any amount received from the trust by the seller (as
payment for services or merchandise) is includible
in the gross income of the seller.
Reasons
for Change
To the extent that pre-need funeral trusts are
treated as grantor trusts under present law,
numerous individual taxpayers are required to
account for the earnings of such trusts on their tax
returns, even though the earnings with respect to
any one taxpayer may be small. The Committee
believes that this recordkeeping burden on
individuals could be eased, and that compliance with
the tax laws would be improved, if such trusts
instead were taxed at the entity level, with one
simplified annual return filed by the trustee
reporting the aggregate income from all such trusts
administered by the trustee.
Explanation
of Provision
The bill allows the trustee of a pre-need funeral
trust to elect special tax treatment for such a
trust, to the extent the trust would otherwise be
treated as a grantor trust. A qualified funeral
trust is defined as one which meets the following
requirements: (1) the trust arises as the result of
a contract between a person engaged in the trade or
business of providing funeral or burial services or
merchandise and one or more individuals to have such
services or property provided upon such individuals'
death; (2) the only beneficiaries of the trust are
individuals who have entered into contracts to have
such services or merchandise provided upon their
death; (3) the only contributions to the trust are
contributions by or for the benefit of the trust
beneficiaries; (4) the trust's only purpose is to
hold and invest funds that will be used to make
payments for funeral or burial services or
merchandise for the trust beneficiaries; and (5) the
trust has not accepted contributions totaling more
than $7,000 by or for the benefit of any individual.
For this purpose, "contributions" include
all amounts transferred to the trust, regardless of
how denominated in the contract. Contributions do
not, however, include income or gain earned with
respect to property in the trust. For purposes of
applying the $7,000 limit, if a purchaser has more
than one contract with a single trustee (or related
trustees), all such trusts are treated as one trust.
Similarly, if the Secretary of Treasury determines
that a purchaser has entered into separate contracts
with unrelated trustees to avoid the $7,000 limit
described above, the Secretary may require that such
trusts be treated as one trust. For contracts
entered into after 1998, the $7,000 limit is indexed
annually for inflation.
The trustee's election to have this provision apply
to a qualified funeral trust is to be made
separately with respect to each purchaser's trust.
It is anticipated that the Department of Treasury
will issue prompt guidance with respect to the
simplified reporting requirements so that if the
election is made, a single annual trust return may
be filed by the trustee, separately listing the
amount of income earned with respect to each
purchaser. If the election is made, the trust is not
treated as a grantor trust and the amount of tax
paid with respect to each purchaser's trust is
determined in accordance with the income tax rate
schedule generally applicable to estates and trusts
(Code sec. 1(e)), but no deduction is allowed under
section 642(b). The tax on the annual earnings of
the trust is payable by the trustee.
As under present law, amounts received from the
trust by the seller are treated as payments for
services and merchandise and are includible in the
gross income of the seller. No gain or loss is
recognized to the beneficiary of the trust for
payments from the trust to the beneficiary upon
cancellation of the contract, and the beneficiary
takes a carryover basis in any assets received from
the trust upon cancellation.
Effective
Date
The provision is effective for taxable years
beginning after the date of enactment.
9.
Adjustments for gifts within three years of
decedent's death (sec. 1109 of the bill and secs.
2035 and 2038 of the Code)
Present
Law
The first $10,000 of gifts of present interests to
each donee during any one calendar year are excluded
from Federal gift tax.
The value of the gross estate includes the value of
any previously transferred property if the decedent
retained the power to revoke the transfer (sec.
2038). The gross estate also includes the value of
any property with respect to which such power is
relinquished during the three years before death
(sec. 2035). There has been significant litigation
as to whether these rules require that certain
transfers made from a revocable trust within three
years of death be includible in the gross estate.
See, e.g., Jalkut Estate v. Commissioner, 96
T.C. 675 (1991) (transfers from revocable trust
includible in gross estate); McNeely v.
Commissioner, 16 F.3d 303 (8th Cir. 1994)
(transfers from revocable trust not includible in
gross estate); Kisling v. Commissioner, 32
F.3d 1222 (8th Cir. 1994) (acq.) (transfers from
revocable trust not includible in gross estate).
Reasons
for Change
The inclusion of certain property transferred during
the three years before death is directed at
transfers that would otherwise reduce the amount
subject to estate tax by more than the amount
subject to gift tax, disregarding appreciation
between the times of gift and death. Because all
amounts transferred from a revocable trust are
subject to the gift tax, the Committee believes that
inclusion of such amounts is unnecessary where the
transferor has retained no power over the property
transferred out of the trust. The Committee believes
that clarifying these rules statutorily will lend
certainty to these rules.
Explanation
of Provision
The provision codifies the rule set forth in the McNeely
and Kisling cases to provide that a transfer
from a revocable trust (i.e., a trust described
under section 676) is treated as if made directly by
the grantor. Thus, an annual exclusion gift from
such a trust is not included in the gross estate.
The provision also revises section 2035 to improve
its clarity.
Effective
Date
The provision applies to decedents dying after the
date of enactment
10.
Clarify relationship between community property
rights and retirement benefits (sec. 1110 of the
bill and sec. 2056(b)(7)(C) of the Code)
Present
Law
Community
property
Under state community property laws, each spouse
owns an undivided one-half interest in each
community property asset. In community property
jurisdictions, a nonparticipant spouse may be
treated as having a vested community property
interest in either his or her spouse's qualified
plan, individual retirement arrangement
("IRA"), or simplified employee pension
("SEP") plan.
Transfer
tax treatment of qualified plans
In the Retirement Equity Act of 1984
("REA"), qualified retirement plans were
required to provide automatic survivor benefits (1)
in the case of a participant who retires under the
plan, in the form of a qualified joint and survivor
annuity, and (2) in the case of a vested participant
who dies before the annuity starting date and who
has a surviving spouse, in the form of a
preretirement survivor annuity. A participant
generally is permitted to waive such annuities,
provided he or she obtains the written consent of
his or her spouse.
The Tax Reform Act of 1986 repealed the estate tax
exclusion, formerly contained in sections 2039(c)
and 2039(d), for certain interests in qualified
plans owned by a nonparticipant spouse attributable
to community property laws and made certain other
changes to conform the transfer tax treatment of
qualified and nonqualified plans.
As a result of these changes made by REA and the Tax
Reform Act of 1986, the transfer tax treatment of
married couples residing in a community property
state is unclear where either spouse is covered by a
qualified plan.
Reasons
for Change
The Committee believes that survivorship interests
in annuities in community property States should be
accorded similar treatment to the tax treatment of
interests in such annuities in non-community
property States. Accordingly, the bill would clarify
that the transfer at death of a survivorship
interest in an annuity to a surviving spouse will be
a deductible marital transfer under the QTIP rules
regardless of whether the decedent's annuity
interest arose out of his or her employment or arose
under community property laws by reason of the
employment of his or her spouse.
Explanation
of Provision
The bill clarifies that the marital deduction is
available with respect to a nonparticipant spouse's
interest in an annuity attributable to community
property laws where he or she predeceases the
participant spouse. Under the bill, the
nonparticipant spouse's interest in an annuity
arising under the community property laws of a State
that passes to the surviving participant spouse may
qualify for treatment as QTIP under section
2056(b)(7).
The provision is not intended to create an inference
regarding the treatment under present law of a
transfer to a surviving spouse of the decedent
spouse's interest in an annuity arising under
community property laws.
Effective
Date
The provision applies to decedents dying, or
waivers, transfers and disclaimers made, after the
date of enactment.
11.
Treatment under qualified domestic trust rules of
forms of ownership which are not trusts (sec. 1111
of the bill and sec. 2056A(c) of the Code)
Present
Law
A marital deduction generally is allowed for estate
and gift tax purposes for the value of property
passing to a spouse. The marital deduction is not
available for property passing to an alien spouse
outside a qualified domestic trust ("QDT").
An estate tax generally is imposed on corpus
distributions from a QDT.
Trusts are not permitted in some countries (e.g.,
many civil law countries).145
As a result, it is not possible to create a QDT in
those countries.
Description
of Proposal
The proposal would provide the Treasury Department
with regulatory authority to treat as trusts legal
arrangements that have substantially the same effect
as a trust.
Effective
Date
The proposal would apply to decedents dying after
the date of enactment.
12.
Opportunity
to correct certain failures under section 2032A
(sec. 1112 of the bill and sec. 2032A of the Code)
Present
Law
For estate tax purposes, an executor may elect to
value certain real property used in farming or other
closely held business operations at its current use
value rather than its highest and best use (sec.
2032A). A written agreement signed by each person
with an interest in the property must be filed with
the election.
Treasury regulations require that a notice of
election and certain information be filed with the
Federal estate tax return (Treas. Reg. sec.
20.2032A-8). The administrative policy of the
Treasury Department is to disallow current use
valuation elections unless the required information
is supplied.
Under procedures prescribed by the Treasury
Department, an executor who makes the election and
substantially complies with the regulations but
fails to provide all required information or the
signatures of all persons with an interest in the
property may supply the missing information within a
reasonable period of time (not exceeding 90 days)
after notification by the Treasury Department.
Reasons
for Change
It is understood that executors commonly fail to
include with the filed estate tax return a recapture
agreement signed by all persons with an interest in
the property or all information required by Treasury
regulations. It is believed that allowing such
signatures or information to be supplied later is
consistent with the legislative intent of section
2032A and eases return filing.
Explanation
of Provision
The bill extends the procedures allowing subsequent
submission of information to any executor who makes
the election and submits the recapture agreement,
without regard to compliance with the Treasury
regulations. Thus, the bill allows the current use
valuation election if the executor supplies the
required information within a reasonable period of
time (not exceeding 90 days) after notification by
the IRS. During that time period, the bill also
allows the addition of signatures to a previously
filed agreement.
Effective
Date
The provision applies to decedents dying after the
date of enactment.
13.
Authority to waive requirement of
U.S.
trustee for qualified domestic trusts (sec. 1113 of
the bill and sec. 2056A(a)(1)(A) of the Code)
Present
Law
In order for a trust to be a QDT, a
U.S.
trustee must have the power to approve all corpus
distributions from the trust. In some countries,
trusts cannot have any
U.S.
trustees. As a result, trusts established in those
countries cannot qualify as a QDT.
Reasons
for Change
The estate of a decedent with a nonresident spouse
should not be precluded from qualifying for the
marital deduction in situations where the use of a
U.S.
trustee is prohibited by another country.
Accordingly, the Committee believes it is
appropriate to grant regulatory authority to allow
qualification for the marital deduction in such
situations where the Treasury Department determines
that the
U.S.
can retain jurisdiction and other adequate security
has been provided for the payment of
U.S.
transfer taxes on subsequent transfers by the
surviving spouse of the property transferred by the
decedent.
Explanation
of Provision
In order to permit the establishment of a QDT in
those situations where a country prohibits a trust
from having a
U.S.
trustee, the bill provides the Treasury Department
with regulatory authority to waive the requirement
that a QDT have a
U.S.
trustee. It is anticipated that such regulations, if
any, provide an alternative mechanism under which
the
U.S.
would retain jurisdiction and adequate security to
impose
U.S.
transfer tax on transfers by the surviving spouse of
the property transferred by the decedent. For
example, one possible mechanism would be a closing
agreement process under which the surviving spouse
waives treaty benefits, allows the
U.S.
to retain taxing jurisdiction and provides adequate
security with respect to such transfer taxes.
Effective
Date
The provision applies to decedents dying after the
date of enactment.
TITLE
XII. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS
A.
Increase De Minimis Limit for After-Market
Alterations Subject to Heavy Truck and Luxury
Automobile Excise Taxes (sec. 1201 of the bill and
secs. 4001 and 4051 of the Code)
Present
Law
An excise tax is imposed on retail sales of truck
chassis and truck bodies suitable for use in a
vehicle with a gross vehicle weight of over 33,000
pounds. The tax is equal to 12 percent of the retail
sales price. An excise tax also is imposed on retail
sales of luxury automobiles. The tax currently is
equal to 8 percent of the amount by which the retail
sales price exceeds an inflation-adjusted $30,000
base. (The rate is reduced by 1 percentage point per
year through 2002, and the tax is not imposed after
2002.) Anti-abuse rules prevent the avoidance of
these taxes through separate purchases of major
component parts. With certain exceptions, tax at the
rate applicable to the vehicle is imposed on the
subsequent installation of parts and accessories
within six months after purchase of a taxable
vehicle. The exceptions include a de minimis
exception for parts and accessories with an
aggregate price that does not exceed $200 (or such
other amount as Treasury may by regulation
prescribe).
Reasons
for Change
Retailers generally are responsible for taxes on
truck chassis and bodies and luxury automobiles. In
the case of a subsequent installation, however, the
owner or operator of the vehicle is responsible for
paying the tax attributable to the installation and
the installer is secondarily liable. Increasing the de
minimis amount should significantly reduce the
number of return filers and relieve many persons
from the administrative burden of filing an excise
tax return reporting a very small amount of tax.
Explanation
of Provision
The tax on subsequent installation of parts and
accessories does not apply to parts and accessories
with an aggregate price that does not exceed $1,000.
Parts and accessories installed on a vehicle on or
before that date are taken into account in
determining whether the $1,000 threshold is
exceeded. If the aggregate price of the
pre-effective date parts and accessories does not
exceed $200, they are not be subject to tax unless
the aggregate price of all additions exceeds $1,000.
Effective
Date
The increase in the threshold for taxing
after-market additions under the heavy truck and
luxury car excise taxes is effective on January 1,
1998.
B.
Simplification of Excise Taxes on Distilled Spirits,
Wine, and Beer (secs. 1211-1222 of the bill and secs.
5008, 5053, 5055, 5115, 5175, and 5207, and new secs.
5222 and 5418 of the Code)
Present
Law
Imported distilled spirits returned to plant.
--Excise tax that has been paid on domestic
distilled spirits is credited or refunded if the
spirits are later returned to bonded premises. Tax
is imposed on imported bottled spirits when they are
withdrawn from customs custody, but the tax is not
refunded or credited if the spirits are later
returned to bonded premises.
Cancellation of export bonds. --An exporter
that withdraws distilled spirits from bonded
warehouses for export or transportation to a customs
bonded warehouse without the payment of tax must
furnish a bond to cover the withdrawal. The required
bonds are canceled "on the submission of such
evidence, records, and certification indicating
exportation as the Secretary may by regulations
prescribe."
Location of records of distilled spirits plant.
--Proprietors of distilled spirits plants are
required to maintain records and reports relating to
their production, storage, denaturation, and
processing activities on the premises where the
operations covered by the record are carried on.
Transfers from brewery to distilled spirits
plant. --A distilled spirits plant may receive
on its bonded premises beer to be used in the
production of distilled spirits only if the beer is
produced on contiguous brewery premises.
Sign not required for wholesale dealers.
--Wholesale liquor dealers are required to post a
sign identifying the firm as such. Failure to do so
is subject to a penalty.
Refund on returns of merchantable wine.
--Excise tax paid on domestic wine that is returned
to bond as unmerchantable is refunded or credited,
and the wine is once again treated as wine in bond
on the premises of a bonded wine cellar.
Increased sugar limits for certain wine.
--Natural wines may be sweetened to correct high
acid content. For most wines, however, sugar cannot
constitute more than 35 percent (by volume) of the
combined sugar and juice used to produce the wine.
Up to 60 percent sugar may be used in wine made from
loganberries, currants, and gooseberries. If the
amount of sugar used exceeds the applicable
limitation, the wine must be labeled
"substandard."
Beer withdrawn for embassy use. --Imported
beer to be used for the family and official use of
representatives of foreign governments or public
international organizations may be withdrawn from
customs bonded warehouses without payment of excise
tax. No similar exemption applies to domestic beer
withdrawn from a brewery or entered into a bonded
customs warehouse for the same authorized use.
Beer withdrawn for destruction. --Removals of
beer from a brewery are exempt from tax if the
removal is for export, because the beer is unfit for
beverage use, for laboratory analysis, research,
development and testing, for the brewer's personal
or family use, or as supplies for certain vessels
and aircraft.
Drawback on exported beer. --A domestic
producer that exports beer may recover the tax
(receive a "drawback") found to have been
paid on the exported beer upon the "submission
of such evidence, records and certificates
indicating exportation" required by
regulations.
Imported beer transferred in bulk to brewery and
imported wine transferred in bulk to wineries.
--Imported beer and wine are subject to tax when
removed from customs custody.
Reasons
for Change
Until 1980, the method of collecting alcohol excise
taxes required the regular presence of Treasury
Department inspectors at alcohol production
facilities. In 1980, the method of collecting tax
was changed to a bonded premises system under which
examinations and collection procedures are similar
to those used in connection with other Federal
excise taxes.
A number of reporting and recordkeeping requirements
need to be modified to conform to the current
collection system. Appropriate modification will
allow the Bureau of Alcohol, Tobacco, and Firearms
to administer alcohol excise taxes more efficiently
and relieve taxpayers of unnecessary paperwork
burdens.
The current rules under which the Code permits
tax-free removals of alcoholic beverages (or allows
a credit or refund of tax on a return to bonded
premises) result in inappropriate disparities in the
treatment of different types of alcoholic beverages.
In addition, these rules unduly limit available
options for complying with environmental and other
laws that regulate the destruction and disposition
of alcoholic beverages. Under the bonded premises
system, these rules scan be liberalized without
jeopardizing the collection of tax revenues.
Other provisions of current law (i.e., the sign
requirement and the sugar limits for certain wine)
are outdated and should be repealed or revised.
Explanation
of Provisions
Imported distilled spirits returned to plant.
--Refunds or credits of the tax are available for
imported bottled spirits that are returned to
distilled spirits plants.
Cancellation of export bonds. --The
certification requirement are relaxed to allow the
bonds to be canceled if there is such proof of
exportation as the Secretary may require.
Location of records of distilled spirits plant.
--Records and reports are permitted to be maintained
elsewhere other than on the plant premises
Transfers from brewery to distilled spirits
plant. --Beer may be brought from any brewery
for use in the production of spirits. Such beer is
exempt from excise tax, subject to Treasury
regulations.
Sign not required for wholesale dealers.
--The requirement that a sign be posted is repealed.
Refund on returns of merchantable wine. --A
refund or credit is available in the case of all
domestic wine returned to bond, whether or not
unmerchantable.
Increased sugar limits for certain wine. --Up
to 60 percent sugar is permitted in any wine made
from juice, such as cranberry or plum juice, with an
acid content of 20 or more parts per thousand.
Beer
withdrawn for embassy use.
Subject to Treasury's regulatory authority, an
exemption similar to that currently available for
imported beer is provided for domestic beer.
Beer
withdrawn for destruction.
An exemption from tax is added for removals for
destruction, subject to Treasury regulations.
Drawback
on exported beer.
The certification requirement is relaxed to allow a
drawback of tax paid if there is such proof of
exportation as the Secretary may be regulations
require.
Imported
beer transferred in bulk to brewery and imported
wine transferred in bulk to wineries.
Subject to Treasury regulations, beer and wine
imported in bulk may be withdrawn from customs
custody and transferred in bulk to a brewery (beer)
or a winery (wine) without payment of tax. The
proprietor of the brewery to which the beer is
transferred or of the winery to which the wine is
transferred is liable for the tax imposed on the
withdrawal from customs custody and the importer is
relieved of liability.
Effective
Date
The provision to repeal the requirement that
wholesale liquor dealers post a sign outside their
place of business takes effect on the date of
enactment. The other provisions take effect on the
first day of the calendar quarter that begins at
least 90 days after the date of enactment.
C.
Other Excise Tax Provisions
1.
Authority for Internal Revenue Service to grant
exemptions from excise tax registration requirements
(sec. 1231 of the bill and sec. 4222 of the Code)
Present
Law
The Code exempts certain types of sales (e.g., sales
for use in further manufacture, sales for export,
and sales for use by a State or local government or
a nonprofit educational organization) from excise
taxes imposed on manufacturers and retailers. These
exemptions generally apply only if the seller, the
purchaser, and any person to whom the article is
resold by the purchaser (the second purchaser) are
registered with the Internal Revenue Service. The
IRS can waive the registration requirement for the
purchaser and second purchaser in some but not all
cases.
Reasons
for Change
Allowing the Internal Revenue Service to waive the
registration requirement for purchasers and second
purchasers in all cases will permit more efficient
administration of the exemptions and reduce
paperwork burdens on taxpayers.
Explanation
of Provision
The IRS is authorized to waive the registration
requirement for purchasers and second purchasers in
all cases.
Effective
Date
The provision applies to sales made pursuant to
waivers issued after the date of enactment.
2.
Repeal of excise tax deadwood provisions (sec. 1232
of the bill and secs. 4051, 4495-4498, and 4681-4682
of the Code)
Present
Law
The Code includes a provision relating to a
temporary reduction in the tax on piggyback trailers
sold before July 18, 1985, and provisions relating
to the tax on the removal of hard minerals from the
deep seabed before June 28, 1990.
An excise tax is imposed on the sale or use by the
manufacturer or importer of certain ozone-depleting
chemicals (sec. 4681). The amount of the tax
generally is determined by multiplying the base tax
amount applicable for the calendar year by an
ozone-depleting factor assigned to each taxable
chemical. The base tax amount was $5.80 per pound in
1996 and will increase by 45 cents per pound per
year thereafter. The Code contains provisions for
special rates of tax applicable to years before 1996
(e.g., sec. 4282(g)(1), (2), (3), and (5)).
Reasons
for Change
The elimination of out-of-date, "deadwood"
provisions will simplify the Code by removing
unneeded Code sections.
Explanation
of Provision
These provisions are repealed, as deadwood.
Effective
Date
The provision s are effective on the date of
enactment.
3.
Modifications to excise tax on certain arrows (sec.
1233 of the bill and sec. 4161 of the Code)
Present
Law
An 11-percent manufacturer's excise tax is imposed
on bows having a draw weight of more than 10 pounds
and on arrows that either are greater than 18 inches
in length or are suitable for use with a taxable
bow. The tax is imposed on the manufacturer's sales
price of the completed arrow.
Reasons
for Change
Imposing the excise tax on the component parts of
the arrow before they are shipped to the assembler
of the arrow will improve compliance with, and
collection of, the tax by reducing the potential
number of tax collection points.
Explanation
of Provision
Under the bill, the current excise tax on arrows tax
is replaced with a manufacturer's excise tax on the
four component parts of the arrow: shafts, points,
nocks, and vanes. The tax rate is increased to 12.4
percent of the value of each of these four
components to offset the reduction in aggregate
value subjected to tax compared to present-law
valuation of the completed arrow.
Effective
Date
The provision is be effective for arrow components
sold after September 30, 1997.
4.
Modifications to heavy highway vehicle retail excise
tax (sec. 1234 of the bill and sec. 4051 of the
Code)
Present
Law
A 12-percent retail excise tax is imposed on certain
heavy highway trucks and trailers, and on highway
tractors. Small trucks (those with a gross vehicle
weight not over 33,000 pounds) and lighter trailers
(those with a gross vehicle weight not over 26,000
pounds) are exempt from the tax. The tax applies to
the first retail sale of a new or remanufactured
vehicle. The determination under present law of
whether a particular modification to an existing
vehicle constitutes remanufacture (taxable) or a
repair (nontaxable) is factual and generally is
based on whether the function of the vehicle is
changed or, in the case of worn vehicles, whether
the cost of the modification exceeds 75 percent of
the value of the modified vehicle.
No tax is imposed on trucks, tractors, and trailers
when they are sold for resale or long-term lease, if
the purchaser is registered with the Treasury
Department. In such cases, purchasers are liable for
the tax when the vehicle is sold or leased. The tax
is based on the sales price in the transaction to
which it applies.
Reasons
for Change
Clarification is needed concerning the application
of the 75-percent-of value threshold in determining
whether repairs to a wrecked vehicle constitutes
remanufacture. A certification requirement for
resales of trucks, tractors, and trailers will
simplify administration of the tax.
Explanation
of Provision
The bill makes two changes to the heavy vehicle
excise tax:
(1) Clarification is provided that the
75-percent-of-value threshold applies in determining
whether repairs to a wrecked vehicle constitute
remanufacture; and
(2) The registration requirement currently
applicable to certain sales of trucks, tractors, and
trailers for resale is replaced with a certification
requirement.
Effective
Date
The provision is effective after December 31, 1997.
5.
Treatment of skydiving flights as noncommercial
aviation (sec. 1235 of the bill and sec. 4081 and
4261 of the Code)
Present
Law
Commercial passenger aviation, or air transportation
for which a fare is charged, is subject to a
10-percent ad valorem excise tax for the
Airport and Airway Trust Fund. General aviation, or
air transportation which is not "for hire"
is subject to a fuels tax for the Trust Fund. In the
case of skydiving flights, questions have arisen as
to when the flight is commercial aviation subject to
the ticket tax and when it is noncommercial aviation
subject to the fuels tax. In general, if instruction
is offered, the flight is general aviation.
Otherwise, the flight is treated as commercial
aviation. Many skydiving flights carry both persons
receiving instruction and others not receiving
instruction.
Reasons
for Change
The tax treatment of skydiving flights as commercial
or noncommercial needs to be clarified.
Explanation
of Provision
The bill specifies that flights which are
exclusively dedicated to skydiving are taxed as
noncommercial aviation flights, regardless of
whether instruction is offered to any of the
passengers.
Effective
Date
The provision is effective for flights beginning
after September 30, 1997.
6.
Eliminate double taxation of certain aviation fuels
sold to producers by "fixed base
operators" (sec. 1236 of the bill and sec. 4091
of the Code)
Present
Law
Section 4091 imposes a tax on the sale of aviation
fuel by any producer (defined to include a wholesale
distributor). Fuel sold at many rural airports is
sold by retail dealers who do not qualify as
wholesale distributors. This fuel is purchased by
the retailers tax-paid. In certain instances, fuel
which has been purchased tax-paid by a retailer will
be re-sold to a producer, e.g., to enable the
producer to serve one of its customers at the
airport. When this fuel is resold at retail by the
producer, a second tax is imposed. The Code contains
no provision allowing a refund of the first tax in
such cases.
Reasons
for Change
Permitting a refund of the tax previously paid on
aviation fuel when a producer resells the fuel and
pays tax on the resale will improve the fairness of
the tax collection for such fuel.
Explanation
of Provision
The bill will permit a refund of the tax previously
paid on aviation fuel when a producer acquires the
fuel, resells it, and pays tax on the second sale.
Effective
Date
The provision is effective for fuel sold after
September 30, 1997.
D.
Tax-Exempt Bond Provisions
Overview
Interest on State and local government bonds
generally is excluded from gross income for purposes
of the regular individual and corporate income taxes
if the proceeds of the bonds are used to finance
direct activities of these governmental units (Code
sec. 103).
Unlike the interest on governmental bonds, described
above, interest on private activity bonds generally
is taxable. A private activity bond is a bond issued
by a State or local governmental unit acting as a
conduit to provide financing for private parties in
a manner violating either (1) a private business use
and payment test or (2) a private loan restriction.
However, interest on private activity bonds is not
taxable if (1) the financed activity is specified in
the Code and (2) at least 95 percent of the net
proceeds of the bond issue is used to finance the
specified activity.
Issuers of State and local government bonds must
satisfy numerous other requirements, including
arbitrage restrictions (for all such bonds) and
annual State volume limitations (for most private
activity bonds) for the interest on these bonds to
be excluded from gross income.
1.
Repeal of $100,000 limitation on unspent proceeds
under 1-year exception from rebate (sec. 1241 of the
bill and sec. 148 of Code)
Present
Law
Subject to limited exceptions, arbitrage profits
from investing bond proceeds in investments
unrelated to the governmental purpose of the
borrowing must be rebated to the Federal Government.
No rebate is required if the gross proceeds of an
issue are spent for the governmental purpose of the
borrowing within six months after issuance.
This six-month exception is deemed to be satisfied
by issuers of governmental bonds (other than tax and
revenue anticipation notes) and qualified 501(c)(3)
bonds if (1) all proceeds other than an amount not
exceeding the lesser of five percent or $100,000 are
so spent within six months and (2) the remaining
proceeds are spent within one year after the bonds
are issued.
Reasons
for Change
Exemption of interest paid on State and local bonds
from Federal income tax provides an implicit subsidy
to State and local governments for their borrowing
costs. The principal Federal policy concern
underlying the arbitrage rebate requirement is to
discourage the earlier and larger than necessary
issuance of tax-exempt bonds to take advantage of
the opportunity to profit by investing funds
borrowed at low-cost tax-exempt rates in higher
yielding taxable investments. If at least 95 percent
of the proceeds of an issue is spent within six
months, and the remainder is spent within one year,
opportunities for such arbitrage profit are
significantly limited.
Explanation
of Provision
The $100,000 limit on proceeds that may remain
unspent after six months for certain governmental
and qualified 501(c)(3) bonds otherwise exempt from
the rebate requirement is deleted. Thus, if at least
95 percent of the proceeds of these bonds is spent
within six months after their issuance, and the
remainder is spent within one year, the six-month
exception is deemed to be satisfied.
Effective
Date
The provision applies to bonds issued after the date
of enactment.
2.
Exception from rebate for earnings on bona fide debt
service fund under construction bond rules (sec.
1242 of the bill and sec. 148 of the Code)
Present
Law
In general, arbitrage profits from investing bond
proceeds in investments unrelated to the
governmental purpose of the borrowing must be
rebated to the Federal Government. An exception is
provided for certain construction bond issues if the
bonds are governmental bonds, qualified 501(c)(3)
bonds, or exempt-facility private activity bonds for
governmentally-owned property.
This exception is satisfied only if the available
construction proceeds of the issue are spent at
minimum specified rates during the 24-month period
after the bonds are issued. The exception does not
apply to bond proceeds invested after the 24-month
expenditure period as part of a reasonably required
reserve or replacement fund, a bona fide debt
service fund, or to certain other investments (e.g.,
sinking funds). Issuers of these construction bonds
also may elect to comply with a penalty regime in
lieu of rebating arbitrage profits if they fail to
satisfy the exception's spending requirements.
Reasons
for Change
Bond proceeds invested in a bona fide debt service
fund generally must be spent at least annually for
current debt service. The short-term nature of
investments in such funds results in only limited
potential for generating arbitrage profits. If the
spending requirements of the 24-month rebate
exception are satisfied, the administrative
complexity of calculating rebate on these proceeds
outweighs the other Federal policy concerns
addressed by the rebate requirement.
Explanation
of Provision
The bill exempts earnings on bond proceeds invested
in bona fide debt service funds from the arbitrage
rebate requirement and the penalty requirement of
the 24-month exception if the spending requirements
of that exception are otherwise satisfied.
Effective
Date
The provision applies to bonds issued after the date
of enactment.
3.
Repeal of debt service-based limitation on
investment in certain nonpurpose investments (sec.
1243 of the bill and sec. 148 of the Code)
Present
Law
Issuers of all tax-exempt bonds generally are
subject to two sets of restrictions on investment of
their bond proceeds to limit arbitrage profits. The
first set requires that tax-exempt bond proceeds be
invested at a yield that is not materially higher
(generally defined as 0.125 percentage points) than
the bond yield ("yield restrictions").
Exceptions are provided to this restriction for
investments during any of several "temporary
periods" pending use of the proceeds and,
throughout the term of the issue, for proceeds
invested as part of a reasonably required reserve or
replacement fund or a "minor" portion of
the issue proceeds.
Except for temporary periods and amounts held
pending use to pay current debt service, present law
also limits the amount of the proceeds of private
activity bonds (other than qualified 501(c)(3)
bonds) that may be invested at materially higher
yields at any time during a bond year to 150 percent
of the debt service for that bond year. This
restriction affects primarily investments in
reasonably required reserve or replacement funds.
Present law further restricts the amount of proceeds
from the sale of bonds that may be invested in these
reserve funds to ten percent of such proceeds.
The second set of restrictions requires generally
that all arbitrage profits earned on investments
unrelated to the governmental purpose of the
borrowing be rebated to the Federal Government
("arbitrage rebate"). Arbitrage profits
include all earnings (in excess of bond yield)
derived from the investment of bond proceeds (and
subsequent earnings on any such earnings).
Reasons
for Change
The 150-percent of debt service limit was enacted
before enactment of the arbitrage rebate requirement
and the ten-percent limit on the size of reasonably
required reserve or replacement funds. It was
intended to eliminate arbitrage-motivated activities
available from investment of such reserve funds.
Provided that comprehensive yield restriction and
arbitrage rebate requirements and the present-law
overall size limit on reserve funds are maintained,
the 150-percent of debt service yield restriction
limit is duplicative.
Explanation
of Provision
The bill repeals the 150-percent of debt service
yield restriction.
Effective
Date
The provision applies to bonds issued after the date
of enactment.
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