Revenue Reconciliation Act Page 9

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Revenue Reconciliation Act page9

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4. Repeal of expired provisions relating to student loan bonds (sec. 1244 of the bill and sec. 148 of the Code)




Present Law



Present law includes two special exceptions to the arbitrage rebate and pooled financing temporary period rules for certain qualified student loan bonds. These exceptions applied only to bonds issued before January 1, 1989.


Explanation of Provision



These special exceptions are deleted as "deadwood."


Effective Date



The provision applies to bonds issued after the date of enactment. It has no effect on bonds issued prior to the date of enactment.


E. Tax Court Procedures




1. Overpayment determinations of Tax Court (sec. 1251 of the bill and sec. 6512 of the Code)




Present Law



The Tax Court may order the refund of an overpayment determined by the Court, plus interest, if the IRS fails to refund such overpayment and interest within 120 days after the Court's decision becomes final. Whether such an order is appealable is uncertain.

In addition, it is unclear whether the Tax Court has jurisdiction over the validity or merits of certain credits or offsets (e.g., providing for collection of student loans, child support, etc.) made by the IRS that reduce or eliminate the refund to which the taxpayer was otherwise entitled.


Reasons for Change



Clarification of the jurisdiction of the Tax Court and the ability to appeal orders of the Tax Court would provide for greater certainty for taxpayers and the government in conducting cases before the Tax Court. Clarification will also reduce litigation.


Explanation of Provision



The bill clarifies that an order to refund an overpayment is appealable in the same manner as a decision of the Tax Court. The bill also clarifies that the Tax Court does not have jurisdiction over the validity or merits of the credits or offsets that reduce or eliminate the refund to which the taxpayer was otherwise entitled.


Effective Date



The provision is effective on the date of enactment.


2. Redetermination of interest pursuant to motion (sec. 1252 of the bill and sec. 7481 of the Code)




Present Law



A taxpayer may seek a redetermination of interest after certain decisions of the Tax Court have become final by filing a petition with the Tax Court.


Reasons for Change



It would be beneficial to taxpayers if a proceeding for a redetermination of interest supplemented the original deficiency action brought by the taxpayer to redetermine the deficiency determination of the IRS. A motion, rather than a petition, is a more appropriate pleading for relief in these cases.


Explanation of Provision



The bill provides that a taxpayer must file a "motion" (rather than a "petition") to seek a redetermination of interest in the Tax Court.


Effective Date



The provision is effective on the date of enactment.


3. Application of net worth requirement for awards of litigation costs (sec. 1253 of the bill and sec. 7430 of the Code)




Present Law



Any person who substantially prevails in any action brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty may be awarded reasonable administrative costs incurred before the IRS and reasonable litigation costs incurred in connection with any court proceeding. A person who substantially prevails must meet certain net worth requirements to be eligible for an award of administrative or litigation costs. In general, only an individual whose net worth does not exceed $2,000,000 is eligible for an award, and only a corporation or partnership whose net worth does not exceed $7,000,000 is eligible for an award. (The net worth determination with respect to a partnership or S corporation applies to all actions that are in substance partnership actions or S corporation actions, including unified entity-level proceedings under sections 6226 or 6228, that are nominally brought in the name of a partner or a shareholder.)


Reasons for Change



Although the net worth requirements are explicit for individuals, corporations, and partnerships, it is not clear which net worth requirement is to apply to other potential litigants. It is also unclear how the individual net worth rules are to apply to individuals filing a joint tax return. Clarifying these rules will provide certainty for potential claimants and will decrease needless litigation over procedural issues.


Explanation of Provision



The bill provides that the net worth limitations currently applicable to individuals also apply to estates and trusts. The bill also provides that individuals who file a joint tax return shall be treated as separate individuals for purposes of computing the net worth limitations.


Effective Date



The provision applies to proceedings commenced after the date of enactment.


4. Tax Court jurisdiction for determination of employment status (sec. 1254 of the bill and new sec. 7435 of the Code)




Present Law



The Tax Court is a court of limited jurisdiction, established under Article I of the Constitution. The Tax Court only has the jurisdiction that is expressly conferred on it by statute (sec. 7442).


Reasons for Change



It will be advantageous to taxpayers to have the option of going to the Tax Court to resolve certain disputes regarding employment status.


Explanation of Provision



The bill provides that, in connection with the audit of any person, if there is an actual controversy involving a determination by the IRS as part of an examination that (a) one or more individuals performing services for that person are employees of that person or (b) that person is not entitled to relief under section 530 of the Revenue Act of 1978, the Tax Court would have jurisdiction to determine whether the IRS is correct. For example, one way the IRS could make the required determination is through a mechanism similar to the employment tax early referral procedures.146 A failure to agree would also be considered a determination for this purpose.

The bill provides for de novo review (rather than review of the administrative record). Assessment and collection of the tax would be suspended while the matter is pending in the Tax Court. Any determination by the Tax Court would have the force and effect of a decision of the Tax Court and would be reviewable as such; accordingly, it would be binding on the parties. Awards of costs and certain fees (pursuant to section 7430) would be available to eligible taxpayers with respect to Tax Court determinations pursuant to this proposal. The bill also provides a number of procedural rules to incorporate this new jurisdiction within the existing procedures applicable in the Tax Court.


Effective Date



The provision takes effect on the date of enactment.


F. Other Provisions




1. Due date for first quarter estimated tax payments by private foundations (sec. 1261 of the bill and sec. 6655(g)(3) of the Code)




Present Law



Under section 4940, tax-exempt private foundations generally are required to pay an excise tax equal to two percent of their net investment income for the taxable year. Under section 6655(g)(3), private foundations are required to pay estimated tax with respect to their excise tax liability under section 4940 (as well as any unrelated business income tax (UBIT) liability under section 511).147 Section 6655(c) provides that this estimated tax is payable in quarterly installments and that, for calendar-year foundations, the first quarterly installment is due on April 15th. Under section 6655(I), foundations with taxable years other than the calendar year must make their quarterly estimated tax payments no later than the dates in their fiscal years that correspond to the dates applicable to calendar-year foundations.


Reasons for Change



Because a private foundation's estimated tax payments are determined, in part, by reference to the foundation's tax liability for the preceding year, the due date of a foundation's first-quarter estimated tax payment should be the same date for filing the foundation's annual return (Form 990-PF) for the preceding year.


Explanation of Provision



The bill amends section 6655(g)(3) to provide that a calendar-year foundation's first-quarter estimated tax payment is due on May 15th (which is the same day that its annual return, Form 990-PF, for the preceding year is due). As a result of the operation of present-law section 6655(I), fiscal-year foundations would be required to make their first-quarter estimated tax payment no later than the 15th day of the fifth month of their taxable year.


Effective Date



The provision applies to taxable years beginning after the date of enactment.


2. Withholding of Commonwealth income taxes from the wages of Federal employees (sec. 1262 of the bill and sec. 5517 of title 5, United States Code)




Present Law



If State law provides generally for the withholding of State income taxes from the wages of employees in a State, the Secretary of the Treasury shall (upon the request of the State) enter into an agreement with the State providing for the withholding of State income taxes from the wages of Federal employees in the State. For this purpose, a State is a State, territory, or possession of the United States . The Court of Appeals for the Federal Circuit recently held in Romero v. United States (38 F.3d 1204 (1994)) that Puerto Rico was not encompassed within this definition; consequently, the court invalidated an agreement between the Secretary of the Treasury and Puerto Rico that provided for the withholding of Puerto Rico income taxes from the wages of Federal employees.


Reasons for Change



The Committee believes that employees of the United States should be in no better or worse position than other employees vis-a-vis local withholding.


Explanation of Provision



The bill makes any Commonwealth eligible to enter into an agreement with the Secretary of the Treasury that would provide for income tax withholding from the wages of Federal employees.


Effective Date



The provision is effective January 1, 1998.


3. Certain notices disregarded under provision increasing interest rate on large corporate underpayments (sec. 1263 of the bill and sec. 6621 of the Code)




Present Law



The interest rate on a large corporate underpayment of tax is the Federal short-term rate plus five percentage points. A large corporate underpayment is any underpayment by a subchapter C corporation of any tax imposed for any taxable period, if the amount of such underpayment for such period exceeds $100,000. The large corporate underpayment rate generally applies to periods beginning 30 days after the earlier of the date on which the first letter of proposed deficiency, a statutory notice of deficiency, or a nondeficiency letter or notice of assessment or proposed assessment is sent. For this purpose, a letter or notice is disregarded if the taxpayer makes a payment equal to the amount shown on the letter or notice within that 30 day period.


Reasons for Change



The large corporate underpayment rate generally applies if the underpayment of tax for a taxable period exceeds $100,000, even if the initial letter or notice of deficiency, proposed deficiency, assessment, or proposed assessment is for an amount less than $100,000. Thus, for example, under present law, a nondeficiency notice relating to a relatively minor mathematical error by the taxpayer may result in the application of the large corporate underpayment rate to a subsequently identified income tax deficiency.


Explanation of Provision



For purposes of determining the period to which the large corporate underpayment rate applies, any letter or notice is disregarded if the amount of the deficiency, proposed deficiency, assessment, or proposed assessment set forth in the letter or notice is not greater than $100,000 (determined by not taking into account any interest, penalties, or additions to tax).


Effective Date



The provision is effective for purposes of determining interest for periods after December 31, 1997.


TITLE XIII. PENSION SIMPLIFICATION




1. Matching contributions of self-employed individuals not treated as elective deferrals (sec. 1301 of the bill and sec. 402(g) of the Code)




Present Law



A qualified cash or deferred arrangement (a "section 401(k) plan") is a type of tax-qualified pension plan under which employees can elect to make pre-tax contributions. An employee's annual elective contributions are subject to a dollar limit ($9,500 for 1997). Employers may make matching contributions based on employees' elective contributions. In the case of employers, such matching contributions are not subject to the $9,500 limit on elective contributions.

Under present law, matching contributions made for a self-employed individual are generally treated as additional elective contributions by the self-employed individual who receives the matching contribution. Accordingly, elective contributions and matching contributions for such self-employed individual are subject to the section 401(k) limits on elective contributions.


Reasons for Change



The Committee believes it is appropriate to treat self-employed individuals in the same manner as other employees with regard to the limitations on matching contributions.


Explanation of Provision



The bill provides that matching contributions for self-employed individuals are treated the same as matching contributions for employees, i.e., they are not treated as elective contributions and are not subject to the elective contribution limit.


Effective Date



The provision is effective for years beginning after December 31, 1997.


2. Contributions to IRAs through payroll deductions (sec. 1302 of the bill)




Present Law



Under present law, employer involvement in the establishment or maintenance of individual retirement arrangements ("IRAs") of its employees can result in the employer being considered to maintain a retirement plan for purposes of title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), thus subjecting the employer to ERISA's fiduciary rules.


Reasons for Change



Some employers would like to assist their employees by providing payroll withholding for IRA contributions but are concerned that if they do so they will be subject to ERISA. The Committee would like to encourage employers to facilitate savings for their employees.


Explanation of Provision



The bill provides that an employer that facilitates IRA contributions by its employees by establishing a system under which employees, through employer payroll deductions, may make contributions to IRAs will not be considered to sponsor a retirement plan subject to ERISA. Under the system, employees would be required to provide their employer with a contribution certificate which establishes the IRA and specifies the contribution amount to be deducted from the employee's wages and remitted to the employee's IRA. As under present law, the amount contributed through payroll deduction would be includible in the employee's gross income and wages for employment tax purposes, and deductible by the employee in accordance with the rules relating to IRAs.

The provision does not apply to an employee employed by an employer who maintains a tax-qualified retirement plan.


Effective Date



The provision is effective for taxable years beginning after December 31, 1997.


3. Plans not disqualified merely by accepting rollover contributions (sec. 1303 of the bill and sec. 401(a) of the Code)




Present Law



Under present law, a qualified retirement plan that accepts rollover contributions from other plans will not be disqualified because the plan making the distribution is, in fact, not qualified at the time of the distribution, if, prior to accepting the rollover, the receiving plan reasonably concluded that the distributing plan was qualified. The receiving plan can reasonably conclude that the distributing plan was qualified if, for example, prior to accepting the rollover, the distributing plan provided a statement that the distributing plan had a favorable determination letter issued by the Internal Revenue Service ("IRS"). The receiving plan is not required to verify this information.


Reasons for Change



In order to encourage employers to accept rollovers from other qualified retirement plans, the Committee believes that the receiving plans should be insulated from disqualification based on the subsequent qualified status of the distributing plan.


Explanation of Provision



The bill clarifies the circumstances under which a qualified plan could accept rollover contributions without jeopardizing its qualified status. Under the provision, if the trustee of the plan making the distribution notifies the recipient plan that the distributing plan is intended to be a qualified plan, the plan receiving the rollover will not be disqualified if the distributing plan was not in fact a qualified plan.


Effective Date



The provision is effective for rollover contributions made after December 31, 1997.


4. Modification of prohibition on assignment or alienation (sec. 1304 of the bill, sec. 401(a)(13) of the Code)




Present Law



Under present law, amounts held in a qualified retirement plan for the benefit of a participant are not, except in very limited circumstances, assignable or available to personal creditors of the participant. A plan may permit a participant, at such time as benefits under the plan are in pay status, to make a voluntary revocable assignment of an amount not in excess of 10-percent of any benefit payment, provided the purpose is not to defray plan administration costs. In addition, a plan may comply with a qualified domestic relations order issued by a state court requiring benefit payments to former spouses or other "alternate payees" even if the participant is not in pay status.

There is no specific exception under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal Revenue Code which would permit the offset of a participant's benefit against the amount owed to a plan by the participant as a result of a breach of fiduciary duty to the plan or criminality involving the plan. Courts have been divided in their interpretation of the prohibition on assignment or alienation in these cases. Some courts have ruled that there is no exception in ERISA for the offset of a participant's benefit to make a plan whole in the case of a fiduciary breach. Other courts have reached a different result and permitted an offset of a participant's benefit for breach of fiduciary duties.


Reasons for Change



The Committee believes that the assignment and alienation rules should be clarified by creating a limited exception that permits participants' benefits under a qualified plan to be reduced under certain circumstances including the participant's breach of fiduciary duty to the plan.


Explanation of Provision



The bill permits a participant's benefit in a qualified plan to be reduced to satisfy liabilities of the participant to the plan due to (1) the participant being convicted of committing a crime involving the plan, (2) a civil judgment (or consent order or decree) entered by a court in an action brought in connection with a violation of the fiduciary provisions of ERISA, or (3) a settlement agreement between the Secretary of Labor or the Pension Benefit Guaranty Corporation and the participant in connection with a violation of the fiduciary provisions of ERISA. The court order establishing such liability must require that the participant's benefit in the plan be applied to satisfy the liability. If the participant is married at the time his or her benefit under the plan is offset to satisfy the liability, spousal consent to such offset is required unless the spouse is also required to pay an amount to the plan in the judgment, order, decree or settlement or the judgment, order, decree or settlement provides a 50-percent survivor annuity for the spouse. The bill will make the corresponding changes to ERISA.


Effective Date



The provision is effective for judgments, orders, and degrees issued, and settlement agreements entered into, on or after the date of enactment.


5. Elimination of paperwork burdens on plans (sec. 1305 of the bill and sec. 101 of ERISA)




Present Law



Under present law, employers are required to prepare summary plan descriptions of employee benefit plans ("SPDs"), and summaries of material modifications to such plans ("SMMs"). The SPDs and SMMs generally provide information concerning the benefits provided by the plan and the participants' rights and obligations under the plan. The SPDs and SMMs must be furnished to plan participants and beneficiaries and filed with the Secretary of Labor.


Reasons for Change



The Committee believes it is appropriate to alleviate the cost and burden of paperwork associated with employee benefit plans.


Explanation of Provision



The bill eliminates the requirement that SPDs and SMMs be filed with the Secretary of Labor. Employers would be required to furnish these documents to the Secretary of Labor upon request. A civil penalty could be imposed by the Secretary of Labor on the plan administrator for failure to comply with such requests. The penalty would be up to $100 per day of failure, up to a maximum of $1,000 per request. No penalty would be imposed if the failure was due to matters reasonably outside the control of the plan administrator.


Effective Date



The provision is effective on the date of enactment.


6. Modification of section 403(b) exclusion allowance to conform to section 415 modifications (sec. 1306 of the bill and sec. 403(b) of the Code)




Present Law



Under present law, annual contributions to a section 403(b) annuity cannot exceed the exclusion allowance. In general, the exclusion allowance for a taxable year is the excess, if any, of (1) 20 percent of the employee's includible compensation multiplied by his or her years of service, over (2) the aggregate employer contributions for an annuity excludable for any prior taxable years. Includible compensation means the amount of compensation from the employer that is includible in gross income for the most recent year that can be counted as a year of service.

Alternatively, an employee may elect to have the exclusion allowance determined under the rules relating to tax-qualified defined contribution plans (sec. 415). Under those rules, the maximum annual addition that can be made to a define contribution plan is the lesser of (1) $30,000 or 25 percent of compensation. For years beginning after December 31, 1996, compensation for this purpose includes certain elective deferrals of the employee. An overall limitation applies if the employee is a participant in both a defined contribution plan and a defined benefit plan of the same employer. This overall limitation may further reduce the maximum annual addition that could be made to a defined contribution plan. The overall limitation is repealed with respect to years beginning after December 31, 1999. Existing Treasury regulations relating to the alternative method of determining the exclusion allowance refer to the overall limit.


Reasons for Change



The exclusion allowance for tax-sheltered annuities should be modified to reflect recent changes to the corresponding limits on benefits under tax-qualified plans.


Explanation of Provision



The bill conforms the exclusion allowance to the way in which the section 415 limit is calculated by providing that includible compensation includes elective deferrals of the employee, and contributions made at the election of the employee to an unfunded deferred compensation plan of a tax-exempt or State or local government (a sec. 457 plan) or a cafeteria plan.

The bill directs the Secretary to revise the regulations regarding the exclusion allowance to reflect the fact that the overall limit on benefits and contributions is repealed. The revised regulations are to be effective for limitation years beginning after December 31, 1999.


Effective Date



The modification to the definition of includible compensation is effective for years beginning after December 31, 1997. The direction to the Secretary is effective on the date of enactment.


7. New technologies in retirement plans (sec. 1307 of the bill)




Present Law



Under present law it is not clear if sponsors of employee benefit plans may use new technologies (telephonic response systems, computers, email) to satisfy the various ERISA requirements for notice, election, consent, record keeping, and participant disclosure.


Reasons for Change



The Committee believes it is appropriate to review existing guidance for purposes of permitting the use of new technologies for notice and record keeping requirements for retirement plans.


Explanation of Provision



The bill directs the Secretaries of the Treasury and Labor to each issue guidance facilitating the use of new technology for plan purposes. The guidance will be designed to (1) interpret the notice, election, consent, disclosure, and time requirements (and related recordkeeping requirements) under the Internal Revenue Code of 1986 ("IRC") and the Employee Retirement Income Security Act of 1974, as amended ("ERISA") relating to retirement plans as applied to the use of new technologies by plan sponsors and administrators while maintaining the protection of the rights of participants and beneficiaries, and (2) clarify the extent to which writing requirements under the IRC shall be interpreted to permit paperless transactions.


Effective Date



The provision is effective on the date of enactment and requires that the guidance be issued not later than December 31, 1998.


8. Permanent moratorium on application of nondiscrimination rules to governmental plans (sec. 1308 of the bill and secs. 401 and 403(b) of the Code)




Present Law



Under present law, the rules applicable to governmental plans require that such plans satisfy certain nondiscrimination and minimum participation rules. In general, the rules require that a plan not discriminate in favor of highly compensated employees with regard to the contribution and benefits provided under the plan, participation in the plan, coverage under the plan, and compensation taken into account under the plan. The nondiscrimination rules apply to all governmental plans; qualified retirement plans (including cash or deferred arrangements (sec. 401(k) plans) in effect before May 6, 1986) and annuity plans (sec. 403(b) plans).

For purposes of satisfying the nondiscrimination rules, the Internal Revenue Service has has issued several Notices which extended the effective date for compliance for governmental plans. Governmental plans will be required to comply with the nondiscrimination rules beginning with plan years beginning on or after the later of January 1, 1999, or 90 days after the opening of the first legislative session beginning on or after January 1, 1999, of the governing body with authority to amend the plan, if that body does not meet continuously. For plan years beginning before the extended effective date, governmental plans are deemed to satisfy the nondiscrimination requirements.


Reasons for Change



The Committee believes that, because of the unique circumstances applicable to governmental plans and the complexity of compliance, the moratorium on compliance with the nondiscrimination rules should be made permanent.


Explanation of Provision



The bill provides that governmental plans are exempt from the nondiscrimination and minimum participation rules.


Effective Date



The provision is effective for taxable years beginning on and after the date of enactment.


9. Clarification of certain rules relating to employee stock ownership plans of S corporations (sec. 1309 of the bill and sec. 409 of the Code)




Present Law



Under present law, an S corporation can have no more than 75 shareholders. 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.

ESOPs are generally required to make distributions in the form of employer securities. If the employer securities are not readily tradable, the employee has a right to require the employer to buy the securities. In the case of an employer whose bylaws or charter restricts ownership of substantially all employer securities to employees or a pension plan, the plan may provide that benefits are distributed in the form of cash. Such a plan may distribute employer securities, if the employee has a right to require the employer to purchase the securities.

ESOPs are subject to certain prohibited transaction rules designed to prohibit certain transactions between the plan and certain persons close to the plan. A number of statutory exceptions are provided to the prohibited transaction rules, including exceptions for loans between the plan and plan participants and certain sales of stock to the ESOP. These statutory exceptions do not apply to shareholder-employees of S corporations. However, such individuals can obtain an administrative exception from such rules from the Department of Labor.


Reasons for Change



It is possible that an S corporation may lose its status as such if the ESOP is required to give stock to plan participants, rather than cash equal to the value of the stock. Changes to the prohibited transactions rules are appropriate to facilitate the maintenance of an ESOP by an S corporation.


Explanation of Provision



The bill provides that ESOPs of S corporations may distribute cash to plan participants as long as the employee has a right to require the employer to purchase the securities (as under the present-law rules). In addition, the bill extends the exception to certain prohibited transactions rules to S corporations.


Effective Date



The provision is effective for taxable years beginning after December 31, 1997.


10. Modification of 10-percent tax on nondeductible contributions (sec. 1310 of the bill and sec. 4972 of the Code)




Present Law



Under present law, contributions to qualified pension plans are deductible within certain limits. In the case of a single-employer defined benefit plan which has more than 100 participants during the year, the maximum amount deductible is not less than the plan's unfunded current liability as determined under the minimum funding rules. Limits are also imposed on the amount of annual deductible contributions if an employer sponsors both a defined benefit plan and a defined contribution plan that covers some of the same employees. Under the combined plan limitation, the total deduction for all plans for a plan year is generally limited to the greater of (1) 25 percent of compensation or (2) the contribution necessary to meet the minimum funding requirements of the defined benefit plan for the year.

A 10-percent nondeductible excise tax is imposed on contributions that are not deductible. This excise tax does not apply to contributions to one or more defined contribution plans that are nondeductible because they exceed the combined plan deduction limit to the extent such contributions do not exceed 6 percent of compensation in the year for which the contribution is made.


Reasons for Change



The Committee believes that present law unfairly penalizes employers by imposing an excise tax on employer plan contributions that are required to be made and that are not deductible because the employer is fully funding its pension plan. In particular, the Committee does not believe that the excise tax on nondeductible contributions should be imposed when an employer is required to make contributions attributable to elective deferrals under a section 401(k) plan and employer matching contributions.


Explanation of Provision



The bill adds an additional exception to the 10-percent excise tax on nondeductible contributions. Under the provision, the excise tax does not apply to contributions to one or more defined contribution plans that are not deductible because they exceed the combined plan deduction limit to the extent such contributions do not exceed the amount of the employer's matching contributions plus the elective deferral contributions to a section 401(k) plan.


Effective Date



The provision is effective with respect to taxable years beginning after December 31, 1997.


11. Modify funding requirements for certain plans (sec. 1311 of the bill and sec. 412 of the Code)




Present Law



Under present law, defined benefit pension plans are required to meet certain minimum funding rules. Underfunded plans are required to satisfy certain faster funding requirements. In general, these additional requirements do not apply in the case of plans with a funded current liability percentage of at least 90 percent.

The Pension Benefit Guaranty Corporation ("PBGC") insures benefits under most defined benefit pension plans in the event the plan is terminated with insufficient assets to pay for plan benefits. The PBGC is funded in part by a flat-rate premium per plan participant, and a variable rate premium based on plan underfunding.


Reasons for Change



Certain interstate bus companies have pension plans that are closed to new participants and the participants in these plans have demonstrated mortality significantly greater than that predicted by the mortality tables that the plans are required to use for minimum funding purposes. As a result, the sponsors of such plans are required to make contributions that cause the plan to be substantially overfunded. The Committee believes it appropriate to modify the minimum funding requirements for such plans, while at the same time ensuring that pension benefits are adequately funded.


Explanation of Provision



The bill modifies the minimum funding requirements in the case of certain plans. The bill applies in the case of plans that (1) were not required to pay a variable rate PBGC premium for the plan year beginning in 1996, (2) do not, in plan years beginning after 1995 and before 2009, merge with another plan (other than a plan sponsored by an employer that was a member of the controlled group of the employer in 1996), and (3) are sponsored by a company that is engaged primarily in the interurban or interstate passenger bus service.

The bill treats a plan to which it applies as having a funded current liability percentage of at least 90 percent for plan years beginning after 1996 and before 2005. For plan years beginning after 2004, the funded current liability percentage will be deemed to be at least 90 percent if the actual funded current liability percentage is at least as follows:

                                                                     

                                                                     

   Plan year beginning in:            Minimum percentage             

                                                                     

      2005                            86                             

                                                                     

      2006                            87                             

                                                                     

      2007                            88                             

                                                                     

      2008                            89                             

                                                                     

      2009 and thereafter             90                             

                                                                     



If the funded current liability percentage falls below 85 percent for a plan year beginning before 2005, the rule described above still applies if contributions for any such year are made to the plan in an amount equal to the lesser of: (1) the amount necessary to bring the funded current liability percentage to 85 percent, or (2) the greater of (a) 2 percent of the plan's current liability as of the beginning of such plan year or (b) the amount necessary to bring the funded current liability percentage to 80 percent as of the end of such plan year.

The relief from the minimum funding requirements applies for the plan year beginning in 2005, 2006, 2007, and 2008 only if contributions to the plan equal at least the expected increase in current liability due to benefits accruing during the plan year.


Effective Date



The provision is effective with respect to contributions due after December 31, 1997.


TITLE XIV. TECHNICAL CORRECTION PROVISIONS




I. TECHNICAL CORRECTIONS TO THE SMALL BUSINESS




JOB PROTECTION ACT OF 1996




A. Small Business-Related Provisions




1. Returns relating to purchases of fish (sec. 1401(a)(1) of the bill and sec. 6050R(c)(1) of the Code)




Present Law



Every person engaged in the trade or business of purchasing fish for resale must file an informational return reporting its purchases from any person that is engaged in the trade or business of catching fish which are in excess of $600 for any calendar year. Persons filing such an informational return relating to the purchase of fish must furnish a statement showing the name and address of the person filing the return, as well as the amount shown on the return, to each person whose name is required to be disclosed on the return.


Explanation of Provision



Every person filing an informational return relating to the purchase of fish must furnish a statement showing the phone number of the person filing the return, as well as such person's name, address and the amount shown on the return, to each person whose name is required to be disclosed on the return.


2. Charitable remainder trusts not eligible to be electing small business trusts (sec. 1402(c)(1) of the bill and sec. 1361(c)(1)(B) of the Code)




Present Law



Under present law, an electing small business trust may be a shareholder in an S corporation. In order to qualify for this treatment, all beneficiaries of the electing small business trust generally must be individuals or estates eligible to be S corporation shareholders. An exempt trust may not qualify as an electing small business trust.


Description of Provision



The provision clarifies that charitable remainder annuity trusts and charitable remainder unitrusts may not be electing small business trusts.


3. Clarify the effective date for post-termination transition period provision (sec. 1401(c)(2) of the bill)




Present Law



Distributions made by a former S corporation during its post-termination period are treated in the same manner as if the distributions were made by an S corporation (e.g., treated by shareholders as nontaxable distributions to the extent of the accumulated adjustment account). Distributions made after the post-termination period are generally treated as made by a C corporation (i.e., treated by shareholders as taxable dividends to the extent of earnings and profits).

The "post-termination period" is the period beginning on the day after the last day of the last taxable year of the S corporation and ending on the later of: (1) a date that is one year later, or (2) the due date for filing the return for the last taxable year and the 120-day period beginning on the date of a determination that the corporation's S corporation election had terminated for a previous taxable year.

The Small Business Act expanded the post-termination period to include the 120-day period beginning on the date of any determination pursuant to an audit of the taxpayer that follows the termination of the S corporation's election and that adjusts a subchapter S item of income, loss or deduction of the S corporation during the S period. In addition, the definition of "determination" was expanded to include a final disposition of the Secretary of the Treasury of a claim for refund and, under regulations, certain agreements between the Secretary and any person, relating to the tax liability of the person. The Small Business Act provision was effective for taxable years beginning after December 31, 1996.


Explanation of Provision



The technical correction clarifies that the effective date for the Small Business Act provision affecting the post-termination transition period is for determinations after December 31, 1996, not for determinations with respect to taxable years beginning after December 31, 1996. However, in no event will the post-termination transition period expanded by the Small Business Act end before the end of the 120-day period beginning after the date of enactment of this Act.


4. Treatment of qualified subchapter S subsidiaries (sec. 1401(c)(3) of the bill and sec. 1361(b)(3) of the Code)




Present Law



Pursuant to a provision of the Small Business Act, an S corporation is allowed to own a qualified subchapter S subsidiary. The term "qualified subchapter S subsidiary" means a domestic corporation that (1) is not an ineligible corporation (i.e., a corporation that would be eligible to be an S corporation if the stock of the corporation were held directly by the shareholders of its parent S corporation) if 100 percent of the stock of the subsidiary were held by its S corporation parent and (2) which the parent elects to treat as a qualified subchapter S subsidiary. Under the election, for all purposes of the Code, the qualified subchapter S subsidiary is not treated as a separate corporation and all the assets, liabilities, and items of income, deduction, and credit of the subsidiary are treated as the assets, liabilities, and items of income, deduction, and credit of the parent S corporation.

The legislative history of the provision provides that if an election is made to treat an existing corporation as a qualified subchapter S subsidiary, the subsidiary will be deemed to have liquidated under sections 332 and 337 immediately before the election is effective.

Explanation of Provision

The technical correction provides that the Secretary of the Treasury may provide, by regulations, instances where the separate corporate existence of a qualified subchapter S subsidiary may be taken into account for purposes of the Code. Thus, if an S corporation owns 100 percent of the stock of a bank (as defined in sec. 581) and elects to treat the bank as a qualified subchapter S subsidiary, it is expected that Treasury regulations would treat the bank as a separate legal entity for purposes of those Code provisions that apply specifically to banks (e.g., sec. 582).

Treasury regulations also may provide exceptions to the general rule that the qualified subchapter S subsidiary election is treated as a deemed section 332 liquidation of the subsidiary in appropriate cases. In addition, if the effect of a qualified subchapter S subsidiary election is to invalidate an election to join in the filing of a consolidated return for a group of subsidiaries that formerly joined in such filing, Treasury regulations may provide guidance as to the consolidated return effects of the S election.


B. Pension Provisions




1. Salary reduction simplified employee pensions ("SARSEPS") (sec. 1401(d)(1)(B) of the bill and sec. 408(k)(6) of the Code)




Present Law



SARSEPs were repealed for years beginning after December 31, 1996, unless the SARSEP was established before January 1, 1997. Consequently, an employer was not permitted to establish a SARSEP after December 31, 1996. SARSEPs established before January 1, 1997, may continue to receive contributions under the rules in effect prior to January 1, 1997.


Explanation of Provision



The bill amends Code section 408(k)(6) to clarify that new employees of an employer hired after December 31, 1996, may participate in a SARSEP of an employer established before January 1, 1997.


2. SIMPLE retirement plans (secs. 1401(d)(1)(A) and (d)(1)(C)-(F) and 1401(d)(2) of the bill)




a. Reporting requirements for SIMPLE IRAs (sec. 1401(d)(1)(A) of the bill and sec. 408(i) of the Code)




Present Law



A trustee of an individual retirement account and the issuer of an individual retirement annuity must furnish reports regarding the account or annuity to the individual for whom the account or annuity is maintained not later than January 31 of the calendar year following the year to which the reports relate. In the case of a SIMPLE IRA, such reports are to be furnished within 30 days after each calendar year.


Explanation of Provision



The bill conforms the time for providing reports for SIMPLE IRAs to that for IRA reports generally. Thus, the bill would provide that the report required to be furnished to the individual under a SIMPLE IRA would be provided within 31 days after each calendar year.


b. Notification requirement for SIMPLE IRAs (sec. 1401(d)(1)(C) of the bill and secs. 408(l)(2) and 6693(c) of the Code)




Present Law



The trustee of any SIMPLE IRA is required to provide the employer maintaining the arrangement a summary plan description containing basic information about the plan. At least once a year, the trustee is also required to furnish an account statement to each individual maintaining a SIMPLE account. In addition, the trustee is required to file an annual report with the Secretary. A trustee who fails to provide any of such reports or descriptions will be subject to a penalty of $50 per day until such failure is corrected, unless the failure is due to reasonable cause.


Explanation of Provision



The bill provides that issuers of annuities for SIMPLE IRAs have the same reporting requirements as SIMPLE IRA trustees.


c. Maximum dollar limitation for SIMPLE IRAs (sec. 1401(d)(1)(D) of the bill and sec. 408(p) of the Code)




Present Law



The Small Business Act created a simplified retirement plan for small business called the savings incentive match plan for employees ("SIMPLE") retirement plan. A SIMPLE plan can be either an individual retirement arrangement ("IRA") for each employee or part of a qualified cash or deferred arrangement ("a 401(k) plan"). A SIMPLE IRA permits employees to make elective contributions up to $6,000 per year to their IRA. The employer is required to satisfy one of two contribution formulas. Under the matching contribution formula, the employer generally is required to match employee elective contributions on a dollar-for-dollar basis up to 3 percent of the employee's compensation, unless the employer elects a lower percentage matching contribution (but not less than 1 percent of each employee's compensation). Alternatively, an employer is permitted to elect, in lieu of making matching contributions, to make a 2 percent of compensation nonelective contribution on behalf of each eligible employee. The employer contribution amounts are contributed to the employee's IRA. The maximum contribution limitation to an IRA is $2,000.


Explanation of Provision



The bill provides that in the case of a SIMPLE IRA, the $2,000 maximum limitation applicable to IRAs is increased to the limitations in effect for contributions made under a qualified salary reduction arrangement. This includes employee elective contributions and required employer contributions.


d. Application of exclusive plan requirement for SIMPLE IRAs to noncollectively bargained employees (sec. 1401(d)(1)(E) of the bill and sec. 408(p)(2)(D) of the Code)




Present Law



A SIMPLE IRA will be treated as a qualified salary reduction arrangement provided the employer does not maintain a qualified plan during the same time period the SIMPLE IRA is maintained. Collectively bargained employees can be excluded from participation in the SIMPLE IRA and may be covered under a plan established by the employer as a result of a good faith bargaining agreement.


Explanation of Provision



The bill provides that an employer who maintains a plan for collectively bargained employees is permitted to maintain a SIMPLE IRA for noncollectively bargained employees.


e. Application of exclusive plan requirement for SIMPLE IRAs in the case of mergers and acquisitions (sec. 1401(d)(1)(F) of the bill and sec. 408(p)(2) of the Code)




Present Law



Only employers who employ 100 or fewer employees who received compensation for the preceding year of at least $5,000 are eligible to establish a SIMPLE IRA. An eligible employer maintaining a SIMPLE IRA who fails to be an eligible employer due to an acquisition, disposition or similar transaction is treated as an eligible employer for the 2 years following the last year the employer was eligible provided rules similar to the special coverage rules of section 410(b)(6)(C)(i) apply. There is no parallel provision with respect to an employer who, because of an acquisition, disposition or similar transaction, maintains a qualified plan and a SIMPLE IRA at the same time.


Explanation of Provision



The bill provides that if an employer maintains a qualified plan and a SIMPLE IRA in the same year due to an acquisition, disposition or similar transaction the SIMPLE IRA is treated as a qualified salary reduction arrangement for the year of the transaction and the following calendar year.


f. Top-heavy exemption for SIMPLE 401(k) arrangements (sec. 1401(d)(2)(A) of the bill and sec. 401(k)(11)(D) of the Code)




Present Law



A plan meeting the SIMPLE 401(k) requirements for any year is not treated as a top-heavy plan under section 416 for the year. This rule was intended to apply only to SIMPLE 401(k)s, and not other plans maintained by the employer.


Explanation of Provision



The bill provides that the top-heavy exemption applies to a plan which permits only contributions required to satisfy the SIMPLE 401(k) requirements.


g. Cost of living adjustments for SIMPLE 401(k) arrangements (sec. 1401(d)(2)(B) of the bill and sec. 401(k)(11) of the Code)




Present Law



The $6,000 limit on deferrals to a SIMPLE IRA is subject to a cost-of-living adjustment. There is no parallel provision applicable to a SIMPLE 401(k) arrangement.


Explanation of Provision



The bill provides that the $6,000 limit on elective deferrals under a SIMPLE 401(k) arrangement will be adjusted at the same time and in the same manner as for SIMPLE IRAs.


h. Employer deduction for SIMPLE 401(k) arrangements (sec. 1401(d)(2)(C) of the bill and sec. 404(a)(3) of the Code)




Present Law



Contributions paid by an employer to a profit sharing or stock bonus plan are deductible by the employer for a taxable year to the extent the contributions do not exceed 15-percent of the compensation otherwise paid or accrued during the taxable year to the participants under the plan. Contributions paid by an employer to a profit sharing or stock bonus plan that are not deductible because they are in excess of the 15-percent limitation are subject to a 10-percent excise tax payable by the employer making the contribution.


Explanation of Provision



The bill provides that to the extent that contributions paid by an employer to a SIMPLE 401(k) arrangement satisfy the contribution requirements of section 401(k)(11)(B), such contributions is deductible by the employer for the taxable year.


i. Notification and election periods for SIMPLE 401(k) arrangements (sec. 1401(d)(2)(D) of the bill and sec. 401(k)(11) of the Code)




Present Law



An employer maintaining a SIMPLE 401(k) arrangement is required to make a matching contribution for employees making elective deferrals of up to 3-percent of compensation (or, alternatively, elect to make a 2-percent of compensation nonelective contribution on behalf of all eligible employees). An employer electing to make a 2-percent nonelective contribution is required to notify all employees of such election within a reasonable period of time before the 60th day before the beginning of the year.

An employer maintaining a SIMPLE IRA is required to notify each employee of the employee's opportunity to make or modify salary reduction contributions as well as the contribution alternative chosen by the employer within a reasonable period of time before the employee's election period. The employee's election period is the 60-day period before the beginning of any year (and the 60-day period before the first day such employee is eligible to participate).


Explanation of Provision



The bill extends the employer notice and employee election requirements of SIMPLE IRAs to SIMPLE 401(k) arrangements.


Effective Date



The bill is effective with respect to calendar years beginning after the date of enactment.


j. Treatment of Indian tribal governments under section 403(b) (sec. 1401(d)(5) of the bill and sec. 403(b) of the Code)




Present Law



Any 403(b) annuity contract purchased in a plan year beginning before January 1, 1995, by an Indian tribal government is treated as purchased by an entity permitted to maintain a tax-sheltered annuity plan. Such contracts may be rolled over into a section 401(k) plan maintained by the Indian tribal government in accordance with the rollover rules of section 403(b)(8).


Explanation of Provision



The bill clarifies that an employee participating in a 403(b) annuity contract of the Indian tribal government would be permitted to roll over amounts from such contract to a section 401(k) plan maintained by the Indian tribal government whether or not the annuity contract is terminated.


C. Foreign Provisions




1. Measurement of earnings of controlled foreign corporations (sec. 1401(e) of the bill, subtitle E of the Act, and section 956 of the Code)




Present Law



U.S. 10-percent shareholders of a controlled foreign corporation (CFC) are subject to current U.S. tax on their pro rata shares of the CFC's earnings invested in United States property. For this purpose, earnings include both current earnings and profits (not including a deficit) referred to in section 316(a)(1) and accumulated earnings and profits referred to in section 316(a)(2). It could be argued that this definition of earnings takes current year earnings into account twice.


Explanation of Provision



The technical correction clarifies that accumulated earnings and profits of a CFC taken into account for purposes of determining the CFC's earnings invested in United States property do not include current earnings (which are taken into account separately). A similar technical correction to the definition of earnings for purposes of prior-law section 956A (relating to a CFC's earnings invested in excess passive assets) was enacted with the Small Business Job Protection Act of 1996 (section 1703(i)(2)).


2. Transfers to foreign trusts at fair market value (sec. 1401(i)(2) of the bill, sec. 1903 of the Act, and sec. 679 of the Code)




Present Law



A U.S. person who transfers property to a foreign trust which has U.S. beneficiaries generally is treated as the owner of such trust. However, this rule does not apply where the U.S. person transfers property to a trust in exchange for fair market value consideration. In determining whether the U.S. person receives fair market value consideration, obligations of certain related persons are not taken into account. For this purpose, related persons include the trust, any grantor or beneficiary of the trust, and certain persons who are related to any such grantor or beneficiary.


Explanation of Provision



The technical correction clarifies that, for purposes of determining whether a U.S. person's transfer to a trust is for fair market value consideration, the related persons whose obligations are disregarded include any owner of the trust and certain persons who are related to any such owner.


3. Treatment of trust as U.S. person (sec. 1401(i)(3) of the bill, sec. 1907 of the Act, and secs. 641 and 7701(a)(30) of the Code)




Present Law



A trust is considered to be a U.S. person if two criteria are met. First, a court within the United States must be able to exercise primary supervision over the administration of the trust. Second, one or more U.S. fiduciaries must have the authority to control all substantial decisions of the trust.

These criteria regarding the treatment of a trust as a U.S. person are effective for taxable years beginning after December 31, 1996. The Internal Revenue Service announced procedures under which a U.S. trust in existence on August 20, 1996 may continue to file returns as a U.S. trust for taxable years beginning after December 31, 1996. To qualify for such treatment, the trustee (1) must initiate modification of the trust to conform to the new criteria by the due date for filing the trust's return for its first taxable year beginning after 1996, (2) must complete the modification within two years of such date, and (3) must attach the required statement to the trust returns for the taxable years beginning after 1996.148


Explanation of Provision



The technical correction clarifies that a trust is treated as a U.S. person as long as one or more U.S. persons have the authority to control all substantial decisions of the trust (and a U.S. court can exercise primary supervision). Accordingly, the fact that a substantial decision of the trust is controlled by a U.S. person who is not a fiduciary would not cause the trust not to be treated as a U.S. person. In addition, the technical correction clarifies that a trust that is a foreign trust under these criteria is not considered to be present or resident in the United States at any time. Finally, the technical correction provides the Secretary of Treasury with authority to allow reasonable time for U.S. trusts in existence on August 20, 1996 to make modifications in order to comply with the new criteria for treatment of a trust as a U.S. person.


D. Other Provisions




1. Treatment of certain reserves of thrift institutions (sec. 1401(f)(5) of the bill and secs. 593(e) and 1374 of the Code)




Present Law



A provision of the Small Business Act repealed the percentage-of-taxable income method for deducting bad debts applicable to thrift institutions. The portion of the section 481(a) adjustment applicable to pre-1988 reserves of an institution required to change its method of accounting generally is not restored to income unless the institution makes a distribution to which section 593(e) applies. Section 593(e) provides that if a institution makes a nonliquidating distribution in an amount in excess of its post-1951 accumulated earnings and profits, such excess will be treated as a distribution of the post-1987 reserve for bad debts, requiring recapture of such amount.

Another provision of the Small Business Act allows a bank or a thrift institution to elect to be treated as an S corporation so long as the entity does not use a reserve method of accounting for bad debts. The earnings of an S corporation increase the corporation's accumulated adjustments account, but do not increase its accumulated earnings and profits (sec. 1368). In addition, any net unrealized built-in gains of a C corporation that converts to S corporation status that are recognized during the 10-year period beginning with the date of such conversion generally are subject to corporate-level tax (sec. 1374). Section 481(a) adjustments taken into account during the 10-year period generally are subject to section 1374.


Explanation of Provision



The bill provides rules to clarify the section 593(e) treatment of pre-1988 bad debt reserves of thrift and former thrift institutions that become S corporations. The technical corrections provide that (1) the accumulated adjustments account of an S corporation would be treated the same as post-1951 earnings and profits for purposes of section 593(e) and (2) section 593(e) would apply irrespective of section 1374 (e.g., distributions that trigger section 593(e) would be subject to corporate-level recapture even if such distributions occur after the 10-year period of section 1374).


2. "FASIT" technical corrections (sec. 1401(f)(6) of the bill and sec. 860L of the Code)




Present Law




In general



A "financial asset securitization investment trust" ("FASIT") is designed to facilitate the securitization of debt obligations such as credit card receivables, home equity loans, and auto loans. A FASIT generally is not taxable; the FASIT's taxable income or net loss flows through to the owner of the FASIT.

The ownership interest of a FASIT generally is required to be entirely held by a single domestic C corporation. In addition, a FASIT generally must hold only qualified debt obligations, and certain other specified assets, and is subject to certain restrictions on its activities. An entity that qualifies as a FASIT can issue instruments (called "regular interests") that meet certain specified requirements and treat those instruments as debt for Federal income tax purposes. In general, those requirements must be met "after the startup date." Instruments bearing yields to maturity over 5 percentage points above the yield to maturity on specified United States government obligations (i.e., "high-yield interests") may be held only by domestic C corporations that are not exempt from income tax.


Income from prohibited transactions



The owner of a FASIT is required to pay a penalty excise tax equal to 100 percent of net income derived from (1) an asset that is not a permitted asset, (2) any disposition of an asset other than a permitted disposition, (3) any income attributable to loans originated by the FASIT, and (4) compensation for services (other than fees for a waiver, amendment, or consent under permitted assets not acquired through foreclosure). A permitted disposition is any disposition of any permitted asset (1) arising from complete liquidation of a class of regular interests (i.e., a qualified liquidation)149 ; (2) incident to the foreclosure, default, or imminent default of the asset; (3) incident to the bankruptcy or insolvency of the FASIT; (4) necessary to avoid a default on any indebtedness of the FASIT attributable to a default (or imminent default) on an asset of the FASIT; (5) to facilitate a clean-up call; (6) to substitute a permitted debt instrument for another such instrument; or (7) in order to reduce over-collateralization where a principal purpose of the disposition was not to avoid recognition of gain arising from an increase in its market value after its acquisition by the FASIT.


Definition of "FASIT"



For an entity or arrangement to qualify as a FASIT, substantially all of its assets must consist of the following "permitted assets": (1) cash and cash equivalents; (2) certain permitted debt instruments; (3) certain foreclosure property; (4) certain instruments or contracts that represent a hedge or guarantee of debt held or issued by the FASIT; (5) contract rights to acquire permitted debt instruments or hedges; (6) a regular interest in another FASIT; and (7) a regular interest in a REMIC. A FASIT must meet the asset test at the 90th day after its formation and at all times thereafter. Permitted assets may be acquired at any time by a FASIT, including any time after its formation.


Explanation of Provision




Definition of regular interest



The bill provides that the requirement of a "regular interest" must be met "on or after the startup date," instead of just "after the startup date."


Correction of cross reference



The bill corrects an incorrect cross reference in section 860L(d)from section 860L(c)(2) to section 860L(b)(2).


Tax on prohibited transactions



The bill provides that the tax on prohibited transactions would not apply to dispositions of foreclosure property or hedges using the similar exception applicable to REMICs.
 

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