Revenue Reconciliation Act
page9
 
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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