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
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