Taxpayer
Relief Act of 1997 page7
 
Constructive
ownership of tenant
If a REIT owns a 10 percent or greater interest in a
person that is a tenant of the REIT, rents paid by
that person to the REIT are not qualifying rents to
the REIT (sec. 856(d)(2)(B)). Example #1.
--If 10 percent or more ofa REIT's shares are owned
by a partnership and a partner owning a one-percent
interest in that partnership also owns a 10-percent
or greater interest in a person that is a tenant of
the REIT, rents paid by the tenant to the REIT are
not qualifying rents to the REIT; the 10-percent or
greater interest in the tenant is considered owned
by the partnership (sec. 318(a)(3)(A)) and in turn
by the REIT (secs. 318(a)(3)(C) and 856(d)(5)). Example
#2. --If aREIT owns a 30-percent interest in a
partnership that in turn owns a 40-percent interest
in a person that is a tenant of the REIT, rents paid
by that person to the REIT are not qualifying rents
to the REIT because the REIT is considered to own
more than 10 percent of the tenant (sec.
318(a)(2)(A)). Example #3. --If 10 percent or
more of a REIT's shares are owned by persons who are
50-percent partners in a partnership whose other
partners own the entirety of the interests in a
tenant of the REIT, none of the interests in the
tenant are considered owned by the partners who own
interests in the REIT (sec. 318(a)(5)(C)).
Constructive
ownership of contractor
If a person providing services to tenants of the
REIT owns a greater-than-35-percent interest in the
REIT, or if another person owns a
greater-than-35-percent interest in both the REIT
and a person providing services, amounts received or
accrued by the REIT with respect to the property are
not qualifying rents because the service provider
does not qualify as an independent contractor (sec.
856(d)(3)). Example #4. --If more than35
percent of a REIT's shares are owned by a
partnership and a partner owning a one-percent
interest in that partnership also owns a
greater-than-35-percent interest in a contractor,
that person will not be considered an independent
contractor because the partnership owns more than 35
percent of the REIT's shares and will also be
considered to own a greater-than-35-percent interest
in the contractor (sec. 318(a)(3)A)). Example #5.
--If more than 35 percent of a REIT's shares are
owned by a person who owns a one-percent interest in
a partnership and another one-percent partner in
that partnership owns more than 35 percent of the
interests in a contractor, the independent
contractor definition will not be met because the
partnership will be considered to own more than 35
percent interests in both the REIT and the
contractor (sec. 318(a)(3)(A)).
Hedging
instruments
Interest rate swaps or cap agreements that protect a
REIT from interest rate fluctuations on variable
rate debt incurred to acquire or carry real property
are treated as securities under the 30-percent test
and payments under these agreements are treated as
qualifying under the 95-percent test (sec.
856(c)(6)(G)).
Treatment
of shared appreciation mortgages
For purposes of the income requirements for
qualification as a REIT, and for purposes of the
prohibited transaction provisions, any income
derived from a "shared appreciation
provision" is treated as gain recognized onthe
sale of the "secured property." For these
purposes, a shared appreciationprovision is any
provision that is in connection with an obligation
that is held by the REIT and secured by an interest
in real property, which provision entitles the REIT
to receive a specified portion of any gain realized
on the sale or exchange of such real property (or of
any gain that would be realized if the property were
sold on a specified date). Secured property for
these purposes means the real property that secures
the obligation that has the shared appreciation
provision.
In addition, for purposes of the income requirements
for qualification as a REIT, and for purposes of the
prohibited transactions provisions, the REIT is
treated as holding the secured property for the
period during which it held the shared appreciation
provision (or, if shorter, the period during which
the secured property was held by the person holding
such property), and the secured property is treated
as property described in section 1221(1) if it is
such property in the hands of the obligor on the
obligation to which the shared appreciation
provision relates (or if it would be such property
if held by the REIT). For purposes of the prohibited
transaction safe harbor, the REIT is treated as
having sold the secured property at the time that it
recognizes income on account of the shared
appreciation provision, and any expenditures made by
the holder of the secured property are treated as
made by the REIT.
Asset
requirements
To satisfy the asset requirements to qualify for
treatment as a REIT, at the close of each quarter of
its taxable year, an entity must have at least 75
percent of the value of its assets invested in real
estate assets, cash and cash items, and government
securities (sec. 856(c)(5)(A)). Moreover, not more
than 25 percent of the value of the entity's assets
can be invested in securities of any one issuer
(other than government securities and other
securities described in the preceding sentence).
Further, these securities may not comprise more than
five percent of the entity's assets or more than 10
percent of the outstanding voting securities of such
issuer (sec. 856(c)(5)(B)). The term real estate
assets is defined to mean real property (including
interests in real property and mortgages on real
property) and interests in REITs (sec.
856(c)(6)(B)).
REIT
subsidiaries
Under present law, all the assets, liabilities, and
items of income, deduction, and credit of a
"qualified REIT subsidiary" are treatedas
the assets, liabilities, and respective items of the
REIT that owns the stock of the qualified REIT
subsidiary. A subsidiary of a REIT is a qualified
REIT subsidiary if and only if 100 percent of the
subsidiary's stock is owned by the REIT at all times
that the subsidiary is in existence. If at any time
the REIT ceases to own 100 percent of the stock of
the subsidiary, or if the REIT ceases to qualify for
(or revokes an election of) REIT status, such
subsidiary is treated as a new corporation that
acquired all of its assets in exchange for its stock
(and assumption of liabilities) immediately before
the time that the REIT ceased to own 100 percent of
the subsidiary's stock, or ceased to be a REIT as
the case may be.
Distribution
requirements
To satisfy the distribution requirement, a REIT must
distribute as dividends to its shareholders during
the taxable year an amount equal to or exceeding (i)
the sum of 95 percent of its REITTI other than net
capital gain income and 95 percent of the excess of
its net income from foreclosure property over the
tax imposed on that income minus (ii) certain excess
noncash income. Excess noncash items include (1) the
excess of the amounts that the REIT is required to
include in income under section 467 with respect to
certain rental agreements involving deferred rents,
over the amounts that the REIT otherwise would
recognize under its regular method of accounting,
(2) in the case of a REIT using the cash method of
accounting, the excess of the amount of original
issue discount and coupon interest that the REIT is
required to take into account with respect to a loan
to which section 1274 applies, over the amount of
money and fair market value of other property
received with respect to the loan, and (3) income
arising from the disposition of a real estate asset
in certain transactions that failed to qualify as
like-kind exchanges under section 1031.
House
Bill
Overview
The House bill modifies many of the provisions
relating to the requirements for qualification as,
and the taxation of, a REIT. In particular, the
modifications relate to the general requirements for
qualification as a REIT, the taxation of a REIT, the
income requirements for qualification as a REIT, and
certain other provisions.
Alterative
penalty for failure to make requests of shareholders
(sec. 1251 of the House bill)
The House bill replaces the rule that disqualifies a
REIT for any year in which the REIT failed to comply
with Treasury regulations to ascertain its
ownership, with an intermediate penalty for failing
to do so. The penalty is $25,000 ($50,000 for
intentional violations) for any year in which the
REIT did not comply with the ownership regulations.
The REIT also is required, when requested by the
IRS, to send curative demand letters.
In addition, a REIT that complied with the Treasury
regulations for ascertaining its ownership, and
which did not know, or have reason to know, that it
was so closely held as to be classified as a
personal holding company, is treated as meeting the
requirement that it not be a personal holding
company.
De
minimis rule for tenant service income (sec. 1252 of
the House bill)
The House bill permits a REIT to render a de minimis
amount of impermissible services to tenants, or in
connection with the management of property, and
still treat amounts received with respect to that
property as rent. The value of the impermissible
services may not exceed one percent of the gross
income from the property. For these purposes, the
services may not be valued at less than 150 percent
of the REIT's direct cost of the services.
Attribution
rules applicable to tenant ownership (sec. 1253 of
the House bill)
The House bill modifies the application the rule
attributing ownership from partners to partnerships
(sec. 318(a)(3)(A)) for purposes of defining
non-qualifying rent from related persons (sec.
856(d)(2)), so that attribution occurs only when a
partner owns directly or indirectly a 25-percent or
greater interest in the partnership. Thus, a REIT
and a tenant will not be treated as related (and,
therefore, rents paid by the tenant to the REIT will
not be treated as non-qualifying rents) if the
REIT's shares are owned by a partnership and a
partner owning a directly and indirectly
less-than-25-percent interest in that partnership
also owns an interest in the tenant. The related
tenant rule (sec. 856(d)(2)(B)) also will not be
violated where owners of the REIT and owners of the
tenant are partners in a partnership and either the
owners of the REIT or the owners of the tenant are
directly and indirectly less-than-25-percent
partners in the partnership.
Credit
for tax paid by REIT on retained capital gains (sec.
1254 of the House bill)
The House bill permits a REIT to elect to retain and
pay income tax on net long-term capital gains it
received during the tax year, just as a RIC is
permitted under present law. Thus, if a REIT made
this election, the REIT shareholders would include
in their income as long-term capital gains their
proportionate share of the undistributed long-term
capital gains as designated by the REIT. The
shareholder would be deemed to have paid the
shareholder's share of the tax, which would be
credited or refunded to the shareholder. Also, the
basis of the shareholder's shares would be increased
by the amount of the undistributed long-term capital
gains (less the amount of capital gains tax paid by
the REIT) included in the shareholder's long-term
capital gains.
Repeal
of 30-percent gross income requirement (sec. 1255 of
the House bill)
The House bill repeals the rule that requires less
than 30 percent of a REIT's gross income be derived
from gain from the sale or other disposition of
stock or securities held for less than one year,
certain real property held less than four years, and
property that is sold or disposed of in a prohibited
transaction.
Modification
of earnings and profits for determining whether REIT
has earnings and profits from non-REIT year (sec.
1256 of the House bill)
The House bill changes the ordering rule for
purposes of the requirement that newly-electing
REITs distribute earnings and profits that were
accumulated in non-REIT years. Distributions of
accumulated earnings and profits generally are
treated as made from the entity's earliest
accumulated earnings and profits, rather than the
most recently accumulated earnings and profits.
These distributions are not treated as distributions
for purposes of calculating the dividends paid
deduction.
Treatment
of foreclosure property (sec. 1257 of the House
bill)
The House bill lengthens the original grace period
for foreclosure property until the last day of the
third full taxable year following the election. The
grace period also could be extended for an
additional three years by filing a request to the
IRS. A REIT could revoke an election to treat
property as foreclosure property for any taxable
year by filing a revocation on or before its due
date for filing its tax return.
In addition, the House bill conforms the definition
of independent contractor for purposes of the
foreclosure property rule (sec. 856(e)(4)(C)) to the
definition of independent contractor for purposes of
the general rules (sec. 856(d)(2)(C)).
Payments
under hedging instruments (sec. 1258 of the House
bill)
The House bill treats income from all hedges that
reduce the interest rate risk of REIT liabilities,
not just from interest rate swaps and caps, as
qualifying income under the 95-percent test. Thus,
payments to a REIT under an interest rate swap, cap
agreement, option, futures contract, forward rate
agreement or any similar financial instrument
entered into by the REIT to hedge its indebtedness
incurred or to be incurred (and any gain from the
sale or other disposition of these instruments) are
treated as qualifying income for purposes of the
95-percent test.
Excess
noncash income (sec. 1259 of the House bill)
The House bill (1) expands the class of excess
noncash items that are not subject to the
distribution requirement to include income from the
cancellation of indebtedness and (2) extends the
treatment of original issue discount and coupon
interest as excess noncash items to REITs that use
an accrual method of taxation.
Prohibited
transaction safe harbor (sec. 1260 of the House
bill)
The House bill excludes from the prohibited sales
rules property that was involuntarily converted.
Shared
appreciation mortgages (sec. 1261 of the House bill)
The House bill provides that interest received on a
shared appreciation mortgage is not subject to the
tax on prohibited transactions where the property
subject to the mortgage is sold within four years of
the REIT's acquisition of the mortgage pursuant to a
bankruptcy plan of the mortgagor unless the REIT
acquired the mortgage knew or had reason to know
that the property subject to the mortgage would be
sold in a bankruptcy proceeding.
Wholly-owned
REIT subsidiaries (sec. 1262 of the House bill)
The House bill permits any corporation wholly-owned
by a REIT to be treated as a qualified subsidiary,
regardless of whether the corporation had always
been owned by the REIT. Where the REIT acquired an
existing corporation, any such corporation is
treated as being liquidated as of the time of
acquisition by the REIT and then reincorporated
(thus, any of the subsidiary's pre-REIT built-in
gain would be subject to tax under the normal rules
of sec. 337). In addition, any pre-REIT earnings and
profits of the subsidiary must be distributed before
the end of the REIT's taxable year.
Effective
date
The House bill are effective for taxable years
beginning after the date of enactment.
Senate
Amendment
The Senate amendment is identical to the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment. In addition, the conference
agreement extends, to the definition of an
independent contractor under section 856(d)(3), the
modification to the attribution to partnerships of
section 318(a)(3)(A) so that attribution occurs only
when a partner owns a 25-percent or greater interest
in the partnership. Thus, a person providing
services will not fail to be an independent
contractor (and, therefore, amounts received or
accrued by the REIT with respect to the property
will not be treated as non-qualifying rents) where
the REIT's shares are owned by a partnership and a
partner owning a directly and indirectly a
less-than-25-percent interest in the partnership
also owns an interest in a contractor. Similarly, a
contractor will not fail to be an independent
contractor where owners of the REIT and owners of
the contractor are partners in a partnership and
either the owners of the REIT or owners of the
tenant are directly and indirectly
less-than-25-percent partners in the partnership.
Effective date. --The conference agreement is
effective for taxable years beginning after the date
of enactment.
E. Repeal the "Short-Short" Test for
Regulated InvestmentCompanies (sec. 1271 of the
House bill and sec. 1071 of the Senate amendment)
Present
Law
To qualify as a regulated investment company ("RIC"),
a companymust derive less than 30 percent of its
gross income from the sale or other disposition of
stock or securities held for less than 3 months (the
"30-percenttest" or "short-short
rule").
House
Bill
The 30-percent test (or short-short rule) is
repealed effective for taxable years ending after
the date of enactment.
Senate
Amendment
The 30-percent test (or short-short rule) is
repealed effective for taxable years beginning after
the December 31, 1997.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment effective for taxable years
beginning after the date of enactment.
F. Taxpayer Protections
1. Provide reasonable cause exception for additional
penalties (sec. 1281 of the House bill and sec. 1081
of the Senate amendment)
Present
Law
Many penalties in the Code may be waived if the
taxpayer establishes reasonable cause. For example,
the accuracy-related penalty (sec. 6662) may be
waived with respect to any item if the taxpayer
establishes reasonable cause for his treatment of
the item and that he acted in good faith (sec.
6664(c)).
House
Bill
The House bill provides that the following penalties
may be waived if the failure is shown to be due to
reasonable cause and not willful neglect:
(1) the penalty for failure to make a report in
connection with deductible employee contributions to
a retirement savings plan (sec. 6652(g));
(2) the penalty for failure to make a report as to
certain small business stock (sec. 6652(k));
(3) the penalty for failure of a foreign corporation
to file a return of personal holding company tax
(sec. 6683); and
(4) the penalty for failure to make required
payments for entities electing not to have the
required taxable year (sec. 7519).
Effective date. --The provision is effective
for taxable yearsbeginning after the date of
enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
2. Clarification of period for filing claims for
refunds (sec. 1282 of the House bill and sec. 1082
of the Senate amendment)
Present
Law
The Code contains a series of limitations on tax
refunds. Section 6511 of the Code provides both a
limitation on the time period in which a claim for
refund can be made (section 6511(a)) and a
limitation on the amount that can be allowed as a
refund (section 6511(b)). Section 6511(a) provides
the general rule that a claim for refund must be
filed within 3 years of the date of the return or 2
years of the date of payment of the taxes at issue,
whichever is later. Section 6511(b) limits the
refund amount that can be covered: if a return was
filed, a taxpayer can recover amounts paid within 2
years before the claim. Section 6512(b)(3)
incorporates these rules where taxpayers who
challenge deficiency notices in Tax Court are found
to be entitled to refunds.
In Commissioner v. Lundy, 116 S. Ct. 647
(1996), the taxpayer had not filed a return, but
received a notice of deficiency within 3 years after
the date the return was due and challenged the
proposed deficiency in Tax Court. The Supreme Court
held that the taxpayer could not recover
overpayments attributable to withholding during the
tax year, because no return was filed and the 2-year
"look back" rule applied. Since
overwithheldamounts are deemed paid as of the date
the taxpayer's return was first due (i.e.,
more than 2 years before the notice of deficiency
was issued), such overpayments could not be
recovered. By contrast, if the same taxpayer had
filed a return on the date the notice of deficiency
was issued, and then claimed a refund, the 3-year
"look back" rule would apply, and the
taxpayer couldhave obtained a refund of the
overwithheld amounts.
House
Bill
The House bill permits taxpayers who initially fail
to file a return, but who receive a notice of
deficiency and file suit to contest it in Tax Court
duringthe third year after the return due date, to
obtain a refund of excessive amounts paid within the
3-year period prior to the date of the deficiency
notice.
Effective date. --The provision applies to
claims for refund with respect to tax years ending
after the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
3. Repeal of authority to disclose whether a
prospective juror has been audited (sec. 1283 of the
House bill and sec. 1083 of the Senate amendment)
Present
Law
In connection with a civil or criminal tax
proceeding to which the United States is a party,
the Secretary must disclose, upon the written
request of either party to the lawsuit, whether an
individual who is a prospective juror has or has not
been the subject of an audit or other tax
investigation by the Internal Revenue Service (sec.
6103(h)(5)).
This disclosure requirement, as it has been
interpreted by several recent court decisions, has
created significant difficulties in the civil and
criminal tax litigation process. First, the
litigation process can be substantially slowed. It
can take the Secretary a considerable period of time
to compile the information necessary for a response
(some courts have required searches going back as
far as 25 years). Second, providing early release of
the list of potential jurors to defendants (which
several recent court decisions have required, to
permit defendants to obtain disclosure of the
information from the Secretary) can provide an
opportunity for harassment and intimidation of
potential jurors in organized crime, drug, and some
tax protester cases. Third, significant judicial
resources have been expended in interpreting this
procedural requirement that might better be spent
resolving substantive disputes. Fourth, differing
judicial interpretations of this provision have
caused confusion. In some instances, defendants
convicted of criminal tax offenses have obtained
reversals of those convictions because of failures
to comply fully with this provision.
House
Bill
The House bill repeals the requirement that the
Secretary disclose, upon the written request of
either party to the lawsuit, whether an individual
who is a prospective juror has or has not been the
subject of an audit or other tax investigation by
the Internal Revenue Service.
Effective date. --The provision is effective
for judicialproceedings commenced after the date of
enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
4. Clarify statute of limitations for items from
pass-through entities (sec. 1284 of the House bill
and sec. 1084 of the Senate amendment)
Present
Law
Pass-through entities (such as S corporations,
partnerships, and certain trusts) generally are not
subject to income tax on their taxable income.
Instead, these entities file information returns and
the entities' shareholders (or beneficial owners)
report their pro rata share of the gross income and
are liable for any taxes due.
Some believe that, prior to 1993, it may have been
unclear as to whether the statute of limitations for
adjustments that arise from distributions from
pass-through entities should be applied at the
entity or individual level (i.e., whether the 3-year
statute of limitations for assessments runs from the
time that the entity files its information return or
from the time that a shareholder timely files his or
her income tax return). In 1993, the Supreme Court
held that the limitations period for assessing the
income tax liability of an S corporation shareholder
runs from the date the shareholder's return is filed
(Bufferd v. Comm., 113 S. Ct. 927 (1993)).
House
Bill
The House bill clarifies that the return that starts
the running of the statute of limitations for a
taxpayer is the return of the taxpayer and not the
return of another person from whom the taxpayer has
received an item of income, gain, loss, deduction,
or credit.
Effective date. --The provision is effective
for taxable yearsbeginning after the date of
enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
5. Awarding of administrative costs and attorneys
fees (sec. 1285 of the House bill)
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.
No time limit is specified for the taxpayer to apply
to the IRS for an award of administrative costs. In
addition, no time limit is specified for a taxpayer
to appeal to the Tax Court an IRS decision denying
an award of administrative costs. Finally, the
procedural rules for adjudicating a denial of
administrative costs are unclear.
House
Bill
The House bill provides that a taxpayer who seeks an
award of administrative costs must apply for such
costs within 90 days of the date on which the
taxpayer was determined to be a prevailing party.
The House bill also provides that a taxpayer who
seeks to appeal an IRS denial of an administrative
cost award must petition the Tax Court within 90
days after the date that the IRS mails the denial
notice.
The House bill clarifies that dispositions by the
Tax Court of petitions relating only to
administrative costs are to be reviewed in the same
manner as other decisions of the Tax Court.
Effective date. --The provision is effective
with respect to costs incurred in civil actions or
proceedings commenced after the date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement follows the House bill.
6. Prohibition on browsing (secs. 1286 and 1287 of
the House bill and secs. 1085 and 1086 of the Senate
amendment)
Present
Law
The Internal Revenue Code prohibits disclosure of
tax returns and return information, except to the
extent specifically authorized by the Internal
Revenue Code (sec. 6103). Unauthorized willful
disclosure is a felony punishable by a fine not
exceeding $5,000 or imprisonment of not more than
five years, or both (sec. 7213). An action for civil
damages also may be brought for unauthorized
disclosure (sec. 7431).
There is no explicit criminal penalty in the
Internal Revenue Code for unauthorized inspection
(absent subsequent disclosure) of tax returns and
return information. Such inspection is, however,
explicitly prohibited by the Internal Revenue
Service ("IRS").14
In a recent case,an individual was convicted of
violating the Federal wire fraud statute (18 U.S.C.
1343 and 1346) and a Federal computer fraud statute
(18 U.S.C. 1030) for unauthorized inspection.
However, the
U.S.
First Circuit Court of Appeals overturned this
conviction.15
Unauthorized inspection of information of
anydepartment or agency of the United States
(including the IRS) via computer was made a crime
under 18 U.S.C. 1030 by the Economic Espionage Act
of 1996.16
Thisprovision does not apply to unauthorized
inspection of paper documents.
House
Bill
Criminal
penalties
The House bill creates a new criminal penalty in the
Internal Revenue Code. The penalty is imposed for
willful inspection (except as authorized by the
Code) of any tax return or return information by any
Federal employee or IRS contractor. The penalty also
applies to willful inspection (except as authorized)
by any State employee or other person who acquired
the tax return or return information under specific
provisions of section 6103. Upon conviction, the
penalty is a fine in any amount not exceeding
$1,000,17
or imprisonment of not more than 1 year, or both,
together with the costs of prosecution. In addition,
upon conviction, an officer or employee of the
United States
would be dismissed from office or discharged from
employment.
The Congress views any unauthorized inspection of
tax returns or return information as a very serious
offense; this new criminal penalty reflects that
view. The Congress also believes that unauthorized
inspection warrants very serious personnel sanctions
against IRS employees who engage in unauthorized
inspection, and that it is appropriate to fire
employees who do this.
Civil
damages
The House bill amends the provision providing for
civil damages for unauthorized disclosure by also
providing for civil damages for unauthorized
inspection. Damages are available for unauthorized
inspection that occurs either knowingly or by reason
of negligence. Accidental or inadvertent inspection
that may occur (such as, for example, by making an
error in typing in a TIN) would not be subject to
damages because it would not meet this standard. The
House bill also provides that no damages are
available to a taxpayer if that taxpayer requested
the inspection or disclosure.
The House bill also requires that, if any person is
criminally charged by indictment or information with
inspection or disclosure of a taxpayer's return or
return information in violation of section 7213(a)
or (b), section 7213A (as added by the bill), or 18
USC section 1030(a)(2)(B), the Secretary notify that
taxpayer as soon as practicable of the inspection or
disclosure.
Effective date. --The provision is effective
for violationsoccurring on or after the date of
enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement does not include these
provisions, because they are identical to the
provisions of H.R. 1226, which passed the House on
April 15, 1997, and which passed the Senate on July
23, 1997, clearing the measure for the President's
signature.
XIII. ESTATE, GIFT, AND TRUST SIMPLIFICATION
PROVISIONS
1. Eliminate gift tax filing requirements for gifts
to charities (sec. 1301 of the House bill and sec.
1101 of the Senate amendment)
Present
Law
A gift tax generally is imposed on lifetime
transfers of property by gift (sec. 2501). In
computing the amount of taxable gifts made during a
calendar year, a taxpayer generally may deduct the
amount of any gifts made to a charity (sec. 2522).
Generally, this charitable gift deduction is
available for outright gifts to charity, as well as
gifts of certain partial interests in property (such
as a remainder interest). A gift of a partial
interest in property must be in a prescribed form in
order to qualify for the deduction.
Individuals who make gifts in excess of $10,000 to
any one donee during the calendar year generally are
required to file a gift tax return (sec. 6019). This
filing requirement applies to all gifts, whether
charitable or noncharitable, and whether or not the
gift qualifies for a gift tax charitable deduction.
Thus, under current law, a gift tax return is
required to be filed for gifts to charity in excess
of $10,000, even though no gift tax is payable on
the transfer.
House
Bill
The House bill provides that gifts to charity are
not subject to the gift tax filing requirements of
section 6019, as long as the entire value of the
transferred property qualifies for the gift tax
charitable deduction under section 2522. The filing
requirements for gifts of partial interests in
property remain unchanged.
Effective date. --The provision is effective
for gifts made afterthe date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment, with a technical clarification
that the property given to charity must be the
donor's entire interest in the property.
2. Clarification of waiver of certain rights of
recovery (sec. 1302 of the House bill and sec. 1102
of the Senate amendment)
Present
Law
For estate and gift tax purposes, a marital
deduction is allowed for qualified terminable
interest property (QTIP). Such property generally is
included in the surviving spouse's gross estate upon
his or her death. The surviving spouse's estate is
entitled to recover the portion of the estate tax
attributable to inclusion of QTIP from the person
receiving the property, unless the spouse directs
otherwise by will (sec. 2207A). For this purpose, a
will provision specifying that all taxes shall be
paid by the estate is sufficient to waive the right
of recovery.
A decedent's gross estate includes the value of
previously transferred property in which the
decedent retains enjoyment or the right to income
(sec. 2036). The estate is entitled to recover from
the person receiving the property a portion of the
estate tax attributable to the inclusion (sec.
2207B). This right may be waived only by a provision
in the will (or revocable trust) specifically
referring to section 2207B.
House
Bill
The House bill provides that the right of recovery
with respect to QTIP is waived only to the extent
that language in the decedent's will or revocable
trust specifically so indicates (e.g., by a specific
reference to QTIP, the QTIP trust, section 2044, or
section 2207A). Thus, a general provision specifying
that all taxes be paid by the estate is no longer
sufficient to waive the right of recovery.
The House bill also provides that the right of
contribution for property over which the decedent
retained enjoyment or the right to income is waived
by a specific indication in the decedent's will or
revocable trust, but specific reference to section
2207B is no longer required.
Effective date. --The provision applies to
decedents dying after the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
3. Transitional rule under section 2056A (sec. 1303
of the House bill and sec. 1103 of the Senate
amendment)
Present
Law
A "marital deduction" generally is allowed
for estate and gift taxpurposes for the value of
property passing to a spouse. The Technical and
Miscellaneous Revenue Act of 1988 ("TAMRA")
denied the marital deduction forproperty passing to
an alien spouse outside a qualified domestic
trust("QDT"). An estate tax generally is
imposed on corpus distributions from a QDT.
TAMRA defined a QDT as a trust that, among other
things, required all trustees be
U.S.
citizens or domestic corporations. This provision
was modified in the Omnibus Budget Reconciliation
Acts of 1989 and 1990 to require that at least one
trustee be a U.S. citizen or domestic corporation
and that no corpus distribution be made unless such
trustee has the right to withhold any estate tax
imposed on the distribution (the "withholding
requirement").
House
Bill
The House bill provides that certain trusts created
before the enactment of the Omnibus Budget
Reconciliation Act of 1990 are treated as satisfying
the withholding requirement if the governing
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