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
instruments require that all trustees be
U.S.
citizens or domestic corporations.
Effective date. --The provision applies as if
included in theOmnibus Budget Reconciliation Act of
1990.
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. Clarifications relating to disclaimers (sec. 1304
of the House bill)
Present
Law
Historically, there must be acceptance of a gift in
order for the gift to be completed under State law
and there is no taxable gift for Federal gift tax
purposes unless there is a completed gift. Most
States have rules that provide that, where there is
a disclaimer of a gift, the property passes to the
person who is entitled to the property had the
disclaiming party died before the purported
transfer.
In the Tax Reform Act of 1976, Congress provided a
uniform disclaimer rule (sec. 2518) that specified
how and when a disclaimer under State law must be
made in order to be effective for Federal transfer
tax purposes. Under section 2518, a State law type
disclaimer is effective for Federal transfer tax
purposes if it is an irrevocable and unqualified
refusal to accept an interest in property and
certain other requirements are satisfied. One of
these other requirements is that the disclaimer
generally must be made in writing not later than
nine months after the transfer creating the interest
occurs. Section 2518 is not currently effective for
Federal tax purposes other than transfer taxes.
In 1981, Congress added a rule to section 2518 that
allowed certain transfers of property to be treated
as a qualified disclaimer. In order to qualify,
these transfer-type disclaimers must be a written
transfer of the disclaimant's "entire interest
in the property" to persons whowould have
received the property had there been a valid
disclaimer under State law (sec. 2518(c)(3)). Like
other disclaimers, the transfer-type disclaimer
generally must be made within nine months of the
transfer creating the interest.
House
Bill
The House bill allows a transfer-type disclaimer of
an "undividedportion" of the disclaimant
transferor's interest in property to qualify under
section 2518. Also, the House bill allows a spouse
to make a qualified transfer-type disclaimer where
the disclaimed property is transferred to a trust in
which the disclaimant spouse has an interest (e.g.,
a credit shelter trust). Further, the House bill
provides that a qualified disclaimer for transfer
tax purposes under section 2518 also is effective
for Federal income tax purposes (e.g., disclaimers
of interests in annuities and income in respect of a
decedent).
None of the foregoing provisions are intended to
create an inference regarding the Federal tax
treatment of disclaimers under present law.
Effective date. --The provision applies to
disclaimers made afterthe date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the House
bill provision.
5. Amend "5 or 5 power" (sec. 1305 of the
House bill)
Present
Law
The exercise or release of a general power of
appointment generally is considered a gift by the
person holding the power (sec. 2514(b)). A special
rule, however, provides that the lapse of a power of
appointment during the life of the person holding
the power is considered a release (and thus a
taxable gift) only to the extent that the value of
the property over which the power lapsed exceeds the
greater of $5,000 or five percent ("5 or
5power") of the value of the assets of the
trust (sec. 2514(e)). A similar provision applies
for purposes of estate taxation (sec. 2041(b)(2)).
House
Bill
The House bill increases the limitations in sections
2514(e) and 2041(b)(2) to the greater of $10,000 or
5 percent.
Effective date. --The provision applies to
lapses occurring intaxable years beginning after the
date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the House
bill provision.
6. Treatment for estate tax purposes of short-term
obligations held by nonresident aliens (sec. 1306 of
the House bill and sec. 1104 of the Senate
amendment)
Present
Law
The
United States
imposes estate tax on assets of noncitizen
nondomiciliaries that were situated in the
United States
at the time of the individual's death. Debt
obligations of a
U.S.
person, the
United States
, a political subdivision of a State, or the
District of Columbia
are considered property located within the
United States
if held by a nonresident not a citizen of the
United States
(sec. 2014(c)).
Special rules apply to treat certain bank deposits
and debt instruments the income from which qualifies
for the bank deposit interest exemption and the
portfolio interest exemption as property from
without the United States despite the fact that such
items are obligations of a U.S. person, the United
States, a political subdivision of a State, or the
District of Columbia (sec. 2105(b)). Income from
such items is exempt from
U.S.
income tax in the hands of the nonresident recipient
(secs. 871(h) and 871(i)(2)(A)). The effect of these
special rules is to exclude these items from the
U.S.
gross estate of a nonresident not a citizen of the
United States
. However, because of an amendment to section 871(h)
made by the Tax Reform Act of 1986, these special
rules no longer cover obligations that generate
short-term OID income despite the fact that such
income is exempt from U.S. income tax in the hands
of the nonresident recipient (sec. 871(g)(1)(B)(i)).
House
Bill
The House bill provides that any debt obligation,
the income from which would be eligible for the
exemption for short-term OID under section
871(g)(1)(B)(i) if such income were received by the
decedent on the date of his death, is treated as
property located outside of the United States in
determining the U.S. estate tax liability of a
nonresident not a U.S. citizen. No inference is
intended with respect to the estate tax treatment of
such obligations under present law.
Effective date. --The provision is effective
for estates ofdecedents 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.
7. Certain revocable trusts treated as part of
estate (sec. 1307 of the House bill)
Present
Law
Both estates and revocable inter vivos trusts can
function to settle the affairs of a decedent and
distribute assets to heirs. In the case of revocable
inter vivos trusts, the grantor transfers property
into a trust which is revocable during his or her
lifetime. Upon the grantor's death, the power to
revoke ceases and the trustee then performs the
settlement functions typically performed by the
executor of an estate. While both estates and
revocable trusts perform essentially the same
function after the testator or grantor's death,
there are a number of ways in which an estate and a
revocable trust operate differently. First, there
can be only one estate per decedent while there can
be more than one revocable trust. Second, estates
are in existence only for a reasonable period of
administration; revocable trusts can perform the
same settlement functions as an estate, but may
continue in existence thereafter as testamentary
trusts.
Numerous differences presently exist between the
income tax treatment of estates and revocable
trusts, including: (1) estates are allowed a
charitable deduction for amounts permanently
set aside for charitable purposes while post death
revocable trusts are allowed a charitable deduction
only for amounts paid to charities; (2) the
active participation requirement the passive loss
rules under section 469 is waived in the case of
estates (but not revocable trusts) for two years
after the owner's death; and (3) estates (but not
revocable trusts) can qualify for section 194
amortization of reforestation expenditures.
House
Bill
The House bill provides an irrevocable election to
treat a qualified revocable trust as part of the
decedent's estate for Federal income tax purposes.
This elective treatment is effective from the date
of the decedent's death until two years after his or
her death (if no estate tax return is required) or,
if later, six months after the final determination
of estate tax liability (if an estate tax return is
required). The election must be made by both the
executor of the decedent's estate (if any) and the
trustee of the revocable trust no later than the
time required for filing the income tax return of
the estate for its first taxable year, taking into
account any extensions. A conforming change is made
to section 2652(b) for generation-skipping transfer
tax purposes.
For this purpose, a qualified revocable trust is any
trust (or portion thereof) which was treated under
section 676 as owned by the decedent with respect to
whom the election is being made, by reason of a
power in the grantor (i.e., trusts that are treated
as owned by the decedent solely by reason of a power
in a nonadverse party would not qualify).
The separate share rule (described below) generally
will apply when a qualified revocable trust is
treated as part of the decedent's estate.
Effective date. --The provision applies to
decedents dying after the date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement follows the House bill.
8. Distributions during first 65 days of taxable
year of estate (sec. 1308 of the House bill and sec.
1105 of the Senate amendment)
Present
Law
In general, trusts and estates are treated as
conduits for Federal income tax purposes; income
received by a trust or estate that is distributed to
a beneficiary in the trust or estate's taxable year
"ending with orwithin" the taxable year of
the beneficiary is taxable to the beneficiary in
that year; income that is retained by the trust or
estate is initially taxable to the trust or estate.
In the case of distributions of previously
accumulated income by trusts (but not estates),
there may be additional tax under the so-called
"throwback" rules if the beneficiary to
whom the distributionswere made has marginal rates
higher than those of the trust. Under the
"65-dayrule," a trust may elect to treat
distributions paid within 65 days after the close of
its taxable year as paid on the last day of its
taxable year. The 65-day rule is not applicable to
estates.
House
Bill
The House bill extends application of the 65-day
rule to distributions by estates. Thus, an executor
can elect to treat distributions paid by the estate
within 65 days after the close of the estate's
taxable year as having been paid on the last day of
such taxable year.
Effective date. --The provision applies to
taxable years beginningafter 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.
9. Separate share rules available to estates (sec.
1309 of the House bill and sec. 1106 of the Senate
amendment)
Present
Law
Trusts with more than one beneficiary must use the
"separateshare" rule in order to provide
different tax treatment of distributions to
different beneficiaries to reflect the income earned
by different shares of the trust's corpus.18
Treasury regulations provide that "[t]heapplication
of the separate share rule . . . will generally
depend upon whether distributions of the trust are
to be made in substantially the same manner as if
separate trusts had been created.... Separate share
treatment will not be applied to a trust or portion
of a trust subject to a power to distribute,
apportion, or accumulate income or distribute corpus
to or for the use of one or more beneficiaries
within a group or class of beneficiaries, unless the
payment of income, accumulated income, or corpus of
a share of one beneficiary cannot affect the
proportionate share of income, accumulated income,
or corpus of any shares of the other beneficiaries,
or unless substantially proper adjustment must
thereafter be made under the governing instrument so
that substantially separate and independent shares
exist." (Treas. Reg. sec. 1.663(c)-3).The
separate share rule presently does not apply to
estates.
House
Bill
The House bill extends the application of the
separate share rule to estates. There are separate
shares in an estate when the governing instrument of
theestate (e.g., the will and applicable local law)
creates separate economic interests in one
beneficiary or class of beneficiaries such that the
economic interests of those beneficiaries (e.g.,
rights to income or gains from specified items of
property) are not affected by economic interests
accruing to another separate beneficiary or class of
beneficiaries. For example, a separate share in an
estate would exist where the decedent's will
provides that all of the shares of a closely-held
corporation are devised to one beneficiary and that
any dividends paid to the estate by that corporation
should be paid only to that beneficiary and any such
dividends would not affect any other amounts which
that beneficiary would receive under the will. As in
the case of trusts, the application of the separate
share rule is mandatory where separate shares exist.
Effective date. --The provision applies to
decedents dying after the date of enactment.
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.
10. Executor of estate and beneficiaries treated as
related persons for disallowance of losses (sec.
1310 of the House bill and sec. 1107 of the Senate
amendment)
Present
Law
Section 267 disallows a deduction for any loss on
the sale of an asset to a person related to the
taxpayer. For the purposes of section 267, the
following parties are related persons: (1) a trust
and the trust's grantor, (2) two trusts with the
same grantor, (3) a trust and a beneficiary of the
trust, (4) a trust and a beneficiary of another
trust, if both trusts have the same grantor, and (5)
a trust and a corporation the stock of which is more
than 50 percent owned by the trust or the trust's
grantor.
Section 1239 disallows capital gain treatment on the
sale of depreciable property to a related person.
For purposes of section 1239, a trust and any
beneficiary of the trust are treated as related
persons, unless the beneficiary's interest is a
remote contingent interest.
Neither section 267 or section 1239 presently treat
an estate and a beneficiary of the estate as related
persons.
House
Bill
Under the House bill, an estate and a beneficiary of
that estate are treated as related persons for
purposes of sections 267 and 1239, except in the
case of a sale or exchange in satisfaction of a
pecuniary bequest.
Effective date. --The provision applies to
taxable years beginningafter 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.
11. Limitation on taxable year of estates (sec. 1311
of the House bill)
Present
Law
The taxability of distributions from a trust or
estate is based on the amount of income received by
the trust or estate in the trust or estate's taxable
year "ending with or within" the taxable
year of the beneficiary(typically a calendar year).
Trusts are required to use a calendar year and,
consequently, income of a trust that is distributed
to a calendar-year beneficiary in the year earned is
taxed to the beneficiary in the year earned.
Estates, on the other hand, are allowed to use any
fiscal year. Consequently, in the case of estates,
the taxation of distributions to a calendar-year
beneficiary in up to the last 11 months of the
calendar year can be deferred until the next taxable
year depending upon the fiscal year selected.
House
Bill
The House bill limits the taxable year of an estate
to a year ending on October 31, November 30, or
December 31.19
Thus, the maximumdeferral allowable to a
calendar-year beneficiary is with respect to
distributions made in the last two months of the
calendar year.
Effective date. --The provision applies to
decedents dying after the date of enactment.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the House
bill provision.
12. Simplified taxation of earnings of pre-need
funeral trusts (sec. 1312 of the House bill and sec.
1108 of the Senate amendment)
Present
Law
A pre-need funeral trust is an arrangement where an
individual purchases funeral services or merchandise
from a funeral home for the benefit of a specified
person in advance of that person's death. (The
beneficiary may be either the purchaser or another
person.) The purchaser enters into a contract with
the provider of such services or merchandise whereby
the purchaser selects the services or merchandise to
be provided upon the death of the beneficiary, and
agrees to pay for them in advance of the
beneficiary's death. Such amounts (or a portion
thereof) are held in trust during the beneficiary's
lifetime and are paid to the seller upon the
beneficiary's death.
Under present law, pre-need funeral trusts generally
are treated as grantor trusts, and the annual income
earned by such trusts is taxed to the
purchaser/grantor of the trust. Rev. Rul. 87-127.
Any amount received from the trust by the seller (as
payment for services or merchandise) is includible
in the gross income of the seller.
House
Bill
The House bill allows the trustee of a pre-need
funeral trust to elect special tax treatment for
such a trust, to the extent the trust would
otherwise be treated as a grantor trust. A qualified
funeral trust is defined as one which meets the
following requirements: (1) the trust arises as the
result of a contract between a person engaged in the
trade or business of providing funeral or burial
services or merchandise and one or more individuals
to have such services or property provided upon such
individuals' death; (2) the only beneficiaries of
the trust are individuals who have entered into
contracts to have such services or merchandise
provided upon their death; (3) the only
contributions to the trust are contributions by or
for the benefit of the trust beneficiaries; (4) the
trust's only purpose is to hold and invest funds
that will be used to make payments for funeral or
burial services or merchandise for the trust
beneficiaries; and (5) the trust has not accepted
contributions totaling more than $7,000 by or for
the benefit of any individual. For this purpose,
"contributions" include all
amountstransferred to the trust, regardless of how
denominated in the contract. Contributions do not,
however, include income or gain earned with respect
to property in the trust. For purposes of applying
the $7,000 limit, if a purchaser has more than one
contract with a single trustee (or related
trustees), all such trusts are treated as one trust.
Similarly, if the Secretary of Treasury determines
that a purchaser has entered into separate contracts
with unrelated trustees to avoid the $7,000 limit
described above, the Secretary may require that such
trusts be treated as one trust. For contracts
entered into after 1998, the $7,000 limit is indexed
annually for inflation.
The trustee's election to have this provision apply
to a qualified funeral trust is to be made
separately with respect to each purchaser's trust.
It is anticipated that the Department of Treasury
will issue prompt guidance with respect to the
simplified reporting requirements so that if the
election is made, a single annual trust return may
be filed by the trustee, separately listing the
amount of income earned with respect to each
purchaser. If the election is made, the trust is not
treated as a grantor trust and the amount of tax
paid with respect to each purchaser's trust is
determined in accordance with the income tax rate
schedule generally applicable to estates and trusts
(Code sec. 1(e)), but no deduction is allowed under
section 642(b). The tax on the annual earnings of
the trust is payable by the trustee. As under
present law, amounts received from the trust by the
seller are treated as payments for services and
merchandise and are includible in the gross income
of the seller. No gain or loss is recognized to the
beneficiary of the trust for payments from the trust
to the beneficiary upon cancellation of the
contract, and the beneficiary takes a carryover
basis in any assets received from the trust upon
cancellation.
Effective date. --The provision is effective
for taxable yearsbeginning after the date of
enactment.
Senate
Agreement
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment with modifications that would
(1) allow the provision to be applied to contracts
purchased by one individual to have funeral or
burial services or merchandise provided for another
individual upon that individual's death (to the
extent that such arrangements would otherwise be
treated as grantor trusts), and (2) allow the
election to be made for taxable years ending
after the date of enactment.
Effective date. --The provision is effective
for taxable yearsending after the date of enactment.
13. Adjustments for gifts within 3 years of
decedent's death (sec. 1313 of the House bill and
sec. 1109 of the Senate amendment)
Present
Law
The first $10,000 of gifts of present interests to
each donee during any one calendar year are excluded
from Federal gift tax.
The value of the gross estate includes the value of
any previously transferred property if the decedent
retained the power to revoke the transfer (sec.
2038). The gross estate also includes the value of
any property with respect to which such power is
relinquished during the three years before death
(sec. 2035). There has been significant litigation
as to whether these rules require that certain
transfers made from a revocable trust within three
years of death be includible in the gross estate.
See, e.g., Jalkut Estate v. Commissioner, 96
T.C. 675 (1991) (transfers from revocable trust
includible in gross estate); McNeely v.
Commissioner, 16 F.3d 303 (8th Cir. 1994)
(transfers from revocable trust not includible in
gross estate); Kisling v. Commissioner, 32
F.3d 1222 (8th Cir. 1994) (acq.) (transfers from
revocable trust not includible in gross estate).
House
Bill
The House bill codifies the rule set forth in the McNeely
and Kisling cases to provide that a transfer
from a revocable trust (i.e., a trust described
under section 676) is treated as if made directly by
the grantor. Thus, an annual exclusion gift from
such a trust is not included in the gross estate.
The House bill also revises section 2035 to improve
its clarity.
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. The provision is not intended
to modify the result reached in the Kisling
case.
14. Clarify relationship between community property
rights and retirement benefits (sec. 1314 of the
House bill and sec. 1110 of the Senate amendment)
Present
Law
Community
property
Under State community property laws, each spouse
owns an undivided one-half interest in each
community property asset. In community property
jurisdictions, a nonparticipant spouse may be
treated as having a vested community property
interest in either his or her spouse's qualified
plan, individual retirement arrangement
("IRA"), or simplified employeepension
("SEP") plan.
Transfer
tax treatment of qualified plans
In the Retirement Equity Act of 1984
("REA"), qualified retirementplans were
required to provide automatic survivor benefits (1)
in the case of a participant who retires under the
plan, in the form of a qualified joint and survivor
annuity, and (2) in the case of a vested participant
who dies before the annuity starting date and who
has a surviving spouse, in the form of a
preretirement survivor annuity. A participant
generally is permitted to waive such annuities,
provided he or she obtains the written consent of
his or her spouse.
The Tax Reform Act of 1986 repealed the estate tax
exclusion, formerly contained in sections 2039(c)
and 2039(d), for certain interests in qualified
plans owned by a nonparticipant spouse attributable
to community property laws and made certain other
changes to conform the transfer tax treatment of
qualified and nonqualified plans. As a result of
these changes made by REA and the Tax Reform Act of
1986, the transfer tax treatment of married couples
residing in a
community property
State
is unclear where either spouse is covered by a
qualified plan.
House
Bill
The House bill clarifies that the marital deduction
is available with respect to a nonparticipant
spouse's interest in an annuity attributable to
community property laws where he or she predeceases
the participant spouse. Under the House bill, the
nonparticipant spouse's interest in an annuity
arising under the community property laws of a State
that passes to the surviving participant spouse may
qualify for treatment as QTIP under section
2056(b)(7).
The provision is not intended to create an inference
regarding the treatment under present law of a
transfer to a surviving spouse of the decedent
spouse's interest in an annuity arising under
community property laws.
Effective date. --The provision applies to
decedents dying, orwaivers, transfers and
disclaimers made, 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. The provision is not intended
to modify the result of the Supreme Court's decision
in Boggs v. Boggs, 117 S.Ct. 1754 (1997).
15. Treatment under qualified domestic trust rules
of forms of ownership which are not trusts (sec.
1315 of the House bill and sec. 1111 of the Senate
amendment)
Present
Law
A marital deduction generally is allowed for estate
and gift tax purposes for the value of property
passing to a spouse. The marital deduction is not
available for property passing to an alien spouse
outside a qualified domestic trust ("QDT").
An estate tax generally is imposed on
corpusdistributions from a QDT.
Trusts are not permitted in some countries (e.g.,
many civil lawcountries).20
As a result, it is not possible to create a QDT in
those countries.
House
Bill
The House bill provides the Treasury Department with
regulatory authority to treat as trusts legal
arrangements that have substantially the same effect
as a trust. It is anticipated that such regulations,
if any, would only permit a marital deduction with
respect to non-trust arrangements under which the
U.S.
would retain jurisdiction and adequate security to
impose
U.S.
transfer tax on transfers by the surviving spouse of
the property transferred by the decedent. Possible
arrangements could include the adoption of a
bilateral treaty that provides for the collection of
U.S.
transfer tax from the noncitizen surviving spouse or
a closing agreement process under which the
surviving spouse waives treaty benefits, allows the
U.S.
to retain taxing jurisdiction and provides adequate
security with respect to such transfer taxes.
Effective date. --The provision applies to
decedents dying after the date of enactment.
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.
16.
Opportunity
to correct certain failures under section 2032A
(sec. 1316 of the House bill and sec. 1112 of the
Senate amendment)
Present
Law
For estate tax purposes, an executor may elect to
value certain real property used in farming or other
closely held business operations at its current use
value rather than its highest and best use (sec.
2032A). A written agreement signed by each person
with an interest in the property must be filed with
the election.
In 1984, section 2032A was amended to provide that
if an executor makes a timely election that
substantially complies with Treasury regulations,
but fails to provide all required information or the
signatures of all persons required to enter into the
agreement, the executor may supply the missing
information within a reasonable period of time (not
exceeding 90 days) after notification by the
Treasury Department.
Treasury regulations require that a notice of
election and certain information be filed with the
Federal estate tax return (Treas. Reg. sec.
20.2032A-8). The administrative policy of the
Treasury Department is to disallow current use
valuation elections unless the required information
is supplied.
House
Bill
The House bill extends the procedures allowing
subsequent submission of information to any executor
who makes the election and submits the recapture
agreement, without regard to compliance with the
Treasury regulations. Thus, the House bill allows
the current use valuation election if the executor
supplies the required information within a
reasonable period of time (not exceeding 90 days)
after notification by the IRS. During that time
period, the House bill also allows the addition of
signatures to a previously filed agreement.
The Committee report on the House bill indicates
that the Treasury Department has taken an
unnecessarily restrictive view of the 1984 amendment
to section 2032A and intends no inference that the
Treasury Department lacks the power, under the law
in effect prior to the date of enactment, to correct
the situation addressed by this provision. The House
bill intends that, with respect to technically
defective 2032A elections made prior to the date of
enactment, prior law should be applied in a manner
consistent with the provision.
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.
17. Authority to waive requirement of
U.S.
trustee for qualified domestic trusts (sec. 1317 of
the House bill and sec. 1113 of the Senate
amendment)
Present
Law
In order for a trust to be a QDT, a
U.S.
trustee must have the power to approve all corpus
distributions from the trust. In some countries,
trusts cannot have any
U.S.
trustees. As a result, trusts established in those
countries cannot qualify as a QDT.
House
Bill
In order to permit the establishment of a QDT in
those situations where a country prohibits a trust
from having a
U.S.
trustee, the House bill provides the Treasury
Department with regulatory authority to waive the
requirement that a QDT have a
U.S.
trustee. It is anticipated that such regulations, if
any, provide an alternative mechanism under which
the
U.S.
would retain jurisdiction and adequate security to
impose
U.S.
transfer tax on transfers by the surviving spouse of
the property transferred by the decedent.
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.
XIV. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS
A. Excise Tax Simplification Provisions
1. Increase de minimis limit for after-market
alterations subject to heavy truck and luxury
automobile excise taxes (sec. 1401 of the House bill
and sec.1201 of the Senate amendment)
Present
Law
An excise tax is imposed on retail sales of truck
chassis and truck bodies suitable for use in a
vehicle with a gross vehicle weight of over 33,000
pounds. The tax is equal to 12 percent of the retail
sales price. An excise tax also is imposed on retail
sales of luxury automobiles. The tax currently is
equal to 8 percent of the amount by which the retail
sales price exceeds an inflation-adjusted base. (The
rate is reduced by 1 percentage point per year
through 2002, and the tax is not imposed after
2002.) Anti-abuse rules prevent the avoidance of
these taxes through separate purchases of major
component parts. With certain exceptions, tax at the
rate applicable to the vehicle is imposed on the
subsequent installation of parts and accessories
within six months after purchase of a taxable
vehicle. The exceptions include a de minimis
exception for parts and accessories with an
aggregate price that does not exceed $200 (or such
other amount as Treasury may by regulation
prescribe).
House
Bill
The tax on subsequent installation of parts and
accessories does not apply to parts and accessories
with an aggregate price that does not exceed $1,000.
Parts and accessories installed on a vehicle on or
before that date are taken into account in
determining whether the $1,000 threshold is
exceeded. If the aggregate price of the
pre-effective date parts and accessories does not
exceed $200, they are not be subject to tax unless
the aggregate price of all additions exceeds $1,000.
Effective date. --The increase in the
threshold for taxingafter-market additions under the
heavy truck and luxury car excise taxes is effective
on January 1, 1998.
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. Simplification of excise taxes on distilled
spirits, wine, and beer (secs. 1411-1422 of the
House bill and secs. 1211-1222 of the Senate
amendment)
Present
Law
Imported distilled spirits returned to plant.
--Excise tax that has been paid on domestic
distilled spirits is credited or refunded if the
spirits are later returned to bonded premises. Tax
is imposed on imported bottled spirits when they are
withdrawn from customs custody, but the tax is not
refunded or credited if the spirits are later
returned to bonded premises.
Cancellation of export bonds. --An exporter
that withdraws distilled spirits from bonded
warehouses for export or transportation to a customs
bonded warehouse without the payment of tax must
furnish a bond to cover the withdrawal. The required
bonds are canceled "on the submission of such
evidence, records, and certification indicating
exportation as the Secretary may by regulations
prescribe."
Location of records of distilled spirits plant.
--Proprietors of distilled spirits plants are
required to maintain records and reports relating to
their production, storage, denaturation, and
processing activities on the premises where the
operations covered by the record are carried on.
Transfers from brewery to distilled spirits
plant. --A distilledspirits plant may receive on
its bonded premises beer to be used in the
production of distilled spirits only if the beer is
produced on contiguous brewery premises.
Sign not required for wholesale dealers.
--Wholesale liquor dealersare required to post a
sign identifying the firm as such. Failure to do so
may subject the wholesaler dealer to a penalty.
Refund on returns of merchantable wine.
--Excise tax paid ondomestic wine that is returned
to bond as unmerchantable is refunded or credited,
and the wine is once again treated as wine in bond
on the premises of a bonded wine cellar.
Increased sugar limits for certain wine.
--Natural wines may be sweetened to correct high
acid content. For most wines, however, sugar cannot
constitute more than 35 percent (by volume) of the
combined sugar and juice used to produce the wine.
Up to 60 percent sugar may be used in wine made from
loganberries, currants, and gooseberries. If the
amount of sugar used exceeds the applicable
limitation, the wine must be labeled
"substandard."
Beer withdrawn for embassy use. --Imported
beer to be used for the family and official use of
representatives of foreign governments or public
international organizations may be withdrawn from
customs bonded warehouses without payment of excise
tax. No similar exemption applies to domestic beer
withdrawn from a brewery or entered into a bonded
customs warehouse for the same authorized use.
Beer withdrawn for destruction. --Removals of
beer from a breweryare exempt from tax if the
removal is for export, because the beer is unfit for
beverage use, for laboratory analysis, research,
development and testing, for the brewer's personal
or family use, or as supplies for certain vessels
and aircraft.
Drawback on exported beer. --A domestic
producer that exports beermay recover the tax
(receive a "drawback") found to have been
paid onthe exported beer upon the "submission
of such evidence, records and certificates
indicating exportation" required by
regulations.
Imported beer transferred in bulk to brewery and
imported wine transferred in bulk to wineries.
--Imported beer and wine are subject to tax when
removed from customs custody.
House
Bill
Imported distilled spirits returned to plant.
--Refunds or creditsof the tax are available for
imported bottled spirits that are returned to
distilled spirits plants.
Cancellation of export bonds. --The
certification requirement are relaxed to allow the
bonds to be canceled if there is such proof of
exportation as the Secretary may require.
Location of records of distilled spirits plant.
--Records andreports are permitted to be maintained
elsewhere other than on the plant premises
Transfers from brewery to distilled spirits
plant. --Beer may bebrought from any brewery for
use in the production of spirits. Such beer is
exempt from excise tax, subject to Treasury
regulations.
Sign not required for wholesale dealers.
--The requirement that asign be posted is repealed.
Refund on returns of merchantable wine. --A
refund or credit is available in the case of all
domestic wine returned to bond, whether or not
unmerchantable.
Increased sugar limits for certain wine. --Up
to 60 percent sugar is permitted in any wine made
from juice, such as cranberry or plum juice, with an
acid content of 20 or more parts per thousand.
Beer withdrawn for embassy use. --Subject to
Treasury's regulatory authority, an exemption
similar to that currently available for imported
beer is provided for domestic beer.
Beer withdrawn for destruction. --An
exemption from tax is added for removals for
destruction, subject to Treasury regulations.
Drawback on exported beer. --The
certification requirement isrelaxed to allow a
drawback of tax paid if there is such proof of
exportation as the Secretary may be regulations
require.
Imported beer transferred in bulk to brewery and
imported wine transferred in bulk to wineries.
--Subject to Treasury regulations, beer and wine
imported in bulk may be withdrawn from customs
custody and transferred in bulk to a brewery (beer)
or a winery (wine) without payment of tax. The
proprietor of the brewery to which the beer is
transferred or of the winery to which the wine is
transferred is liable for the tax imposed on the
withdrawal from customs custody and the importer is
relieved of liability.
Effective date. --The provision to repeal the
requirement thatwholesale liquor dealers post a sign
outside their place of business takes effect on the
date of enactment. The other provisions take effect
on the first day of the calendar quarter that begins
at least 90 days after the date of enactment.
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 modification delaying
the effective date of certain provisions from the
first day of the calendar quarter that begins at
least 90 days after the date of enactment to the
first day of the quarter beginning at least 180 days
after such date.
3. Authority for Internal Revenue Service to grant
exemptions from excise tax registration requirements
(sec. 1431 of the House bill and sec. 1231 of the
Senate amendment)
Present
Law
The Code exempts certain types of sales (e.g., sales
for use in further manufacture, sales for export,
and sales for use by a State or local government or
a nonprofit educational organization) from excise
taxes imposed on manufacturers and retailers. These
exemptions generally apply only if the seller, the
purchaser, and any person to whom the article is
resold by the purchaser (the second purchaser) are
registered with the Internal Revenue Service. The
IRS can waive the registration requirement for the
purchaser and second purchaser in some but not all
cases.
House
Bill
The IRS is authorized to waive the registration
requirement for purchasers and second purchasers in
all cases.
Effective date. --The provision applies to
sales made pursuant to waivers issued after the date
of enactment.
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. Repeal of expired excise tax provisions (sec.
1432 of the House bill and sec. 1232 of the Senate
amendment)
Present
Law
The Code includes a provision relating to a
temporary reduction in the tax on piggyback trailers
sold before July 18, 1985, and provisions relating
to the tax on the removal of hard minerals from the
deep seabed before June 28, 1990.
An excise tax is imposed on the sale or use by the
manufacturer or importer of certain ozone-depleting
chemicals (sec. 4681). The amount of the tax
generally is determined by multiplying the base tax
amount applicable for the calendar year by an
ozone-depleting factor assigned to each taxable
chemical. The base tax amount was $5.80 per pound in
1996 and will increase by 45 cents per pound per
year thereafter. The Code contains provisions for
special rates of tax applicable to years before 1996
(e.g., sec. 4282(g)(1), (2), (3), and (5)).
House
Bill
These provisions are repealed, as
"deadwood".
Effective date. --The provisions are
effective on the date ofenactment.
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. Modifications to excise tax on certain arrows
(sec. 1233 of the Senate amendment)
Present
Law
An 11-percent manufacturer's excise tax is imposed
on bows having a draw weight of more than 10 pounds
and on arrows that either are greater than 18 inches
in length or are suitable for use with a taxable
bow. The tax is imposed on the manufacturer's sales
price of the completed arrow.
House
Bill
No provision.
Senate
Amendment
The current excise tax on arrows tax is replaced
with a manufacturer's excise tax on the four
component parts of the arrow: shafts, points, nocks,
and vanes. The tax rate is increased to 12.4 percent
of the value of each of these four components to
offset the reduction in aggregate value subjected to
tax compared to present-law valuation of the
completed arrow.
Effective date. --The provision is be
effective for arrow components sold after September
30, 1997.
Conference
Agreement
The conference agreement follows the Senate
amendment.
6. Modifications to heavy highway vehicle retail
excise tax (sec. 1234 of the Senate amendment)
Present
Law
A 12-percent retail excise tax is imposed on certain
heavy highway trucks and trailers, and on highway
tractors. Small trucks (those with a gross vehicle
weight not over 33,000 pounds) and lighter trailers
(those with a gross vehicle weight not over 26,000
pounds) are exempt from the tax. The tax applies to
the first retail sale of a new or remanufactured
vehicle. The determination under present law of
whether a particular modification to an existing
vehicle constitutes remanufacture (taxable) or a
repair (nontaxable) is factual and generally is
based on whether the function of the vehicle is
changed or, in the case of worn vehicles, whether
the cost of the modification exceeds 75 percent of
the value of the modified vehicle.
No tax is imposed on trucks, tractors, and trailers
when they are sold for resale or long-term lease, if
the purchaser is registered with the Treasury
Department. In such cases, purchasers are liable for
the tax when the vehicle is sold or leased. The tax
is based on the sales price in the transaction to
which it applies.
House
Bill
No provision.
Senate
Amendment
The Senate amendment makes two changes to the heavy
vehicle excise tax:
(1) Clarification is provided that the
75-percent-of-value threshold applies in determining
whether repairs to a wrecked vehicle constitute
remanufacture; and
(2) The registration requirement currently
applicable to certain sales of trucks, tractors, and
trailers for resale is replaced with a certification
requirement.
Effective date. --The provision is effective
after December 31,1997.
Conference
Agreement
The conference agreement follows the Senate
amendment.
7. Treatment of skydiving flights as noncommercial
aviation (sec. 1235 of the Senate amendment)
Present
Law
Commercial passenger aviation, or air transportation
for which a fare is charged, is subject to a
10-percent ad valorem excise tax for the
Airport and Airway Trust Fund. Noncommercial
aviation, or air transportation which is not
"for hire," is subject to a fuels tax for
the TrustFund. In the case of skydiving flights,
questions have arisen as to when the flight is
commercial aviation subject to the ticket tax and
when it is noncommercial aviation subject to the
fuels tax. In general, if instruction is offered,
the flight is noncommercial aviation. Otherwise, the
flight is treated as commercial aviation. Many
skydiving flights carry both persons receiving
instruction and others not receiving instruction.
House
Bill
No provision.
Senate
Amendment
The Senate amendment specifies that flights which
are exclusively dedicated to skydiving are taxed as
noncommercial aviation flights, regardless of
whether instruction is offered to any of the
passengers.
Effective date. --The provision is effective
for flights beginningafter September 30, 1997.
Conference
Agreement
The conference agreement follows the Senate
amendment.
8. Eliminate double taxation of certain aviation
fuels sold to producers by "fixed base
operators" (sec. 1236 of the Senate amendment)
Present
Law
Section 4091 imposes a tax on the sale of aviation
fuel by any producer (defined to include a wholesale
distributor). Fuel sold at many rural airports is
sold by retail dealers who do not qualify as
wholesale distributors. This fuel is purchased by
the retailers tax-paid. In certain instances, fuel
which has been purchased tax-paid by a retailer will
be re-sold to a producer, e.g., to enable the
producer to serve one of its customers at the
airport. When this fuel is resold at retail by the
producer, a second tax is imposed. The Code contains
no provision allowing a refund of the first tax in
such cases.
House
Bill
No provision.
Senate
Amendment
The Senate amendment permits a refund of the tax
previously paid on aviation fuel when a registered
producer acquires the fuel.
Effective date. --The provision is effective
for fuel sold after September 30, 1997.
Conference
Agreement
The conference agreement follows the Senate
amendment, with a clarification that the provision
applies to tax-paid fuel purchased by registered
producers after September 30, 1997.
B. Tax-Exempt Bond Provisions
Overview
Interest on State and local government bonds
generally is excluded from gross income for purposes
of the regular individual and corporate income taxes
if the proceeds of the bonds are used to finance
direct activities of these governmental units (Code
sec. 103).
Unlike the interest on governmental bonds, described
above, interest on private activity bonds generally
is taxable. A private activity bond is a bond issued
by a State or local governmental unit acting as a
conduit to provide financing for private parties in
a manner violating either (1) a private business use
and payment test or (2) a private loan restriction.
However, interest on private activity bonds is not
taxable if (1) the financed activity is specified in
the Code and (2) at least 95 percent of the net
proceeds of the bond issue is used to finance the
specified activity.
Issuers of State and local government bonds must
satisfy numerous other requirements, including
arbitrage restrictions (for all such bonds) and
annual State volume limitations (for most private
activity bonds) for the interest on these bonds to
be excluded from gross income.
1. Repeal of $100,000 limitation on unspent proceeds
under 1-year exception from rebate (sec. 1441 of the
House bill and sec. 1241 of the Senate amendment)
Present
Law
Subject to limited exceptions, arbitrage profits
from investing bond proceeds in investments
unrelated to the governmental purpose of the
borrowing must be rebated to the Federal Government.
No rebate is required if the gross proceeds of an
issue are spent for the governmental purpose of the
borrowing within six months after issuance.
This six-month exception is deemed to be satisfied
by issuers of governmental bonds (other than tax and
revenue anticipation notes) and qualified 501(c)(3)
bonds if (1) all proceeds other than an amount not
exceeding the lesser of 5 percent or $100,000 are so
spent within six months and (2) the remaining
proceeds are spent within one year after the bonds
are issued.
House
Bill
Under the House bill, the $100,000 limit on proceeds
that may remain unspent after six months for certain
governmental and qualified 501(c)(3) bonds otherwise
exempt from the rebate requirement is deleted. Thus,
if at least 95 percent of the proceeds of these
bonds is spent within six months after their
issuance, and the remainder is spent within one
year, the six-month exception is deemed to be
satisfied.
Effective date. --The provision applies to
bonds issued after thedate 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. Exception from rebate for earnings on bona fide
debt service fund under construction bond rules
(sec. 1442 of the House bill and sec. 1242 of the
Senate amendment)
Present
Law
In general, arbitrage profits from investing bond
proceeds in investments unrelated to the
governmental purpose of the borrowing must be
rebated to the Federal Government. An exception is
provided for certain construction bond issues if the
bonds are governmental bonds, qualified 501(c)(3)
bonds, or exempt-facility private activity bonds for
governmentally-owned property.
This exception is satisfied only if the available
construction proceeds of the issue are spent at
minimum specified rates during the 24-month period
after the bonds are issued. The exception does not
apply to bond proceeds invested after the 24-month
expenditure period as part of a reasonably required
reserve or replacement fund, a bona fide debt
service fund, or to certain other investments (e.g.,
sinking funds). Issuers of these construction bonds
also may elect to comply with a penalty regime in
lieu of rebating arbitrage profits if they fail to
satisfy the exception's spending requirements.
House
Bill
The House bill exempts earnings on bond proceeds
invested in bona fide debt service funds from the
arbitrage rebate requirement and the penalty
requirement of the 24-month exception if the
spending requirements of that exception are
otherwise satisfied.
Effective date. --The provision applies to
bonds issued after thedate 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 debt service-based limitation on
investment in certain nonpurpose investments (sec.
1443 of the House bill and sec. 1243 of the Senate
amendment)
Present
Law
Issuers of all tax-exempt bonds generally are
subject to two sets of restrictions on investment of
their bond proceeds to limit arbitrage profits. The
first set requires that tax-exempt bond proceeds be
invested at a yield that is not materially higher
(generally defined as 0.125 percentage points) than
the bond yield ("yield restrictions").
Exceptions areprovided to this restriction for
investments during any of several "temporaryperiods"
pending use of the proceeds and, throughout the term
of the issue, for proceeds invested as part of a
reasonably required reserve or replacement fund or a
"minor" portion of the issue proceeds.
Except for temporary periods and amounts held
pending use to pay current debt service, present law
also limits the amount of the proceeds of private
activity bonds (other than qualified 501(c)(3)
bonds) that may be invested at materially higher
yields at any time during a bond year to 150 percent
of the debt service for that bond year. This
restriction affects primarily investments in
reasonably required reserve or replacement funds.
Present law further restricts the amount of proceeds
from the sale of bonds that may be invested in these
reserve funds to ten percent of such proceeds.
The second set of restrictions requires generally
that all arbitrage profits earned on investments
unrelated to the governmental purpose of the
borrowing be rebated to the Federal Government
("arbitrage rebate").Arbitrage profits
include all earnings (in excess of bond yield)
derived from the investment of bond proceeds (and
subsequent earnings on any such earnings).
House
Bill
The House bill repeals the 150-percent of debt
service yield restriction.
Effective date. --The provision applies to
bonds issued after thedate 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. Repeal of expired provisions relating to student
loan bonds (sec. 1444 of the House bill and sec.
1244 of the Senate amendment)
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.
House
Bill
These special exceptions are deleted as
"deadwood."
Effective date. --The provision applies to
bonds issued after thedate 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.
C. Tax Court Procedures
1. Overpayment determinations of Tax Court (sec.
1451 of the House bill and sec. 1251 of the Senate
amendment)
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.
House
Bill
The House bill clarifies that an order to refund an
overpayment is appealable in the same manner as a
decision of the Tax Court. The House 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 ofenactment.
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. Redetermination of interest pursuant to motion
(sec. 1452 of the House bill and sec. 1252 of the
Senate amendment)
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. 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.
House
Bill
The House bill provides that a taxpayer must file a
"motion"(rather than a
"petition") to seek a redetermination of
interest in the TaxCourt. The House bill also
clarifies that the Tax Court's jurisdiction to
redetermine the amount of interest under section
7481(c) does not depend on whether the interest is
underpayment interest or overpayment interest.
Effective date. --The provision is effective
on the date ofenactment.
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. In clarifying the Tax Court's
jurisdiction over interest determinations, the
conferees do not intend to limit any other remedies
that taxpayers may currently have with respect to
such determinations, including in particular refund
proceedings relating solely to the amount of
interest due.
3. Application of net worth requirement for awards
of litigation costs (sec. 1453 of the House bill and
sec. 1253 of the Senate amendment)
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.)
House
Bill
The House bill provides that the net worth
limitations currently applicable to individuals also
apply to estates and trusts. The House bill also
provides that individuals who file a joint tax
return shall be treated as one individual for
purposes of computing the net worth limitations.
Consequently, the net worth of both spouses is
aggregated for purposes of this computation. An
exception to this rule is provided in the case of a
spouse otherwise qualifying for innocent spouse
relief.
Effective date. --The provision applies to
proceedings commencedafter the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill
with respect to estates and trusts. The Senate
amendment provides that individuals who file a joint
return are treated as separate individuals
(resulting in a net worth limitation of $4,000,000
for individuals who file a joint return).
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment with respect to estates and
trusts. The conference agreement follows the Senate
amendment with respect to individuals.
4. Tax Court jurisdiction for determination of
employment status (sec. 1454 of the House bill and
sec. 1254 of the Senate amendment)
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).
House
Bill
The House 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 (1) one or more
individuals performing services for that person are
employees of that person or (2) 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.21
The House 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 sec. 7430) would be
available to eligible taxpayers with respect to Tax
Court determinations pursuant to this proposal. The
House 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 is effective
on the date ofenactment.
Senate
Amendment
The Senate amendment is the same as the House bill,
with technical modifications.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment, with additional technical
modifications.
D. Other Provisions
1. Due date for first quarter estimated tax payments
by private foundations (sec. 1461 of the House bill
and sec. 1261 of the Senate amendment)
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).22
Section 6655(c) provides that this estimated tax
ispayable 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.
House
Bill
The House 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 will 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 beginningafter 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. Withholding of Commonwealth income taxes from the
wages of Federal employees (sec. 1462 of the House
bill and sec. 1262 of the Senate amendment)
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.
House
Bill
The House 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.
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. Certain notices disregarded under provision
increasing interest rate on large corporate
underpayments (sec. 1463 of the House bill and sec.
1263 of the Senate amendment)
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.
House
Bill
The House bill provides that, 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 ofdetermining interest for periods
after December 31, 1997.
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.
XV. PENSION AND EMPLOYEE BENEFIT PROVISIONS
A. Miscellaneous Provisions Relating to Pensions and
Other Benefits
1. Cash or deferred arrangements for irrigation and
drainage entities (sec. 911 of the House bill)
Present
Law
Under present law, taxable and tax-exempt employers
may maintain qualified cash or deferred
arrangements. State and local government
organizations generally are prohibited from
establishing qualified cash or deferred arrangements
("section 401(k) plans"). This prohibition
does notapply to qualified cash or deferred
arrangements adopted by a State or local government
before May 6, 1986.
Mutual irrigation or ditch companies are exempt from
tax if at least 85 percent of the income of the
company consists of amounts collected from members
for the sole purpose of meeting losses and expenses.
House
Bill
Under the House bill, mutual irrigation or ditch
companies and districts organized under the laws of
a State as a municipal corporation for the purpose
of irrigation, water conservation or drainage (or a
national association of such organizations) are
permitted to maintain qualified cash or deferred
arrangements, even if the company or district is a
State or local government organization.
Effective date. --The provision is effective
with respect to years beginning after December 31,
1997.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement follows the House bill.
2. Permanent moratorium on application of
nondiscrimination rules to State and local
governmental plans (sec. 912 of the House bill and
sec. 1308 of the Senate amendment)
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. 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).
Elective deferrals under section 401(k) plans are
required to satisfy a special nondiscrimination test
called the average deferral percentage
("ADP") test. Employer matching andafter-tax
employee contributions are subject to a similar test
called the average contribution percentage ("ACP")
test.
For purposes of satisfying the nondiscrimination
rules, the Internal Revenue Service 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.
House
Bill
The House bill provides that State and local
governmental plans are exempt from the
nondiscrimination and minimum participation rules.
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 and clarifies that the
exemption from the nondiscrimination and
participation rules includes exemption from the ACP
and ADP tests. The conference agreement provides
that a cash or deferred arrangement under a
governmental plan is treated as a qualified cash or
deferred arrangement even though the ADP test is not
in fact satisfied. Thus, for example, elective
contributions made by a government employer on
behalf of an employee are not treated as distributed
or made available to the employee (in accordance
with section 402(e)(3) of the Code).
Effective date. --Same as the House bill and
Senate amendment.
3. Treatment of certain disability payments to
public safety employees (sec. 913 of the House bill
and sec. 785 of the Senate amendment)
Present
Law
Under present law, amounts received under a
workmen's compensation act as compensation for
personal injuries or sickness incurred in the course
of employment are excluded from gross income.
Compensation received under a workmen's compensation
act by the survivors of a deceased employee also are
excluded from gross income. Nonoccupational death
and disability benefits are not excludable from
income as workmen's compensation benefits.
House
Bill
Under the House bill, certain payments made on
behalf of full-time employees of any police or fire
department organized and operated by a State (or any
political subdivision, agency, or instrumentality
thereof) are excludable from income. The House bill
applies to payments made on account of heart disease
or hypertension of the employee and that were
received in 1989, 1990, 1991 pursuant to a State law
as amended on May 19, 1992, which irrebuttably
presumed that heart disease and hypertension are
work-related illnesses, but only for employees
separating from service before July 1, 1992. Claims
for refund or credit for overpayment of tax
resulting from the provision may be filed up to 1
year after the date of enactment, without regard to
the otherwise applicable statute of limitations.
Effective date. --The provision is effective
on the date ofenactment.
Senate
Amendment
The Senate amendment is the same as the House bill,
except that the provision applies to amounts payable
under a State law (as in existence on July 1, 1992)
which irrebuttably presumed that heart disease and
hypertension are work-related illnesses, but only
for employees separating from service before such
date.
Effective date. --Same as the House bill.
Conference
Agreement
The conference agreement follows the House bill.
4. Portability of permissive service credit under
governmental pension plans (sec. 914 of the House
bill)
Present
Law
Under present law, limits are imposed on the
contributions and benefits under qualified pension
plans (Code sec. 415). Certain special rules apply
in the case of State and local governmental plans.
In the case of a defined contribution plan, the
limit on annual additions is the lesser of $30,000
or 25 percent of compensation. Annual additions
include employer contributions, as well as after-tax
employee contributions. In the case of a defined
benefit pension plan, the limit on the annual
retirement benefit is the lesser of (1) 100 percent
of compensation or (2) $125,000 (indexed for
inflation). The 100 percent of compensation
limitation does not apply in the case of State and
local governmental pension plans.
Amounts contributed by employees to a State or local
governmental plan are treated as made by the
employer if the employer "picks up"
thecontribution.
House
Bill
Under the House bill, in applying the defined
benefit pension plan limit, the annual benefit under
a State or local governmental plan includes the
accrued benefit derived from contributions to
purchase permissive service credit. Such
contributions are not taken into account in
determining annual additions.
Permissive service credit means credit for a period
of service recognized by the governmental plan if
the employee contributes to the plan an amount (as
determined by the plan) which does not exceed the
amount necessary to fund the accrued benefit
attributable to such period of service.
The House bill does not affect the treatment of
"pick up"contributions.
Effective date. --The provision is effective
with respect to years beginning after December 31,
1997.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement follows the House bill,
with modifications. Under the conference agreement,
contributions by a participant in a State or local
governmental plan to purchase permissive service
credits are subject to one of two limits. Either (1)
the accrued benefit derived from all contributions
to purchase permissive service credit must be taken
into account in determining whether the defined
benefit pension plan limit is satisfied, or (2) all
such contributions must be taken into account in
determining whether the $30,000 limit on annual
additions is met for the year (taking into account
any other annual additions of the participant).
Under the first alternative, a plan will not fail to
satisfy the reduced defined benefit pension plan
limit that applies in the case of early retirement
due to the accrued benefit derived from the purchase
of permissive service credits. These limits may be
applied on a participant-by-participant basis. That
is, contributions to purchase permissive service
credits by all participants in the same plan do not
have to satisfy the same limit.
Under the conference agreement, permissive service
credit is defined as under the House bill. Thus, it
is credit for a period of service that is recognized
by the governmental plan only if the employee
voluntarily contributes to the plan an amount (as
determined by the plan) which does not exceed the
amount necessary to fund the benefit attributable to
the period of service and which is in addition to
the regular employee contributions, if any, under
the plan. Section 415 is violated if more than 5
years of permissive service credit is purchased for
"nonqualified service". In addition,
section 415 isviolated if nonqualified service is
taken into account for an employee who has less than
5 years of participation under the plan.
Nonqualified service is service other than service
(1) as a Federal, State, or local government
employee, (2) as an employee of an association
representing Federal, State or local government
employees, (3) as an employee of an educational
institution which provides elementary or secondary
education, or (4) for military service. Service
under (1), (2) or (3) is not qualified if it enables
a participant to receive a retirement benefit for
the same service under more than one plan.
The conference agreement provides that in the case
of any repayment of contributions and earnings to a
governmental plan with respect to an amount
previously refunded upon a forfeiture of service
credit under the plan (or another plan maintained by
a State or local government employer within the same
State) any such repayment shall not be taken into
account for purposes of section 415 and service
credit obtained as a result of the repayment shall
not be considered permissive service credit.
The provision is not intended to affect the
application of "pickup" contributions to
purchase permissive service credit or the treatment
of pick up contributions under section 415. The
provision does not apply to purchases of service
credit for qualified military service under the
rules relating to veterans' reemployment rights
(sec. 414(u)).
Effective date. --In general, the conference
agreement is effectivewith respect to contributions
to purchase permissive service credits made in years
beginning after December 31, 1997.
The conference agreement provides a transition rule
for plans that provided for the purchase of
permissive service credit prior to enactment of this
Act. Under this rule, the defined contribution
limits will not reduce the amount of permissive
service credit of an eligible participant allowed
under the terms of the plan as in effect on the date
of enactment. For this purpose an eligible
participant is an individual who first became a
participant in the plan before the first plan year
beginning after the last day of the calendar year in
which the next regular session (following the date
of the enactment of this Act) of the governing body
with authority to amend the plan ends.. 5.
Gratuitous transfers for the benefit of employees
(sec. 915 of the House bill)
Present
Law
An employee stock ownership plan ("ESOP")
is a qualified stockbonus plan or a combination
stock bonus and money purchase pension plan under
which employer securities are held for the benefit
of employees.
A deduction is allowed for Federal estate tax
purposes for transfers by a decedent to charitable,
religious, scientific, etc. organizations. In the
case of a transfer of a remainder interest to a
charity, the remainder interest must be in a
charitable remainder trust. A charitable remainder
trust generally is a trust that is required to pay,
no less often than annually, a fixed dollar amount
(charitable remainder annuity trust) or a fixed
percentage of the fair market value of the trust's
assets determined at least annually (charitable
remainder unitrust) to noncharitable beneficiaries,
and the remainder of the trust (i.e., after
termination of the annuity or unitrust amounts) to a
charitable, religious, scientific, etc.
organization.
House
Bill
The House bill permits certain limited transfers of
qualified employer securities by charitable
remainder trusts to ESOPs without adversely
affecting the status of the charitable remainder
trusts. As a result, the bill provides that a
qualified gratuitous transfer of employer securities
to an ESOP is deductible from the gross estate of a
decedent under Code section 2055 to the extent of
the present value of the remainder interest. In
addition, an ESOP will not fail to be a qualified
plan because it complies with the requirements with
respect to a qualified gratuitous transfer.
In order for a transfer of securities to be a
qualified gratuitous transfer, a number of
requirements must be satisfied, including the
following: (1) the securities transferred to the
ESOP must previously have passed from the decedent
to a charitable remainder trust; (2) at the time of
the transfer to the ESOP, family members of the
decedent own (directly or indirectly) no more than
10 percent of the value of the outstanding stock of
the company; (3) immediately after the transfer to
the ESOP, the ESOP owns at least 60 percent of the
value of outstanding stock of the company; and (4)
the plan meets certain requirements. The provision
applies in cases in which the ESOPs was in existence
on August 1, 1996 and the decedent dies on or before
December 31, 1998.
Effective date. --The provision is effective
with respect totransfers to an ESOP after the date
of enactment.
Senate
Amendment
No provision.
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