Home
Up
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Page 8
Page 9
Page 10
Page 11
Page 12
Page 13
Page 14
|
House
Bill
No provision.
Senate
Amendment
Under the provision, the special recapture rule for
overall foreign losses that currently applies to
dispositions of foreign trade or business assets
applies to the disposition of stock in a controlled
foreign corporation controlled by the taxpayer.
Thus, a disposition of controlled foreign
corporation stock by a controlling shareholder
results in the recognition of foreign-source income
in an amount equal to the lesser of the fair market
value of the stock over its adjusted basis, or the
amount of prior unrecaptured overall foreign losses.
Such income is resourced as U.S.-source income for
foreign tax credit limitation purposes without
regard to the 50-percent limit.
Although the provision generally extends to all
dispositions of such stock, regardless of whether
gain or loss is recognized on the transfer,
exceptions are made for certain internal
restructurings. Contributions to corporations or
partnerships under sections 351 and 721,
respectively, and certain stock and asset
reorganizations do not trigger recapture of overall
foreign losses, provided that the transferor's
underlying indirect interest in the disposed
controlled foreign corporation does not change.
However, any gain recognized in connection with a
transaction meeting any of these exceptions, such as
boot, triggers recapture of overall foreign losses
to the extent of such gain.
Effective date. --The provision applies to
dispositions after the date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment with modifications. Under the provision as
modified, a disposition of controlled foreign
corporation stock in a transaction in which the
taxpayer or a member of its consolidated group
acquires the assets of the controlled foreign
corporation in a liquidation under section 332 or a
reorganization does not trigger the recapture of
overall foreign losses. Any gain recognized in
connection with a transaction meeting this exception
triggers recapture of overall foreign losses to the
extent of such gain.
15. Application of earnings-stripping rules to
partnerships and S corporations (sec. 462 of the
Senate amendment and sec. 163 of the Code)
Present
Law
Present law provides rules to limit the ability of
U.S.
corporations to reduce the
U.S.
tax on their U.S.-source income through earnings
stripping transactions. Section 163(j) specifically
addresses earnings stripping involving interest
payments, by limiting the deductibility of interest
paid to certain related parties ("disqualified
interest"),894
if the payor's debt-equity ratio exceeds 1.5 to 1
and the payor's net interest expense exceeds 50
percent of its "adjusted taxable income"
(generally taxable income computed without regard to
deductions for net interest expense, net operating
losses, and depreciation, amortization, and
depletion). Disallowed interest amounts can be
carried forward indefinitely. In addition, excess
limitation (i.e., any excess of the 50-percent limit
over a company's net interest expense for a given
year) can be carried forward three years.
The present-law earnings stripping provision does
not apply to partnerships. Proposed Treasury
regulations provide that a corporate partner's
proportionate share of the liabilities of a
partnership is treated as debt of the corporate
partner for purposes of applying the earnings
stripping limitation to its own interest payments.895
In addition, interest paid or accrued by a
partnership is treated as interest expense of a
corporate partner, with the result that a deduction
for the interest expense may be disallowed if that
expense would be disallowed under the earnings
stripping rules if paid by the corporate partner
itself.896
The proposed regulations also provide that the
earnings stripping rules do not apply to subchapter
S corporations.897
Thus, under present law and the proposed
regulations, a partnership or S corporation
generally is allowed a deduction for interest paid
or accrued on indebtedness that it issues that
otherwise would be disallowed under the earnings
stripping rules in the case of a subchapter C
corporation.
House
Bill
No provision.
Senate
Amendment
The Senate amendment incorporates a rule attributing
partnership debt to a corporate partner for purposes
of applying the earnings stripping rules to the
corporation.898
Effective date. --The Senate amendment
provision generally is effective for taxable years
beginning on or after the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
16. Recognition of cancellation of indebtedness
income realized on satisfaction of debt with
partnership interest (sec. 463 of the Senate
amendment and sec. 108 of the Code)
Present
Law
Under present law, a corporation that transfers
shares of its stock in satisfaction of its debt must
recognize cancellation of indebtedness income in the
amount that would be realized if the debt were
satisfied with money equal to the fair market value
of the stock.899
Prior to enactment of this present-law provision in
1993, case law provided that a corporation did not
recognize cancellation of indebtedness income when
it transferred stock to a creditor in satisfaction
of debt (referred to as the "stock-for-debt
exception").900
When cancellation of indebtedness income is realized
by a partnership, it generally is allocated among
the partners in accordance with the partnership
agreement, provided the allocations under the
agreement have substantial economic effect. A
partner who is allocated cancellation of
indebtedness income is entitled to exclude it if the
partner qualifies for one of the various exceptions
to recognition of such income, including the
exception for insolvent taxpayers or that for
qualified real property indebtedness of taxpayers
other than subchapter C corporations.901
The availability of each of these exceptions is
determined at the partner, rather than the
partnership, level.
In the case of a partnership that transfers to a
creditor a capital or profits interest in the
partnership in satisfaction of its debt, no Code
provision expressly requires the partnership to
realize cancellation of indebtedness income. Thus,
it is unclear whether the partnership is required to
recognize cancellation of indebtedness income under
either the case law that established the
stock-for-debt exception or the present-law
statutory repeal of the stock-for-debt exception. It
also is unclear whether any requirement to recognize
cancellation of indebtedness income is affected if
the cancelled debt is nonrecourse indebtedness.902
House
Bill
No provision.
Senate
Amendment
The Senate amendment provides that when a
partnership transfers a capital or profits interest
in the partnership to a creditor in satisfaction of
partnership debt, the partnership generally
recognizes cancellation of indebtedness income in
the amount that would be recognized if the debt were
satisfied with money equal to the fair market value
of the partnership interest. The Senate amendment
applies without regard to whether the cancelled debt
is recourse or nonrecourse indebtedness. Any
cancellation of indebtedness income recognized under
the Senate amendment is allocated solely among the
partners who held interests in the partnership
immediately prior to the satisfaction of the debt.
Under the Senate amendment, no inference is intended
as to the treatment under present law of the
transfer of a partnership interest in satisfaction
of partnership debt.
Effective date. --The Senate amendment is
effective for cancellations of indebtedness
occurring on or after the date of enactment.
Conference
Agreement
The conference agreement includes the Senate
amendment.
17. Denial of installment sale treatment for all
readily tradable debt (Sec. 465 of the Senate
amendment and sec. 453 of the Code)
Present
Law
Under present law, taxpayers are permitted to
recognize as gain on a disposition of property only
that proportion of payments received in a taxable
year which is the same as the proportion that the
gross profit bears to the total contract price (the
"installment method").903
However, the installment method is not available if
the taxpayer sells property in exchange for a
readily tradable evidence of indebtedness that is
issued by a corporation or a government or political
subdivision.904
No similar provision under present law prohibits the
use of the installment method where the taxpayer
sells property in exchange for readily tradable
indebtedness issued by a partnership or an
individual.
House
Bill
No provision.
Senate
Amendment
The Senate amendment denies installment sale
treatment with respect to all sales in which the
taxpayer receives indebtedness that is readily
tradable under present-law rules, regardless of the
nature of the issuer. For example, if the taxpayer
receives readily tradable debt of a partnership in a
sale, the partnership debt is treated as payment on
the installment note, and the installment method is
unavailable to the taxpayer.
Effective date. --The Senate amendment
provision is effective for sales occurring on or
after date of enactment.
Conference
Agreement
The conference agreement includes the Senate
amendment.
18. Modify treatment of transfers to creditors in
divisive reorganizations (sec. 466 of the Senate
amendment and secs. 357 and 361 of the Code)
Present
Law
Section 355 of the Code permits a corporation
("distributing") to separate its
businesses by distributing a controlled subsidiary
("controlled") tax-free, if certain
conditions are met. In cases where the distributing
corporation contributes property to the controlled
corporation that is to be distributed, no gain or
loss is recognized if the property is contributed
solely in exchange for stock or securities of the
controlled corporation (which are subsequently
distributed to distributing's shareholders). The
contribution of property to a controlled corporation
that is followed by a distribution of its stock and
securities may qualify as a reorganization described
in section 368(a)(1)(D). That section also applies
to certain transactions that do not involve a
distribution under section 355 and that are
considered 'acquisitive" rather than
"divisive" reorganizations.
The contribution in the course of a divisive section
368(a)(1)(D) reorganization is also subject to the
rules of section 357(c). That section provides that
the transferor corporation will recognize gain if
the amount of liabilities assumed by controlled
exceeds the basis of the property transferred to it.
Because the contribution transaction in connection
with a section 355 distribution is a reorganization
under section 368(a)(1)(D), it is also subject to
certain rules applicable to both divisive and
acquisitive reorganizations. One such rule, in
section 361(b), states that a transferor corporation
will not recognize gain if it receives money or
other property and distributes that money or other
property to its shareholders or creditors. The
amount of property that may be distributed to
creditors without gain recognition is unlimited
under this provision.
House
Bill
No provision.
Senate
Amendment
The bill limits the amount of money plus the fair
market value of other property that a distributing
corporation can distribute to its creditors without
gain recognition under section 361(b) to the amount
of the basis of the assets contributed to a
controlled corporation in a divisive reorganization.
In addition, the bill provides that acquisitive
reorganizations under section 368(a)(1)(D) are no
longer subject to the liabilities assumption rules
of section 357(c).
Effective date. --The bill is effective for
transactions on or after the date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment.
19. Clarify definition of nonqualified preferred
stock (sec. 467 of the Senate amendment and sec.
351(g) of the Code)
Present
Law
The Taxpayer Relief Act of 1997 amended sections
351, 354, 355, 356, and 1036 to treat
"nonqualified preferred stock" as boot in
corporate transactions, subject to certain
exceptions. For this purpose, preferred stock is
defined as stock that is "limited and preferred
as to dividends and does not participate in
corporate growth to any significant extent."
Nonqualified preferred stock is defined as any
preferred stock if (1) the holder has the right to
require the issuer or a related person to redeem or
purchase the stock, (2) the issuer or a related
person is required to redeem or purchase, (3) the
issuer or a related person has the right to redeem
or repurchase, and, as of the issue date, it is more
likely than not that such right will be exercised,
or (4) the dividend rate varies in whole or in part
(directly or indirectly) with reference to interest
rates, commodity prices, or similar indices,
regardless of whether such varying rate is provided
as an express term of the stock (as in the case of
an adjustable rate stock) or as a practical result
of other aspects of the stock (as in the case of
auction stock). For this purpose, clauses (1), (2),
and (3) apply if the right or obligation may be
exercised within 20 years of the issue date and is
not subject to a contingency which, as of the issue
date, makes remote the likelihood of the redemption
or purchase.
House
Bill
No provision.
Senate
Amendment
The provision clarifies the definition of
nonqualified preferred stock to ensure that stock
for which there is not a real and meaningful
likelihood of actually participating in the earnings
and profits of the corporation is not considered to
be outside the definition of stock that is limited
and preferred as to dividends and does not
participate in corporate growth to any significant
extent.
As one example, instruments that are preferred on
liquidation and that are entitled to the same
dividends as may be declared on common stock do not
escape being nonqualified preferred stock by reason
of that right if the corporation does not in fact
pay dividends either to its common or preferred
stockholders. As another example, stock that
entitles the holder to a dividend that is the
greater of seven percent or the dividends common
shareholders receive does not avoid being preferred
stock if the common shareholders are not expected to
receive dividends greater than seven percent.
No inference is intended as to the characterization
of stock under present law that has terms providing
for unlimited dividends or participation rights but,
based on all the facts and circumstances, is limited
and preferred as to dividends and does not
participate in corporate growth to any significant
extent.
Effective date. --The provision is effective
for transactions after
May 14, 2003
.
Conference
Agreement
The conference agreement follows the Senate
amendment.
20. Modify definition of controlled group of
corporations (sec. 468 of the Senate amendment and
sec. 1563 of the Code)
Present
Law
Under present law, a tax is imposed on the taxable
income of corporations. The rates are as follows:
Marginal
Federal Corporate Income Tax Rates
If taxable Then the income tax
income is : rate is :
_______________ _____________________
$0 - $50,000 ...................15 percent of taxable income
$50,001 - $75,000 ..............25 percent of taxable income
$75,001 - $10,000,000 ..........34 percent of taxable income
Over $10,000,000................35 percent of taxable income
The first two graduated rates described above are
phased out by a five-percent surcharge for
corporations with taxable income between $100,000
and $335,000. Also, the application of the
34-percent rate is phased out by a three-percent
surcharge for corporations with taxable income
between $15 million and $18,333,333.
The component members of a controlled group of
corporations are limited to one amount in each of
the taxable income brackets shown above.905
For this purpose, a controlled group of corporations
means a parent-subsidiary controlled group and a
brother-sister controlled group.
A brother-sister controlled group means two or more
corporations if five or fewer persons who are
individuals, estates or trusts own (or
constructively own) stock possessing (1) at least 80
percent of the total combined voting power of all
classes of stock entitled to vote and at least 80
percent of the total value of all stock, and (2)
more than 50 percent of percent of the total
combined voting power of all classes of stock
entitled to vote or more than 50 percent of the
total value of all stock, taking into account the
stock ownership of each person only to the extent
the stock ownership is identical with respect to
each corporation.906
House
Bill
No provision.
Senate
Amendment
Under the provision, a brother-sister controlled
group means two or more corporations if five or
fewer persons who are individuals, estates or trusts
own (or constructively own) stock possessing more
than 50 percent of the total combined voting power
of all classes of stock entitled to vote, or more
than 50 percent of the total value of all stock,
taking into account the stock ownership of each
person only to the extent the stock ownership is
identical with respect to each corporation.
The provision applies only for purposes of section
1561, currently relating to corporate tax brackets,
the accumulated earnings credit, and the minimum
tax. The provision does not affect other Code
sections or other provisions that utilize or refer
to the section 1563 brothersister corporation
controlled group test for other purposes.907
Effective date. --The provision applies to
taxable years beginning after the date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment.
21. Establish specific class lives for utility
grading costs (sec. 472 of the Senate amendment and
sec. 168 of the Code)
Present
Law
A taxpayer is allowed a depreciation deduction for
the exhaustion, wear and tear, and obsolescence of
property that is used in a trade or business or held
for the production of income. For most tangible
property placed in service after 1986, the amount of
the depreciation deduction is determined under the
modified accelerated cost recovery system ("MACRS")
using a statutorily prescribed depreciation method,
recovery period, and placed in service convention.
For some assets, the recovery period for the asset
is provided in section 168. In other cases, the
recovery period of an asset is determined by
reference to its class life. The class lives of
assets placed in service after 1986 are generally
set forth in Revenue Procedure 87-56.908
If no class life is provided, the asset is allowed a
7-year recovery period under MACRS.
Assets that are used in the transmission and
distribution of electricity for sale are included in
asset class 49.14, with a class life of 30 years and
a MACRS recovery period of 20 years. The cost of
initially clearing and grading land improvements are
specifically excluded from asset class 49.14. Prior
to adoption of the accelerated cost recovery system,
the
IRS
ruled that an average useful life of 84 years for
the initial clearing and grading relating to
electric transmission lines and 46 years for the
initial clearing and grading relating to electric
distribution lines, would be accepted. However, the
result in this ruling was not incorporated in the
asset classes included in Rev. Proc. 87-56 or its
predecessors. Accordingly such costs are depreciated
over a 7-year recovery period under MACRS as assets
for which no class life is provided.
A similar situation exists with regard to gas
utility trunk pipelines and related storage
facilities. Such assets are included in asset class
49.24, with a class life of 22 years and a MACRS
recovery period of 15 years. Initial clearing and
grade improvements are specifically excluded from
the asset class, and no separate asset class is
provided for such costs.
Accordingly, such costs are depreciated over a
7-year recovery period under MACRS as assets for
which no class life is provided.
House
Bill
No provision.
Senate
Amendment
The Senate amendment assigns a class life to
depreciable electric and gas utility clearing and
grading costs incurred to locate transmission and
distribution lines and pipelines. The provision
includes these assets in the asset classes of the
property to which the clearing and grading costs
relate (generally, asset class 49.14 for electric
utilities and asset class 49.24 for gas utilities,
giving these assets a recovery period of 20 years
and 15 years, respectively).
Effective date. --The Senate amendment is
effective for property placed in service after the
date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment.
22. Expansion of limitation on expensing of
certain passenger automobiles (sec. 473 of the
Senate amendment and sec. 179 of the Code)
Present
Law
A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain
property used in a trade or business or for the
production of income. The amount of the depreciation
deduction allowed with respect to tangible property
for a taxable year is determined under the modified
accelerated cost recovery system ("MACRS").
Under MACRS, passenger automobiles generally are
recovered over five years. However, section 280F
limits the annual depreciation deduction with
respect to certain passenger automobiles.909
For purposes of the depreciation limitation,
passenger automobiles are defined broadly to include
any 4-wheeled vehicles that are manufactured
primarily for use on public streets, roads, and
highways and which are rated at 6,000 pounds
unloaded gross vehicle weight or less.910
In the case of a truck or a van, the depreciation
limitation applies to vehicles that are rated at
6,000 pounds gross vehicle weight or less. Sports
utility vehicles are treated as a truck for the
purpose of applying the section 280F limitation.
In lieu of depreciation, a taxpayer with a
sufficiently small amount of annual investment may
elect to expense such investment (sec. 179). The
Jobs and Growth Tax Relief Reconciliation Act (JGTRRA)
of 2003911
increased the amount a taxpayer may deduct, for
taxable years beginning in 2003 through 2005, to
$100,000 of the cost of qualifying property placed
in service for the taxable year.912
In general, qualifying property is defined as
depreciable tangible personal property that is
purchased for use in the active conduct of a trade
or business. The $100,000 amount is reduced (but not
below zero) by the amount by which the cost of
qualifying property placed in service during the
taxable year exceeds $400,000. Prior to the
enactment of JGTRRA (and for taxable years beginning
in 2006 and thereafter) a taxpayer with a
sufficiently small amount of annual investment may
elect to deduct up to $25,000 of the cost of
qualifying property placed in service for the
taxable year. The $25,000 amount is reduced (but not
below zero) by the amount by which the cost of
qualifying property placed in service during the
taxable year exceeds $200,000. Passenger automobiles
subject to section 280F are eligible for section 179
expensing only to the extent of the applicable
limits contained in section 280F.
House
Bill
No provision.
Senate
Amendment
The Senate amendment limits the ability of taxpayers
to claim deductions under section 179 for certain
vehicles not subject to section 280F to $25,000. The
provision applies to sport utility vehicles rated at
14,000 pounds gross vehicle weight or less (in place
of the present law 6,000 pound rating). For this
purpose, a sport utility vehicle is defined to
exclude any vehicle that: (1) is designed for more
than nine individuals in seating rearward of the
driver's seat; (2) is equipped with an open cargo
area, or a covered box not readily accessible from
the passenger compartment, of at least six feet in
interior length; or (3) has an integral enclosure,
fully enclosing the driver compartment and load
carrying device, does not have seating rearward of
the driver's seat, and has no body section
protruding more than 30 inches ahead of the leading
edge of the windshield.
The following example illustrates the operation of
the provision.
Example. --Assume that during 2005, a
calendar year taxpayer acquires and places in
service a sport utility vehicle subject to the
provision that costs $70,000. In addition, assume
that the property otherwise qualifies for the
expensing election under section 179. Under the
provision, the taxpayer is first allowed a $25,000
deduction under section 179. The taxpayer is also
allowed an additional first-year depreciation
deduction (sec. 168(k)) of $22,500 based on $45,000
($70,000 original cost less the section 179
deduction of $25,000) of adjusted basis. Finally,
the remaining adjusted basis of $22,500 ($45,000
adjusted basis less $22,500 additional first-year
depreciation) is eligible for an additional
depreciation deduction of $4,500 under the general
depreciation rules (automobiles are five-year
recovery property). The remaining $18,000 of cost
($70,000 original cost less $52,000 deductible
currently) would be recovered in 2006 and subsequent
years pursuant to the general depreciation rules.
Effective date. --The Senate amendment is
effective for property placed in service after the
date of enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment.
23. Provide consistent amortization period for
intangibles (sec. 474 of the Senate amendment and
secs. 195, 248, and 709 of the Code)
Present
Law
At the election of the taxpayer, start-up
expenditures913
and organizational expenditures914
may be amortized over a period of not less than 60
months, beginning with the month in which the trade
or business begins. Start-up expenditures are
amounts that would have been deductible as trade or
business expenses, had they not been paid or
incurred before business began. Organizational
expenditures are expenditures that are incident to
the creation of a corporation (sec. 248) or the
organization of a partnership (sec. 709), are
chargeable to capital, and that would be eligible
for amortization had they been paid or incurred in
connection with the organization of a corporation or
partnership with a limited or ascertainable life.
Treasury regulations915
require that a taxpayer file an election to amortize
start-up expenditures no later than the due date for
the taxable year in which the trade or business
begins. The election must describe the trade or
business, indicate the period of amortization (not
less than 60 months), describe each start-up
expenditure incurred, and indicate the month in
which the trade or business began. Similar
requirements apply to the election to amortize
organizational expenditures. A revised statement may
be filed to include start-up and organizational
expenditures that were not included on the original
statement, but a taxpayer may not include as a
start-up expenditure any amount that was previously
claimed as a deduction.
Section 197 requires most acquired intangible assets
(such as goodwill, trademarks, franchises, and
patents) that are held in connection with the
conduct of a trade or business or an activity for
the production of income to be amortized over 15
years beginning with the month in which the
intangible was acquired.
House
Bill
No provision.
Senate
Amendment
The Senate amendment modifies the treatment of
start-up and organizational expenditures. A taxpayer
would be allowed to elect to deduct up to $5,000 of
start-up and $5,000 of organizational expenditures
in the taxable year in which the trade or business
begins. However, each $5,000 amount is reduced (but
not below zero) by the amount by which the
cumulative cost of start-up or organizational
expenditures exceeds $50,000, respectively. Start-up
and organizational expenditures that are not
deductible in the year in which the trade or
business begins would be amortized over a 15-year
period consistent with the amortization period for
section 197 intangibles.
Effective date. --The Senate amendment is
effective for start-up and organizational
expenditures incurred after the date of enactment.
Start-up and organizational expenditures that are
incurred on or before the date of enactment would
continue to be eligible to be amortized over a
period not to exceed 60 months. However, all
start-up and organizational expenditures related to
a particular trade or business, whether incurred
before or after the date of enactment, would be
considered in determining whether the cumulative
cost of start-up or organizational expenditures
exceeds $50,000.
Conference
Agreement
The conference agreement follows the Senate
amendment.
24. Doubling of certain penalties, fines, and
interest on underpayments related to certain
offshore financial arrangements (sec. 483 of the
Senate amendment)
Present
Law
The Code contains numerous civil penalties, such as
the delinquency, accuracy-related and fraud
penalties. These civil penalties are in addition to
any interest that may be due.
In January 2003, Treasury announced the Offshore
Voluntary Compliance Initiative ("OVCI")
running through
April 15, 2003
, to encourage the voluntary disclosure of
previously unreported income placed by taxpayers in
offshore accounts and accessed through credit card
or other financial arrangements. The taxpayer will
pay back taxes, interest and certain accuracyrelated
and delinquency penalties.
A taxpayer's timely, voluntary disclosure of a
substantial unreported tax liability has long been
an important factor in deciding whether the
taxpayer's case should ultimately be referred for
criminal prosecution. The voluntary disclosure must
be truthful, timely, and complete. A voluntary
disclosure does not guarantee immunity from
prosecution.
House
Bill
No provision.
Senate
Amendment
Increases by a factor of two the total amount of
civil penalties, interest and fines applicable for
taxpayers who would have been eligible to
participate in either the OVCI or the Treasury
Department's voluntary disclosure initiative but did
not participate in either program.
Effective date. --Taxpayers' open tax years
on or after date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
25. Whistleblower reforms (sec. 488 of the Senate
amendment)
Present
Law
Under section 7623, the
IRS
is authorized to pay such sums as deemed necessary
for: "(1) detecting underpayments of tax; and
(2) detecting and bringing to trial and punishment
persons guilty of violating the internal revenue
laws or conniving at the same." Amounts are
paid based on a percentage of tax, fines, and
penalties (but not interest) actually collected
based on the information provided. For specific
information that caused the investigation and
resulted in recovery, the
IRS
administratively has set the reward in an amount not
to exceed 15 percent of the amounts recovered. For
information, although not specific, that nonetheless
caused the investigation and was of value in the
determination of tax liabilities, the reward is not
to exceed 10 percent of the amount recovered. For
information that caused the investigation, but had
no direct relationship to the determination of tax
liabilities, the reward is not to exceed one percent
of the amount recovered. The reward ceiling is $10
million (for payments made after
November 7, 2002
), and the reward floor is $100. No reward will be
paid if the recovery was so small as to call for
payment of less than $100 under the above formulas.
Both the ceiling and percentages can be increased
with a Special Agreement. The Code permits the
IRS
to disclose return information pursuant to a
contract for tax administration services (sec.
6103(n)).
House
Bill
No provision.
Senate
Amendment
The Senate amendment creates a reward program for
actions in which the tax, penalties, interest,
additions to tax, and additional amounts in dispute
exceed $20,000, and, if the taxpayer is an
individual, the individual's gross income exceeds
$200,000 for any taxable year.
Generally, the Senate amendment establishes a reward
floor of 15 percent of the collected proceeds
(including penalties, interest, additions to tax and
additional amounts) if the
IRS
proceeds with an administrative or judicial action
based on information brought to the
IRS
's attention by an individual. The Senate amendment
permits awards of lesser amounts (but no less than
10 percent) if the action was based principally on
allegations (other than information provided by the
individual) resulting from a judicial or
administrative hearing, government report, hearing,
audit, investigation, or from the news media. The
Senate amendment caps the available reward at 30
percent of the collected proceeds. Any determination
regarding a reward may be appealed to the U.S. Tax
Court.
The Senate amendment creates a Whistleblower Office
within the
IRS
to administer this reward program. The Whistleblower
Office is funded with amounts equal to rewards made.
The Whistleblower Office may seek the assistance
from the individual providing information or from
his legal representative, and may reimburse the
costs incurred by any legal representative out of
the funds of the Whistleblower Office. To the extent
the disclosure of returns or return information is
required to render such assistance, the disclosure
must be pursuant to an
IRS
tax administration contract.
Effective date. --Information provided on or
after the date of enactment.
Conference
Agreement
The conference agreement does not include the Senate
amendment provision.
26. Increase in age of minor children whose
unearned income is taxed as if parent's income (sec.
495 of the Senate amendment and sec. 1 of the Code)
Present
Law
Filing
requirements for children
A single unmarried individual eligible to be claimed
as a dependent on another taxpayer's return
generally must file an individual income tax return
if he or she has: (1) earned income only over $4,850
(for 2004); (2) unearned income only over the
minimum standard deduction amount for dependents
($800 in 2004); or (3) both earned income and
unearned income totaling more than the smaller of
(a) $4,850 (for 2004) or (b) the larger of (i) $800
(for 2004), or (ii) earned income plus $250.916
Thus, if a dependent child has less than $800 in
gross income, the child does not have to file an
individual income tax return for 2004.917
A child who cannot be claimed as a dependent on
another person's tax return (e.g., because the
support test is not satisfied by any other person)
is subject to the generally applicable filing
requirements. That is, such an individual generally
must file a return if the individual's gross income
exceeds the sum of the standard deduction and the
personal exemption amounts applicable to the
individual.
Taxation of unearned income under section 1(g)
Special rules (generally referred to as the "kiddie
tax") apply to the unearned income of a child
who is under age 14.918
The kiddie tax applies if: (1) the child has not
reached the age of 14 by the close of the taxable
year; (2) the child's une
|
