[Editor's Note: In addition to HR 2014, Congress last week passed HR 2015, the Balanced Budget Bill of 1997, which contains tax provisions. These provisions are summarized in an article in the Current Developments section of this issue.]
The Bill provides a complex formula for determining the limitations on the amount of the credit and its refundability. This formula depends on whether the taxpayer has three or more children and interacts with the earned income credit (EIC). The conferees indicated that they anticipate that Treasury will determine whether a simplified method of calculating the child credit consistent with this formula can be achieved.
The child tax credit, which is contained in new Code Section 24, applies to taxable years beginning after December 31, 1997. (Bill Section 101; Code Sections 24, 32.)
* The Bill provides an above-the-line deduction for interest paid on student loans. In 1998, the maximum amount is $1,000; 1999 $1,500; 2000 $2,000; 2001 or thereafter $2,500. The deduction phases out at income levels beginning at $40,000 for individuals and $60,000 for joint returns (indexed for inflation beginning after 2002). The deduction is allowed only with respect to interest paid on any qualified education loan during the first 60 months in which interest payments are required. No deduction is permitted for taxpayers who may be claimed as dependents on another taxpayer's return. Applicable to any qualified education loan incurred on, before, or after the date of enactment, but only with respect to any loan interest payment due and paid after December 31, 1997, and the portion of the 60-month period after December 31, 1997. (Bill Section 202; new Code Section 221.)
* The Bill provides that the Section 72(t) 10% early withdrawal tax on IRA distributions would not apply to distributions from IRAs if the taxpayer uses the amounts to pay qualified higher education expenses (including those related to graduate-level courses) of the taxpayer, the taxpayer's spouse, or any child, or grandchild of the taxpayer or the taxpayer's spouse. The provision would be effective for distributions after December 31, 1997, with respect to expenses paid after such date for education furnished in academic periods beginning after such date. (Bill Section 203; Code Section 72(t).)
* expands the definition of eligible education institution by defining such term in reference to Section 481 of the Higher Education Act of 1965 (generally including post-secondary educational institutions offering credit toward a bachelor's degree, an associate's degree, a graduate-level or professional degree, or another recognized post-secondary credential;
* expands the definition of the term ``member of the family'' for purposes of allowing tax-free transfers or rollovers of credits or account balances in qualified State tuition programs so that the term means persons described in Section 152(a)(1) through (8);
* clarifies the rule that prohibits contributors or designated beneficiaries to direct the investment of contributions to the program;
* provides that no amount will be includible in the gross income of a contributor to, or beneficiary of, a qualified State tuition program with respect to any contribution to or earnings on such a program until a distribution is made from the program, at which time the earnings portion of the distribution will be includible in the gross income of the distributee. However, to the extent that a distribution from a qualified State tuition program is used to pay for qualified tuition and fees, the distributee (or another taxpayer claiming the distributee as a dependent) will be able to claim the HOPE credit or Lifetime Learning credit if so qualified;
* any contribution to a qualified State tuition program will be treated as a completed gift of a present interest, except that in the case of contributions that exceed the annual gift tax exclusion limit, the contributor may elect to have the contribution treated as if made ratably over a five-year period; if an owner making an over the annual gift tax exclusion limit dies during the five-year averaging period, the portion of the contribution that has not been allocated to the years prior to death is includible in the donor's estate. Generally effective on January 1, 1998. The inclusion of room and board expenses is effective as if included in the amendments made by the Small Business Job Protection Act of 1996. The gift tax provisions are effective for contributions made after the date of enactment, and the estate tax provisions are effective for decedents dying after June 8, 1997. (Bill Section 211; Code Section 529.)
* The Bill repeals the $150 million limit on qualified Code Section 501(c)(3) bonds other than hospital bonds. Effective with respect to bonds issued after the date of enactment. (Bill Section 222; Code Section 145).
* The Bill provides that up to $5 million dollars of bonds used to finance public school capital expenditures incurred after Dec. 31, 1997, are excluded from application of the $5 million limit that applies to issuers that qualify for the small issue exception from arbitrage rebate. (Bill Section 223; Code Section 148.)
* The Bill provides that corporations making donations of computer technology and equipment to schools below the college level will qualify for an enhanced charitable contribution deduction. Effective for taxable years beginning after December 31, 1997. (Bill Section 224; Code Section 170.)
* The Bill provides that an individual's gross income will not include forgiveness of loans made by tax-exempt charitable organizations provided the loan recipient's work satisfies a community benefit requirement. Code Section 108(f) is also expanded to cover forgiveness of certain Federal direct student loans for which an income-contingent repayment option has been selected. Effective for discharges of indebtedness after the date of enactment. (Bill Section 225; Code Section 108).
* The Bill allows a credit to eligible taxpayers who hold qualified zone academy bonds on the credit allowance date. The credit amount is equal to the product of a specified credit rate determined by the Secretary of the Treasury for the month in which such bond was issued, multiplied by the face amount of the bonds held by the taxpayer on the credit allowance date. Eligible taxpayers are banks, insurance companies and corporations actively engaged in the business of lending money. Effective for obligations issued after December 31, 1997. (Bill Section 226; new Code Section 1397E.)
For single taxpayers the range is as follows:
Taxable years.....................Phase-out Range beginning in:
1998..................................$30,000_$40,000
1999..................................$31,000_$41,000
2000..................................$32,000_$42,000
2001..................................$33,000_$43,000
2002..................................$34,000_$44,000
2003..................................$40,000_$50,000
2004..................................$45,000_$55,000
2005 and thereafter............$50,000_$60,000.
For taxpayers filing joint returns, the range is as follows:
Taxable years.....................Phase-out Range beginning in:
1998..................................$50,000_$60,000
1999..................................$51,000_$61,000
2000..................................$52,000_$62,000
2001..................................$53,000_$63,000
2002..................................$54,000_$64,000
2003..................................$60,000_$70,000
2004..................................$65,000_$75,000
2005..................................$70,000_$80,000
2006..................................$75,000_$85,000
2007 and thereafter............$80,000_$100,000
(Bill Section 301(a), Code Section 219(g)(3).)
* The bill provides that an individual is not considered an active participant in an employer-sponsored retirement plan for purposes of determining eligibility make a deductible IRA contribution merely because the individual's spouse is an active participant. However, the maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, is phased out for taxpayers with AGI between $150,000 and $160,000. (Bill Section 301(b); Code Section 219(g)(1), (7).)
* The bill establishes a new type of nondeductible IRA called the ``Roth IRA.'' The maximum contribution that can be made to a Roth IRA is phased out for individuals with AGI between $95,000 and $110,000 and for joint filers with AGI between $150,000 and $160,000. Only taxpayers with AGI of less than $100,000 are eligible to roll over or convert an IRA into a Roth IRA. The bill retains present-law nondeductible IRAs. Thus, an individual who cannot (or does not) make contributions to a deductible IRA or a Roth IRA can make contributions to a nondeductible IRA. In no case can contributions to all an individual's IRAs for a taxable year exceed $2,000. Effective for taxable years beginning after December 31, 1997. (Bill Section 302; Code Section 408A.) III.B.
* The Bill provides that the 10% early withdrawal tax for distributions from an IRA before age 59 1/2 does not apply to distributions from any IRA for first-time homebuyer expenses. The provision applies to payments and distributions in taxable years beginning after December 31, 1997. (Bill Section 303; Code Sections 72(t), 408(d)(3).)
* The Bill provides that, effective for taxable years beginning after Dec. 31, 1997, the IRS assets may be invested in certain platinum coins and in certain gold, silver, platinum or palladium bullion. (Bill Section 304; Code Section 408).
* The Bill generally provides that $250,000 ($500,000 in the case of a married couple) of gain from the sale of a principal residence is exempt from tax, for sales after May 6, 1997. The exclusion is allowed each time a taxpayer selling or exchanging a principal residence meets the eligibility requirements, but generally no more frequently than once every two years. However, gain would be recognized to the extent of any depreciation allowable with respect to the rental or business use of a principal residence for periods after May 6, 1997. The Bill also provides that the gain from the sale or exchange of the remainder interest in the taxpayer's principal residence may qualify for the otherwise allowable exclusion. A taxpayer may elect to apply present law (rather than the new exclusion) to a sale or exchange (1) made before the date of enactment of the Act, (2) made after the date of enactment pursuant to a binding contract in effect on such date or (3) where the replacement residence was acquired on or before the date of enactment (or pursuant to a binding contract in effect on the date of enactment) and the rollover provision would apply. If a taxpayer acquired his or her current residence in a rollover transaction periods of ownership and use of the prior residence would be taken into account in determining ownership and use of the current residence. These provisions are available for all sales or exchanges of a principal residence occurring after May 6, 1997, and replace the present-law rollover and one-time exclusion provisions applicable to principal residences. (Bill Section 312; Code Section 121.)
* Effective for sales after enactment date, gain on the sale of certain stock which qualifies as qualified small business stock under new Code Section 1045 may generally be rolled and only amounts not rolled over are subject to tax. (Bill Section 313; Code Section 1045.)
* The Bill provides that, for corporations, the amount of gain subject to the alternative rate of tax may not exceed the corporation's taxable income. (Note that because the Section 1201 alternative tax does not presently apply, this change has no effect under the rate structure of present law.) (Bill Section 314; Code Section 1201.)
* The Bill conforms the recovery period used for AMT purposes to those used for regular tax purposes for property (including pollution control facilities) placed in service after December 31, 1998.
* The Bill provides that, for AMT purposes, farmers may use the installment method of accounting effective for dispositions after 1987 (with a special rule for taxable years beginning in 1987).
(Bill Sections 401, 401, 403; Code Sections 55, 56(a).) The Bill does not contain any increase in the AMT exemption amounts.
* It also indexes the following amounts after 1998, using 1997 as the base year for the cost of living adjustment: (1) the Code Section 2503(b) $10,000 gift tax annual exclusion (rounded to the next lowest multiple of $1,000); (2) the $750,000 ceiling on Code Section 2032A special use valuation (rounded to the next lowest multiple of $10,000); (3) the $1 million generation-skipping transfer tax exemption under Code Section 2631 (rounded to the next lowest multiple of $10,000); and (4) the $1 million ceiling on the value of a closely held business that qualifies for a special low interest rate under Code Section 6601(j) on deferred estate tax. (Bill Section 501; Code Sections 2503(b), 2032A, 2631, 6601(j).)
*Adding new Code Section 2033A, the Bill allows the executor of an estate of a U.S. citizen or resident decedent dying after 1997 to elect special estate tax treatment for ``qualified family-owned business interests.'' In general, Code Section 2033A operates with the unified credit to allow the exclusion of $1.3 million from the decedent's gross estate. The decedent's executor may elect Code Section 2033A treatment if the value of the qualified family-owned business interests included in the decedent's gross estate, along with certain interests the decedent gifted to family members, comprise more than 50% of the decedent's adjusted gross estate. Qualified family-owned business interests include an sole proprietorship interest as well as an interest in an entity carrying on a trade or business if the decedent and his or her family members own: (1) at least 50% of an entity; (2) at least 30% of an entity in which members of two families own 70%; and (3) at least 30% of an entity in which members of three families own 90%. Interests in a business whose principal place of business is outside the United States or whose stock was readily tradable on an established securities market or secondary market within three years of the decedent's death cannot qualify. In addition, cash and/or marketable securities in excess of the reasonably expected day-to-day working capital needs of the business are not qualified interests. Largely analogous to Code Section 2032A, Code Section 2033A imposes material participation requirements both before and for 10-years after the decedent's death. In addition to the individuals listed in Code Section 2032A(e)(1), ``qualified heir'' for Code Section 2033 purposes those who have been actively employed by the business for 10 years before the decedent's death. The tax benefits are subject to recapture on disposition or failure to meet the material participation requirements, with the recaptured amount decreasing between the seventh and tenth years. Special security requirements apply to qualified heirs who are not U.S. citizens and the benefits of Code Section 2033A are subject to recapture if a qualified heir loses U.S. citizenship or the principal place of business ceases to be within the United States. (Bill Section 502; Code Section 2033A.)
*The Bill reduces the rate of interest on the amount of estate tax deferred under Code Section 6166 that is attributable to the first $1 million in taxable value of a closely held business (i.e., the first $1 million above the amount sheltered by the unified credit) from 4% to 2% for the estates of decedents dying after 1997. Interest on deferred taxes above that amount is payable at a rate equal to 45% of the Code Section 6621 underpayment rate. Interest paid on the deferred estate tax, however, is no longer deductible for either estate or income tax purposes. Estates of decedents dying before 1998 may elect to apply the 2% rate to installments due after 1997 that were previously subject to the 4% interest rate. (Bill Section 503; Code Section 6601(j).)
*Amending the Section 2032A(c) estate tax recapture provisions, the Bill provides that the cash lease of specially valued real property after 1976 by a lineal descendant of the decedent to a member of the lineal descendant's family, who continues to operate the farm or closely held business, would not cause the qualified use of such property to cease. (Bill Section 504; Code Section 2032A(c)(7)(E).)
*The Bill grants the estates of decedents dying after the date of enactment access to the Tax Court to resolve disputes over the estate's eligibility for the Section 6166 estate tax deferral election by authorizing the court to enter declaratory judgments regarding initial or continuing Section 6166 eligibility. The estate must first exhaust administrative remedies before seeking a judicial determination of eligibility. The action must be brought within 90 days of the IRS mailing notice of its determination. (Bill Section 505; Code Section 7479.)
*The Bill prohibits the IRS from revaluing an adequately disclosed gift made after the date of enactment for which the limitations period has passed for purposes of determining the applicable estate tax bracket and available unified credit. The bill also allows a donor to challenge an IRS determination of the value of a gift in an action for declaratory judgment in the Tax Court. The donor must exhaust administrative remedies and must bring the Tax Court action within 90 days of the IRS mailing notice of its determination. The statute of limitations, however, would not run on a transfer that was not adequately disclosed in calendar years after the date of enactment, regardless of whether a gift tax return was filed for other transfers in that year. (Bill Section 506; Code Sections 2001(f), 7477.)
*The Bill generally exempts from the Section 665 throwback rules amounts distributed by domestic trusts after the date of enactment. Foreign trusts, domestic trusts which were at any time foreign trusts (unless excepted by regulations), and domestic trusts created before March 1, 1984 that would be subject to the Section 643(f) multiple trust rules (if Section 643(f) applied to pre-March 1, 1984 trusts) remain subject to the throwback rules. Section 644, taxing precontribution gains on property transferred to trusts at less than fair market value at the time the trust sells or exchanges the property is repealed, effective for sales and exchanges after the date of enactment. (Bill Section 507; Code Sections 665, 644.)
*The Bill would allow an executor of a decedent dying after 1997 to elect to exclude from the decedent's taxable estate up to 40% of the value of any land subject to a qualified conservation easement if: (1) land is located within certain geographic areas; (2) length of ownership requirements are met; and (3) a qualified conservation contribution (under Section 170(h)) of a qualified real property interest was granted by the transferor or a member of the transferor's family. The 40% exclusion percentage is reduced by 2% for each percentage point by which the value of the qualified conservation is less than 30% of the value of the land. The exclusion amount will be limited in 1998 to $100,000 and will increase by $100,000 annually until it reaches $500,000 for estates of decedents dying in 2002 or thereafter. The exclusion generally does not apply to debt-financed property or donor-retained development rights. Property excluded from the decedent's estate under this provision does not receive a basis step-up. The granting of a qualified conservation easement after 1997 would not trigger recapture under Section 2032A and would not prevent the property from later qualifying for Section 2032A special use valuation. A charitable deduction would be available for a contribution of a permanent conservation easement after 1997 on property where a mineral interest has been retained where the probability of surface mining is so remote as to be negligible. (Bill Section 508; Code Sections 2031(c), 1014(a), 2032A(c)(8), Section 170(h)(5)(B)(ii).)
* The Bill extends the enhanced deduction for contributions of listed stock to private foundations from June 1, 1997 through June 30, 1998. (Bill Section 602; Code Section 170(e)(5).)
* The Bill extends the work opportunity tax credit for nine months and makes other modifications, generally effective for wages paid or incurred to qualified individuals who begin work for the employer after Sept. 30, 1997, and before June 30, 1998. (Bill Section 603; Code Section 51.)
* The Bill permanently extends the orphan drug tax credit effective for qualified clinical testing expenses paid or incurred after May 31, 1997. (Bill Section 604; Code Section 45C.)
* First-time home buyers of a principal resident in the District a one-time nonrefundable personal tax credit up to $5,000 ($2,500 married filing separate) of the amount of the purchase price, effective after date of enactment and before January 1, 2001. The deduction is phased-out ratably for taxpayers with modified AGI between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
* Increase in the Code Section 1394(c)(1) limitation on amount of tax-exempt enterprise zone facility bonds from $3,000,000 to $15,000,000 for the D.C. Enterprise Zone (census tracts in certain currently designated enterprise communities under Subchapter U of the Code and any other census tract where the poverty rate is not less than 20%), effective for bonds issued during the period beginning on January 1, 1998, and ending on December 31, 2002.
* Zero percent capital gains rate for capital gains from the sale of certain qualified D.C. Zone assets (business stock or partnership interests held in, or tangible property held by, a qualified D.C. Zone business, i.e., an enterprise zone business) held for more than five years, effective for purchases during the period January 1, 1998, through December 31, 2002, for gains attributable to the period from January 1, 1998, through December 31, 2007.
* The Bill repeals the tax on diesel fuel used in recreational boats, effective for fuel sold after 1997. (Bill Section 902; Code Section 4041.)
* The Bill repeals exemption for imported recycled halon-1211, effective on the date of enactment. (Bill Section 903; Code Section 4682.)
* The Bill modifies the excise tax on vaccines to provide a uniform rate of $0.75 per dose for all vaccines. Effective on the day after the date of enactment. (Bill Section 904; Code Section 4131.)
* The Bill treats certain ``chain retailers'' (owner-operators having 10 or more retail outlets) as wholesale distributors under the gasoline tax refund rules. Effective for sales after the date of enactment. (Bill Section 905; Code Section 6416.)
* The Bill increases the threshold at which the luxury car excise tax on automobiles applies in the case of clean-burning fuel vehicles and electric cars to 150% of the current inflation-indexed amount. Effective for sales occurring after the date of enactment. (Bill Section 906; Code 4001.)
* The Bill amends the tax rate on propane, liquefied natural gas, and methanol from natural gas. Effective on October 1, 1997. (Bill Section 907; Code Section 4041.)
* The Bill lowers the rate of alcohol excise tax on certain hard ciders. Effective on October 1, 1997. (Bill Section 908; Code Section 5041.)
* The Bill requires the Secretary of the Treasury to conduct a feasibility study of moving the collection point for distilled spirits excise tax under Section 5001. The report shall be submitted not later than March 31, 1998. (Bill Section 909; Code Section 5001.)
* The Bill clarifies the authority to use semi-generic designations on wine labels. Effective on the date of enactment. (Bill Section 910; Code Section 5388.)
* The Bill allows the Secretary to issue guidance concerning alternate types of acceptable appraisals in order to claim a disaster loss. Effective on date of enactment. (Bill Section 912; Code Section 165(i).)
* The Bill provides that a cash method taxpayer whose principal trade or business is farming and who is forced to sell livestock due not only to drought but also to floods or other weather related conditions, may elect to include income from the sale of the livestock in the taxable year following the taxable year of sale. Applicable to sales and exchanges after December 31, 1996. (Bill Section 913; Code Section 451(e).)
* The Bill waives the three year lack of ownership requirement, the income limits, and the purchase price limits for loans to finance residences in certain presidentially declared disaster areas. Applicable to loans financed with bonds issued after December 31, 1996, and before January 1, 1999. (Bill Section 914; Code Section 143(k).)
* The Bill provides that if the Secretary extends the time for filing income tax returns and the time for paying income tax for any individual in a presidentially declared disaster area, the Secretary shall abate for such period the assessment of any interest prescribed under Code Section 6601. Applicable to disasters declared after December 31, 1996. (Bill Section 915; Code Section 6601.)
* The Bill codifies case law by providing that net earnings from self employment do not include any amount received during the taxable year from an insurance company on account of services performed by such individual as an insurance salesman for such company if: (1) such amount is received after termination of the individual's agreement to perform services for the company; (2) the individual performs no services for the company after such termination and before the close of the taxable year; and (3) the amount of the payment depends primarily on policies sold by or credited to the account of the individual during the last year of the agreement and the extent to which such policies remain in force for some period after such termination, or both and does not depend on the length of service or overall earnings from services performed for the company; and (4) the payments are conditioned upon the salesman agreeing not to compete with the company for at least one year following such termination. The Bill also amends the Social Security Act to provide that such termination payments are not treated as earnings for purposes of determining social security benefits. The provision is effective with respect to payments after December 31, 1997. (Bill Section 922; Code Section 1402.)
* The Bill expands the definition of ``principal place of business'' for purposes of the home office deduction. Effective for taxable years beginning after December 31, 1998. (Bill Section 932; Code Section 280A.)
* The Bill provides for income averaging for farm income over a three-year period for individual taxpayers (excluding estates and trusts), at the election of the taxpayer. This provision, which is contained in new Code Sec. 1301, applies to taxable years beginning after December 31, 1997 and before January 1, 2001. (Bill Section 933; Code Section 1301.)
* The Bill increases the deduction for health insurance costs of self-employed individuals. Effective for taxable years beginning after December 31, 1996, the applicable percentage is: 1997 - 40%; 1998 & 1999 - 45%; 2000 & 2001 - 50%; 2002 - 60%; 2003 through 2005 - 80%; 2006 - 90%; 2007 and thereafter - 100%. (Bill Section 934; Code Section 162(l)(1)(B).)
* Under provisions relating to determining the net earnings from self-employment, the Bill places a moratorium on regulations (either temporary or final) for purposes of defining who is a limited partner, until July 1, 1998. (Bill Section 935; Code Section 1402(a)(13).)
* The Bill adds Section 1391(g) to grant the appropriate Secretaries the power to designate in the aggregate an additional 20 nominated areas as empowerment zones, subject to a poverty rate requirement, size limitation, and aggregate population limitation. The Section 1396 employment credit will not apply to Section 1391(g) empowerment zones. This provision is effective after date of enactment and before January 1, 1999. (Bill Section 962; Code Sections 1391, 1396.)
* The Bill adds Section 1394(f) that provides that enterprise zone facility bonds with respect to Section 1391(g) new empowerment zones will not be treated as private activity bonds under Section 146 and the Section 1394(c) volume cap will not apply, provided the bond issue obtains a special designation (containing its own more liberal volume cap). This provision is effective for obligations issued after the date of enactment of the Bill. (Bill Section 953; Code Section 1394.)
* The Bill adds Section 1392(d) that provides that eligibility criteria with respect to distress, size, and poverty rate will be treated as being met if for each census tract or block group within such area 20% or more of the families have income which is 50% or less that the statewide median. (Bill Section 954; Code Section 1392.)
* The Bill amends Section 1394(b) to provide that in determining qualification as an enterprise zone business: (1) a waiver of such requirements are provided during the startup period of a business; and (2) the requirements of Section 1397B(b) and (c) are reduced after the testing period. The Bill also amends Section 1394(b) (defining qualified zone property) to provide that such definition include certain substantial renovations where such renovations exceed the greater of 15% of the adjusted basis of the renovated property or $5,000. This provision is effective for obligations issued after the date of enactment of the Bill. (Bill Section 955; Code Section 1394.)
* The Bill amends Section 1397B to generally lower the criteria for qualification as a qualified business entity, qualified proprietorship, and qualified business. This provision is effective for taxable years beginning on or after the date of enactment of the Bill. (Biffor taxable years ending after the date of enactment, provides that a method of keeping inventories will not be treated as failing to clearly reflect income solely because it includes an adjustment for the shrinkage estimated to occur through year-end, based on inventories taken other than at year-end. (Bill Section 961; Code Section 471.)
* The Bill extends the exclusion for certain personal liability assignments under Section 130 to amounts assigned for assuming a liability to pay compensation under any workers' compensation act. In addition to the requirements of current law, the assignee must assume the liability from a party to the workers' compensation claim and the periodic payment must be excludible under Section 104(a)(1). The provision is effective for claims filed after the date of enactment. (Bill Section 962; Code Section 130.)
* The Bill extends tax-exempt status to certain state- sponsored organizations providing workers' compensation insurance effective for taxable years beginning after December 31, 1997. (Bill Section 963; Code Section 501(c)(27).)
* ``Grandfathered'' publicly traded partnerships whose partnership tax treatment sunsets at the end of 1997 may elect to retain partnership tax treatment permanently if they pay a 3.5% excise tax on their gross income from the active conduct of trades and businesses. (Bill Section 964; Code Section 7704.)
* Effective for payments solicited or received after 1997, the Bill exempts from the unrelated business income tax corporate sponsorship payments received by tax-exempt organizations. (Bill Section 965; Code Section 513.)
* The Bill extends the rules for taxation of homeowners associations to timeshare associations; however, the rate of tax applicable to timeshare associations is 32%. Effective for taxable years beginning after 1996. (Bill Section 966; Code Section 528.)
* The Bill extends the deferral under Code Section 1042 to the sale of stock of a qualified refiner or processor to an eligible farmer's cooperative. The Bill defines a qualified refiner or processor as a domestic corporation substantially all the activities of which consist of the active conduct of the trade or business of refining or processing agricultural or horticultural products and which purchases more than one-half of such products to be refined or processed from farmers who make up the cooperative which is purchasing the stock or the cooperative. The Bill defines an eligible farmer's cooperative as an organization which is treated as a cooperative for federal income tax purposes and which is engaged in the marketing of agricultural or horticultural products. The Bill provides that the deferral of gain is available only if, immediately after the sale, the eligible farmer's cooperative owns 100% of the qualified refiner or processor. The provision applies without regard to whether the stock of the qualified refiner or processor is an employer security or is publicly traded and applies to the gain on the sale of stock by a C corporation. The provision applies to sales after December 31, 1997. (Bill Section 968, adding Code Section 1042(g).)
* The Bill phases in to 80% by the year 2008, the Section 274(n) deductible percentage allowed for business meals for airline crews and others subject to Transportation Department hours-of-service limitations. Effective Dec. 31, 1997. (Bill Section 969; Code Section 274(n)(3).)
* The Bill clarifies that meals are fully deductible by an employer if provided for the employer's convenience and excluded from employees' income as a de minimis fringe benefit. Effective for taxable years after Dec. 31, 1997. (Bill Section 970; Code Section 132.)
* The Bill triples the Section 280F depreciation deductions for factory-built electric cars. Effective for vehicles placed in service after enactment and before Jan. 1, 2005. (Bill Section 971; Code Section 280F.)
* The Bill temporarily suspends the taxable income limit on percentage depletion for marginal production for any taxable year beginning after December 31, 1997, and before January 1, 2000. (Bill Section 972; Code Section 613A.)
* The Bill amends 170(i) to increases to 14 cents per mile the standard mileage rate allowable for purposes of computing the charitable deduction, effective for taxable years beginning after December 31, 1997.
* The Bill clarifies that, for purposes of Code Section 501(e), billing and collection services include the purchase of patron accounts receivable on a recourse basis. The provision is effective for taxable years beginning after December 31, 1996. (Bill Section 974; Code Section 501(e)(1).)
* The Bill amends 62(a)(2) to allow employee business expenses relating to service as an official of a state or local government to be deductible in computing adjusted gross income, provided the official is compensated in whole or part on a fee basis, effective for expenses paid or incurred in taxable years beginning after December 31, 1986.
* The Bill requires the Secretary of the Treasury to provide for a demonstration project to assess the feasibility and desirability of expanding combined federal and state tax reporting. The demonstration project will be carried out between the IRS and the state of Montana for a period ending with the date which is 5 years after the date of the enactment of the Act and is limited to the reporting of employment taxes. (Bill Section 976; Code Section 6103(d).)
* Under provisions relating to Amtrak (the National Railroad Passenger Corporation), the Bill allows an elective carryback of existing qualified carryovers. (Bill Section 977; Code Section 172.)
Missing from the Conference Bill are House provisions which would have provided special rules for mutual savings banks with life insurance business and allowed offsets of state tax debts against federal tax overpayments.
* Effective for tax years of securities traders ending after enactment date, allows securities traders and commodities traders and dealers to elect application of the mark-to-market accounting rules. (Bill Section 1001(b); Code Section 475.)
* Effective generally for transfers after June 8, 1997, modifies the definition of an investment company for purposes of determining whether a transfer of property to a partnership or a corporation results in gain recognition by requiring that certain other assets be taken into account for purposes of the definition, in addition to marketable stocks and securities (as under Code Section 351 before this change). (Bill Section 1002; Code Section 351.)
* Effective for property acquired or positions established more than 30 days after enactment date, extends the rule which treats gain or loss from the cancellation, lapse, expiration, or other termination of a right or obligation which is a capital asset in the hands of the taxpayer to all types of property. (Bill Section 1003; Code Section 1234A.)
* The bill applies the special OID rule applicable to any regular interest in a REMIC, qualified mortgages held by a REMIC, or certain other debt instruments to any pool of debt instruments the yield on which may be affected by reason of prepayments. Treasury is authorized to provide appropriate exemptions from the provision, including exemptions for taxpayers that hold a limited amount of debt instruments, such as small retailers. The provision applies to taxable years beginning after the date of enactment. If a taxpayer is required to change its method of accounting under the bill, such change would be treated as initiated by the taxpayer with the consent of the Secretary of the Treasury and any Code Section 481 adjustment would be included in income ratably over a four-year period. (Bill Section 1004; Code Section 1272(a)(6).)
* The bill denies a deduction for interest or OID on an instrument issued by a corporation (or by a partnership to the extent of its corporate partners) that is payable in stock of the issuer or a related party (within the meaning of Code Sections 267(b) and 707(b)), including an instrument a substantial portion of which is mandatorily convertible or convertible at the issuer's option into stock of the issuer or a related party. The provision is effective for instruments issued after June 8, 1997, but will not apply to such instruments (1) issued pursuant to a written agreement which was binding on such date and at all times thereafter, (2) described in a ruling request submitted to the IRS on or before such date, or (3) described in a public announcement or filing with the SEC on or before such date. (Bill Section 1005; new Code Section 163(l).)
* Effective generally for distributions after April 16, 1997, restrictions under Code Section 355 are adopted concerning acquisitions and dispositions of the stock of the distributing or controlled corporation. (Bill Section 1012; Code Section 355.)
* Effective generally for distributions or acquisitions after June 8, 1997, to the extent a Code Section 304 transaction is treated as a distribution under Section 301, the transferor and the acquiring corporation are treated as if (1) the transferor had transferred the stock involved in the transaction to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which Code Section 351(a) applies, and (2) the acquiring corporation had then redeemed the stock it is treated as having issued. A special rule applies to Code Section 304 transactions involving acquisitions by foreign corporations and limits the earnings and profits of the acquiring foreign corporation that are taken into account in applying Code Section 304. (Bill Section 1013; Code Section 304.)
* Effective generally for transactions occurring after June 8, 1997, if a person transfers property to a corporation and receives ``nonqualified preferred stock,'' Code Section 351(a) does not apply to such transferor. The Bill also amends Code Sections 354, 355, 356, and 1036 to treat ``nonqualified preferred stock'' as ``other property'' (i.e., boot) subject to certain exceptions, with the result that the receipt of such preferred stock generally will be txchange. (Bill Section 1014; Code Sections 351, 354, 355, 356, and 1036.)
* Effective generally for dividends received or accrued after the 30th day after enactment date, a corporation will not be eligible for the dividends received deduction unless it satisfies a holding period requirement immediately before or immediately after the corporation becomes entitled to receive the dividend. (Bill Section 1015; Code Section 246.)
*Requires the filing of information returns for payments of fees _ as distinguished from payments made solely for the attorney's client _ made to attorneys, law firms, or corporations providing legal services. Effective for payments made after Dec. 31, 1997. (Bill Section 1021; Code Section 6045(f).)
*Lowers the information reporting threshold for contractors performing services for federal agencies from $25,000 to $600, under Section 6041A. Effective for payments made after the date of enactment. (Bill Section 1022; Code Section 6041A.)
*Extends permanently the provisions allowing disclosure of certain tax information to the Department of Veterans Affairs. Effective the date of enactment. (Bill Section 1023; Code Section 6103.)
*Imposes a continuous levy under Section 6331 against non- means tested federal payments (e.g., social security) and imposes up to a 15% continuous levy on unemployment and means-tested public assistance payments. Effective the date of enactment. (Bill Section 1024; Code Section 6331.)
*Modifies payments that are exempt from levy, by no longer exempting worker's compensation, Railroad Retirement Act benefits, unemployment benefits, or means- tested public assistance payments. Effective the date of enactment. (Bill Section 1025; Code Section 6334.)
*Imposes confidentiality requirements for levies, and their releases, filed with the Financial Management Services for enforcing collection of federal payments. Effective date of enactment. (Bill Section 1026; Code Section 6103(k).)
*Requires beneficiaries of estates and trusts to file their returns in a manner consistent with the information received from the estate or trust, unless the beneficiary files notice of inconsistent treatment with his return. Effective for returns filed after the enactment date. (Bill Section 1026; Code Section 6034A.)
*Mandates registration of certain confidential corporate tax shelters. (Bill Section 1028; Code Section 6111.)
* The Bill reinstates the prior-law Leaking Underground Storage Tank Trust Fund excise tax through April 1, 2005, effective October 1, 1997. (Bill Section 1033; Code Section 4081(d).)
* The Bill extends the temporary Federal Unemployment Tax Act (FUTA) surtax rate through December 31, 2007, and also increases the limit from 0.25% to 0.50% of covered wages on the Federal Unemployment Account in the Unemployment Trust Fund. The provision is effective for labor performed on or after January 1, 1999. (Bill Section 1035; Code Section 3301.)
* The Bill repeals the grandfather rules applicable to that portion of the business of Mutual of America which is attributable to pension business. A fresh start is provided regarding changes in accounting methods resulting from the change from tax-exempt to taxable status. The provision is effective for taxable years beginning after December 31, 1997. (Bill Section 1042; Section 1012(c)(4) of the Tax Reform Act of 1986.)
* The Bill provides that for the nonrecognition rules of Section 1031 to apply, the property surrendered in the exchange and the property received in the exchange must be both predominantly used either in (or outside) the United States. The provision is effective for exchanges after June 8, 1997, unless the exchange is pursuant to a binding contract in effect on such date and all times thereafter. (Bill Section 1052; Code Section 1031.)
* The Bill denies a shareholder the foreign tax credits normally available with respect to a dividend on stock of a foreign corporation or regulated investment company if the shareholder has not held the stock for 16 days if the stock is common stock, or 46 days if the stock is preferred stock. An exception is made for dividends on certain stock held by a foreign securities dealer. The provision is effective for dividends paid or accrued more than 30 days after the date of enactment. (Bill Section 1053; Code Section 901.)
* The Bill limits the availability of a reduced rate of withholding under an income tax treaty in the case of income derived through a hybrid entity, in order to prevent tax avoidance, effective upon the date of enactment. (Bill Section 1054; Code Section 894.)
* The Bill provides that if an underpayment for a tax year is reduced or eliminated by a foreign tax credit carryback from a subsequent tax year, such carryback does not affect the computation of interest on the underpayment for the period ending with the filing date for such subsequent tax year in which the foreign taxes were paid or accrued. The provision is effective for foreign taxes actually paid or accrued in tax years beginning after the date of enactment. (Bill Section 1055; Code Section 6601.)
* The Bill provides that, in the case of a claim relating to an overpayment attributable to foreign tax credits, the limitations period is determined by reference to the year in which the foreign taxes were paid or accrued, effective for foreign taxes paid or accrued in tax years beginning after the date of enactment. (Bill Section 1056; Code Section 6511.)
* The Bill repeals the special exception regarding the use of foreign tax credits for purposes of the alternative minimum tax as provided by the Omnibus Budget Reconciliation Act of 1989, effective for tax years beginning after the date of enactment. (Bill Section 1057; Code Section 59.)
* Effective generally for sales, exchanges, and distributions after enactment date (there is an exception for binding contracts in effect on June 8, 1997), eliminates requirement that inventory be substantially appreciated in order to give rise to ordinary income under the rules relating to sales and exchanges of partnership interests and certain partnership distributions. (Bill Section 1062; Code Section 751.)
* Effective for property contributed to a partnership after June 8, 1997, the Bill extends to 7 years the period in which a partner recognizes pre-contribution gain with respect to property contributed to a partnership. (Bill Section 1063; Code Sections 704, 737.)
* Under the Bill, no amount would be includible in the income of an employee merely because the employer offers the employee a choice between cash and employer-provided parking. The amount of cash offered would be includible in income only if the employee chooses the cash instead of parking. The provision is effective with respect to taxable years beginning after December 31, 1997. (Bill Section 1072; Code Section 132(f)(4).)
* The Bill repeals the 15% excise tax on excess distributions and the 15% estate tax on excess retirement accumulations under Code Section 4980A, effective with respect to excess distributions received after December 31, 1996, and decedents dying after December 31, 1996. (Bill Section 1073; Code Section 4980A.)
* The Bill increases the initial-level prohibited transaction tax under Code Section 4975 from 10% to 15%, effective with respect to prohibited transactions occurring after the date of enactment. (Bill Section 1074; Code Section 4975(a).)
* Under the Bill, the present-law table used under Code Section 72 to figure the portion of an annuity payment that is a return of basis would apply to benefits based on the life of one annuitant, and a separate table would apply to benefits based on the life of more than one annuitant, as follows:
Combined age of annuitants:..........Number of payments:
110 or less...............................................410
111-120..................................................360
121-130..................................................310
131-140..................................................260
141 and over...........................................210
The provision is effective with respect to annuity starting dates beginning after December 31, 1997. (Bill Section 1075; Code Section 72(d)(1)(B).)
* The Bill generally reduces the carryback period for net operating losses (NOLs) from three to two years and extends the carryforward period from 15 to 20 years, effective for NOLs arising in taxable years beginning after the date of enactment. (Bill Section 1082; Code Section 172.)
* The Bill limits the carrybavaxable years beginning after December 31, 1997. (Bill Section 1083; Code Section 39(a).)
* The Bill amends Section 264(a) (concerning tax treatment of insurance premiums) to provide that the premium deduction limitation does not apply to premiums paid on any Section 672(s)(5) annuity contract and any annuity contract to which Section 672(u) applies. The Bill also broadens the Section 264(a)(4) interest disallowance provision to include interest incurred on a life insurance policy on any individual (not just officers, employees and those with a financial interest in the taxpayer's business). The Bill adds Section 264(f) that requires the pro rata allocation of interest expense to unborrowed policy cash values. These provisions apply to contracts issued after June 8, 1997. (Bill Section 1084; Code Section 264.)
* The Bill provides for improved enforcement of the application of the earned income credit. Generally, the Bill disallows the credit for a two year or ten year period if the taxpayer received a final determination that the taxpayer's claim of credit was due to reckless or intentional disregard of the rules or to fraud. Applicable to tax years beginning after December 31, 1996. (Bill Section 1085; Code Section 32.)
* The Bill limits the availability of the income forecast method of depreciation to movies, sound recordings, videotapes, books, patents, copyrights, and other similar items. Also provides a four-year class life for rent-to-own property. Effective for property placed in service after the date of enactment. (Bill Section 1086; Code Section 168.)
* The Bill modifies the exception to the involuntary conversion related party rules to only provide an exception for a $100,000 de minimis amount. Effective for involuntary conversions occurring after June 8, 1997. (Bill Section 1087; Code Section 1033.)
* The Bill repeals the exception that permits use of the installment method of accounting for sales of property from a manufacturer to a dealer effective for taxable years beginning more than one year from the date of enactment. (Bill Section 1088; Tax Reform Act of 1986 Section 811(c).)
* The Bill denies tax-exempt status to charitable remainder trusts with large noncharitable payouts, and withdraws the charitable contribution deduction for payments to such trusts. Under the Bill, if a trust pays an annual annuity or unitrust amount that is greater than 50% of the value of the trust assets, it will not qualify as a charitable remainder unitrust. In addition, a charitable remainder trust will not qualify unless the charitable remainder interest is at least 10% of the value of the contributed property. This provision is effective for transfers made after July 28, 1997, with limited transitional rules for existing wills and grantors under a mental disability. (Bill Section 1089; Code Section 664(d).)
* The Bill requires the Social Security Administration to obtain Social Security numbers (SSNs) of both parents on minor childrens' applications for SSNs. SSA will provide this information to the IRS as part of the Data Master File. The IRS will use the information to identify questionable claims for the earned income credit, the dependent exemption, and other tax benefits, before tax refunds are paid out. The provision is effective on the date of enactment. (Bill Section 1090; SSA Section 454A(e)(4)(D).)
* The Bill amends Section 6654(d)(1)(C) (relating to limitation on use of preceding year's tax) to modify the percentage used when looking back to a preceding year's tax liability. This provision is effective with respect to any installment payment for taxable years beginning after December 31, 1997. (Bill Section 1091; Code Section 6654.)
* The Bill generally permits accrual basis taxpayers to translate foreign taxes at the average exchange rate for the tax year to which such taxes relate. The Bill also generally provides that, in cases where the foreign taxes actually are paid more than two years after such accrual, such taxes are to be taken into account for the year to which they relate, but are to be translated at the exchange rate for the time of payment. The provision generally is effective for foreign taxes accrued in tax years beginning after 1997. (Bill Section 1102; Code Section 986.)
* The Bill allows taxpayers to elect to use as their AMT foreign tax credit limitation fraction the ratio of foreign source regular taxable income to entire alternative minimum taxable income, rather than the ratio of foreign source alternative minimum taxable income to entire alternative minimum taxable income. The provision applies to tax years beginning after 1997. (Bill Section 1103; Code Section 59.)
* The Bill applies nonrecognition treatment to any exchange gain that results from an individual's acquisition of foreign currency and disposition of it in a personal transaction, provided that such gain does not exceed $200. The provision applies to tax years beginning after 1997. (Bill Section 1104; Code Section 988.)
* The Bill simplifies the foreign tax credit limitation for dividends from 10/50 companies. The provision applies to tax years beginning after 2002. (Bill Section 1105; Code Section 904.)
* The Bill extends the application of the indirect foreign tax credit to taxes paid or accrued by fourth- through sixth-tier CFCs. The provision is generally effective for foreign taxes paid or incurred by CFCs for tax years of such corporations beginning after the date of enactment. (Bill Section 1113; Code Section 902.)
* The Bill permits a shareholder of a PFIC to make a mark-to-market election with respect to the stock of the PFIC, provided that such stock is marketable. The provision is effective for tax years of U.S. persons beginning after 1997, and tax years of foreign corporations ending with or within such tax years of U.S. persons. (Bill Sections 1122 and 1124; Code Sections 1296 and 1297 redesignated as Sections 1297 and 1298, respectively, and new Code Section 1296 added.)
* The Bill provides that in determining whether a foreign corporation is a PFIC, the ``value'' of the foreign corporation's assets is based on the fair market value of the assets (rather than adjusted bases) if the corporation is publicly traded. Non-publicly traded foreign corporations may elect to value their assets at adjusted bases; CFCs must use adjusted bases for the determination. The provision is effective for tax years of U.S. persons beginning after 1997, and tax years of foreign corporations ending with or within such tax years of U.S. persons. (Bill Sections 1123 and 1124; Code Section 1297, as redesignated by Bill Section 1122.)
* The Bill provides that controlled foreign partnerships are subject to information reporting comparable to information reporting for CFCs. The provision is effective for annual accounting periods beginning after the date of enactment. (Bill Section 1142; Code Section 6038.)
* The Bill generally provides that no return is required (by reason of changes in ownership interests in foreign partnerships) unless the change in ownership involves at least a 10% interest in the partnership. The provision is effective for transfers after the date of enactment (Bill Section 1143; Code Section 6046A.)
* The Bill provides that property transfers to foreign partnerships are subject to information reporting comparable to information reporting for such transfers to foreign corporations. The provision is effective for transfers made after the date of enactment. (Bill Section 1144; Code Section 6038B.)
* The Bill extends the statute of limitations for the failure to comply with the information reporting requirements for the foreign transfers described above until three years after the required information is provided. The provision applies to information the due date for the reporting of which is after the date of enactment. (Bill Section 1145; Code Section 6501.)
* The Bill increases the stock ownership threshold that results in an information reporting obligation with respect to a foreign corporation from 5% (based on value) to 10% (based on vote or value), effective for reportable transactions occurring after 1997. (Bill Section 1146; Code Section 6046.)
* The Bill modifies the present law safe-harbor that treats foreign persons that trade stock or securities for their own accounts as not engaged in a U.S. trade orthat the entity's principal office not be within the United States, effective for tax years beginning after 1997. (Bill Section 1162; Code Section 864.)
* The Bill clarifies that, for purposes of the indirect foreign tax credit, a foreign corporation's foreign tax pool does not include any taxes that are attributable to dividends distributed by such corporation in prior tax years, effective on the date of enactment. (Bill Section 1163; Code Section 902.)
* The Bill clarifies that the exclusion from passive income for income treated as high-taxed income does not apply for purposes of the separate foreign tax credit limitation applicable to financial services income, effective on the date of enactment. (Bill Section 1163; Code Section 904.)
* The Bill increases the limitation on the exclusion for foreign earned income from $70,000 to $80,000, in $2,000 increments each year beginning in 1998, and provides that the limitation is indexed for inflation beginning in 2008. The provision is effective for tax years beginning after 1997. (Bill Section 1172; Code Section 911.)
* The Bill provides two additional exceptions from the definition of U.S. property for purposes of the subpart F rules. The first exception covers the deposit of collateral or margin by a securities or commodities dealer, or the receipt of such a deposit by a securities or commodities dealer, if such deposit is made or received on commercial terms in the ordinary course of the dealer's business as a securities or commodities dealer. The second exception covers repurchase agreement transactions and reverse repurchase agreement transactions entered into by or with a securities or commodities dealer in the ordinary course of its business as a securities or commodities dealer. The provision is effective for tax years of foreign corporations beginning after 1997, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Bill Section 1173; Code Section 956.)
* The Bill treats gross income of a nonresident alien individual, who is present in the United States as a member of the regular crew of a foreign vessel, from the performance of personal services in connection with the international operation of a ship as income from foreign sources, thus exempting such income from U.S. income and withholding tax. In addition, for purposes of determining whether an individual is a U.S. resident under the substantial presence test, the Bill provides that the days that such individual is present as a member of the regular crew of a foreign vessel are disregarded. The provision is effective for tax years beginning after 1997. (Bill Section 1174; Code Sections 861, 863 and 7701.)
* The Bill provides a temporary exception from foreign personal holding company income for subpart F purposes for certain income that is derived in the active conduct of an insurance, banking, financing or similar business. The provision applies only to tax years of foreign corporations beginning in 1998, and to tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Bill Section 1175; Code Section 954.)
* The Bill increases the alternative minimum tax (AMT) exemption amount under Section 59(j) in taxable years beginning after Dec. 31, 1997 for a child under age 14 to the lesser of (1) $33,750 or (2) the sum of the child's earned income plus $5,000. The $5,000 amount is indexed for inflation after 1998. (Bill Section 1201(b); Code Section 59.)
* The Bill amends Section 6654(e) to increase the individual estimated tax de minimis threshold from $500 to $1,000 for taxable years beginning after Dec. 31, 1997. (Bill Section 1202; Code Section 6654.)
* The Bill provides for the payment of taxes by any commercially acceptable means, effective nine months after the date of enactment. (Bill Section 1205; Code Section 6311.)
* The Bill provides that a property and casualty insurance company that elects for regular tax purposes to be taxed only on taxable investment income determines its adjusted current earnings under the alternative minimum tax without regard to any amount not taken into account in determining its gross investment income under Code Section 834(b). This provision is effective for taxable years beginning after December 31, 1997. (Bill Section 1212; Code Section 56(g).)
* Under the Bill's provisions, a landlord's payment of cash (or rent reduction) to a lessee for construction or improvements of retail space under a short-term lease is not gross income to the lessee, provided the allowance does not exceed the amount the lessee spends on improving the property. Effective for leases entered into after enactment. (Bill Section 1213, Code Section 110.)
*Simplifies the reporting and audit rules in electing large partnerships, which are generally those that elect to come within the provisions and that have 100 or more partners for the partnership's preceding taxable year. Under new Sections 771-777, the number of items that must be separately reported to partners by electing large partnership status is significantly reduced.
*Changes the reporting date under Section 6031(b), for partnerships electing large partnership status to report to partners to March 15 following the close of the partnership's taxable year.
*Allows reporting on magnetic media to the IRS for all partnerships under Section 6011, and modifies the filing threshold for an IRA with an interest in an electing large partnership.
These provisions are effective for partnership taxable years ending on or after Dec. 31. 1997. (Bill Sections 1221- 1226; Code Sections 771-777.)
* replacing the rule that disqualifies a REIT for any year in which the REIT failed to ascertain its ownership with an intermediate penalty of $25,000 ($50,000 for intentional violations) and a requirement that, upon request by the IRS, a REIT send curative demand letters;
* treating a REIT that did not know, or have reason to know, that it was closely held as meeting the requirement that it not be a personal holding company;
* amending Section 856(d) to permit a REIT to render a de minimis amount (1% of rents) 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;
* modifying the application of the attribution rules applicable to tenant ownership for purposes of defining rent in Section 856(d)(2) so that attribution occurs only when a partner owns a 25% or greater interest in the partnership;
* allowing a REIT to elect to retain and pay income tax on net long-term capital gains it received during the tax year;
* repealing the rule under Section 856(c)(4) that requires less than 30% 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;
* changing the ordering rule under Section 857(d) for purposes of determining whether a REIT has earnings and profits from a non-REIT year;
* lengthening the original grace period for foreclosure property until the last day of the third full taxable year following the election; permitting the revocation of an election to treat property as foreclosure property for any taxable year; and conforming the definition of independent contractor for purposes of the foreclosure property rule to the definition of independent contractor for purposes of the general rules;
* treating income from all hedges that reduce the interest rate risk of REIT liabilities as qualifying income under the 95% test;
* expanding the class of excess noncash items that are not subject to the distribution requirement to include coupon interest as excess noncash items to REITs that use an accrual method of taxation;
* excluding property that was involuntarily converted from the prohibited sales rules;
* amending Section 856(j) making interest received on a shared appreciation mortgage 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 that acquired the mortgage knew or had reason to know that the property subject to the mortgage would be sold in a bankruptcy proceeding; and
* permitting any corporation wholly owned by a REIT to be treated as a qualified subsidiary under Section 856(i), regardless of whether the corporation had always been owned by the REIT.
These provisions are effective for taxable years beginning after the date of enactment. (Bill Sections 1251_1263; Code Sections 856 and 857.)
*Establishes a reasonable cause defense for penalties imposed under Section 6652(g) relating to required information for deductible employee distributions; under Section 6652(k) concerning the failure to make reports of a qualified small business; under Section 6683 relating to the returns of a personal holding company tax by foreign corporations; and under Section 7519 relating to the failure to make required payments. (Bill Section 1281; Code Sections 6652, 6683, 7519.)
*Allows taxpayers a three-year statute of limitations under Section 6511 for requesting refunds, if the IRS issues a notice of deficiency before the taxpayer files the return. Overrules Comr. v. Lundy, 116 S. Ct. 647 (1996). (Bill Section 1282; Code Section 6511.)
*Repeals the authority to disclose a potential juror's audit history. (Bill Section 1283; Code Section 6103.)
*Clarifies that the statute of limitations on assessments begins to run from the taxpayer's return, not from the filing of a pass-through return. Affirms Bufferd v. Comr., 113 S. Ct. 927 (1993). (Bill Section 1284; Code Section 6501.)
*Imposes a 90-day period in which taxpayers can for an award of administrative costs. (Bill Section 1285; Code Section 7430.)
Missing from the Bill are provisions imposing criminal fines and imprisonment for tax return browsing by an IRS employee. Instead, these provisions are enacted as separate legislation, the Taxpayer Browsing Protection Act of 1997 (H.R. 1226), currently pending the President's signature.
*The Bill requires a specific indication in a surviving spouse's will or revocable trust of his or her intent to waive the right of recovery of estate tax attributable to the inclusion of QTIP property in his or her estate (e.g., reference to QTIP, Section 2044, or Section 2207A) to prevent inadvertent waiver of that right. Section 2207B is similarly modified to require a specific indication of the decedent's intent to waive the right of recovery for tax attributable to property included in the gross estate under Section 2036 (but specific reference to Section 2207B is no longer required), effective for decedents dying after the date of enactment. Both amendments apply to the estates of decedents dying after the date of enactment. (Bill Section 1302; Code Sections 2207A, 2207B.)
*Qualified domestic trusts (QDOTs) created before the enactment of the Omnibus Budget Reconciliation Act of 1990 will be treated as satisfying the withholding requirements enacted by OBRA 1990 if the QDOT governing instrument requires that all trustees be U.S. citizens or domestic corporations. This amendment is effective as if included in OBRA 1990. (Section 1303; Code Section 2056A(a)(1).)
*For estates of decedents dying after the date of enactment, Section 2105(b)(3) treats any debt obligation, the income from which would be eligible for the Section 871(g)(1)(B)(i) exemption for short-term OID if the decedent received such income before death, as property located outside of the United States in determining the U.S. estate tax liability of a nonresident not a U.S. citizen. (Bill Section 1304, Code Section 2105(b)(3).)
*New Code Section 646 allows the executor of the estate of a decedent dying after the date of enactment and the trustee of a qualified revocable trust'' to elect to have the trust treated as part of the decedent's estate for federal income tax purposes for the period from the date of the decedent's death until two years after death (if no estate tax return is required) or, if later, six months after the final determination of estate tax liability (if a return is required). A qualified trust is any trust (or portion thereof) that was treated as owned by the decedent under Section 676 by reason of a power in the grantor (but without attribution of the powers of the grantor's spouse under Section 672(e).) The election, which must be made by the due date for the income tax return for the first taxable year of the estate (with extensions), is irrevocable. Comparable treatment is available under the generation-skipping transfer tax. (Bill Section 1305; Code Sections 646, 2652(b)(1).)
*The Bill extends the application of the Section 663(b) 65-day rule to estates as well as trusts, effective for taxable years beginning after the date of enactment. It also extends the separate share rule under Section 663(c) to estates of decedents dying after the date of enactment (Bill Sections 1306, 1307; Code Section 663.)
*An estate and a beneficiary of that estate are considered related persons for purposes of Sections 267 and 1239, except in the case of a sale or exchange in satisfaction of a pecuniary bequest, in taxable years beginning after the date of enactment. (Bill Section 1308; Code Sections 267(b)(13), 1239(b)(3).)
*New Code Section 685 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 in taxable years beginning after the date of enactment. Available to qualified funeral trusts that arise as a result of a contract with a person engaged in the trade or business of providing funeral or burial services, the trust would be subject to the Section 1(e) tax rates applicable to trusts, with each beneficiary's share treated as a separate trust. Contributions to qualified funeral trusts are limited to $7,000, as adjusted annually for inflation. The IRS is authorized to prescribe rules for simplified reporting of all trusts having a single trustee. (Bill Section 1309; Code Section 685.)
*The Bill revises Section 2035 to improve its clarity. Although modified extensively, the only substantive amendment ensures that an annual exclusion gift from a revocable trust within three years of the grantor's death is not included in the grantor's gross estate by treating any transfer from the trust as if it were made directly by the grantor, applicable to decedents dying after the date of enactment. (Bill Section 1310; Section 2035.)
*Amendments to Section 2056(b)(7) clarify that for qualified retirement plans, IRAs, and SEPs, a 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 the QTIP marital deduction, effective for decedents dying after the date of enactment. (Bill Section 1311; Code Section 2056(b)(7)(C).)
*The Bill grants the IRS regulatory authority to treat as trusts legal arrangements that have substantially the same effect as trusts for purposes of qualifying a transfer to a non-U.S. citizen spouse for the estate tax marital deduction under Section 2056A and to waive the requirement that a QDOT have a U.S. trustee in order to permit the establishment of a QDOT in countries that prohibit a trust from having a U.S. trustee. Both provisions are effective for decedent's dying after the date of enactment. (Bill Sections 1312, 1314; Code Section 2056A(c)(3), (a)(1).)
*The Bill eases the procedures for perfecting a defective Section 2032A special use valuation election in estates of decedents dying after the date of enactment. The executor will have a reasonable time (not exceeding 90 days) after notification by the IRS of a failure to provide necessary information or submit a recapture agreement signed by all required persons to provide the required information or signatures. (Bill Section 1313; Code Section 2032A(d)(3).)
* The Bill provides a credit for the tire tax in lieu of exclusion of value of tires in computing price. Effective on January 1, 1998. (Bill Section 1402; Code Section 4051.)
*Clarifies that an order of the Tax Court directing the IRS to refund an overpayment is appealable in the same manner as a court decision. (Bill Section 1451; Code Section 6512.)
*Directs taxpayers seeking a redetermination of interest after the Tax Court's decision becomes final to file a motion, not a petition. (Bill Section 1452; Code Section 7481.)
*Applies the $2 million net worth ceiling (as applies to individual taxpayers) for recovering fees and costs under Section 7430 to estates and trusts and clarifies that the net worth of spouses filing a joint return is aggregated for this purpose. (Bill Section 1453; Code Section 7430.)
*Grants jurisdiction to the Tax Court for resolving a disputed employment/independent contractor status. (Bill Section 1454; Code Section 7436.)
* Establishing hich is the same date that its annual return, Form 990-PF, for the preceding year is due). (Bill Section 1461; Code Section 6655(g)(3).)
* Allowing withholding of Puerto Rico commonwealth income taxes from the wages of federal employees. (Bill Section 1462; 5 USC Section 5517.)
*Providing that the increased rate of interest _ ``hot interest'' _ on a large corporate underpayments does not apply if the amount of the proposed deficiency listed in the 30-day letter or notice of deficiency is not greater than $100,000. (Bill Section 1463; Code Section 6621.)
* The bill provides that matching contributions for self-employed individuals are treated the same as matching contributions for employees, i.e., they are not treated as elective contributions and are not subject to the elective contribution limit. Effective for years beginning after December 31, 1997. (Bill Section 1501; Code Section 402(g).)
* The bill permits a participant's benefit in a qualified plan to be reduced to satisfy liabilities of the participant to the plan due to (1) the participant being convicted of committing a crime involving the plan, (2) a civil judgment (or consent order or decree) entered by a court in an action brought in connection with a violation of the fiduciary provisions of ERISA, or (3) a settlement agreement between the Secretary of Labor or the PBGC and the participant in connection with a violation of ERISA's fiduciary rules. Effective for judgments, orders, and degrees issued, and settlement agreements entered into, on or after the date of enactment. Bill Section 1502; ERISA Section 206(d).)
* The bill eliminates the requirement that SPDs and SMMs be filed with the Secretary of Labor. Employers would have to furnish these documents to the Secretary of Labor upon request. A civil penalty could be imposed on the plan administrator for failure to comply with such requests. The penalty would be up to $100 per day of failure, up to a maximum of $1,000 per request. No penalty would be imposed if the failure was due to matters reasonably outside the control of the plan administrator. Effective on the date of enactment. (Bill Section 1503; ERISA Sections 101(b) and 102(a).)
* The bill conforms the Section 403(b) exclusion allowance for tax-deferred annuities to the way in which the Section 415 limit is calculated by providing that includible compensation includes elective deferrals of the employee, and contributions made at the election of the employee to a Section 457 plan or a cafeteria plan. Directs the Secretary to revise the regulations regarding the exclusion allowance to reflect the fact that the overall limit on benefits and contributions is repealed. The revised regulations are to be effective for limitation years beginning after December 31, 1999. The modification to the definition of includible compensation is effective for years beginning after December 31, 1997. The direction to the Secretary is effective on the date of enactment. (Bill Section 1504; Code Section 403(b).)
* The bill provides that governmental plans are permanently exempt from the Code's nondiscrimination and minimum participation rules for qualified plans. Effective for taxable years beginning on and after the date of enactment. (Bill Section 1505; Code Sections 401(a)(5), 401(a)(26), 401(k)(3), 410(c)(2), 403(b)(12).
* The bill provides that ESOPs of S corporations may distribute cash to participants as long as the employee has a right to require the employer to purchase the securities (as under the present-law rules). Also extends the exception to certain prohibited transactions rules to S corporations. Effective for taxable years beginning after December 31, 1997. (Bill Section 1506, Code Section 409(h).)
* The bill exempts from the excise tax on nondeductible contributions to qualified plans contributions to one or more defined contribution plans that are not deductible because they exceed the combined plan deduction limit to the extent such contributions do not exceed the amount of the employer's matching contributions plus the elective deferral contributions to a Section 401(k) plan. Effective for taxable years beginning after December 31, 1997. (Bill Section 1507; Code Section 4972(c)(6)(B).)
* The bill modifies rules for calculating the funded current liability percentage for plans that (1) were not required to pay a variable rate PBGC premium for the plan year beginning in 1996, (2) do not, in plan years beginning after 1995 and before 2009, merge with another plan (other than a plan sponsored by an employer that was a member of the controlled group of the employer in 1996), and (3) are sponsored by a company that is engaged primarily in the interurban or interstate passenger bus service. Effective with respect to plan years beginning after December 31, 1996. (Bill Section 1508, Section 769 of the Retirement Protection Act of 1994).)
* The bill directs the Secretary of the Treasury or his delegate to clarify that, under IRS regulations protecting pension plans from disqualification by reason of the receipt of invalid rollover contributions under Code Section 402(c), in order for the administrator of the plan receiving any such contribution to reasonably conclude that the contribution is a valid rollover contribution it is not necessary for the distributing plan to have a determination letter with respect to its status as a qualified plan under Code Section 401. (Bill Section 1509.)
* The bill directs the Secretaries of the Treasury and Labor to each issue guidance facilitating the use of new technology for plan purposes. The provision is effective on the date of enactment and requires that the guidance be issued not later than December 31, 1998. (Bill Section 1510.)
* The Bill provides that in the case of a contribution made on behalf of a minister who is self-employed to a church plan, the contribution is excludible from the income of the minister to the extent that the contribution would be excludible if the minister were an employee of a church and the contribution were made to the plan. In addition, if a minister is employed by an organization other than a church and the organization is not otherwise participating in the church plan, then the minister does not have to be included as an employee under the retirement plan of the organization for purposes of the nondiscrimination rules. The provision is effective for years beginning after December 31, 1997. (Bill Section 1522; Code Section 414(e)(5).)
* The Bill repeals the provision treating items of income or loss of an S corporation as unrelated business taxable income in the case of an employee stock ownership plan that is an S corporation shareholder. This provision applies only with respect to employer securities held by an employee stock ownership plan (as defined in Code Section 4975(e)(7)) maintained by an S corporation. The provision applies to taxable years beginning after December 31, 1997. (Bill Section 1523; Code Section 512(e).)
* The Bill provides that the term ``eligible individual account plan'' (for purposes of the 10% limitation on investments in employer securities and real property) does not include the portion of a plan that consists of elective deferrals (and earnings on the elective deferrals) made under Code Section 401(k) if elective deferrals equal to more than 1% of an employee's eligible compensation are required to be invested in employer securities at the direction of a person other than the participant. Eligible compensation is compensation that is eligible to be deferred. Such portion of the plan is treated as a separate plan subject to the 10% limitation on investment in employer securities and real property. The provision does not apply to an individual account plan if the value of the assets of all individual account plans maintained by the employer does not exceed 10% of the value of the assets of all pension plans maintained by the employer. Multiemployer plans are not taken into account in making this determination. The provision does not apply to an employee stock ownership plan as defined in Code Section 4975(e)(7). The provision is effective with respect to elective deferrals in plan years beginning after December 31, 1998 (and earnings thereon). The provision does not apply with respect to earnings on elective deferrals for years beginning before January 1, 1999. (Bill Section 1524; Code Section 401(k).)
* Under the 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. The provision is effective with respect to years beginning after December 31, 1997. (Bill Section 1525; Code Section 401(k)(7).)
* Under the 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 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. 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 provision is effective with respect to contributions to purchase permissive service credits made in years beginning after December 31, 1997. A transition rule is provided for plans that provided for the purchase of permissive service credit before the enactmd benefit plan for police and fire department employees. The exception from the dollar limit for police and fire department employees only applies to the reduction for early retirement benefits. Thus, the defined benefit plan dollar limit continues to apply, but is not reduced in the case of early retirement. The dollar limit is increased for such employees if benefits begin after age 65. The provision is effective for years beginning after December 31, 1996. (Bill Section 1527; Code Section 415(b)(2).)
* The Bill provides for the exclusion from gross income of certain death benefits paid to survivors of public safety officers killed in the line of duty effective for amounts received in taxable years beginning after December 31, 1996 with respect to individuals dying after that date. (Bill Section 1528; Code Section 101(h).)
* The Bill provides for exclusion under Code Section 104(a)(1) for certain disability payments related to heart disease and hypertension to individuals (or their survivors) who were full-time employees of a police or fire department organized and operated by a State or political subdivision or agency thereof. This provisions applies to certain payments received in 1989, 1990, or 1991 pursuant to a state law as amended on May 19, 1992 which irrebuttably presumed that heart disease and hypertension are work-related illnesses. The Bill provides for a special statute of limitations for filing of a claim for refund. (Bill Section 1529; Code Section 104(a)(1).)
* The 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: (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% of the value of the outstanding stock of the company; (3) immediately after the transfer to the ESOP, the ESOP owns at least 60% 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 were in existence on August 1, 1996, and the decedent dies on or before December 31, 1998. (Bill Section 1530; Code Section 664(d).)
* The bill provides that certain church plans are not treated as violating the nondiscrimination requirements based on health status applicable to group health plans merely because the plan requires evidence of good health in order for an individual to enroll in the plan for (1) individuals who are employees of employers with 10 or fewer and for self-employed individuals or (2) any individual who enrolls after the first 90 days of eligibility under the plan. The provision applies to a church plan for a year if the plan included such provisions requiring evidence of good health on July 15, 1997, and at all times thereafter before the beginning of the year. The provision is effective as if included in HIPAA. (Bill Section 1532; Code Section 9802.)
* The Bill provides that the requirement of a ``regular interest'' under Section 860L(b)(1)(A) must be met ``on or after the startup date,'' instead of ``after the startup date'' for a FASIT. (Bill Section 1601(f)(6); Code Section 860L.)
* The Bill provides that the tax on prohibited transactions by a FASIT would not apply to dispositions of foreclosure property or hedges using the similar exception applicable to real estate mortgage investment conduits (REMICs). (Bill Section 1601(f)(6); Code Section 860L.)
* The Bill amends Section 23 to conform the treatment of otherwise qualified adoption expenses paid or incurred in years after the year the adoption becomes final to the treatment of expenses paid or incurred in the year the adoption becomes final, and repeals an ordering rule inadvertently included in the credit. (Bill Section 1601(h)(1); Code Section 23.)
* The Bill conforms the phaseout range of the adoption assistance exclusion to the phaseout range of the credit for qualified adoption expenses. (Bill Section 1601(h)(2); Code Section 137.)
* The Bill amends several provisions of the Taxpayer Bill of Rights 2 affecting tax-exempt organizations. It gives the IRS authority, under Section 4962, to abate the first-tier intermediate sanctions tax imposed on public charities and social welfare organizations by Section 4958. This amendment is effective as if included in the Taxpayer Bill of Rights 2 (TBOR2). (Bill Section 1603; Code Section 4962(b).)
* The Bill also amends the reporting requirements for Section 501(c)(3) public charities to require that they report on Form 990 the imposition of excise taxes under Sections 4911, 4912, 4955, and 4958 on the organization and the organization managers. Any reimbursement of the tax imposed on a manager would also have to be reported. These changes are effective as if included in TBOR2. (Bill Section 1603; Code Section 6033(b).)
* Clarifies that new employees of an employer hired after December 31, 1996, may participate in a SARSEP of an employer established before January 1, 1997. (Bill Section 1601(d)(1)(B); Code Section 408(k)(6).)
* Provides that issuers of annuities for SIMPLE IRAs have the same reporting requirements as SIMPLE IRA trustees. (Bill Section 1601(d)(1)(C); Code Section 408(l)(2).)
* In the case of a SIMPLE IRA, increases the $2,000 limit on contribution to the limit for contributions made under a qualified salary reduction arrangement. (Bill Section 1601(d)(1)(D); Code Section 408(p)(8).)
* Allows an employer who maintains a plan for collectively bargained employees to maintain a SIMPLE IRA for noncollectively bargained employees. (Bill Section 1601(d)(1)(E); Code Section 408(p)(2)(D).)
* Provides that if an employer maintains a qualified plan and a SIMPLE IRA in the same year due to an acquisition, disposition or similar transaction, the SIMPLE IRA is treated as a qualified salary reduction arrangement for the year of the transaction and the following calendar year. (Bill Section 1601(d)(1)(F); Code Section 408(p)(2)(iii).)
* Provides that the top-heavy exemption applies to a plan which permits only contributions required to satisfy the SIMPLE 401(k) requirements. (Bill Section 1601(d)(2)(A); Code Section 401(k)(11)(D).)
* Provides that the $6,000 limit on elective deferrals under a SIMPLE
401(k) arrangement will be adjusted at the same time and in the same manner
as for SIMPLE IRAs. (Bill Section 1601(d)(2)(B); Code * Provides that to the extent that contributions paid by an employer
to a SIMPLE Section 401(k) arrangement satisfy the contribution requirements
of Section 401(k)(11)(B), such contributions are deductible by the employer
for the taxable year. (Bill Section 1601(d)(2)(C); Code * Extends the employer notice and employee election requirements of
SIMPLE IRAs to SIMPLE Section 401(k) arrangements. (Effective with respect
to calendar years beginning after the date of enactment). (Bill Section
1601(d)(2)(D); Code Section 401(k)(11).)
* Clarifies that an employee participating in a Section 403(b) annuity
contract of the Indian tribal government can to roll over amounts from
such contract to a Section 401(k) plan maintained by the Indian tribal
government whether or not the annuity contract is terminated. (Bill Section
1601(d)(4); Section 1450 of the Small Business Job Protection Act of 1996.)
The bill contains the following technical corrections to the Health Insurance
Portability and Accountability Act of 1996 (P.L. 104-191 or ``HIPAA'').
The provisions are effective as if includes in HIPAA unless otherwise specified.
(Bill Section 1602; Sections 301-325, 501-512 of the Health Insurance Portability
and Accountability Act of 1996, P.L. 104-191.)
Specifically, the bill:
* Provides that the 15% tax on nonmedical withdrawals from an MSA is
not treated as tax liability for AMT purposes.
* Deletes Medicare supplemental plans from the types of permitted coverage
an individual may have and still qualify for an MSA.
* Clarifies that, in any year for which a contribution is made to an
MSA, withdrawals from the MSA are excludable from income only if the individual
for whom the expenses were incurred was covered under a high deductible
health plan (and no other health plan except for plans that provide certain
permitted coverage) in the month in which the expenses were incurred.
* Provides provides that the $50 penalty does not apply to information
returns.
* Clarifies, for purposes of the long-term care insurance provisions
of the Code, that the five-activity requirement, i.e., that the number
of actof three alternative definitions of a chronically ill individual
(Code Section 7702B(c)(2)(A)(i)), i.e., by reason of the individual being
unable to perform (without substantial assistance) at least two ADLs for
at least 90 days due to a loss of functional capacity.
* Applies the rules for the deduction for health insurance expenses
of a self-employed individual separately with respect to (1) plans that
include coverage for qualified long-term care services or that are qualified
long-term care insurance contracts, and (2) plans that do not include such
coverage and are not such contracts.
* Clarifies that the nonforfeiture provision required in long-term care
insurance contracts shall provide for a benefit available in the event
of a default in the payment of any premiums and that the amount of the
benefit may be adjusted subsequent to being initially granted only as necessary
to reflect changes in claims, persistency, and interest.
* Clarifies, for purposes of the ``COLI'' rule regarding the deductibility
of indebtedness paid or incurred with respect to certain insurance policies
(Code Section 264(a)(4)) that the rule relates to life insurance policies
or annuity or endowment contracts covering any individual who (1) is or
was an officer or employee of, or (2) is or was financially interested
in, any trade or business carried on currently or formerly by the taxpayer.
* Provides, for purposes of the COLI rule, that an election of an applicable
period for purposes of applying the interest rate for a variable rate contract
can be made no later than the 90th date after the date of enactment of
the proposal, and applies to the taxpayer's first taxable year ending on
or after October 13, 1995. If no election is made, the applicable period
is the policy year.
* Clarifies, for purposes of the COLI rules, that, in determining a
key person, if the taxpayer is not a corporation, a 20% owner is an individual
who directly owns 20% or more of the capital or profits interest of the
taxpayer.
* Clarifies that, under the COLI rule, the interest rate cap on key
persons and pre-1986 contracts applies to interest paid or accrued for
any month beginning after December 31, 1995.
* Clarifies that, under the transition relief provided under the COLI
rule, the four-out-of-seven rule and the single premium rule do not apply
solely by reason of a lapse occurring by reason of no additional premiums
being received under the contract after October 13, 1995.
* Clarifies that the period to which the general rule of Code Section
877(d)(2) requiring gain recognition on certain exchanges applies is the
10-year period that begins on the date of loss of U.S. citizenship or U.S.
residency status. Also clarifies that in the case of an exchange occurring
during the five-year period before the loss of U.S. citizenship or U.S.
residency status, any gain required to be recognized under regulations
is to be recognized immediately after the date of such loss of U.S. citizenship.
* Clarifies that the period to which the rule suspending the 10-year
period in case of substantial diminution of risk of loss (Code Section
877(d)(3)) in the case of a substantial diminution of risk of loss applies
is the 10-year period that begins on the date of loss of U. S. citizenship
or U.S. residency status.
* Clarifies that the period to which the rule regarding certain contributions
to foreign corporations (Code Section 877(d)(4)) applies is the 10-year
period that begins on the date of loss of U.S. citizenship or U.S. residency
status. Also clarifies that the rule applies in the case of property the
income from which, immediately before the contribution, was from U.S. sources.
* Clarifies the formula for determining the amount of the foreign tax
credit allowable against U.S. estate taxes on property includible in the
decedent's U.S. estate solely by reason of the expatriation estate tax
provision Code Section 2107(c)).
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