Summary of the Revenue Provisions of H.R. 2014,
The "Taxpayers Relief Act of 1997"
Prepared by the Staff
of the Joint Committee on Taxation
August 1, 1997 / JCX-40-97
SUMMARY OF REVENUE PROVISIONS OF H.R. 2014 "TAXPAYER
RELIEF ACT OF 1997"
TITLE I.--CHILD TAX CREDIT: HEALTH CARE FOR CHILDREN
TITLE II.--EDUCATION TAX INCENTIVES
TITLE III.--SAVINGS AND INVESTMENT INCENTIVES
TITLE IV.--ALTERNATIVE MINIMUM TAX PROVISIONS
TITLE V.--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
TITLE VI.--EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS
TITLE VII.--DISTRICT OF COLUMBIA TAX INCENTIVES
TITLE VIII.--WELFARE-TO-WORK TAX CREDIT
TITLE IX.--MISCELLANEOUS PROVISIONS
TITLE X.--REVENUE-INCREASE PROVISIONS
TITLE XI.--FOREIGN TAX PROVISIONS
TITLE XII.--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
TITLE XIII.--ESTATE, GIFT, AND TRUST SIMPLIFICATION
TITLE XIV.--EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS
TITLE XV.--PENSION AND EMPLOYEE BENEFIT PROVISIONS
TITLE XVI.--TECHNICAL CORRECTION PROVISIONS
TITLE XVII.--LIMITED TAX BENEFITS SUBJECT TO THE
LINE ITEM VETO ACT
This document,(1) prepared by the
staff of the Joint Committee on Taxation, provides a brief summary of the
revenue provisions of H.R. 2014 ("Taxpayer Relief Act of 1997")
("the bill"). The Congress approved the conference report for
H.R. 2014 on July 30, 1997 (H. Rept. 105-220).
This summary is prepared for the use of the Member of Congress and
the public. The official legislative history of the conference agreement
is the conference report.
A separate staff document (JCX-39-97) provides the estimated budget
effects of the revenue provisions of H.R. 2014.
SUMMARY OF REVENUE
OF THE CONFERENCE AGREEMENT ON H.R. 2014
("TAXPAYER RELIEF ACT OF 1997")
TITLE I.--CHILD TAX CREDIT; HEALTH
CARE FOR CHILDREN
Child tax credit
Size of credit.--The bill provides a $500 ($400 for taxable
year 1998) credit for each qualifying child of a taxpayer under the age
of 17. A qualifying child is defined as an individual for whom the taxpayer
can claim a dependency exemption and who is a son or daughter of the taxpayer
(or descendent of either), a stepson or stepdaughter of the taxpayer or
an eligible foster child of the taxpayer.
Phaseout of credit.--For taxpayers with modified adjusted
gross income (AGI) in excess of certain thresholds, the otherwise allowable
child credit is phased out at a rate of $50 for each $1,000 of modified
AGI (or fraction thereof) in excess of the threshold. For married taxpayers
filing joint returns, the threshold is $110,000. For taxpayers filing single
or head of household returns, the threshold is $75,000. For married taxpayers
filing separate returns, the threshold is $55,000. These thresholds are
not indexed for inflation.
Maximum allowable child credit.--In general, in the case of
a taxpayer with qualifying children, the amount of the child credit equals
$500 times the number of qualifying children.
In the case of a taxpayer with one or two qualifying children, a
portion of the child credit may be treated as a supplemental child credit
amount. This amount equals the difference between (1) $500 times the number
of qualifying children up to the taxpayer's income tax liability (net of
applicable credits other than the earned income credit) over the taxpayer's
tentative minimum tax liability (determined without regard to the alternative
minimum foreign tax credit) and (2) the sum of the taxpayer's regular tax
liability (net of applicable credits other than the earned income credit)
and the employee share of FICA (and one-half of the taxpayer's SECA tax
liability, if applicable) reduced by any earned income credit amount. In
no case will the total amount of the allowable child credit exceed the
amount that would result from its calculation as a nonrefundable personal
In the case of a taxpayer with three or more qualifying children,
the maximum amount of the child credit for each taxable year cannot exceed
the greater of: (1) the taxpayer's regular tax liability (net of applicable
credits other than the earned income credit) over the taxpayer's tentative
minimum tax liability (determined without regard to the alternative minimum
foreign tax credit), or (2) an amount equal to the excess of the sum of
the taxpayer's regular tax liability (net of applicable credits other than
the earned income credit) and the employee share of FICA (and one-half
of the taxpayer's SECA tax liability, if applicable) reduced by the earned
income credit. To the extent that the amount determined under (1) is greater
than the amount determined under (2), the difference is treated as a supplemental
child credit amount.
Refundable child care credit amount.--In the case of a taxpayer
with three or more qualifying children, if the amount of the allowable
child credit as computed under the computation described above exceeds
the taxpayer's regular tax liability before the computation, then the excess
is a refundable tax credit.
Effective date.--Generally, the child tax credit is effective
for taxable years beginning after December 31, 1997.
Expand definition of high-risk
individuals with respect to tax-exempt state-sponsored organizations providing
Present law provides tax-exempt status to any membership organization
that is established by a State exclusively to provide coverage for medical
care on a nonprofit basis to certain high-risk individuals, provided certain
criteria are satisfied. The bill expands the definition of high-risk individuals
to include the spouse or any child of an individual who meets the present-law
definition of a high-risk individual, subject to certain requirements.
The provision is effective for taxable years beginning after December 31,
TITLE II.--EDUCATION TAX INCENTIVES
HOPE tax credit and Lifetime
Learning tax credit for higher education tuition expenses
HOPE credit.--Individual taxpayers are allowed to claim a
nonrefundable HOPE credit against Federal income taxes up to $1,500 per
student for qualified tuition and fees paid during the year on behalf of
a student (i.e., the taxpayer, the taxpayer's spouse, or a dependent) who
is enrolled in a post-secondary degree or certificate program at an eligible
institution on at least a half-time basis. The credit rate is 100 percent
on the first $1,000 of qualified tuition and fees and 50 percent on the
next $1,000 of qualified tuition and fees. The HOPE credit is available
only for the first two years of a student's post-secondary education. For
taxable years beginning after 2001, the $1,500 maximum HOPE credit amount
will be indexed for inflation. The HOPE credit amount that a taxpayer may
otherwise claim is phased out for taxpayers with modified AGI between $40,000
and $50,000 ($80,000 and $100,000 for joint returns).
The HOPE credit is computed on a per-student basis (i.e., a HOPE
credit may be computed separately for each eligible student in a taxpayer's
family). If a parent claims a child as a dependent, then only the parent
may claim the HOPE credit with respect to such child, and any qualified
expenses paid by the child are deemed to be paid by the parent.
For a taxable year, a taxpayer may elect with respect to an eligible
student the HOPE credit, the 20-percent Lifetime Learning credit (as provided
for by the bill), or the exclusion from gross income for certain distributions
from an education IRA (also as provided for by the bill).
The HOPE credit is available for expenses paid after December 31,
1997, for education furnished in academic periods beginning after such
Lifetime Learning credit.--The bill provides that individual
taxpayers are allowed to claim a nonrefundable Lifetime Learning credit
against Federal income taxes equal to 20 percent of qualified tuition and
fees paid during the taxable year on behalf of the taxpayer, the taxpayer's
spouse, and any dependent. The student must be enrolled at an eligible
educational institution but need not be enrolled on at least a half-time
basis. Instead, the student is eligible for the Lifetime Learning credit
so long as he or she is taking undergraduate or graduate-level classes
to acquire or improve job skills (assuming that the other requirements
for the credit are satisfied). For expenses paid before January 1, 2003,
up to $5,000 of qualified tuition and fees per taxpayer return will be
eligible for the Lifetime Learning credit (i.e., the maximum credit per
taxpayer return will be $1,000). For expenses paid after December 31, 2002,
up to $10,000 of qualified tuition and fees per taxpayer return will be
eligible for the Lifetime Learning credit (i.e., the maximum credit per
taxpayer return will be $2,000). The Lifetime Learning credit amount that
a taxpayer may otherwise claim is phased out over the same income phase-out
range that applies for purposes of the HOPE credit.
The Lifetime Learning credit is computed on a per-taxpayer return
basis (i.e., the credit does not vary based on the number of students in
a taxpayer's family). However, in contrast to the HOPE credit, the Lifetime
Learning credit may be claimed for an unlimited number of taxable years.
If a parent claims a child as a dependent, then only the parent may claim
the Lifetime Learning credit with respect to such child, and any qualified
tuition and fees paid by the child are deemed to be paid by the parent.
The Lifetime Learning credit is available for expenses paid after
June 30, 1998, for education furnished in academic periods beginning after
Deduction for student
Under the bill, certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for such interest
expenses, up to a maximum deduction of $2,500 per year. The maximum deduction
is phased in over 4 years, with a $1,000 maximum deduction in 1998, $1,500
in 1999, $2,000 in 2000, and $2,500 in 2001. The maximum deduction amount
is not indexed for inflation. In addition, the deduction is phased out
ratably for individual taxpayers with modified AGI of $40,000-$55,000 ($60,000-$75,000
for joint returns); such income ranges will be indexed for inflation occurring
after the year 2002, rounded down to the closest multiple of $5,000.
The deduction is allowed only with respect to interest paid on a
qualified education loan during the first 60 months in which interest payments
are required. A qualified education loan generally is defined as any indebtedness
incurred to pay for the qualified higher education expenses of the taxpayer,
the taxpayer's spouse, or any dependent of the taxpayer. Qualified higher
education expenses generally include tuition, fees, room and board, and
related expenses, reduced by certain educational benefits that are excludable
from gross income (e.g., amounts excluded under section 135, excludable
distributions from an education IRA, section 117 scholarship or fellowship
grants, and section 127 employer-provided educational assistance). Such
expenses must be paid or incurred within a reasonable period before or
after the indebtedness is incurred, and must be attributable to a period
when the student is at least a half-time student.
Any person in a trade or business or any governmental agency that
receives $600 or more in qualified education loan interest from an individual
during a calendar year must provide an information report on such interest
to the IRS and to the payor.
The provision is effective for interest payments due and paid after
December 31, 1997, on any qualified education loan.
Tax treatment of qualified
State tuition programs and education IRAs; exclusion for certain distributions
from education IRAs used to pay qualified higher education expenses
Qualified State tuition programs.--The bill expands present-law
section 529--which provides tax-exempt status and deferral of tax on earnings
of qualified State tuition programs--to include State programs under which
individuals prepay (or save) not only for post-secondary tuition, fees,
books, and supplies, but also for future room and board expenses of a designated
beneficiary. The bill also expands the definition of eligible educational
institutions for purposes of present-law section 529 and the definition
of the term "member of the family" for purposes of allowing tax-free
rollovers of credits or account balances in qualified State tuition programs.
The bill also includes provisions clarifying the estate and gift tax treatment
of contributions to qualified State tuition programs or education IRAs
Under the bill, to the extent that a distribution from a qualified
State tuition program is used to pay for qualified tuition and fees at
an eligible post-secondary institution, then the student (or his or her
parent) may be able to claim the HOPE credit or Lifetime Learning credit
provided for by the bill with respect to such tuition and fees (depending
on whether the income limitations and other requirements of the HOPE credit
or Lifetime Learning credit are satisfied). The modifications to section
529 generally are effective after December 31, 1997.
Education IRAs.--The bill provides that taxpayers may establish
education IRAs, meaning trusts or custodial accounts created exclusively
for the purpose of paying qualified higher education expenses of a named
beneficiary. Annual contributions to education IRAs may not exceed $500
per beneficiary, and may not be made after the designated beneficiary reaches
age 18. The contribution limit is phased out for certain high-income contributors.
No contribution may be made by any person to an education IRA during any
year in which any contributions are made by anyone to a qualified State
tuition program on behalf of the same beneficiary.
Until a distribution is made from an education IRA, earnings on contributions
to the account are not subject to tax. In addition, the bill provides that
distributions from an education IRA are excludable from gross income to
the extent that the distribution does not exceed qualified higher education
expenses incurred by the beneficiary during the year the distribution is
made, regardless of whether the student is enrolled in classes on a full-time,
half-time, or less than half-time basis. However, certain room and board
expenses are qualified higher education expenses only if the student incurring
such expenses is enrolled at an eligible educational institution on at
least a half-time basis. The earnings portion of a education IRA distribution
not used to pay qualified higher education expenses is includible in the
gross income of the distributee and generally is subject to an additional
10-percent tax penalty. However, prior to the beneficiary reaching age
30, the bill allows tax-free (and penalty-free) rollovers of account balances
from an education IRA benefiting one family member to an education IRA
benefiting another family member. The provisions governing education IRAs
apply to taxable years beginning after December 31, 1997.
Treatment of cancellation
of certain student loans
The bill provides that an individual's gross income does not include
forgiveness of loans made by tax-exempt educational organizations if the
proceeds of such loans are used to pay costs of attendance at an educational
institution or to refinance outstanding student loans and the student is
not employed by the lender organization. The exclusion applies only if
the forgiveness is contingent on the student's working for a certain period
of time in certain professions for any of a broad class of employers. In
addition, the student's work must fulfill a public service requirement.
The provision applies to discharges of indebtedness after the date of enactment.
from IRAs for higher education expenses
The bill permits penalty-free withdrawals from individual retirement
arrangements (IRAs) for 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 individual or the individual's
spouse. This provision is effective for distributions made after December
31, 1997, which respect to expenses paid after such date for education
furnished in academic periods beginning after such date.
The bill extends the exclusion from gross income for employer-provided
educational assistance for undergraduate education through May 31, 2000.
Modification of $150 million
limit on qualified 501(c)(3) bonds other than hospital bonds
The bill repeals the $150 million limit for bonds issued after the
date of enactment to finance capital expenditures incurred after the date
of enactment. The provision is effective for bonds issued after the date
of enactment to finance capital expenditures incurred after such date.
Enhanced deduction for
corporate contributions of computer technology and equipment
The bill permits C corporations that donate computer technology and
equipment that is not more than two years old for educational purposes
in any of grades K-12 to claim an augmented charitable contribution deduction.
The provision is effective for contributions made in taxable years beginning
after 1997 and before January 1, 2001.
Expansion of arbitrage
rebate exception for certain bonds
The bill provides that up to $5 million dollars of bonds used to
finance public school capital expenditures incurred after December 31,
1997, are excluded from application of the present-law $5 million limit.
Thus, small issuers will continue to benefit from the small issue exception
from arbitrage rebate if they issue no more than $10 million in governmental
bonds per calendar year and no more than $5 million of the bonds is used
to finance expenditures other than for public school capital expenditures.
The provision is effective for bonds issued after December 31, 1997.
Tax credit for holders
of qualified zone academy bonds
Under the bill, certain financial institutions that hold "qualified
zone academy bonds" are entitled to a nonrefundable tax credit in
an amount equal to a credit rate (set by the Treasury Department) multiplied
by the face amount of the bond. "Qualified zone academy bonds"
are any bond issued by a State or local government, provided that (1) 95
percent of the proceeds are used for the purpose of renovating, providing
equipment to, developing course materials for use at, or training teachers
and other school personnel in a "qualified zone academy" and
(2) private entities have promised to contribute to the qualified zone
academy certain property or services with a value equal to at least 10
percent of the bond proceeds. A school is a "qualified zone academy"
if (1) the school is a public school that provides education and training
below the college level, (2) the school operates a special academic program
in cooperation with businesses to enhance the academic curriculum and increase
graduation and employment rates, and (3) either (a) the school is located
in an empowerment zone or enterprise community (including empowerment zones
designated or authorized to be designated under the bill), or (b) it is
reasonably expected that at least 35 percent of the students at the school
will be eligible for free or reduced-cost lunches under the school lunch
program established under the National School Lunch Act.
A total of $400 million of "qualified zone academy bonds"
may be issued in each of 1998 and 1999. The $800 million aggregate bond
cap will be allocated to the States according to their respective populations
of individuals below the poverty line. Each State, in turn, will allocate
the credit to qualified zone academies within such State.
The provision is effective for bonds issued after 1997.
TITLE III.--SAVINGS AND INVESTMENT
The bill increases the income ranges over which the $2,000 IRA deduction
limit is phased out for individuals who are active participants in an employer-sponsored
retirement plan. Under the bill, in 1998, the phase out ranges are increased
to $50,000 - $60,000 of AGI for married couples and to $30,000 - $40,00
of AGI for single taxpayers. The income limits are increased each year
thereafter until they are double the present-law limits; i.e., until the
phase-out range is $80,000 to $100,000 for married taxpayers and $50,000
to $60,000 for single taxpayers.
The bill permits deductible contributions for spouses of individuals
who are in an employer-sponsored retirement plan. The deduction is phased
out for taxpayers with AGI between $150,000 and $160,000.
The bill creates a new, tax-free nondeductible IRA called the "Roth
IRA" for individuals with AGI between $95,000 - $110,000 and married
couples with AGI between $150,000 - $160,000. Distributions from a Roth
IRA are tax free if made more than 5 years after a Roth IRA has been established
and if the distribution is (1) made after age 59-1/2, death, or disability,
or (2) for first-time homebuyer expenses (up to $10,000). No more than
$2,000 per year can be made to all an individual's IRAs.
The bill permits IRAs to invest in certain gold coins and bullion.
The bill permits penalty-free withdrawals from IRAs for first-time
homebuyer expenses (up to $10,000) and higher education expenses.
Capital gains provisions
The bill reduces the maximum capital gains rate for individuals to
20 percent (10 percent for taxpayers in the 15-percent bracket), effective
May 7, 1997. Real estate depreciation recapture generally will be taxed
at a maximum rate of 25 percent. The present maximum 28-percent rate will
be retained for collectibles and, effective July 29, 1997, for assets held
between 1 year and 18 months. Beginning in 2001, assets held for 5 years
will get favorable rates (8 percent for 15-percent bracket taxpayers in
2001 and 18 percent for others in 2006).
A $250,000 exclusion for the sale of a principal residence ($500,000
in the case of a joint return) is provided, effective May 7, 1997.
The bill allows the tax-free rollover of gain from certain small
business stock to other small business stock, effective on date of enactment.
TITLE IV.--ALTERNATIVE MINIMUM TAX
Repeal alternative minimum
tax for small businesses and repeal the deprecation adjustment
For taxable years beginning after 1997, the bill repeals the corporate
alternative minimum tax for small businesses (i.e., those with average
gross receipts of less than $5 million). The exemption would continue to
apply as long as the corporation has average gross receipts of less than
In addition, for property placed in service after 1998, the bill
conforms the depreciable lives used for purposes of the alterative minimum
tax to the depreciable lives used for purposes of the present-law regular
Repeal AMT installment
method adjustment for farmers
The bill repeals the installment sales adjustment applicable to the
alternative minimum tax, generally for sales after 1987. Thus, qualified
farmers are eligible to use the installment sales method of accounting
for both regular tax and alternative minimum tax purposes.
TITLE V.--ESTATE, GIFT, AND GENERATION-SKIPPING
Increase in estate and
gift tax unified credit
The present-law unified credit is increased as follows: the effective
exemption is $625,000 for decedents dying and gifts made in 1998; $650,000
in 1999; $675,000 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000
in 2004; $950,000 in 2005; and $1 million in 2006 and thereafter. These
amounts are not indexed for inflation.
Indexing of certain other
estate and gift tax provisions
After 1998, the $10,000 annual exclusion for gifts, the $750,000
ceiling on special use valuation, the $1,000,000 generation-skipping transfer
tax exemption, and the $1,000,000 ceiling on the value of a closely-held
business eligible for the special low interest rate are indexed annually
Estate tax exclusion for
qualified family-owned businesses
For estate tax purposes, an executor may elect to exclude the value
of certain qualified "family-owned business interests" if such
interests comprise more than 50 percent of a decedent's estate and certain
other requirements are met. The exclusion for family-owned business interests
may be taken only to the extent that the exclusion for family-owned business
interests, plus the amount effectively exempted by the unified credit,
does not exceed $1.3 million.
Reduction in estate tax
for certain land subject to permanent conservation easement
An executor may elect to exclude from the taxable estate 40 percent
of the value of any land subject to a qualified conservation easement that
meets the following requirements: (1) the land is located within 25 miles
of a metropolitan area or a national park or wilderness area, or within
10 miles of an Urban National Forest; (2) the land has been owned by the
decedent or a member of the decedent's family at all times during the three-year
period ending on the date of the decedent's death; and (3) a qualified
conservation contribution of a qualified real property interest was granted
by the decedent or a member of his or her family. The maximum exclusion
for land subject to a qualified conservation easement is limited to $100,000
in 1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and $500,000
in 2002 and thereafter. The exclusion for land subject to a qualified conservation
easement may be taken in addition to the maximum exclusion for qualified
family-owned business interests (i.e., there is no coordination between
the two provisions). Debt-financed property is eligible for this provision
to the extent of the net equity in the property.
Installment payments of
estate tax attributable to closely held businesses
For estate taxes that are deferred under section 6166, the tax attributable
to the first $1,000,000 in taxable value of the closely held business (i.e.,
the first $1,000,000 in value in excess of the effective exemption provided
by the unified credit and any other exclusions) is subject to interest
at a rate of two percent. The remainder of such taxes is subject to interest
at a rate equal to 45 percent of the rate applicable to underpayments of
tax, and all taxes paid under section 6166 are made nondeductible. Taxpayers
currently deferring taxes under section 6166 may make a one-time election
to receive similar treatment.
Estate tax recapture from
cash leases of specially-valued property
The cash lease of specially-valued real property 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, does not cause the qualified
use of such property to cease for purposes of imposing the additional estate
tax under section 2032A(c).
Clarify eligibility for
extension of time for payment of estate tax
Taxpayers are given access to the courts to resolve disputes over
an estate's eligibility for the section 6166 election by authorizing the
U.S. Tax Court to provide declaratory judgments regarding initial or continuing
eligibility for deferral under section 6166.
Gifts may not be revalued
for estate tax purposes after expiration of statute of limitations
A gift for which the three-year statute of limitations period has
passed cannot be revalued for purposes of determining the applicable estate
tax bracket and available unified credit.
Repeal of throwback rules
applicable to certain domestic trusts
Amounts distributed by certain domestic trusts are exempted from
the throwback rules. The throwback rules continue to apply with respect
to (1) foreign trusts, (2) domestic trusts that were once treated as foreign
trusts (except as provided in Treasury regulations), and (3) domestic trusts
created before March 1, 1984, that would be treated as multiple trusts
under section 643(f) of the Code. In addition, precontribution gain on
property sold by certain domestic trusts no longer is subject to section
644 (i.e., taxed at the contributor's marginal tax rates).
Modification of generation-skipping
transfer tax for transfers to individuals with deceased parents
The current law "predeceased parent exception" is extended
to transfers to collateral heirs, provided that the decedent has no living
lineal descendants at the time of the transfer, and to taxable terminations
and taxable distributions, provided that the parent of the relevant beneficiary
was dead at the earliest time that the transfer (from which the beneficiary's
interest in the property was established) was subject to estate or gift
TITLE VI.--EXTENSION OF CERTAIN EXPIRING
Research tax credit
The bill extends the research tax credit (which provides a 20 percent
tax credit for qualified research expenses in excess of a taxpayer's research
credit base amount) for 13 months--i.e., generally for the period June
1, 1997, through June 30, 1998.
Contributions of stock
to private foundations
The special rule contained in section 170(e)(5) that permits a fair-market
value deduction for contributions of qualified appreciated stock to private
foundations is extended for the period June 1, 1997, through June 30, 1998.
Work opportunity tax credit
The bill provides a 9-month extension of the work opportunity tax
credit. It also provides a credit percentage of 25 percent for employment
of less than 400 hours of employment and 40 percent for employment of 400
or more hours, reduces the period employees must be employed to qualify
for the credit, and makes other changes. The bill is generally effective
for wages paid to qualified individuals who begin work for an employer
after September 30, 1997, and before July 1, 1998.
Orphan drug tax credit
The orphan drug tax credit provides a 50-percent tax credit for qualified
clinical testing expenses incurred in testing certain drugs for rare diseases
or conditions. The bill permanently extends the orphan drug tax credit,
effective for expenses paid or incurred after May 31, 1997.
TITLE VII.--DISTRICT OF COLUMBIA TAX
Designation of D.C. Enterprise
The bill designates certain economically depressed census tracts
within the District of Columbia as the "D.C. Enterprise Zone,"
within which businesses and individual residents are eligible for special
tax incentives. The census tracts that compose the D.C. Enterprise Zone
for purposes of the wage credit, expensing, and tax-exempt financing incentives
include all census tracts that presently are part of the D.C. enterprise
community and census tracts within the District of Columbia where the poverty
rate is not less than 20 percent. The D.C. Enterprise Zone designation
generally will remain in effect for five years for the period from January
1, 1998, through December 31, 2002.
Empowerment zone wage
credit, expensing, and tax-exempt financing
The following tax incentives that are available under present law
in empowerment zones generally will be available in the D.C. Enterprise
Zone: (1) a 20-percent wage credit for the first $15,000 of wages paid
to D.C. residents who work in the D.C. Enterprise Zone; (2) an additional
$20,000 of expensing under Code section 179 for qualified zone property;
and (3) special tax-exempt financing for certain zone facilities.
The bill provides a zero-percent capital gains rate for capital gains
from the sale of certain qualified D.C. Zone assets held for more than
five years. For purposes of the zero-percent capital gains rate, the D.C.
Enterprise Zone is defined to include all census tracts within the District
of Columbia where the poverty rate is not less than 10 percent.
The bill allows first-time homebuyers of a principal residence in
the District a tax credit of up to $5,000 of the amount of the purchase
price, except that the credit phases out for individual taxpayers with
adjusted gross income between $70,000 and $90,000 ($110,000-$130,000 for
joint filers). The credit is available with respect to property purchased
after the date of enactment and before January 1, 2001.
The bill provides to employers a tax credit on the first $20,000
of eligible wages paid to qualified long-term family assistance (AFDC or
its successor program) recipients during the first two years of employment.
The credit is 35 percent of the first $10,000 of eligible wages in the
first year of employment and 50 percent of the first $10,000 of eligible
wages in the second year of employment. The maximum credit is $8,500 per
qualified employee. The provision is effective for wages paid or incurred
to a qualified individual who begins work for an employer on or after January
1, 1998 and before May 1, 1999.
TITLE IX.--MISCELLANEOUS PROVISIONS
Excise tax provisions
Repeal excise tax on diesel fuel used in recreational motorboats.--The
bill repeals the 24.3-cents-per-gallon excise tax on diesel fuel used in
recreational motorboats. Currently, imposition of this tax is suspended
through December 31, 1997.
Continued application of tax on imported recycled halon-1211.--The
bill repeals the present-law exemption from the excise tax on ozone-depleting
chemicals for imported recycled halon-1211.
Transfer 4.3-cents-per-gallon General Fund highway fuels tax to
Highway Trust Fund..--The bill provides for transfer of the 4.3-cents-per-gallon
General Fund excise taxes on gasoline, diesel fuel, special motor fuels,
and kerosene to the Highway Trust Fund, effective after September 30, 1997.
Provisions are included to ensure that this transfer has no effect on direct
spending under the Budget Act. Certain tax deposit rules are modified for
Tax certain alternative fuels based on energy equivalency to gasoline.--The
bill adjusts the excise tax rate on propane, methanol derived from natural
gas, and liquefied natural gas to reflect the relative Btu content of these
fuels to gasoline. The provision is effective on October 1, 1997.
Certain gasoline "chain retailers" treated as wholesale
distributors.--The bill extends eligibility to file excise tax refund
claims on behalf of certain exempt gasoline users to retailers selling
the fuel from 10 or more commonly controlled outlets. This provides comparable
treatment to these retail dealers to that currently provided to wholesale
distributors. The provision is effective after September 30, 1997.
Exemption of electric and other clean-fuel vehicles from luxury
automobile classification.--The bill modifies the threshold above which
the luxury excise tax on automobiles will apply for each of two identified
classes of automobiles. First, for an automobile that is not a clean-burning
fuel vehicle to which retrofit parts and components are installed to make
the vehicle a clean-burning vehicle, the threshold would be $30,000, as
adjusted for inflation under present law, plus an amount equal to the increment
to the retail value of the automobile attributable to the retrofit parts
and components installed. In the case of a passenger vehicle designed to
be propelled primarily by electricity and built by an original equipment
manufacturer, the threshold applicable for any year is modified to equal
150 percent of $30,000, with the result increased for inflation occurring
Reduce rate of alcohol excise tax on certain hard ciders.--The
bill adjusts the tax rate on apple cider having an alcohol content of less
than 7 percent to 22.6 cents per gallon for those persons who produce more
than 100,000 gallons of "hard cider" during a calendar year.
Study feasibility of moving collection point for distilled spirits
excise tax.--The $13.50 per proof gallon distilled spirits excise tax
is imposed when these beverages are removed from a distillery (or imported).
The bill directs the Secretary of the Treasury to study and report to Congress
on compliance and budgetary effects of various options for changing the
point where this tax is imposed. The study is due by March 31, 1998.
Codify rules on use of semi-generic names on wine labels.--The
bill codifies the current Treasury regulatory list of semi-generic wine
names (i.e., names having geographic significance) that may be used by
U.S. wine producers and the conditions in which those names may be used
for wines not originating in the historical area to which the name relates.
Uniform rate of excise tax on vaccines.--The bill replaces
the present-law excise taxes on vaccines, that differ by vaccine, with
a single rate tax of $0.75 per dose on any listed vaccine component. In
addition, the bill adds three new taxable vaccines to the present-law taxable
vaccines: (1) HIB (hemophilus influenza type B); (2) Hepatitis B; and (3)
Disaster relief provisions
Authority to postpone certain tax-related deadlines on account
of Presidentially declared disasters.--The bill provides Treasury with
the authority to postpone certain tax-related deadlines by reason of a
Presidentially declared disaster.
Use of certain appraisals to establish amount of disaster loss.--The
bill provides that Treasury may issue guidance providing that an appraisal
for the purpose of obtaining a Federal loan or Federal loan guarantee as
the result of a Presidentially declared disaster may be used to establish
the amount of the disaster loss.
Treatment of livestock sold on account of weather-related conditions.--Present
law allows taxpayers, in certain circumstances, to defer gain recognized
on the sale of livestock sold on account of drought. The bill expands these
present-law exceptions to livestock sold on account of flood or other weather-related
conditions. The provisions are effective for sales and exchanges after
Mortgage bond financing for residences located in Presidentially
declared disaster areas.--Qualified mortgage bonds are private activity
tax-exempt bonds issued by States and local governments acting as conduits
to provide mortgage loans to first-time home buyers who satisfy specified
income limits and who purchase homes that cost less than statutory maximums.
The bill allows the waivers of first-time homebuyer requirement, the income
limits, and the purchase price limits for loans to finance homes in certain
Presidentially declared disaster areas. The waiver applies only during
the two-year period following the date of disaster declaration. The provision
applies to loans financed with bonds issued after December 31, 1996 and
before January 1, 1999.
Abatement of interest by reason of Presidentially declared disaster.--The
bill requires the IRS to abate interest for individual taxpayers in Presidentially
declared disaster areas under specified circumstances for disasters in
Employment tax provisions
The bill clarifies the standards to be used in determining whether
securities brokers are employees for Federal tax purposes. The bill provides
that certain termination payments received by former insurance salesmen
are not subject to SECA taxes. The bill imposes a moratorium on the issuance
of IRS regulations relating to the definition of limited partner for SECA
tax purposes until July 1, 1998.
The bill establishes a demonstration project for combined Federal/State
employment tax reporting.
Small business provisions
EFTPS.--The bill delays the imposition of penalties for certain
failures to make payments electronically through EFTPS through June 30,
Home office deduction: clarification of definition of principal
place of business.--The bill enhances the ability of taxpayers who
work at home to claim deductions for home office expenses by expanding
the definition of "principal place of business" to include a
home office that is used by the taxpayer to conduct administrative or management
activities of the business, provided that there is no other fixed location
where the taxpayer conducts substantial administrative or management activities
of the business. As under present law, deductions will be allowed for a
home office only if the office is exclusively used on a regular basis as
a place of business and, in the case of an employee, only if such exclusive
use is for the convenience of the employer.
The provision applies to taxable years beginning after December 31,
Increase in self-employed health deduction.--The bill increases
the deduction for health insurance of self-employed individuals as follows:
the deduction is 40 percent in 1997, 45 percent in 1998 and 1999, 50 percent
in 2000 and 2001, 60 percent in 2002, 80 percent in 2003 through 2005,
90 percent in 2006, and 100 percent in 2007 and thereafter.
Shrinkage estimates for inventory accounting.--A method of
keeping inventories will not be considered unsound, or to fail 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. It is expected that safe harbor methods of estimating inventory
shrinkage will be established by regulation. A safe harbor method specific
to retail trade is described in the Conference Report. The provision is
effective for taxable years ending after the date of enactment.
Treatment of workmen's compensation liability under rules for
certain personal injury liability assignments.--The bill extends the
exclusion for qualified assignments under Code section 130 to amounts assigned
for assuming a liability to pay compensation under any workmen's compensation
act. The provision is effective for workmen's compensation claims filed
after the date of enactment.
Tax-exempt status for certain State workmen's compensation act
companies.--The bill clarifies the tax-exempt status of any organization
that is created by State law, and organized and operated exclusively to
provide workmen's compensation insurance and related coverage that is incidental
to workmen's compensation insurance, and that meets certain additional
requirements, including a requirement that the State must either extend
its full faith and credit to the initial debt of the organization or provide
the initial operating capital of such organization, and also including
a requirement that the assets of the organization must revert to the State
upon dissolution or State law must not permit the dissolution of the organization.
The provision is effective for taxable years beginning after December 31,
1997. No inference is intended that organizations described in the provision
are not tax-exempt under present law.
Election for 1987 partnerships to continue exception from treatment
of publicly traded partnerships as corporations.--Under the bill, in
the case of an existing 1987 publicly traded partnership that elects under
the provision to be subject to a tax on gross income from the active conduct
of a trade or business, the rule of present law treating a publicly traded
partnership as a corporation does not apply. The tax is 3.5 percent of
the partnership's gross income from the active conduct of a trade or business.
The provision is effective for taxable years beginning after December 31,
Exclusion from UBIT for certain corporate sponsorship payments.--The
bill provides an exclusion from the unrelated business income tax (UBIT)
for qualified sponsorship payments received by tax-exempt organizations
(and State colleges and universities). "Qualified sponsorship payments"
are defined as any payment made by a person engaged in a trade or business
with respect to which the person will receive no substantial return benefit
other than the use or acknowledgment of the name or logo (or product lines)
of the person's trade or business in connection with the organization's
activities. Such a use or acknowledgment does not include advertising
of such person's products or services--meaning qualitative or comparative
language, price information or other indications of savings or value, or
an endorsement or other inducement to purchase, sell, or use such products
or services. The safe-harbor exclusion provided by the bill for "qualified
sponsorship payments" does not apply to payments that entitle the
payor to the use or acknowledgment of the payor's trade or business name
or logo (or product lines) in tax-exempt organization periodicals (or to
payments made in connection with certain convention or trade show activities),
which continue to be governed by present-law rules to determine whether
the payment is subject to the UBIT.
The provision applies to qualified sponsorship payments solicited
or received after December 31, 1997.
Timeshare associations.--The bill permits timeshare associations
to be taxed similarly to homeowner's associations, except the tax rate
on their association income is 32 percent, effective for taxable years
beginning after December 31, 1996.
Exception from real estate reporting requirements for certain
sales of principal residences .--Generally, sales of personal residences
with a gross sales price of $500,000 or less ($250,000 or less in the case
of a seller who is not married) are excluded from the real estate transaction
reporting requirement, provided the seller represents that any gain on
the sale will be exempt from Federal income tax.
Increased deduction for business meals for individuals operating
under Department of Transportation hours of service limitation.--The
deductible percentage of the cost of food and beverages consumed while
away from home by an individual during, or incident to, a period of duty
subject to the hours of service limitations of the Department of Transportation
is gradually increased from 50 to 80 percent. The percentage allowable
increases in 5-percent increments every other year beginning in 1998.
Deductibility of meals provided for the convenience of the employer.--The
bill clarifies the tax treatment of meals provided for the convenience
of the employer.
Increase in standard mileage rate for purposes of computing charitable
deduction.--The bill increases from 12 cents per mile to 14 cents per
mile the standard mileage rate used for purposes of computing the charitable
deduction, effective for taxable years beginning after December 31, 1997.
Expensing of environmental remediation costs ("brownfields").--The
bill allows taxpayers to elect to treat certain environmental remediation
expenditures that would otherwise be chargeable to capital account as deductible
in the year paid or incurred. The expenditure must be incurred in connection
with the abatement or control of hazardous substances at a qualified contaminated
site. A "qualified contaminated site" generally is any property
that (1) is held for use in a trade or business, for the production of
income, or as inventory; (2) is certified by the appropriate State environmental
agency to be located within a targeted area; and (3) contains (or potentially
contains) a hazardous substance (so-called "brownfields"). Targeted
areas include: (1) empowerment zones and enterprise communities as designated
under present law and under the bill (including any supplemental empowerment
zone designated on December 21, 1994); (2) sites announced before February
1997, as being subject to one of the 76 Environmental Protection Agency
(EPA) Brownfields Pilots; (3) any population census tract with a poverty
rate of 20 percent or more; and (4) certain industrial and commercial areas
that are adjacent to tracts described in (3) above. The provision applies
to eligible expenditures incurred in taxable years ending after date of
enactment and before January 1, 2001.
Modify limits on depreciation of luxury automobiles for certain
clean-burning fuel and electric vehicles.--The bill modifies the present-law
limitation on depreciation in the case of qualified clean-burning fuel
vehicles and certain electric vehicles. With respect to qualified clean-burning
fuel vehicles, the bill generally this has the effect of only subjecting
the cost of the vehicle before modification to the present-law limitations.
In the case of a passenger vehicle designed to be propelled primarily by
electricity and built by an original equipment manufacturer, the present-law
base-year limitation amounts are tripled.
Modification of advance refunding rules for certain tax-exempt
bonds issued by the Virgin Islands.--Under the bill, one additional
advance refunding would be allowed for governmental bonds issued by the
Virgin Islands that were advance refunded before June 9, 1997, if the Virgin
Islands debt provisions are changed to repeal the current priority first
Deferral of gain on certain sales of farm product refiners and
processors.--The bill extends the deferral provided under section 1042
to the sale of stock of a qualified refiner or processor to an eligible
farmer's cooperative. The provision is effective for sales after December
Above-the-line deduction for certain expenses.--The bill provides
that employee business expenses relating to service as an official of a
State or local government (or political subdivision thereof) are deductible
in computing AGI, provided the official is compensated in whole or in part
on a fee basis. The provision is effective with respect to expenses paid
or incurred in taxable years beginning after December 31, 1986.
Survivor benefits of public safety officers killed in the line
of duty.--The bill provides an exclusion from gross income for certain
survivor benefits paid on account of the death of a public safety officer
killed in the line of duty. The provision is effective for amounts received
in taxable years beginning after December 31, 1996, with respect to individuals
dying after that date.
Temporary suspension of income limitations on percentage depletion
for production from marginal wells.--The bill suspends the 100-percent-of-net-income
property limitation with respect to oil and gas produced from marginal
properties during taxable years beginning after December 31, 1997, and
before January 1, 2000.
Purchasing of receivables by tax-exempt hospital cooperative service
organizations.--The bill clarifies that, for purposes of 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.
Designation of additional empowerment zones; modification of empowerment
zone and enterprise community criteria
a. Two additional empowerment zones with
same tax incentives as previously designated empowerment zones
Under the bill, the Secretary of HUD is authorized to designate two
additional empowerment zones located in urban areas (thereby increasing
to eight the total number of empowerment zones located in urban areas)
with respect to which generally apply the same tax incentives (i.e., the
wage credit, additional expensing, and special tax-exempt financing) as
are available within the empowerment zones authorized by the Omnibus Budget
Reconciliation Act of 1993 (OBRA 1993). The wage credit available in the
two new urban empowerment zones is modified slightly to provide that the
percentage of wages taken into account for purposes of determining the
wage credit is 20 percent for 2000-2004, 15 percent for 2005, 10 percent
for 2006, and 5 percent for 2007. No wage credit is available in the two
new urban empowerment zones after 2007. The two additional empowerment
zones are subject to the same eligibility criteria that applies to the
original six urban empowerment zones. The two empowerment zones must be
designated within 180 days after the date of enactment. However, the designations
will not take effect before January 1, 2000, and generally will remain
in effect for 10 years.
b. Designation of additional empowerment
The bill authorizes the Secretaries of HUD and Agriculture to designate
an additional 20 empowerment zones (no more than 15 in urban areas and
no more than five in rural areas). With respect to these additional empowerment
zones, the present-law eligibility criteria are expanded slightly.
Within the 20 additional empowerment zones, qualified "enterprise
zone businesses" are eligible to receive up to $20,000 of additional
section 179 expensing and to utilize special tax-exempt financing benefits.
The "brownfields" tax incentive provided under the bill also
is available within all designated empowerment zones. Businesses within
the 20 additional empowerment zones are not, however, eligible to
receive the present-law wage credit available within the 11 other designated
The 20 additional empowerment zones are required to be designated
before 1999, and the designations generally will remain in effect for 10
c. Modification of definition of enterprise
The bill provides that an entity may qualify as an "enterprise
zone business" if (in addition to the other present-law criteria)
at least 50 percent of the total gross income of such entity is derived
from the active conduct of a qualified business within an empowerment zone
or enterprise community. In addition, the bill makes certain other modifications
to the definition of an "enterprise zone business." This modified
"enterprise zone business" definition applies to all previously
designated empowerment zones and enterprise communities, the two urban
empowerment zones designated under the bill, as well as to the 20 additional
empowerment zones authorized to be designated pursuant to the bill. The
modifications to the definition of "enterprise zone business"
are effective for taxable years beginning on or after the date of enactment.
d. Tax-exempt financing rules
The bill allows "new empowerment zone facility bonds" to
be issued for qualified enterprise zone businesses in the 20 additional
empowerment zones. These bonds are not subject to the State private activity
bond volume caps or the special limits on issue size applicable to qualified
enterprise zone facility bonds under present law. The maximum amount of
these bonds that can be issued is limited to $60 million per rural zone,
$130 million per urban zone with a population of less than 100,000, and
$230 million per urban zone with a population of 100,000 or more.
The bill also makes certain modifications to the special tax-exempt
bond financing available under present-law rules in empowerment zones and
enterprise communities. The changes to the tax-exempt financing rules are
effective for qualified enterprise zone facility bonds and the new empowerment
zone facility bonds issued after the date of enactment.
e. Special rules for Alaska and Hawaii
The bill modifies the present-law empowerment zone and enterprise
community designation criteria so any zones or communities designated in
the States of Alaska or Hawaii will not be subject to the general size
limitations, nor will such zones or communities be subject to the general
poverty-rate criteria. Instead, nominated areas in either State will be
eligible for designation as an empowerment zone or enterprise community
if, for each census tract or block group within such area, at least 20
percent of the families have incomes which are 50 percent or less of the
State-wide median family income. Such zones and communities will be subject
to the population limitations under present-law section 1392(a)(1). The
provision is effective on the date of enactment.
Income averaging for farmers.--An individual taxpayer generally
is allowed to elect to compute his or her current year regular tax liability
by averaging, over the prior three-year period, all or a portion of his
or her taxable income from the trade of business of farming. The provision
applies to taxable years beginning after December 31, 1997, and before
January 1, 2001.
Elective carryback of existing net operating losses of the National
Railroad Passenger Corporation (Amtrak).--Amtrak is allowed a tax refund
based on the carryback of its net operating losses against the tax attributes
of its predecessor railroads. The availability of the provision is conditioned
on Amtrak (1) agreeing to make payments of one percent (1%) of the amount
it receives to each of the non-Amtrak States to offset certain transportation
related expenditures and (2) using the balance for certain qualified expenses.
The maximum refund payable to Amtrak under this provision is limited to
$2,323,000,000. One half of the refund is treated as a payment of estimated
tax by Amtrak for each of the first two taxable years ending after the
date of enactment. However, no refund will be made as a result of this
provision earlier than the date of enactment of Federal legislation which
authorizes reforms of Amtrak.
Extension of system of
generalized preferences (GSP)
The bill extends the Generalized System of Preferences ("GSP")
through June 30, 1998. Under GSP (Trade Act of 1974), the President has
the authority to provide duty-free treatment on imports of eligible articles
from designated beneficiary developing countries. The President's authority
to grant GSP benefits expired on May 31, 1997. Under the bill, refunds
of any duty paid between May 31, 1997 and the date of enactment are provided
upon request of the importer.
TITLE X.--REVENUE-INCREASE PROVISIONS
Financial product provisions
Require recognition of gain on certain appreciated positions in
personal property.--The bill requires recognition of gain (but not
loss) upon a constructive sale of any appreciated position in stock, a
partnership interest or certain debt instruments. A constructive sale occurs
when a taxpayer enters into a short sale, an offsetting notional principal
contract or certain other transactions. The provision is generally effective
for constructive sales entered into after June 8, 1997.
Election of mark-to-market for securities traders.--The bill
allows securities traders and commodities traders and dealers to elect
mark-to-market accounting similar to that currently required for securities
dealers. The election applies to taxable years ending after the date of
Limitation on exception for investment companies under section
351.--The bill expands the definition of an "investment company"
for purposes of the exception for such companies from the general rules
allowing tax-free contributions of property to corporations and partnerships.
Under the conference agreement, an investment company includes a company
more than 80 percent of the assets of which consist of securities and other
high-quality investment assets. The provision is effective for transfers
after June 8, 1997, with an exception for transfers pursuant to certain
binding contracts in effect on that date.
Treatment of certain transactions as exchange.--The bill provides
that redemptions of debt issued by natural persons and debt issued before
July 2, 1982, is treated as an exchange and, accordingly, any gain or loss
on that redemption would be capital gain or loss effective for debt issued
or purchased after June 8, 1997. In addition, the bill treats gain or loss
from the cancellation, lapse, expiration, or other termination more than
after 30 days after enactment of a right or obligation which is (or on
acquisition would be) a capital asset in the hands of the taxpayer to all
types of property as a capital gain or loss. Lastly, the bill provides
that a taxpayer that enters into a short sale of property (and, to the
extent provided in Treasury regulations, any option with respect to property,
any offsetting notional principal contract with respect to property, any
futures or forward contract to deliver property, or with respect to any
similar transaction or position) that becomes substantially worthless after
the date of enactment shall recognize gain as if the short sale (or other
property) were closed (or sold) when the property becomes substantially
Determination of original issue discount where pooled debt obligations
subject to acceleration.--The bill requires a reasonable assumption
for interest income accruals with respect to a pool of debt instruments
the payments on which may be affected by reason of prepayments. Thus, if
a taxpayer holds a pool of credit card receivables that require interest
to be paid if the borrowers do not pay their accounts by a specified date,
the taxpayer would be required to accrue interest on such pool based upon
a reasonable assumption regarding the timing of the payments of the accounts
in the pool. Similar rules apply under present law with respect to the
accrual of original issue discount with respect to REMICs. The provision
is effective for taxable years beginning after the date of enactment.
Deny interest deduction on certain debt instruments.--The
bill denies interest deductions on certain corporate instruments payable
in stock of the issuer or a related party, including instruments a substantial
portion of the principal or interest on which is mandatorily (or at the
option of the issuer or a related party) payable or convertible into such
stock, or determined by reference to the value of such stock, or that are
part of an arrangement designed to result in such payment of the instrument
with or by reference to such stock.
The bill 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 Internal Revenue Service
on or before such date, or (3) described in a public announcement or filing
with the Securities and Exchange Commission on or before such date.
Require gain recognition for certain extraordinary dividends.--Under
the bill, a corporate shareholder recognizes gain immediately with respect
to any redemption treated as a dividend when the nontaxed portion of the
dividend exceeds the basis of the shares surrendered, if the redemption
is treated as a dividend due to options being counted as stock ownership.
In addition, the provision requires immediate gain recognition whenever
the basis of stock with respect to which any extraordinary dividend was
received is reduced below zero.
The bill generally is effective for distributions after May 3, 1995,
unless made pursuant to the terms of a written binding contract in effect
on May 3, 1995 and at all times thereafter before such distribution, or
a tender offer outstanding on May 3, 1995. In certain types of cases, September
13, 1995 is substituted for May 3, 1995.
Require gain recognition on certain distributions of controlled
corporation stock.--The bill restricts certain otherwise tax-free "spin-off"
transactions after April 16, 1997, under section 355 of the Code, in which
a distributing corporation distributes stock of a controlled corporation
to shareholders. Corporate level gain is recognized on a spin-off which
is part of a plan or series of related transactions in which there is an
acquisition of 50-percent or more of the vote or value of stock of either
the distributing corporation or the controlled corporation. The gain is
recognized immediately before the distribution, in the amount that the
distributing corporation would have recognized had the stock of the controlled
corporation been sold for fair market value on the date of the distribution.
No adjustment to the basis of the stock or assets of either corporation
is allowed by reason of the recognition of the gain.
In addition, distributions within an affiliated group of corporations,
in connection with such an acquisition transaction, are not treated as
tax-free spin-offs. The Treasury Department also has additional regulatory
authority to adjust the basis of stock in intra-group spin-off distributions
For certain transfers of property to a corporation as part of a spin-off
after the date of enactment, the present law requirement that shareholders
of the contributing corporation own 80 percent of the voting power and
80 percent of each other class of stock after the distribution is modified
to a requirement of greater-than-50 percent of the vote and value of the
The bill is generally effective for distributions after April 16,
The bill will not apply to a distribution after April 16, 1997 that
is part of an acquisition that would otherwise cause gain recognition to
the distributing or controlled corporation under the bill if such acquisition
is: (1) made pursuant to a written agreement which was binding on April
16, 1997 and at all times thereafter; (2) described in a ruling request
submitted to the Internal Revenue Service on or before such date; or (3)
described on or before such date in a public announcement or in a filing
with the Securities and Exchange Commission ("SEC") required
solely by reason of the acquisition or transfer. Any written agreement,
ruling request, or public announcement or SEC filing is not within the
scope of these transition provisions unless it identifies the acquiror
of the distributing corporation or of any controlled corporation, whichever
Reform tax treatment of certain corporate stock transfers.--The
bill modifies certain rules that apply if one corporation purchases stock
of a related corporation and the transaction is treated as a distribution.
A special rule applies to transactions involving acquisitions by foreign
corporations, limiting the earnings and profits of the acquiring foreign
corporation that are taken into account.
The bill is effective for distributions or acquisitions after June
8, 1997 except that the provision will not apply to any such distribution
or acquisition (1) made 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 Internal Revenue Service on or before such date, or (3)
described in a public announcement or filing with the Securities and Exchange
Commission on or before such date.
Modify holding period for dividends-received deduction.--The
bill modifies the present-law 46-day holding period for the dividends -received
deduction (or 91-day period for certain dividends on preferred stock) to
require that the holding period be met with respect to each dividend received.
Present law restrictions against diminishing risk of loss likewise apply
to each dividend under the bill.
The bill is generally effective for dividends paid or accrued after
the 30th day after the date of enactment. However, the bill will not apply
to certain dividends received within two years of the date of enactment
if the dividend is paid with respect to stock held on June 8, 1997, and
all times thereafter until the dividend is received, and certain other
requirements are continuously met with respect to identified risk-reduction
Other corporate provisions.
Corporate tax shelter registration.--The bill requires that
certain confidential corporate tax shelters register with the Treasury
and makes parallel changes to the substantial understatement penalty.
Treat certain preferred stock as "boot".--The bill
requires certain preferred stock that is received in otherwise tax-free
transactions to be treated as taxable "boot". Thus, when a taxpayer
exchanges property for this preferred stock in a transaction that otherwise
qualifies as tax-free, gain but not loss is recognized.
The bill is effective for transactions after June 8, 1997, but will
not apply to such transactions (1) made 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 Internal Revenue Service on or before
such date, or (3) described in a public announcement or filing with the
Securities and Exchange Commission on or before such date.
Payments to attorneys.--The bill requires the reporting to
the IRS of certain payments made to attorneys.
Payments to corporations performing services for Federal agencies.--The
bill lowers the information reporting threshold with respect to information
reporting on persons receiving contract payments from certain Federal agencies.
Veterans Administration disclosure.--The bill provides for
the continuation of authorization for the disclosure of tax return information
for purposes of the administration of certain veterans programs.
Continuous levy.--The bill establishes continuous levy by
the IRS and limits the exemptions from levy.
Consistency rule for beneficiaries of trusts and estates.--The
bill requires a beneficiary of an estate or trust to file its return in
a manner that is consistent with the information received from the estate
or trust, unless the beneficiary identifies the inconsistency.
Excise tax provisions
Extend and modify the Airport and Airway Trust Fund excise taxes.--The
present-law Airport and Airway Trust Fund excise taxes (commercial passenger
ticket, commercial cargo shipping invoice, and noncommercial aviation fuels)
are extended for 10 years, through September 30, 2007.
The commercial passenger taxes are modified, as follows:
(1) The present 10-percent ad valorem tax rate is replaced
with a combination ad valorem and flight segment dollar rate tax.
The revised rates are --
October 1, 1997 - September 30, 1998
9% of fare plus $1 per domestic
October 1, 1998 - September 30, 1999
8% of fare plus $2 per domestic
October 1, 1999 - December 31, 1999
7.5% of fare plus $2.25 per domestic
After December 31, 1999, the ad valorem rate remains at 7.5
percent, but the domestic flight segment rate will increase to $2.50 (calendar
year 2000), $2.75 (calendar year 2001), and $3 (calendar year 2002). After
2002, the $3 rate is indexed to the consumer price index.
(2) The present $6 per passenger international departure tax is increased
to $12 per passenger and that rate is extended to international arrivals
as well. (The $6 rate is retained for the international portion of certain
domestic flights between the continental United States and Alaska or Hawaii.)
The new rates are indexed to the consumer price index after 1998.
(3) A special rule is provided reducing the tax rate for flight segments
to or from certain small, rural airports to 7.5 percent, with no domestic
flight segment tax being imposed on those flight segments.
Additionally, clarification is provided that the ad valorem
portion of the tax (at the 7.5 percent rate) applies to payments to airlines
for frequent flyer and similar awards from banks and credit card companies,
merchants, frequent flyer program partners (e.g., other airlines, hotels,
or rental car companies), and other businesses.
Air carriers are made secondarily liable for payment of the Airport
and Airway Trust Fund excise taxes.
Certain tax deposits rules are modified for 1997 and 1998.
These provisions generally apply to transportation beginning after
September 30, 1997.
Extend diesel fuel excise tax rules to kerosene.--The bill
provides that kerosene generally will be taxed the same as diesel fuel.
Thus, when kerosene is removed from pipeline terminals, it either will
be taxed (at 24.4 cents per gallon) or dyed (if destined for nontaxable
use). Exceptions are provided allowing undyed kerosene to be sold without
tax for certain aviation and feedstock uses. Additionally, ultimate vendors
are allowed to claim expedited refunds for undyed kerosene sold for use
in space heaters. To ensure availability of dyed kerosene, eligibility
of terminals to store untaxed fuel is conditioned on offering dyed fuel
to customers. The provision is effective after June 30, 1998.
Reinstate Leaking Underground Storage Trust Fund excise tax.--The
bill reinstates an expired 0.1-cent-per-gallon excise tax on gasoline,
diesel fuel, special motor fuels, aviation fuels, and inland waterway fuels
for a 7-1/2 year period beginning on October 1, 1997, through March 31,
2005. Revenues from this tax will be deposited in the Leaking Underground
Storage Tank Trust Fund to finance cleanup of damage resulting from underground
petroleum storage tanks.
Application of communications excise tax to prepaid telephone
cards.--The bill clarifies that any amounts paid to communications
service providers (in cash or in kind) for the right to award or otherwise
distribute free or reduced-rate telephone service (i.e., local or toll
telephone service) are treated as amounts paid for taxable communication
services, subject to the 3-percent ad valorem tax rate.
Modify treatment of tires under the heavy vehicle retail excise
tax.--The bill substitutes a credit for tire tax paid for a current
tax deduction in calculating the 12-percent retail excise on heavy highway
vehicles. The provision is effective after December 31, 1997.
Increase tobacco excise taxes.--H.R. 2015 (the spending provision
of budget reconciliation) includes two scheduled increases in the Federal
excise tax on cigarettes and other tobacco products. For small cigarettes,
these increases are 10 cents per pack effective January 1, 2000, and an
additional 5 cents per pack, effective January 1, 2002. Proportional increases
are provided for other currently taxable tobacco products, and "roll-your-own"
tobacco is taxed at the same rate as pipe tobacco.
The bill provides that amounts equal to these tax increases are to
be credited against payments required under future Federal legislation
implementing the June 20, 1997 proposed tobacco industry settlement.
Provisions relating to
Extend UBIT rules to second-tier subsidiaries and amend control
test.--The bill modifies section 512(b)(13) (which treats otherwise
excluded rent, royalty, annuity, and interest income as unrelated business
taxable income if such income is received from certain controlled subsidiaries
of a tax-exempt organization) The bill provides that "control"
for this purpose generally means ownership by vote or value of more than
50 percent of the ownership interests in the entity. In addition, the bill
applies the constructive ownership rules of section 318 for purposes section
512(b)(13). The provision generally applies to taxable years beginning
after the date of enactment. However, the provision does not apply to payments
made during the first two taxable years beginning on or after the date
of enactment if such payments are made pursuant to a binding written contract
in effect on June 8, 1997, and at all times thereafter before such payment.
Repeal grandfather rule with respect to pension business of certain
insurers.--The bill repeals the grandfather rules applicable to that
portion of the business of the Teachers Insurance Annuity Association-College
Retirement Equities Fund which is attributable to pension business and
to that portion of the business of Mutual of America which is attributable
to pension business. Special rules relating to the change in method of
accounting and the basis of assets apply, and reserve weakening after June
8, 1997, is treated as occurring in 1998. The provision applies for taxable
years beginning after December 31, 1997.
Inclusion of income from notional principal contracts and stock
lending transactions under subpart F.--The bill adds to the definition
of foreign personal holding company income for subpart F purposes net income
from all types of notional principal contracts and payments in lieu of
dividends derived from equity securities lending transactions. The bill
provides an expanded dealer exception from the definition of foreign personal
holding company income.
Restrict like-kind exchange rules for certain personal property.--No
gain or loss is recognized if property held for productive use in a trade
or business or for investment is exchanged for property of a "like-kind"
which is to be held for productive use in a trade or business or for investment.
In general, any kind of real estate is treated as of a like-kind with other
real property as long as the properties are both located either within
or both outside the United States.
The bill provides that personal property predominantly used within
the United States and personal property predominantly used outside the
United States are not "like-kind" properties. 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.
Impose holding period requirement for claiming foreign tax credits
with respect to dividends.--The bill disallows the foreign tax credits
normally available with respect to a dividend from a foreign corporation
or regulated investment company if the shareholder has not held the stock
for 16 days in the case of common stock and 46 days in the case of preferred
Limitation on treaty benefits for payments to hybrid entities.--The
bill limits the availability of a reduced rate of withholding tax under
an income tax treaty in the case of income derived through a hybrid entity
in order to prevent tax avoidance.
Interest on underpayment reduced by foreign tax credit carryback.--The
bill provides that, if an underpayment for a taxable year is reduced or
eliminated by a foreign tax credit carryback from a subsequent taxable
year, such carryback does not affect the computation of interest on the
underpayment for the period ending with the filing date for such subsequent
taxable year in which the foreign taxes were paid or accrued.
Determination of period of limitations relating to foreign tax
credits.--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.
Repeal special exception to foreign tax credit limitation for
alternative minimum tax purposes.--Under present law, the combination
of the taxpayer's net operating loss carryover and foreign tax credits
cannot reduce the taxpayer's alternative minimum tax liability by more
than 90 percent of the amount determined without these items. The Omnibus
Budget Reconciliation Act of 1989 ("1989 Act") provided a special
exception to the limitation on the use of the foreign tax credit against
the tentative minimum tax. The bill repeals this special exception for
taxable years beginning after the date of enactment.
Pension and employee benefit
The bill contains several revenue-increase provisions relating to
pension and employee benefits. These provisions: (1) increase the amount
of benefits that may be cashed out of a retirement plan from $3,500 to
$5,000; (2) repeal the 15-percent excise tax applicable to excess plan
distributions and excess retirement plan accumulations; (3) increase the
penalty tax on prohibited transactions from 10-percent to 15-percent; (4)
revise the basis recovery rules related to retirement plan payments; and
(5) permit employees to elect cash compensation in lieu of nontaxable parking
Phase out suspense accounts for certain large farm corporations.--The
bill repeals the present-law ability of a family farm corporation to establish
a suspense account when it is required to change from the cash method to
an accrual method of accounting. Thus, any family farm corporation required
to change to an accrual method of accounting would restore the section
481 adjustment applicable to the change in gross income ratably over a
10-year period beginning with the year of change.
In addition, any taxpayer with an existing suspense account is required
to restore the account into income ratably over a 20-year period beginning
in the first taxable year beginning after June 8, 1997. The amount required
to be restored to income for a taxable year pursuant to the 20-year spread
period shall not exceed the net operating loss of the corporation for the
year (in the case of a corporation with a net operating loss) or 50 percent
of the net income of the taxpayer for the year (for corporations with taxable
income). The bill repeals the present-law requirement that a corporation
restores a portion of its suspense account as its gross receipts decreases.
Modify net operating loss ("NOL") carryback and carryforward
rules.--The bill limits the NOL carryback period to two years (from
three years) and extends the NOL carryforward period to 20 years (from
15 years). The 3-year carryback is retained for NOLs attributable to casualty
losses of individuals and NOLs of farmers and small businesses attributable
to losses incurred in Presidentially declared disaster areas. The provision
is effective for NOLs arising in taxable years beginning after the date
Expand the limitations on deductibility of premiums and interest
with respect to life insurance, endowment and annuity contracts.--Under
the bill, the present-law premium deduction limitation with respect to
life insurance contracts is modified to provide that no deduction is permitted
for premiums paid on any life insurance, annuity or endowment contract,
if the taxpayer is directly or indirectly a beneficiary under the contract.
Also, generally, no deduction is allowed for interest paid or accrued on
any indebtedness with respect to life insurance policy, or endowment or
annuity contract, covering the life of any individual. In addition, in
the case of a taxpayer other than a natural person, no deduction is allowed
for the portion of the taxpayer's interest expense that is allocable to
unborrowed policy cash surrender values with respect to any life insurance
policy or annuity or endowment contract issued after June 8, 1997. The
provisions apply generally with respect to contracts issued after June
Allocation of basis of properties distributed to a partner by
a partnership.--The bill modifies the basis allocation rules for distributee
partners, so that the basis of distributed property is allocated generally
in proportion to the fair market values of the property. The provision
applies to partnership distributions after the date of enactment.
Treatment of inventory items of a partnership.--The bill eliminates
the 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. The provision is effective for sales and exchanges,
and distributions after the date of enactment, with an exception for written
binding contracts in effect on June 8, 1997.
Treatment of appreciated property contributed to a partnership.--The
bill extends from 5 years to 7 years the period in which a partner recognizes
pre-contribution gain with respect to property contributed to a partnership.
The provision is effective for property contributed to a partnership after
June 8, 1997. An exception is provided for property contributed to a partnership
pursuant to a written binding contract in effect on June 8, 1997.
Earned income credit compliance provisions
a. Deny EIC eligibility for prior acts of
recklessness or fraud
Under the bill, a taxpayer who fraudulently claims the earned income
credit (EIC) is ineligible to claim the EIC for a subsequent period of
10 years. In addition, a taxpayer who erroneously claims the EIC due to
reckless or intentional disregard of rules or regulations is ineligible
to claim the EIC for a subsequent period of two years. These sanctions
are in addition to any other penalty imposed under present law. The determination
of fraud or of reckless or intentional disregard of rules or regulations
are made in a deficiency proceeding (which provides for judicial review).
The provision is effective for taxable years beginning after December 31,
b. Recertification required when taxpayer
found to be ineligible for EIC in past
Under the bill, a taxpayer who has been denied the EIC as a result
of deficiency procedures is ineligible to claim the EIC in subsequent years
unless evidence of eligibility for the credit is provided by the taxpayer.
To demonstrate current eligibility, the taxpayer is required to meet evidentiary
requirements established by the Secretary of the Treasury. Failure to provide
this information when claiming the EIC is treated as a mathematical or
clerical error. If a taxpayer is recertified as eligible for the credit,
the taxpayer is not required to provide this information in the future
unless the IRS again denies the EIC as a result of a deficiency procedure.
Ineligibility for the EIC under the provision is subject to review by the
courts. The provision is effective for taxable years beginning after December
c. Due diligence requirements for paid preparers
Under the bill, return preparers are required to fulfill certain
due diligence requirements with respect to returns they prepare claiming
the EIC. The penalty for failure to meet these requirements is $100. This
penalty is in addition to any other penalty imposed under present law.
The provision is effective for taxable years beginning after December 31,
d. Modify the definition of AGI used to
phaseout the EIC
Under present law, the EIC is phased out above certain income levels.
For individuals with earned income (or AGI, if greater) in excess of the
beginning of the phaseout range, the maximum credit amount is reduced by
the phaseout rate multiplied by the amount of earned income (or AGI, if
greater) in excess of the beginning of the phaseout range. The definition
of AGI used for the phase out of the earned income credit disregards certain
losses. The losses disregarded are: (1) net capital losses (if greater
than zero); (2) net losses from trusts and estates; (3) net losses from
nonbusiness rents and royalties; and (4) 50 percent of the net losses from
business, computed separately with respect to sole proprietorships (other
than in farming), sole proprietorships in farming, and other businesses.
The bill modifies the definition of AGI used for phasing out the
credit by adding two items of nontaxable income and changing the percentage
of certain losses disregarded. The two items added are: (1) tax-exempt
interest, and (2) nontaxable distributions from pensions, annuities, and
individual retirement arrangements (but only if not rolled over into similar
vehicles during the applicable rollover period). The bill also increases
the amount of net losses from businesses, computed separately with respect
to sole proprietorships (other than farming), sole proprietorships in farming,
and other businesses disregarded from 50 percent to 75 percent. The provision
is effective for taxable years beginning after December 31, 1997.
Eligibility for income forecast method.--The bill limits the
types of property to which the income forecast method may be applied. Under
the bill, the income forecast method is available to motion picture films,
television films and taped shows, books, patents, master sound recordings,
copyrights, and other such property as designated by the Secretary of the
In addition, consumer durables subject to rent-to-own contracts are
provided a three-year recovery period and a four-year class life for MACRS
purposes (and would not be eligible for the income forecast method). Such
property generally is described in Rev. Proc. 95-38, 1995-34 I.R.B. 25.
The provisions generally are effective for property placed in service
after the date of enactment.
Modify the exception to the related party rule of section 1033
for individuals to only provide an exception for de minimis amounts.--Under
section 1033, gain realized by a taxpayer from certain involuntary conversions
of property is deferred to the extent the taxpayer purchases property similar
or related in service or use to the converted property within a specified
replacement period of time. Corporations are not entitled to defer gain
under section 1033 if the replacement property or stock is purchased from
a related person.
The bill expands the present-law denial of the application of section
1033 to any other taxpayer (including an individual) that acquires replacement
property from a related party unless the taxpayer has aggregate realized
gain of $100,000 or less for the taxable year with respect to converted
property with aggregate realized gains. The provision applies to involuntary
conversions occurring after June 8, 1997.
v Repeal of installment sale accounting for certain manufacturers.--The
bill repeals a provisions that permits the use of the installment method
of accounting for certain sales by manufacturers to dealers effective for
taxable years beginning one year after the date of enactment.
Extension of Federal unemployment surtax.--The bill extends
the temporary surtax rate through December 31, 2007. It also increases
the limit from 0.25 percent to 0.50 percent of covered wages on the Federal
Unemployment Account (FUA) in the Unemployment Trust Fund. The provision
is effective for labor performed on or after January 1, 1999.
Additional requirements for charitable remainder trusts.--Under
the bill, a trust cannot be a charitable remainder annuity trust if the
annuity for any year is greater than 50 percent of the initial fair market
value of the trust's assets or be a charitable remainder unitrust if the
percentage of assets that are required to be distributed at least annually
is greater than 50 percent effective for transfers to a trust made after
June 18, 1997. In addition, the bill requires that the value of the charitable
remainder with respect to any transfer to a qualified charitable remainder
annuity trust or charitable remainder unitrust be at least 10 percent of
the net fair market value of such property transferred in trust on the
date of the contribution to the trust, effective for transfers to a trust
made after June 28, 1997. The bill contains special rules which deal with
revocations and reformations of trusts created after that date that do
not meet the 10-percent requirement. In addition, the 10-percent requirement
does not apply to trusts created by will or other testamentary instrument
if the settler dies before January 1, 1999 and the will or other testamentary
instrument is not changed after June 28, 1997, or the settlor is under
a mental disability on that date. Finally, the bill provides that additional
contributions made after July 28, 1997, to a charitable remainder unitrust
created before July 29, 1997, that does not meet the 10-percent requirement
with respect to the additional contribution, is treated, under Treasury
regulations as if those contributions were made to a new trust that does
not affect the status of the original unitrust as a charitable remainder
Modify general business credit carryback and carryforward rules.--The
bill reduces the carryback period for the general business credit to one
year (from three years) and extends the carryforward period to 20 years
(from 15 years). The provision is effective for credits arising in taxable
years beginning after December 31, 1997.
Using Federal case registry of child support orders for tax enforcement
purposes.--The Personal Responsibility and Work Opportunity Reconciliation
Act of 1996 mandated the creation of a Federal Case Registry of Child Support
Orders (the FCR) by October 1, 1998. Although HHS has not yet issued final
regulations, the FCR is required to include the names, and the State case
identification numbers of individuals who are owed or who owe child support
or for whom paternity is being established. It may also include the social
security numbers (SSNs) of these individuals.
Not later than October 1, 1999, the Secretary of the Treasury will
have access to the Federal Case Registry of Child Support Orders. Also,
by October 1, 1999, the data elements on the State Case Registry will include
the SSNs of children covered by cases in the Registry, and the States will
provide the SSNs of these children to the FCR.
The provision is effective on October 1, 1999.
Expanded SSA records for tax enforcement.--Under the Family
Support Act of 1988, States must require each parent to furnish their social
security number (SSN) for birth records. Parents can apply directly to
the Social Security Administration (SSA) for an SSN for their child; or,
in most states, they may apply for the child's SSN when obtaining a birth
certificate. On an individual's SSN application, the SSA currently requires
the mother's maiden name but not her SSN.
SSA is required to obtain social security numbers (SSNs) of both
parents on minor children's applications for SSNs. The SSA will provide
this information to the IRS as part of the Data Master File ("DM-1
file"). The conferees anticipate that 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 180 days after the date of enactment.
Treatment of amounts received under the work requirements of the
Personal Responsibility and Work Opportunity Act of 1996.--The bill
provides that workfare payments are not wages for purposes of the earned
income credit. There is no inference intended with respect to whether workfare
payments otherwise qualify as wages for purposes of income and employment
taxes or as wages for purposes of an employer's eligibility for the work
opportunity tax credit and the welfare-to-work tax credit. Also, there
is no inference intended with respect to whether workfare payments are
wages for purposes of the earned income credit before enactment of this
Modification of estimated tax requirements.--Under present
law, an individual with an AGI of more than $150,000 as shown on the return
for the preceding taxable year generally does not have an underpayment
of estimated tax if he or she makes timely estimated tax payments at least
equal to: (1) 110 percent of the tax shown on the return of the individual
for the preceding year (the "110 percent of last year's liability
safe harbor") or (2) 90 percent of the tax shown on the return for
the current year.
The bill changes the 110 percent of last year's liability safe harbor
to be a 100 percent of last year's liability safe harbor for taxable years
beginning in 1998, a 105 percent of last year's liability safe harbor for
taxable years beginning in 1999, 2000, and 2001, and a 112 percent of last
year's liability safe harbor for taxable years beginning in 2002. In addition,
no estimated tax penalties will be imposed under section 6654 or 6655 for
any period before January 1, 1998, for any payment the due date of which
is before January 16, 1998, with respect to an underpayment to the extent
the underpayment is created or increased by a provision of the Act.
TITLE XI.--FOREIGN TAX PROVISIONS
Simplify foreign tax credit
limitation for individuals
The bill exempts individuals with no more than $300 ($600 in the
case of married persons filing jointly) of creditable foreign taxes, and
no foreign source income other than passive income, from the foreign tax
credit limitation rules.
Simplify translation of
The bill generally provides for accrual-basis taxpayers to translate
foreign taxes at the average exchange rate for the taxable year to which
such taxes relate. The bill also provides that, in cases where the foreign
taxes actually are paid more than two years after such accrual, taxes eligible
for the direct foreign tax credit are taken into account for the year to
which they relate and taxes eligible for the indirect foreign tax credit
are taken into account for the year in which paid; in all such cases the
taxes subsequently paid are translated at the exchange rate for the time
Election to use simplified
foreign tax credit limitation for alternative minimum tax purposes
The bill permits 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.
Simplify treatment of
personal transactions in foreign currency
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
Simplify foreign tax credit
limitation for dividends from 10/50 companies
Under the bill, dividends paid by a so-called 10/50 company out of
earnings and profits for taxable years beginning after 2002 will be subject
to look-through treatment for foreign tax credit limitation purposes (i.e.,
such dividends are characterized based on the character of the underlying
income of the company). In the case of dividends paid by 10/50 companies
out of earnings and profits for taxable years beginning before 2003, a
single foreign tax credit limitation generally will apply to such dividends
received by the taxpayer from all 10/50 companies (other than any 10/50
company that qualifies as a passive foreign investment company). The provision
is effective for taxable years beginning after December 31, 2002.
General provisions affecting
treatment of controlled foreign corporations
The bill makes several modifications to the treatment of controlled
foreign corporations and lower-tier controlled foreign corporations. In
addition, the bill extends the application of the indirect foreign tax
credit to taxes paid or accrued by fourth- through sixth-tier controlled
Modification of passive
foreign investment company provisions to eliminate overlap with subpart
F, to allow mark-to-market election, and to require measurement based on
value for PFIC asset test
Under the bill, a shareholder that is subject to the subpart F rules
with respect to stock of a passive foreign investment company that is also
a controlled foreign corporation is not subject also to the passive foreign
investment company provisions with respect to the same stock. The bill
also allows a shareholder of a passive foreign investment company to make
a mark-to-market election with respect to the stock of the passive foreign
investment company, provided that such stock is marketable. Finally, the
bill requires that the measurement of assets for purposes of the PFIC asset
test be based on value in the case of publicly-traded corporations.
Simplify formation and
operation of international joint ventures
The bill repeals the excise tax that applies to transfers of appreciated
property by U.S. persons to certain foreign entities. The bill also requires
enhanced information reporting by U.S. persons with respect to their interests
in foreign partnerships.
Modification of reporting
threshold for stock ownership of a foreign corporation
The bill increases the stock ownership threshold that results in
an information reporting obligation with respect to a foreign corporation
from 5 percent to 10 percent.
Transition rule for certain
The bill grants regulatory authority to allow nongrantor trusts that
had been treated as U.S. trusts prior to the enactment of the Small Business
Job Protection Act of 1996 to elect to continue to be treated as U.S. trusts.
Simplify stock and securities
trading safe harbor.
The bill modifies the "safe harbor" from U.S. net income
taxation for foreign persons that trade in stocks or securities for their
own accounts. The bill eliminates the safe harbor's requirement for both
partnerships and foreign corporations that the entity's principal office
not be within the United States.
Clarification of determination
of foreign taxes deemed paid
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 the foreign corporation
in prior taxable years.
Clarification of foreign
tax credit limitation for financial services income
The bill clarifies that the exclusion from passive income for income
that is treated as high-taxed income does not apply for purposes of the
separate foreign tax credit limitation applicable to financial services
Eligibility of licenses
of computer software for foreign sales corporation benefits
The bill provides that computer software licensed for reproduction
abroad is not excluded from the definition of export property for
purposes of the foreign sales corporation provisions. Accordingly, computer
software that is exported with a right to reproduce is eligible for the
benefits of the foreign sales corporation provisions.
Increase dollar limitation
on section 911 exclusion
Under the bill, the $70,000 limitation on the exclusion for foreign
earned income is increased to $80,000, in increments of $2,000 each year
beginning in 1998, and is indexed for inflation beginning in 2008.
Treatment of certain securities
positions under the subpart F investment in U.S. property rules
The bill provides two additional exceptions from the definition of
U.S. property for purposes of the subpart F rules. These exceptions cover
collateral or margin deposit and repurchase agreement transactions entered
into by a securities or commodities dealer in the ordinary course of its
Exception from foreign
personal holding company income under subpart F for active financing income
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.
Such exception is applicable only for taxable years beginning in 1998.
Treat service income of
nonresident alien individuals earned on foreign ships as foreign source
income and disregard U.S. presence of such individuals
The bill generally treats 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
exempt from U.S. income and withholding tax. The bill further provides
that any day that such an individual is present in the U.S. as a crew member
is disregarded for purposes of determining whether the individual is treated
as a U.S. resident for tax purposes, unless the individual otherwise engages
in trade or business in the United States on such day.
TITLE XII.--SIMPLIFICATION PROVISIONS
RELATING TO INDIVIDUALS AND BUSINESSES
Increased standard deduction for dependent children.--The
bill increases the standard deduction for a taxpayer with respect to whom
a dependency exemption is allowed on another taxpayer's return to the lesser
of (1) the standard deduction for individual taxpayers or (2) the greater
of: (a) $500 (indexed for inflation as under present law), or (b) the individual's
earned income plus $250, effective for taxable years beginning after December
31, 1997. The $250 amount is indexed for inflation after 1998. In addition,
the bill increases the AMT exemption amount 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, effective for taxable years beginning after December 31, 1997.
The $5,000 amount is indexed for inflation after 1998.
Estimated tax for individuals.--The bill increases the de
minimis threshold for estimated tax payments from $500 to $1000 for individuals.
Rural mail carriers.--The bill simplifies the treatment of
certain reimbursed expenses of rural letter carriers' vehicles.
Travel expenses of certain Federal employees.--The bill simplifies
the tax treatment of travel expenses of Federal employees participating
in a Federal criminal investigation.
Payment of taxes by credit card.--The bill permits the payment
of taxes by commercially acceptable means (such as credit cards). The bill
prohibits the payment of any credit card fees by the Treasury.
Modifications to look-back method for long-term contracts.--The
bill provides two safe harbors such that a taxpayer may elect not to apply
the look-back method for de minimis changes in estimated income from a
long-term contract. In addition, the bill provides that for purposes of
the look-back method, only one rate of interest is to apply for each accrual
The provisions apply to contracts completed in taxable years ending
after the date of enactment.
Minimum tax treatment of certain property and casualty insurance
companies.--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. The provision is effective for taxable years
beginning after December 31, 1997.
Treatment of construction allowances provided to lessees.--The
bill provides that the gross income of a lessee does not include amounts
received in cash (or treated as a rent reduction) from a lessor under a
short-term lease of retail space for the purpose of the lessee's construction
or improvement of qualified long-term real property for use in the lessee's
trade or business at such retail space.
In addition, the lessor must treat the amounts expended on the construction
allowance as nonresidential real property owner by the lessor. Reporting
requirements are provided to ensure that both the lessor and lessee treat
such amounts as nonresidential real property. The provision applies to
leases entered into after the date of enactment.
Simplified flow-through for electing large partnerships.--The
bill modifies the tax treatment of an electing large partnership (generally,
any partnership that elects under the provision, if the number of partners
in the preceding taxable year is 100 or more) and its partners. The provision
provides that each partner takes into account separately the partner's
distributive share of certain items of partnership income, gain, loss,
deduction and credit. The provisions generally apply to partnership taxable
years beginning after December 31, 1997.
Simplified audit procedures for electing large partnerships.--The
bill creates a new audit system for electing large partnerships (generally,
any partnership that elects under the reporting provisions, if the number
of partners in the preceding taxable year is 100 or more). Partnership
adjustments generally flow through to the partners for the year in which
the adjustment takes effect. In lieu of flowing an adjustment through to
its partners, the partnership may elect to pay an imputed underpayment.
The provision applies to partnership taxable years beginning after December
Due date for furnishing information to partners of electing large
partnerships.--The bill provides that an electing large partnership
must furnish information returns to partners by the first March 15 following
the close of the partnership's taxable year. Electing large partnerships
are those partnerships subject to the simplified reporting and audit rules
(generally, any partnership that elects under the reporting provision,
if the number of partners in the preceding taxable year is 100 or more).
The provision is effective for partnership taxable years beginning after
December 31, 1997.
Partnership returns required on magnetic media.--The bill
provides generally that any partnership is required to provide the tax
return of the partnership (Form 1065), as well as copies of the schedule
sent to each partner (Form K-1), to the Internal Revenue Service on magnetic
media. An exception is provided for partnerships with 100 or fewer partners.
The provision is effective for partnership taxable years beginning after
December 31, 1997.
Treatment of partnership items of individual retirement arrangements.--The
bill modifies the filing threshold for an IRA with an interest in a partnership
that is subject to the partnership-level audit rules. A fiduciary of an
IRA that receives taxable income from such a partnership of less than $1,000
(before the $1,000 specific deduction) is not required to file an income
tax return if the IRA does not have any other income from an unrelated
trade or business. The provision applies to taxable years beginning after
December 31, 1997.
Other partnership audit rules.--The conference agreement contains
provisions to simplify the partnership audit rules enacted in the Tax Equity
and Fiscal Responsibility Act of 1982 (TEFRA).
Closing of partnership taxable year with respect to deceased partner.--The
bill provides that the taxable year of a partnership closes with respect
to a partner whose entire interest in the partnership terminates, whether
by death, liquidation or otherwise. The provision is effective for partnership
taxable years beginning after December 31, 1997.
The bill modifies the following provisions relating to the requirements
for qualification as, and the taxation of, a REIT, effective for taxable
years beginning after the date of enactment:
Alternative penalties for failure to request information from
shareholders.--The bill replaces he rule that disqualifies a REIT for
any year in which the REIT failed to comply with regulations to ascertain
its ownership, with an intermediate penalty of $25,000 ($50,000 for intentional
violations) failing to do so. In addition, a REIT that complied with the
regulations for ascertaining its ownership, and which did not know, or
have reason to know, that it was so closely held as to be classified as
a personal holding company, would not be treated as a personal holding
De minimis rule for tenant service income.--The bill permits
a REIT to render a de minimis amount of impermissible services to
tenants, or in connection with the management of property, and still treat
amounts received with respect to that property as rent. The value of the
impermissible services could not exceed one percent of the gross income
from the property.
Attribution rules applicable to tenant ownership and independent
contractors.-- The bill modifies the rules relating to attribution
to partnerships for purposes of defining qualified rent and independent
contractor , so that attribution would occur only when a partner owns a
25 percent or greater interest in the partnership.
Credit for tax paid by REIT on retained capital gains.-- The
bill permits a REIT to elect to retain and pay income tax on net long-term
capital gains it received during the tax year, just as a RIC is permitted
under present law.
Repeal of 30-percent gross income requirement.--The bill repeals
the rule that requires less than 30 percent of a REIT's gross income be
derived from gain from the sale or other disposition of stock or securities
held for less than one year, certain real property held less than four
years, and property that is sold or disposed of in a prohibited transaction.
Modification of earnings and profits for determining whether REIT
has earnings and profits from non-REIT year.-- The bill changes the
ordering rule for purposes of the requirement that newly-electing REITs
distribute earnings and profits that were accumulated in non-REIT years
so that distributions of accumulated earnings and profits generally would
be treated as made from the entity's earliest accumulated earnings and
profits, rather than the most recently accumulated earnings and profits.
Treatment of foreclosure property.--The bill lengthens the
original grace period for foreclosure property to three taxable year and
permits extension of the grace period for an additional three years by
filing a request to the IRS. A REIT could revoke an election to treat property
as foreclosure property for any taxable year. Further, the bill conforms
the definition of independent contractor for purposes of the foreclosure
property rule to the definition of independent contractor for purposes
of the general rules.
Payments under hedging instruments.-- The bill treats income
from all hedges that reduce the interest rate risk of REIT liabilities,
not just from interest rate swaps and caps, as qualifying income.
Excess noncash income.--The bill (1) expands the class of
excess noncash items to include income from the cancellation of indebtedness
and (2) extends the treatment of original issue discount and coupon interest
as excess noncash items to REITs that use an accrual method of taxation.
Prohibited transaction safe harbor.--The bill excludes from
the prohibited sales rules property that was involuntarily converted.
Shared appreciation mortgages.--The bill provides that interest
received on a shared appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject to the mortgage is sold
within 4 years of the REIT's acquisition of the mortgage pursuant to a
bankruptcy plan of the mortgagor unless the REIT acquired the mortgage
knew or had reason to know that the property subject to the mortgage would
be sold in a bankruptcy proceeding.
Wholly-owned REIT subsidiaries.--The bill permits any corporation
wholly-owned by a REIT to be treated as a qualified subsidiary, regardless
of whether the corporation had always been owned by the REIT. Where the
REIT acquired an existing corporation, the bill treats any such corporation
as being liquidated as of the time of acquisition by the REIT and then
reincorporated (thus, any of the subsidiary's pre-REIT built-in gain would
be subject to tax). In addition, any pre-REIT earnings and profits of the
subsidiary must be distributed before the end of the REIT's taxable year.
Repeal of 30-percent
requirement of regulated investment companies
The bill repeals the requirement that a regulated investment company
("RIC") must derive less than 30 percent of its gross income
from the sale or disposition of certain investments (including stock, securities,
options, futures, and forward contracts) held less than three months (the
"short-short test") (sec. 851(b)(3)) effective for taxable years
beginning after the date of enactment.
The bill provides several additional protections for taxpayers, such
as providing a reasonable cause exception for additional penalties where
one does not now exist, clarifying several aspects of the statute of limitations,
and repealing the authority to disclose whether a prospective juror has
GIFT, AND TRUST SIMPLIFICATION
The bill contains a number of simplification provisions relating
to Federal estate, gift and trust taxes that are intended to simplify administration
of the Internal Revenue Code. These provisions: (1) eliminate gift tax
filing requirements for gifts to charities; (2) clarify waivers of certain
rights of recovery; (3) provide that certain trusts created before the
enactment of the Omnibus Budget Reconciliation Act of 1990 are treated
as satisfying the withholding requirement if the governing instruments
require that all trustees be U.S. citizens or domestic corporations; (4)
provide that any debt obligation, the income from which would be eligible
for the exemption for short-term OID under section 871(g)(1)(B)(i) if such
income were received by the decedent on the date of his death, is treated
as property located outside of the United States in determining the U.S.
estate tax liability of a nonresident not a U.S. citizen; conform the treatment
of estates and trusts by (a) providing an irrevocable election to treat
a qualified revocable trust as part of the decedent's estate for Federal
income tax purposes, extending the application of the 65-day rule applicable
under current law to trusts to distributions by estates, and (c) extending
the separate share rule to estates; (6) treat an estate and a beneficiary
of that estate as related persons for purposes of sections 267 and 1239,
except in the case of a sale or exchange in satisfaction of a pecuniary
bequest; (7) allow the trustee of a pre-need funeral trust to elect special
tax treatment for such a trust; (8) clarify the treatment of certain transfers
made through a revocable trust within three years of death; (9) clarify
that the marital deduction is available with respect to a nonparticipant
spouse's interest in an annuity attributable to community property laws
where he or she predeceases the participant spouse; (10) provide the Treasury
Department with regulatory authority to treat as trusts legal arrangements
that have substantially the same effect as a trust; (11) provide an opportunity
to correct certain failures in an election to specially value certain real
property used in farming or other closely held businesses; and (12) waive
the requirement of a U.S. trustee for qualified domestic trusts.
TITLE XIV.--EXCISE TAX AND OTHER SIMPLIFICATION
Excise tax simplification
The bill includes a package of excise tax simplification provisions.
(1) Certain de minimis exceptions to the taxes on heavy highway
vehicles and luxury automobiles for after-market additions are increased
from $200 to $1000.
(2) Various changes are made to the excise taxes on distilled spirits,
wine, and beer to conform the treatment of the three beverages under various
present-law rules or to conform the Code to changes in the administration
of those taxes enacted in recent years.
(3) The Internal Revenue Service is provided expanded authority to
exempt taxpayers from registration requirements of the Code.
(4) The excise tax on arrows is replaced by a tax on four component
parts of arrows.
(5) The rules governing when modified trucks are "remanufactured"
and thus subject to the retail tax on heavy highway vehicles are clarified.
(6) Clarification is provided that skydiving flights are taxed as
noncommercial aviation subject to a fuels tax (rather than to the commercial
passenger ticket tax).
(7) A provision eliminating double taxation of certain aviation fuel
(8) Certain "deadwood" provisions are deleted from the
Tax-exempt bond provisions
Repeal of $100,000 limitation on unspent proceeds under 1-year
exception from rebate.--Under the bill, the $100,000 limit on proceeds
that may remain unspent after six months for certain governmental and qualified
501(c)(3) bonds otherwise exempt from the rebate requirement is deleted.
Thus, if at least 95 percent of the proceeds of these bonds is spent within
six months after their issuance, and the remainder is spent within one
year, the six-month exception is deemed to be satisfied. The provision
applies to bonds issued after the date of enactment.
Exception from rebate for earnings on bona fide debt service fund
under construction bond rules.--The bill exempts earnings on bond proceeds
invested in bona fide debt service funds from the arbitrage rebate requirement
and the penalty requirement of the 24-month exception if the spending requirements
of that exception are otherwise satisfied. The provision applies to bonds
issued after the date of enactment.
Repeal of debt service-based limitation on investment in certain
nonpurpose investments.--The bill repeals the 150-percent of debt service
yield restriction. The provision applies to bonds issued after the date
Repeal of expired provisions relating to student loan bonds.--Present
law includes two special exceptions to the arbitrage rebate and pooled
financing temporary period rules for certain qualified student loan bonds.
These exceptions applied only to bonds issued before January 1, 1989. These
special exceptions are deleted as "deadwood."
Tax Court Provisions
The bill clarifies several aspects of the procedures utilized in
the Tax Court, and establishes jurisdiction for the Tax Court to determine
Due date for first quarter estimated tax payments by private foundations.--The
bill provides that a calendar-year foundation's first-quarter estimated
tax payment is due on May 15th (which is the same day that its annual return,
Form 990-PF, for the preceding year is due). The provision applies to taxable
years beginning after the date of enactment.
Withholding of Puerto Rico taxes for Federal employees.--The
bill provides the authority for the withholding of Commonwealth income
taxes from the wages of Federal employees.
Certain notices disregarded.--The bill provides that certain
notices are to be disregarded under the provision increasing the interest
rate on large corporate underpayments.
AND EMPLOYEE BENEFIT PROVISIONS
The bill contains a variety of miscellaneous provisions relating
to pensions and other benefits. Several provisions apply to State and local
governmental plans including an exemption from the discrimination rules,
a portability provision which permits employees participating in governmental
plans to purchase additional service credit for their retirement benefit,
and provision which provides for an income exclusion for disability payments
to public safety employees.
The bill contains certain rules relating to ESOPs of S corporations,
including the repeal of the application of the unrelated business taxable
income rules to S corporation income. The bill contains a provision which
removes a cap on the funding limitation applicable to certain defined benefit
plans, and includes a requirement that cash or deferred arrangements provide
diversification of investments (the Boxer amendment). The bill increases
the 150-percent of current liability full funding limit.
In addition, the bill provides tax sanctions with respect to the
requirements of The Newborns' and Mothers' Health Protection Act of 1996
and The Mental Health Parity Act of 1996.
The bill also contains pension simplification provisions which address
a variety of plan administration issues including the use of new technologies
in retirement plans, the elimination of paperwork burdens on plans, a modification
to the antiassignment and alienation rules, and a simplification of the
rollover rules applicable to qualified retirement plans.
The bill contains technical, clerical, and conforming amendments
to the Small Business Job Protection Act of 1996, the Health Insurance
Portability and Accountability Act of 1996, the Taxpayer Bill of Rights
2, and other recently enacted legislation.
TAX BENEFITS SUBJECT TO THE LINE ITEM VETO ACT
The bill identifies 79 provisions in the bill that are subject to
the President's cancellation authority under the Line Item Veto Act.
1. This document may be cited as follows: Summary
of Revenue Provisions of H.R. 2014 ("Taxpayer Relief Act of 1997")
(JCX-40-97), August 1, 1997.
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