Scheduled for Markup by the Senate Committee on Finance on March 31, 1998
Prepared by the Staff of the Joint Committee on Taxation March 26, 1998 / JCX-18-98

CONTENTS

INTRODUCTION 1

I. Description of Technical Corrections to the Taxpayer Relief Act of 1997 2

A. Amendments to Title I of the 1997 Act Relating to the Child Credit 2

1. Stacking rules for the child credit under the limitations based on tax liability 2
   
2. Treatment of a portion of the child credit as a supplemental child credit 3
   

B. Amendments to Title II of the 1997 Act Relating to Education Incentives 5

1. Clarifications to HOPE and Lifetime Learning tax credits 5
   
2. Education IRAs 6
   
3. Treatment of cancellation of certain student loans 8
   
4. Deductibility of student loan interest 9
   
5. Enhanced deduction for corporate donations of computers 10
   
6. Qualified State tuition programs 11
   
7. Qualified zone academy bonds 12

C. Amendments to Title III of the 1997 Act Relating to Savings Incentives 14

1. Conversions of IRAs into Roth IRAs 14
   
2. Penalty-free distributions from IRAs for education expenses and purchase of first homes 17
   
3. Limits based on modified adjusted gross income 17
   
4. Contribution limit to Roth IRAs 18
   
5. Contribution limitations for active participation in an IRA 19

D. Amendments to Title III of the 1997 Act Relating to Capital Gains 21

1. Individual capital gain rate reductions 21
   
2. Rollover of gain from sale of qualified stock 22
   
3. Exclusion of gain on the sale of a principal residence owned and used less than two years 22
   
4. Effective date of the exclusion of gain on the sale of a principal residence 23
   

E. Amendments to Title IV of the 1997 Act Relating to Alternative Minimum Tax 24

1. Election to use AMT depreciation for regular tax purposes 24
   
2. Clarification of small business exemption 24

F. Amendments to Title V of the 1997 Act Relating to Estate and Gift Taxes 26

1. Clarification of phaseout range for 5-percent surtax to phase out benefits of the unified credit and graduated rates 26
   
2. Clarification of effective date for indexing of generation-skipping exemption 26
   
3. Coordination between unified credit and family-owned business exclusion 27
   
4. Clarification of businesses eligible for family-owned business exclusion 28
   
5. Clarification that interests eligible for family-owned business exclusion must be passed to a qualified heir 29
   
6. Clarification of "trade or business" requirement for family-owned business exclusion 29
   
7. Conversion of qualified family-owned business exclusion into a deduction 30
   
8. Other modifications to the qualified family-owned business provision 30
   
9. Clarification of interest on installment payment of estate tax on holding companies 31
   
10. Clarification on declaratory judgment jurisdiction of U.S. Tax Court regarding installment payment of estate tax 32
    
11. Clarification of rules governing revaluation of gifts 32
    
12. Clarification with respect to post-mortem conservation easements 33
    

G. Amendments to Title VII of the 1997 Act Relating to Incentives for the District of Columbia 34

H. Amendments to Title IX of the 1997 Act Relating to Miscellaneous Provisions 38

1. Clarification of effect on certain transfers to Highway Trust Fund 38
2. Clarification of Mass Transit Account portions of highway motor fuels taxes 38
   
3. Clarification of qualification for reduced rate of tax on certain hard ciders 39
   
4. Combined employment tax reporting demonstration project 40
   
5. Election for 1987 partnerships to continue exception from treatment of publicly traded partnerships as corporations 41
   
6. Depreciation limitations for electric vehicles 42
   
7. Modification of operation of elective carryback of existing net operating losses of the National Railroad Passenger Corporation ("Amtrak") 42
   

I. Amendments to Title X of the 1997 Act Relating to Revenue-Raising Provisions 44

1. Exemption from constructive sales rules for certain debt positions 44
   
2. Definition of forward contract under constructive sales rules 44
3. Treatment of mark-to-market gains of electing traders 45
   
4. Special effective date for constructive sale rules 46
   
5. Gain recognition for certain extraordinary dividends 46
   
6. Treatment of certain corporate distributions 47
   
7. Certain preferred stock treated as "boot"--statute of limitations 50
8. Certain preferred stock treated as "boot"--treatment of transferor 50
   
9. Application of section 304 to certain international transactions 51
   
10. Establish IRS continuous levy and improve debt collection 52
    
11. Clarification regarding aviation gasoline excise tax 53
    
12. Clarification of requirement that registered fuel terminals offer dyed fuel 54
    
13. Clarification of treatment of prepaid telephone cards 54
    
14. Modify UBIT rules applicable to second-tier subsidiaries 55
    
15. Clarification to provision expanding the limitations on deductibility of premiums and interest with respect to life insurance, endowment and annuity contracts 56
    
16. 16.Clarification of allocation of basis of properties distributed by a partnership 57
    
17. Clarification to the definition of modified adjusted gross income for purposes of the earned income credit phaseout 59

J. Amendments to Title XI of the 1997 Act Relating to Foreign Provisions 61

1. Application of attribution rules under PFIC provisions 61
   
2. Treatment of PFIC option holders 62
   
3. Application of PFIC mark-to-market rules to RICs 63
   
4. Interaction between the PFIC provisions and other mark-to-market rules 64
   
5. Application of foreign tax credit holding period rule to RICs 65

K. Amendments to Title XII of the 1997 Act Relating to Simplification Provisions 66

1. Travel expenses of Federal employees participating in a Federal criminal investigation 66
   
2. Effective date for provisions relating to electing large partnerships, partnership returns required on magnetic media, and treatment of partnership items of individual retirement arrangements 66
   
3. Modification of distribution rule for REITS 67

L. Amendments to Title XIII of the 1997 Act Relating to Estate, Gift and Trust Simplification 68

1. Clarification of treatment of revocable trusts for purposes of the generation-skipping transfer tax 68
   
2. Provision of regulatory authority for simplified reporting of funeral trusts terminated during taxable year 68

M. Amendments to Title XV of the 1997 Act Relating to Pensions and Employee Benefits 70

1. Treatment of certain disability payments to public safety employees 70

N. Amendments to Title XVI of the 1997 Act Relating to Technical Corrections 71

1. Application of requirements for SIMPLE IRAs in the case of mergers and acquisitions 71
2. Treatment of Indian tribal governments under section 403(b) 71

II. Technical Corrections to other Tax Legislation 73

A. Treatment of Adoption Tax Credit Carryovers 73

B. Disclosure Requirements for Apostolic Organizations 74

C. Allow Deduction for Unused Employer Social Security Credit 75

D. Earned Income Credit Qualification Rules 76

III. Differences Between Proposed Technical Corrections Contained in the Chairman's Mark and the Provisions of Title VI of H.R. 2676 78

Introduction

The Senate Committee on Finance has scheduled a markup of technical corrections provisions on March 31, 1998. This document, prepared by the staff of the Joint Committee on Taxation, provides a description of the Chairman's mark for various technical corrections to previously enacted tax legislation, primarily the Taxpayer Relief Act of 1997 ("1997 Act"). As noted in the descriptions, these technical corrections generally are proposed to be effective as if included in the original provisions to which they relate. Proposed technical corrections that are clerical in nature generally are not described in this document.

Part I of the document is a description of technical corrections to the Taxpayer Relief Act of 1997, and Part II is a description of other technical correction provisions. Part III is a brief description of the differences between the proposed technical corrections in the Chairman's mark and those included in Title VI of H.R. 2676 ("Tax Technical Corrections Act of 1997") as passed by the House on November 5, 1997.

I. Description of Technical Corrections to the Taxpayer Relief Act of 1997

A. Amendments to Title I of the 1997 Act Relating to the Child Credit

1. Stacking rules for the child credit under the limitations based on tax liability (Sec. 101 of the 1997 Act and Sec. 24 of the Code)

Present Law

Present law provides a $500 ($400 for taxable year 1998) tax credit for each qualifying child 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 a descendent of either), a stepson or stepdaughter of the taxpayer or an eligible foster child of the taxpayer. For taxpayers with modified adjusted gross income in excess of certain thresholds, the allowable child credit is phased out. The length of the phase-out range is affected by the number of the taxpayer's qualifying children.

Generally, the maximum amount of a taxpayer's child credit for each taxable year is limited to the excess of the taxpayer's regular tax liability over the taxpayer's tentative minimum tax liability (determined without regard to the alternative minimum foreign tax credit). In the case of a taxpayer with three or more qualifying children, the maximum amount of the taxpayer's child credit for each taxable year is limited to the greater of: (1) the amount computed under the rule described above, or (2) an amount equal to the excess of the sum of the taxpayer's regular income tax liability and the employee share of FICA taxes (and one-half of the taxpayer's SECA tax liability, if applicable) reduced by the earned income credit. In the case of a taxpayer with three or more qualifying children, the excess of the amount allowed in (2) over the amount computed in (1) is a refundable credit.

Nonrefundable credits may not be used to reduce tax liability below a taxpayer's tentative minimum tax. Certain credits not used as result of this rule may be carried over to other taxable years, while others may not. Special stacking rules apply in determining which nonrefundable credits are used in the current year. Generally, the stacking rules require that nonrefundable personal credits be considered first, followed by other credits, (e.g., the business credits). Refundable credits, which are not limited by the minimum tax, are not stacked until after the nonrefundable credits.

Description of Proposal

The proposal would clarify the application of the income tax liability limitation to the refundable portion of the child credit by treating the refundable portion of the child credit in the same way as the other refundable credits. Specifically, after all the other credits are applied according to the stacking rules of the income tax limitation then the refundable credits would be applied first to reduce the taxpayer's tax liability for the year and then to provide a credit in excess of income tax liability for the year.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.

2. Treatment of a portion of the child credit as a supplemental child credit (Sec. 101 of the 1997 Act and Sec. 32(m) of the Code)

Present Law

A portion of the child credit may be treated as a supplemental child credit. The amount of the supplemental child credit, if any, equals the excess of (1) $500 times the number of qualifying children up to the excess of the taxpayer's income tax liability (net of applicable credits other than the earned income credit) over the taxpayer's tentative minimum tax (determined without regard to the alternative minimum foreign tax credit) over (2) the sum of the taxpayer's regular income tax liability (net of applicable credits other than the earned income credit) and the employee share of FICA taxes (and one-half of the taxpayer's SECA tax liability, if applicable) reduced by any earned income credit amount. The supplemental child credit is treated as provided under the earned income credit and the child credit amount is reduced by the amount of the supplemental child credit.

Description of Proposal

The proposal would clarify that the treatment of a portion of the child credit as a supplemental child credit under the earned income credit (Sec. 32) and the offsetting reduction of the child credit (Sec.24) does not effect any other credit available to the taxpayer. It would also clarify that the earned income credit rules (e.g., the phaseout of the earned credit) generally do not apply to the supplemental child credit.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1997.