SUMMARY OF REVENUE PROVISIONS
CONTAINED IN LEGISLATION ENACTED
DURING THE 105TH CONGRESS
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
November 19, 1998
JCX-75-98
SUMMARY CONTENTS
INTRODUCTION
PART ONE: AIRPORT AND AIRWAY TRUST FUND EXTENSION ACT OF 1997 (H.R. 668)
PART TWO: TAXPAYER RELIEF ACT OF 1997 (H.R. 2014)
PART THREE: REVENUE PROVISIONS OF THE BALANCED BUDGET ACT OF 1997 (H.R. 2015)
PART FOUR: TAXPAYER BROWSING PROTECTION ACT (H.R. 1226)
PART FIVE: EXTENSION OF HIGHWAY TRUST FUND (S. 1519)
PART SIX: REVENUE PROVISIONS OF THE TRANSPORTATION EQUITY ACT FOR THE 21ST CENTURY (TITLE IX OF H.R. 2400)
PART SEVEN: INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998 (H.R. 2676)
PART EIGHT: TAX AND TRADE RELIEF EXTENSION ACT OF 1998 (DIVISION J OF H.R. 4328, THE OMNIBUS CONSOLIDATED AND EMERGENCY SUPPLEMENTAL APPROPRIATIONS ACT, 1999)
PART NINE: RICKY RAY HEMOPHILIA RELIEF FUND ACT OF 1998 (SEC. 103(h) OF H.R. 1023)
APPENDIX: TOPICAL INDEX TO REVENUE PROVISIONS ENACTED DURING THE 105TH CONGRESS
CONTENTS
INTRODUCTION
PART ONE: AIRPORT AND AIRWAY TRUST FUND EXTENSION ACT OF 1997 (H.R. 668)
1. Reinstate air transportation excise taxes
2. Transfer revenues to the Airport Trust Fund
3. Modify Treasury Department excise tax deposit regulations
PART TWO: TAXPAYER RELIEF ACT OF 1997 (H.R. 2014)
TITLE I.--CHILD TAX CREDIT: HEALTH CARE FOR CHILDREN
1. Child tax credit
2. Expand definition of high-risk individuals with respect to tax-exempt state-sponsored organizations providing health coverage
TITLE II.--EDUCATION TAX INCENTIVES
1. HOPE tax credit and Lifetime Learning tax credit for higher education tuition expenses
2. Deduction for student loan interest
3. Tax treatment of qualified State tuition programs and education IRAs; exclusion for certain distributions from education IRAs used to pay qualified higher education expenses
4. Treatment of cancellation of certain student loans
5. Penalty-free withdrawals from IRAs for higher education expenses
6. Employer-provided educational assistance
7. Modification of $150 million limit on qualified 501(c)(3) bonds other than hospital bonds
8. Enhanced deduction for corporate contributions of computer technology and equipment
9. Expansion of arbitrage rebate exception for certain bonds
10. Tax credit for holders of qualified zone academy bonds
TITLE III.--SAVINGS AND INVESTMENT INCENTIVES
1. Individual retirement arrangements
2. Capital gains provisions
TITLE IV.--ALTERNATIVE MINIMUM TAX PROVISIONS
1. Repeal alternative minimum tax for small businesses and repeal the depreciation adjustment
2. Repeal AMT installment method adjustment for farmers
TITLE V.--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
1. Increase in estate and gift tax unified credit
2. Indexing of certain other estate and gift tax provisions
3. Estate tax exclusion for qualified family-owned businesses
4. Reduction in estate tax for certain land subject to permanent conservation easement
5. Installment payments of estate tax attributable to closely held businesses
6. Estate tax recapture from cash leases of specially-valued property
7. Clarify eligibility for extension of time for payment of estate tax
8. Gifts may not be revalued for estate tax purposes after expiration of statute of limitations
9. Repeal of throwback rules applicable to certain domestic trusts
10. Modification of generation-skipping transfer tax for transfers to individual with deceased parents
TITLE VI.--EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS
1. Research tax credit
2. Contributions of stock to private foundations
3. Work opportunity tax credit
4. Orphan drug tax credit
TITLE VII.--DISTRICT OF COLUMBIA TAX INCENTIVES
1. Designation of D.C. Enterprise Zone
2. Empowerment zone wage credit, expensing, and tax-exempt financing
3. Zero-percent capital gains rate
4. First-time homebuyer tax credit
TITLE VIII.--WELFARE-TO-WORK TAX CREDIT
TITLE IX.--MISCELLANEOUS PROVISIONS
1. Excise tax provisions
2. Disaster relief provisions
3. Employment tax provisions
4. Small business provisions
5. Other provisions
TITLE X.--REVENUE-INCREASE PROVISIONS
1. Financial product provisions
2. Corporate organizations and reorganizations
3. Other corporate provisions
4. Administrative provisions
5. Excise tax provisions
6. Provisions relating to exempt organizations
7. Foreign provisions
8. Pension and employee benefit revenue-increase provisions
9. Other revenue-increase provisions
TITLE XI.--FOREIGN TAX PROVISIONS
1. Simplify foreign tax credit limitation for individuals
2. Simplify translation of foreign taxes
3. Election to use simplified foreign tax credit limitation for alternative minimum tax purposes
4. Simplify treatment of personal transactions in foreign currency
5. Simplify foreign tax credit limitation for dividends from 10/50 companies
6. General provisions affecting treatment of controlled foreign corporations
7. 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
8. Simplify formation and operation of international joint ventures
9. Modification of reporting threshold for stock ownership of a foreign corporation
10. Transition rule for certain trusts
11. Simplify stock and securities trading safe harbor
12. Clarification of determination of foreign taxes deemed paid
13. Clarification of foreign tax credit limitation for financial services income
14. Eligibility of licenses of computer software for foreign sales corporation benefits
15. Increase dollar limitation on section 911 exclusion
16. Treatment of certain securities positions under the subpart F investment in U.S. property rules
17. Exception from foreign personal holding company income under subpart F for active financing income
18. Treat service income of nonresident alien individuals earned on foreign ships as foreign source income and disregard U.S. presence of such individuals
TITLE XII.--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND BUSINESSES
1. Individual simplification provisions
2. Business simplification provisions
3. Partnership simplification provisions
4. REIT simplification
5. Repeal of 30-percent requirement of regulated investment companies
6. Taxpayer protections
TITLE XIII.--ESTATE, GIFT, AND TRUST SIMPLIFICATION PROVISIONS
TITLE XIV.--EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS
1. Excise tax simplification
2. Tax-exempt bond provisions
3. Tax court provisions
4. Other provisions
TITLE XV.--PENSION AND EMPLOYEE BENEFIT PROVISIONS
TITLE XVI.--TECHNICAL CORRECTIONS PROVISIONS
PART THREE: REVENUE PROVISIONS OF THE BALANCED BUDGET ACT OF 1997 (H.R. 2015)
A. Taxation of Medicare+Choice Medical Savings Accounts
B. Tax Treatment of Hospitals Which Participate in Provider-Sponsored Organizations
C. Provision of Employer Identification Numbers by Medicare Providers
D. Disclosure of Tax Return Information for Verification of Employment Status of Medicare Beneficiaries and the Spouse of a Medicare Beneficiary
E. Employment Tax Provisions
1. Exemption from service performed by election workers from the Federal Unemployment Tax
2. Treatment of certain services performed by inmates
3. Exemption of service performed for an elementary or secondary school operated primarily for religious purposes from the Federal unemployment tax
F. Authorization of Appropriations for Enforcement Initiatives Related to the Earned Income Credit
G. Increase in Excise Tax on Tobacco Products
PART FOUR: TAXPAYER BROWSING PROTECTION ACT (H.R. 1226)
PART FIVE: EXTENSION OF HIGHWAY TRUST FUND (S. 1519)
PART SIX: REVENUE PROVISIONS OF THE TRANSPORTATION EQUITY ACT FOR THE 21ST CENTURY (TITLE IX OF H.R. 2400)
I. HIGHWAY-RELATED TAXES AND TRUST FUND
A. Extension and Modification of Highway-Related Taxes
1. Highway-related taxes and exemptions
2. Motor fuels refund procedure
3. Requirement that motor fuels terminals offer dyed fuel
B. Highway Trust Fund Provisions
II. OTHER TRUST FUND PROVISIONS
A. Aquatic Resources Trust Fund
B. National Recreational Trails Trust Fund
III. ADDITIONAL REVENUE PROVISIONS
A. Rail Fuels Excise Tax
B. Income Tax Provisions
1. Tax treatment of parking and transit benefits
2. Purposes for which Amtrak NOL monies may be used in non-Amtrak States
PART SEVEN: INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998 (H.R. 2676)
TITLE I. REORGANIZATION OF STRUCTURE AND MANAGEMENT OF THE IRS
A. IRS Restructuring and Creation of IRS Oversight Board
1. IRS restructuring and mission
2. Establishment and duties of IRS Oversight Board
B. Appointment and Duties of IRS Commissioner and Chief Counsel and Other Personnel
1. IRS Commissioner and other personnel
2. IRS Chief Counsel
C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO")
D. Taxpayer Advocate and Taxpayer Assistance Orders
E. Treasury Office of Inspector General; IRS Office of the Chief Inspector
F. Prohibition on Executive Branch Influence Over Taxpayer Audits
G. IRS Personnel Flexibilities
TITLE II. ELECTRONIC FILING
A. Electronic Filing of Tax and Information Returns
B. Due Date for Certain Information Returns
C. Paperless Electronic Filing
D. Return-Free Tax System
E. Access to Account Information
TITLE III. TAXPAYER PROTECTION AND RIGHTS
A. Burden of Proof
B. Proceedings by Taxpayers
1. Expansion of authority to award costs and certain fees
2. Civil damages for collection actions
3. Increase in size of cases permitted on small case calendar
4. Actions for refund with respect to certain estates which have elected the installment method of payment
5. Review of an adverse IRS determination of a bond issue's tax-exempt status
6. Civil action for release of erroneous lien
C. Relief for Innocent Spouses and for Taxpayers Unable to Manage Their Financial Affairs Due to Disabilities
1. Relief for innocent spouses
2. Suspension of statute of limitations on filing refund claims during periods of disability
D. Provisions Relating to Interest and Penalties
1. Elimination of interest differential on overlapping periods of interest on income tax overpayments and underpayments
2. Increase in overpayment rate payable to taxpayers other than corporations
3. Mitigation of penalty for individual's failure to pay during period of installment agreement
4. Mitigation of failure to deposit penalty
5. Suspension of interest and certain penalties if Secretary fails to contact individual taxpayer
6. Procedural requirements for imposition of penalties and additions to tax
7. Personal delivery of notice of penalty under section 6672
8. Notice of interest charges
9. Abatement of interest on underpayments by taxpayers in Presidentially declared disaster areas
E. Protections for Taxpayers Subject to Audit or Collection Activities
1. Due process in IRS collection actions
2. Examination activities
a. Uniform application of confidentiality privilege to taxpayer communications with federally authorized practitioners
b. Limitation on financial status audit techniques
c. Software trade secrets protection
d. Threat of audit prohibited to coerce tip reporting alternative commitment agreements
e. Taxpayers allowed motion to quash all third-party summonses
f. Service of summonses to third-party recordkeepers permitted by mail
g. Notice of IRS contact of third parties
3. Collection activities
a. Approval process for liens, levies, and seizures
b. Modifications to certain levy exemption amounts
c. Release of levy upon agreement that amount is uncollectible
d. Levy prohibited during pendency of refund proceedings
e. Approval required for jeopardy and termination assessments and jeopardy levies
f. Increase in amount of certain property on which lien not valid
g. Waiver of early withdrawal tax for IRS levies on employer- sponsored retirement plans or IRAs
h. Prohibition of sales of seized property at less than minimum bid
i. Accounting of sales of seized property
j. Uniform asset disposal mechanism
k. Codification of IRS administrative procedures for seizure of taxpayer's property
l. Procedures for seizure of residences and businesses
4 . Provisions relating to examination and collection activities
a. Procedures relating to extensions of statute of limitations by agreement
b. Offers-in-compromise
c. Notice of deficiency to specify deadlines for filing Tax Court petition
d. Refund or credit of overpayments before final determination
e. IRS procedures relating to appeal of examinations and collections
f. Application of certain fair debt collection practices
g. Guaranteed availability of installment agreements
h. Prohibition on requests to taxpayers to waive rights to bring actions
F. Disclosures to Taxpayers
1. Explanation of joint and several liability
2. Explanation of taxpayers' rights in interviews with the IRS
3. Disclosure of criteria for examination selection
4. Explanation of the appeals and collection process
5. Explanation of reason for refund disallowance
6. Statements to taxpayers with installment agreements
7. Notification of change in tax matters partner
8. Conditions under which taxpayers' returns may be disclosed
9. Disclosure of Chief Counsel advice
G. Low-Income Taxpayer Clinics
H. Other Provisions
1. Cataloging complaints
2. Archive of records of Internal Revenue Service
3. Payment of taxes
4. Clarification of authority of Secretary relating to the making of elections
5. IRS employee contacts
6. Use of pseudonyms by IRS employees
7. Illegal tax protestor designations
8. Provision of confidential information to Congress by whistleblowers
9. Listing of local IRS telephone numbers and addresses
10. Identification of return preparers
11. Offset of past-due, legally enforceable State income tax obligations against overpayments
12. Reporting requirements relating to education tax credits
I. Studies
1. Administration of penalties and interest
2. Confidentiality of tax return information
3. Noncompliance with internal revenue laws by taxpayers
4. Payments for informants
TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS
A. Review of Requests for GAO Investigations of the IRS
B. Joint Congressional Review and Coordinated Oversight Reports
C. Funding for Century Date Change
D. Tax Law Complexity Analysis
TITLE V. ADDITIONAL PROVISIONS
A. Elimination of 18-Month Holding Period for Capital Gains
B. Deductibility of Meals Provided for the Convenience of the Employer
TITLE VI. TAX TECHNICAL CORRECTIONS
TITLE VII. REVENUE OFFSETS
A. Employer Deductions for Vacation and Severance Pay
B. Freeze Grandfathered Status of Stapled REITs
C. Make Certain Trade Receivables Ineligible for Mark-to-Market Treatment
D. Exclusion of Minimum Required Distributions from AGI for Roth IRA Conversions
TITLE IX. CORRECTIONS TO THE TRANSPORTATION EQUITY ACT FOR THE 21ST CENTURY
PART EIGHT: TAX AND TRADE RELIEF EXTENSION ACT OF 1988(DIVISION J OF H.R. 4328, THE OMNIBUS CONSOLIDATED AND EMERGENCY SUPPLEMENTAL APPROPRIATIONS ACT, 1999)
A. Emergency Tax Relief for Farmers
1. Income averaging for farmers
2. Farm production flexibility contract payments
3. Net operating loss carrybacks
B. Extension of Expiring Tax and Trade Provisions
C. Other Revenue Provisions
1. Personal credits fully allowed against regular tax liability during 1998
2. Increase deduction for health insurance expenses of self-employed individuals
3. Modification of individual estimated tax safe harbor
4. Volume limits on private activity bonds
5. Treasury study on depreciation
6. State election to exempt student employees from Social Security
D. Revenue Offset Provisions
1. Treatment of certain deductible liquidating distributions of regulated investment companies ("RICs") and real estate investment trusts ("REITS")
2. Vaccine excise tax
3. Mathematical error procedure
4. Restrict NOL carryback rules for specified liability losses
E. Tax Technical Corrections Provisions
F. Revenue Offset for Medicare Home Health Provision
1. Treatment of certain prizes
PART NINE: RICKY RAY HEMOPHILIA RELIEF FUND ACT OF 1998(SEC. 103(h) OF H.R. 1023)
APPENDIX: TOPICAL INDEX TO REVENUE PROVISIONS ENACTED DURING THE 105TH CONGRESS [NOT INCLUDED IN ON-LINE VERSION]
INTRODUCTION
This document,(1) prepared by the staff of the Joint Committee on Taxation, provides a summary of the revenue provisions contained in legislation enacted during the 105th Congress. This summary is prepared for the convenience of the Members and the general public.
Part One of this document is a summary of the provisions contained in the Airport and Airway Trust Fund Extension Act of 1997 (H.R. 668, Public Law 105-2), enacted on February 28, 1997. Part Two is a summary of the Taxpayer Relief Act of 1997 (H.R. 2014, Public Law 105-34), enacted on August 5, 1997. Part Three is a summary of the revenue provisions contained in the Balanced Budget Act of 1997 (H.R. 2015, Public Law 105-33), enacted on August 5, 1997. Part Four is a summary of the Taxpayer Browsing Protection Act (H.R. 1226, Public Law 105-35), enacted on August 5, 1997. Part Five is a summary of the extension of the Highway Trust Fund (S. 1519, Public Law 105-130), enacted on December 1, 1997. Part Six is a summary of the revenue provisions in the Transportation Equity Act for the 21st Century (Title IX of H.R. 2400, Public Law 105-178), enacted on June 9, 1998. Part Seven is a summary of the Internal Revenue Service Restructuring and Reform Act of 1998 (H.R. 2676, Public Law 105-206), enacted on July 22, 1998. Part Eight is a summary of the Tax and Trade Relief Extension Act of 1998, which was contained in Division J of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 (H.R. 4328, Public Law 105-277), enacted on October 21, 1998. Part Nine is a summary of the revenue provision contained in the Ricky Ray Hemophilia Relief Fund Act of 1998 (sec. 103(h) of H.R. 1023, Public Law 105-369), enacted on November 12, 1998. A topical index is contained in Appendix A [not included in on-line version].
PART ONE: AIRPORT AND AIRWAY TRUST FUND EXTENSION ACT OF 1997(H.R. 668)(2)
1. Reinstate air transportation excise taxes
The Airport and Airway Trust Fund Extension Act of 1997 ("the Airport and Airway Act") reinstated the air transportation excise taxes that expired after December 31, 1996, during the period beginning seven days after the date of enactment and ending after September 30, 1997. These taxes included commercial aviation, passenger ticket, and freight waybill taxes and the noncommercial aviation gasoline and jet fuels taxes. See, also, Part Two, which further extended and modified the aviation excise taxes, and Part Eight, which describes subsequent changes to conform to new Trust Fund expenditure authority.
2. Transfer revenues to the Airport Trust Fund
The Airport and Airway Act authorized the Treasury Department to transfer to the Airport Trust Fund receipts attributable to excise taxes described above that were imposed on commercial and general aviation. This reauthorization permitted transfer of receipts attributable to taxes imposed both during the period August 27, 1996, through December 31, 1996, and during the period beginning seven days after the date of enactment.
3. Modify Treasury Department excise tax deposit regulations
The provisions of Treasury Department regulations providing an exception to penalties for underpayment of estimated excise taxes based on a look-back period were made inapplicable when tax was not imposed throughout the look-back period. In such a case, taxpayers may continue to use an alternative safe harbor that provides that no underpayment penalty is imposed as long as the taxpayer has paid at least 95 percent of the current quarter's liability.
PART TWO: TAXPAYER RELIEF ACT OF 1997 (H.R. 2014)(3)
TITLE I.--CHILD TAX CREDIT; HEALTH CARE FOR CHILDREN
1. Child tax credit
Size of credit.--The Taxpayer Relief Act of 1997 (the "1997 Act") provided 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.-The child credit, together with the other nonrefundable credits, generally may not exceed the amount by which the individual's regular tax exceeds the tentative minimum tax.(4)
Refundable child credit.-For a taxpayer with three or more children, the child credit may be refundable up to the amount by which the taxpayer's social security taxes exceeds the amount of the earned income tax credit.
Supplemental child credit.-In the case of a taxpayer whose credits (including the earned income credit) exceed the sum of the regular income tax and the social security taxes, the child credit may be deemed to be an additional earned income credit. This provision does not change the individual's total credits.
Effective date.--Generally, the child tax credit was effective for taxable years beginning after December 31, 1997.
2. Expand definition of high-risk individuals with respect to tax-exempt State-sponsored organizations providing health coverage
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 1997 Act expanded the definition of high-risk individuals to include the spouse or any child of an individual who meets the prior-law definition of a high-risk individual, subject to certain requirements. The provision was effective for taxable years beginning after December 31, 1997.
TITLE II.--EDUCATION TAX INCENTIVES
1. HOPE tax credit and Lifetime Learning tax credit for higher education tuition expenses(5)
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 Act), or the exclusion from gross income for certain distributions from an education IRA (also as provided for by the Act).
The HOPE credit is available for expenses paid after December 31, 1997, for education furnished in academic periods beginning after such date.
See, also, the provisions relating to reporting requirements for education tax credits in Part Seven, below.
Lifetime Learning credit.--The 1997 Act provided 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 such date.
See, also, the provisions relating to reporting requirements for education tax credits in Part Seven, below.
2. Deduction for student loan interest
Under the 1997 Act, certain individuals who are legally obligated to pay 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 four 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 to $55,000 ($60,000 to $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 solely 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.
3. 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 1997 Act expanded 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 1997 Act also expanded the definition of eligible educational institutions for purposes of 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 1997 Act also included provisions clarifying the estate and gift tax treatment of contributions to qualified State tuition programs or education IRAs (described below).
Under the 1997 Act, 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 1997 Act 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 were effective after December 31, 1997.
Education IRAs.--The 1997 Act provided 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 taxpayers with modified adjusted gross income ("AGI") between $95,000 and $110,000 (between $150,000 and $160,000 in the case of a married couple filing a joint return). 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 1997 Act provided 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 an 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. Any balance remaining in an education IRA will be deemed to be distributed within 30 days after the date the designated beneficiary reaches age 30. However, prior to the beneficiary reaching age 30, the Act 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.
4. Treatment of cancellation of certain student loans
The 1997 Act provided that an individual's gross income does not include forgiveness of loans made by educational organizations and certain tax-exempt 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 August 5, 1997.
5. Penalty-free withdrawals from IRAs for higher education expenses
The 1997 Act permitted 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 was 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.
6. Employer-provided educational assistance
The 1997 Act extended the exclusion from gross income for employer-provided educational assistance for undergraduate education through May 31, 2000.
7. Modification of $150 million limit on qualified 501(c)(3) bonds other than hospital bonds
The 1997 Act repealed the $150 million limit on qualified 501(c)(3) bonds issued by a State or local government after August 5, 1997, to finance capital expenditures incurred after such date.
8. Enhanced deduction for corporate contributions of computer technology and equipment
The 1997 Act permitted 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.
9. Expansion of arbitrage rebate exception for certain bonds
Under present and prior law, an exception to the arbitrage rebate rules applies for bonds issued by governmental units having general taxing powers if the governmental unit issues $5 million or less of governmental bonds during the calendar year ("the small issue exception"). The 1997 Act provided that up to $5 million dollars of bonds of State or local governments used to finance public school capital expenditures incurred after December 31, 1997, are excluded from application of the limit for the small issue exception. Thus, small issuers 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.
10. Tax credit for holders of qualified zone academy bonds
Under the 1997 Act, 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) at least 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 Act), 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 is allocated to the States according to their respective populations of individuals below the poverty line. Each State, in turn, allocates the credit to qualified zone academies within such State.
The provision is effective for bonds issued after 1997.
TITLE III.--SAVINGS AND INVESTMENT INCENTIVES
1. Individual retirement arrangements
The 1997 Act increased 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 1997 Act, in 1998, the phase out ranges are increased to $50,000 to $60,000 of AGI for married couples and to $30,000 to $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 1997 Act permitted 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 1997 Act created a new, tax-free nondeductible IRA called the "Roth IRA" for individuals with AGI between $95,000 and $110,000 and married couples with AGI between $150,000 and $160,000. Distributions from a Roth IRA are tax free if made more than five 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 contributed to all an individual's IRAs. See, also, the provisions relating to Roth IRAs in Part Seven, below.
The 1997 Act permitted IRAs to invest in certain gold coins and bullion.
The 1997 Act permitted penalty-free withdrawals from IRAs for first-time homebuyer expenses (up to $10,000) and higher education expenses.
2. Capital gains provisions
The 1997 Act reduced 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 is taxed at a maximum rate of 25 percent. The prior-law maximum 28-percent rate was retained for collectibles and, effective July 29, 1997, for assets held between one year and 18 months. Beginning in 2001, assets held for five years will get lower rates (8 percent for 15-percent bracket taxpayers in 2001 and 18 percent for others in 2006). See, also, the provisions relating to capital gains in Part Seven, below, eliminating the 18-month holding period for capital gains.
The 1997 Act provided a $250,000 gain exclusion from the sale of a principal residence ($500,000 in the case of a joint return), effective on May 7, 1997.
The 1997 Act allowed the tax-free rollover of gain from certain small business stock to other small business stock, effective on August 5, 1997.
TITLE IV.--ALTERNATIVE MINIMUM TAX PROVISIONS
1. Repeal alternative minimum tax for small businesses and repeal the deprecation adjustment
For taxable years beginning after 1997, the 1997 Act repealed the corporate alternative minimum tax for small businesses (i.e., generally those with average gross receipts of less than $7.5 million).
In addition, for property placed in service after 1998, the 1997 Act conformed the depreciable lives used for purposes of the alternative minimum tax to the depreciable lives used for purposes of the present-law regular tax.
2. Repeal AMT installment method adjustment for farmers
The 1997 Act repealed 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 TAX PROVISIONS
1. Increase in estate and gift tax unified credit
Under the 1997 Act, the exemption equivalent of the estate and gift tax unified credit was 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.
2. 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 for inflation.
3. Estate tax deduction for qualified family-owned businesses
Under the 1997 Act, for estate tax purposes, an executor may elect a deduction equal to 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 deduction for family-owned business interests may be taken only to the extent that the deduction for family-owned business interests, plus the amount effectively exempted by the unified credit, does not exceed $1.3 million. The provision was effective for decedents dying after December 31, 1997.
4. 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, the decedent's estate, or a member of the decedent's 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 deduction 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.
5. 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. The provision was effective for decedents dying after December 31, 1997. Taxpayers currently deferring taxes under section 6166 may make a one-time election to receive similar treatment.
6. 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), effective with respect to leases entered into after December 31, 1976.
7. 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, effective with respect to estates of decedents dying after August 5, 1997.
8. Gifts may not be revalued for estate tax purposes after expiration of statute of limitations
A gift that has been adequately disclosed 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, effective for gifts made after August 5, 1997.
9. 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). The provision was effective for taxable years beginning after August 5, 1997.
10. Modification of generation-skipping transfer tax for transfers to individuals with deceased parents
The prior-law "predeceased parent exception" was 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 tax. The provision was effective for generation-skipping transfers made after December 31, 1997.
TITLE VI.--EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS
1. Research tax credit
The 1997 Act extended 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. See, also, the provisions contained in Part Eight, below, providing for a subsequent extension of the research tax credit through June 30, 1999.
2. 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 was extended for the period June 1, 1997, through June 30, 1998. See, also, the provisions contained in Part Eight, below, providing for a permanent extension of the deduction.
3. Work opportunity tax credit
The 1997 Act provided a nine-month extension of the work opportunity tax credit. It also provided 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 Act was generally effective for wages paid to qualified individuals who begin work for an employer after September 30, 1997, and before July 1, 1998. See, also, the provision contained in Part Eight, below, providing a subsequent extension of the work opportunity tax credit through June 30, 1999.
4. 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 1997 Act permanently extended the orphan drug tax credit, effective for expenses paid or incurred after May 31, 1997.
TITLE VII.--DISTRICT OF COLUMBIA TAX INCENTIVES
1. Designation of D.C. Enterprise Zone
The 1997 Act designated 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 remains in effect for five years for the period from January 1, 1998, through December 31, 2002.
2. Empowerment zone wage credit, expensing, and tax-exempt financing
The 1997 Act made the following tax incentives that are available under present law in empowerment zones generally 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.
3. Zero-percent capital gains rate
The 1997 Act provided 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.
4. First-time homebuyer tax credit
The 1997 Act allowed 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 August 4, 1997, and before January 1, 2001.
TITLE VIII.--WELFARE-TO-WORK TAX CREDIT
The 1997 Act provided 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. See, also, the provisions in Part Eight, below, providing for a subsequent extension of the welfare to work tax credit through June 30, 1999.
TITLE IX.--MISCELLANEOUS PROVISIONS
1. Excise tax provisions
Repeal excise tax on diesel fuel used in recreational motorboats.--The 1997 Act repealed the 24.3-cents-per-gallon excise tax on diesel fuel used in recreational motorboats. Imposition of this tax previously had been suspended through December 31, 1997.
Continued application of tax on imported recycled halon-1211.--The 1997 Act repealed the prior-law exemption from the excise tax on ozone-depleting chemicals for imported recycled halon-1211, effective on August 5, 1997.
Transfer 4.3-cents-per-gallon General Fund highway fuels tax to Highway Trust Fund..--The 1997 Act provided 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 were included to ensure that this transfer had no effect on direct spending under the Budget Act. Certain tax deposit rules were modified for 1998. See, also, the provisions described in Part Five, below.
Tax certain alternative fuels based on energy equivalency to gasoline.--The 1997 Act adjusted 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, effective on October 1, 1997.
Certain gasoline "chain retailers" treated as wholesale distributors.--The 1997 Act extended 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 treatment to these retail dealers comparable to that previously provided only to wholesale distributors. The provision was effective after September 30, 1997.
Exemption of electric and other clean-fuel vehicles from luxury automobile classification.--The 1997 Act modified 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 is $30,000, as adjusted for inflation under prior 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 after 1990.
Reduce rate of alcohol excise tax on certain hard ciders.--The 1997 Act reduced the tax rate on still 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, effective on October 1, 1997.
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 1997 Act directed 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.
Codify rules on use of semi-generic names on wine labels.--The 1997 Act codified the 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, effective on August 5, 1997.
Uniform rate of excise tax on vaccines.--The 1997 Act replaced the prior-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 Act added three new taxable vaccines to the list of taxable vaccines: (1) HIB (hemophilus influenza type B); (2) Hepatitis B; and (3) varicella (chickenpox), generally effective on August 5, 1997. See, also Part Eight, below, for subsequent modifications to the vaccine excise tax.
2. Disaster relief provisions
Authority to postpone certain tax-related deadlines on account of Presidentially declared disasters.--The 1997 Act provided Treasury with the authority to postpone certain tax-related deadlines by reason of a Presidentially declared disaster, effective with respect to any period for performing an act that had not expired before August 5, 1997.
Use of certain appraisals to establish amount of disaster loss.--The 1997 Act provided that the Treasury Department 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, effective on August 5, 1997.
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 1997 Act expanded these exceptions to livestock sold on account of flood or other weather-related conditions. The provisions were effective for sales and exchanges after 1996.
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 1997 Act allowed waivers of the 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 applied 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 1997 Act required the IRS to abate interest for individual taxpayers in Presidentially declared disaster areas under specified circumstances for disasters in 1997, effective with respect to disasters declared after December 31, 1996. See, also, the provision relating to abatement of interest in disaster areas in Part Seven, below.
3. Employment tax provisions
The 1997 Act clarified the standards to be used in determining whether securities brokers are employees for Federal tax purposes. The Act provided that certain termination payments received by former insurance salesmen are not subject to SECA taxes. The 1997 Act imposed a moratorium on the issuance of IRS regulations relating to the definition of limited partner for SECA tax purposes until July 1, 1998.
The 1997 Act established a demonstration project for combined Federal/State employment tax reporting.
4. Small business provisions
EFTPS.--The 1997 Act delayed the imposition of penalties for certain failures to make payments electronically through the Electronic Funds Transfer Payment System ("EFTPS") through June 30, 1998. The Internal Revenue Service further extended the delay through June 30, 1999, by administrative action.
Home office deduction: clarification of definition of principal place of business.--The 1997 Act enhanced 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 prior law, deductions are 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 is effective for taxable years beginning after December 31, 1998.
Increase in self-employed health deduction.--The 1997 Act increased the deduction for health insurance of self-employed individuals as follows: 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. See, also, the provisions in Part Eight, below, accelerating the increases in the deduction for health insurance of self-employed individuals.
5. Other provisions
Shrinkage estimates for inventory accounting.--Under the 1997 Act, 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. Safe harbor methods of estimating inventory shrinkage will be established by Treasury regulation; a safe harbor method specific to retail trade was described in the Conference Report. The provision was effective for taxable years ending after August 5, 1997.
Treatment of workmen's compensation liability under rules for certain personal injury liability assignments.--The 1997 Act extended 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 was effective for workmen's compensation claims filed after August 5, 1997.
Tax-exempt status for certain State workmen's compensation act companies.--The 1997 Act clarified the tax-exempt status of any organization that: (1) is created by State law, (2) is organized and operated exclusively to provide workmen's compensation insurance and related coverage that is incidental to workmen's compensation insurance, and (3) meets certain additional requirements. Among these additional requirements are requirements that: (1) 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 (2) 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 was effective for taxable years beginning after December 31, 1997. No inference was intended that organizations described in the provision were not tax-exempt under prior law.
Election for 1987 partnerships to continue exception from treatment of publicly traded partnerships as corporations.--Under the 1997 Act, 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 was effective for taxable years beginning after December 31, 1997.
Exclusion from UBIT for certain corporate sponsorship payments.--The 1997 Act provided 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 Act 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 1997 Act permitted 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.--The 1997 Act provided that 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 1997 Act clarified the tax treatment of meals provided for the convenience of the employer, effective for taxable years beginning after December 31, 1997. See, also, the provision in Part Seven, below,
Increase in standard mileage rate for purposes of computing charitable deduction.--The 1997 Act increased 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 1997 Act allowed 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 prior law and under the Act (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 census tracts with a poverty rate of 20 percent or more. The provision applied to eligible expenditures incurred in taxable years ending after August 5, 1997, and before January 1, 2001.
Modify limits on depreciation of luxury automobiles for certain clean-burning fuel and electric vehicles.--The 1997 Act modified the 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 1997 Act generally has the effect of only subjecting the cost of the vehicle before modification to the limitations. In the case of a passenger vehicle designed to be propelled primarily by electricity and built by an original equipment manufacturer, the prior-law base-year limitation amounts were tripled. The provision is effective for property placed in service after August 5, 1997, and before January 1, 2005.
Modification of advance refunding rules for certain tax-exempt bonds issued by the Virgin Islands.--Under the 1997 Act, one additional advance refunding was allowed for bonds issued by the Virgin Islands that were advance refunded before June 9, 1997, effective on change of the Virgin Islands debt provisions to repeal a then-existing priority first lien requirement.
Deferral of gain on certain sales of farm product refiners and processors.--The 1997 Act extended 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 was effective for sales after December 31, 1997. This provision was (1) identified as a limited tax benefit subject to the Line Item Veto Act, (2) cancelled by the President pursuant to his authority under the Line Item Veto Act, and (3) reinstated when the U.S. Supreme Court ruled that the Line Item Veto Act was unconstitutional.
Above-the-line deduction for certain expenses.--The 1997 Act provided 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 was 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 1997 Act provided 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 was 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 1997 Act suspended 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 1997 Act clarified that, for purposes of section 501(e), billing and collection services include the purchase of patron accounts receivable on a recourse basis. The provision was 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 1997 Act, the Secretary of HUD was 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 the same tax incentives (i.e., the wage credit, additional expensing, and special tax-exempt financing) generally apply 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 was 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 designations do not take effect before January 1, 2000, and generally remain in effect for 10 years.
b. Designation of additional empowerment zones
The 1997 Act authorized 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 were 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 Act 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 empowerment zones.
The 20 additional empowerment zones are required to be designated before 1999, and the designations generally will remain in effect for 10 years.
c. Modification of definition of enterprise zone business
The 1997 Act provided 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 1997 Act made 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 1997 Act, as well as to the 20 additional empowerment zones authorized to be designated pursuant to the 1997 Act. The modifications to the definition of "enterprise zone business" were effective for taxable years beginning on or after August 5, 1997.
d. Tax-exempt financing rules
The 1997 Act allowed "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. 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 1997 Act also made 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 were effective for qualified enterprise zone facility bonds and the new empowerment zone facility bonds issued after August 5, 1997.
e. Special rules for Alaska and Hawaii
The 1997 Act modified the prior-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 are 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 are subject to the population limitations under section 1392(a)(1). The provision was effective on August 5, 1997.
Income averaging for farmers.--Under the 1997 Act, 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. See, also, the provisions in Part Eight, which made permanent the rules providing for income averaging for farmers.
Elective carryback of existing net operating losses of the National Railroad Passenger Corporation (Amtrak).--Under the 1997 Act, 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 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 August 5, 1997. However, no refund could be made as a result of this provision earlier than the date of enactment of S. 738 ("Amtrak Reform and Accountability Act of 1997"), which authorizes reforms of Amtrak. S. 738 was enacted on December 2, 1997 (P.L. 105-134). See, also, the provision relating to Amtrak NOL monies in Part Six, below.
TITLE X.--REVENUE-INCREASE PROVISIONS
1. Financial product provisions
Require recognition of gain on certain appreciated positions in personal property.--The 1997 Act required 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 against the box 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 1997 Act allowed 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 August 5, 1997.
Limitation on exception for investment companies under section 351.--The 1997 Act expanded 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 1997 Act, 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 exchanges.--The 1997 Act provided 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 1997 Act treated as capital gains or losses the gains or losses arising from the cancellation, lapse, expiration, or other termination after September 4, 1997, of a right or obligation with respect to all types of property that are (or on acquisition would be) capital assets in the hands of the taxpayer. Lastly, the 1997 Act provided 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 August 5, 1997, shall recognize gain as if the short sale (or other property) were closed (or sold) when the property becomes substantially worthless.
Determination of original issue discount where pooled debt obligations subject to acceleration.--The 1997 Act required 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 was effective for taxable years beginning after August 5, 1997.
Deny interest deduction on certain debt instruments.--The 1997 Act denied 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 provision was effective for instruments issued after June 8, 1997, but does 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.
2. Corporate organizations and reorganizations
Require gain recognition for certain extraordinary dividends.--Under the 1997 Act, 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 provision generally was 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 1997 Act restricted 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 generally.
For certain transfers of property to a corporation as part of a spin-off after August 5, 1997, the prior 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 stock.
The provision was generally effective for distributions after April 16, 1997.
The provision does 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 1997 Act 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 is applicable.
Reform tax treatment of certain corporate stock transfers.--The 1997 Act modified 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 provision was effective for distributions or acquisitions after June 8, 1997, except that the provision does 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 1997 Act modified the 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 provision.
The provision generally was effective for dividends paid or accrued after September 4, 1997. However, the provision does not apply to certain dividends received within two years of August 5, 1997, if (1) the dividend is paid with respect to stock held on June 8, 1997, and at all times thereafter until the dividend is received, and (2) certain other requirements are continuously met with respect to identified risk-reduction positions.
3. Other corporate provisions
Corporate tax shelter registration.--The 1997 Act required that certain confidential corporate tax shelters register with the Treasury and made parallel changes to the substantial understatement penalty.
Treat certain preferred stock as "boot".--The 1997 Act required certain preferred stock that is received in otherwise tax-free transactions to be treated as taxable "boot." Thus, when a taxpayer exchanges appreciated property for this preferred stock in a transaction that otherwise qualifies as tax-free, gain is recognized.
The provision was effective for transactions after June 8, 1997, but does 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.
4. Administrative provisions
Payments to attorneys.--The 1997 Act required the reporting to the IRS of certain payments made to attorneys, effective for payments made after December 31, 1997.
Payments to corporations performing services for Federal agencies.--The 1997 Act lowered the information reporting threshold with respect to information reporting on persons receiving contract payments from certain Federal agencies, effective for any return the due date for which is after November 3, 1997.
Veterans Administration disclosure.--The 1997 Act provided for the continuation of authorization for the disclosure of tax return information for purposes of the administration of certain veterans programs.
Continuous levy.--The 1997 Act established continuous levy by the IRS and limits the exemptions from levy, effective for levies issued after August 5, 1997.
Consistency rule for beneficiaries of trusts and estates.--The 1997 Act required 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.
5. Excise tax provisions
Extend and modify the Airport and Airway Trust Fund excise taxes.--The 1997 Act extended the prior-law Airport and Airway Trust Fund excise taxes (commercial passenger ticket, commercial cargo shipping invoice, and noncommercial aviation fuels) for 10 years with modifications, through September 30, 2007.
The commercial passenger taxes were modified, as follows:
(1) The prior-law 10-percent ad valorem tax rate was 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 flight segment |
| October 1, 1998 - September 30, 1999 | 8% of fare plus $2 per domestic flight segment |
| October 1, 1999 - December 31, 1999 | 7.5% of fare plus $2.25 per domestic flight segment |
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 $6 per passenger international departure tax was increased to $12 per passenger and that rate was extended to international arrivals as well. (The $6 rate was 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 was 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 was 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 were made liable for payment of the Airport and Airway Trust Fund excise taxes.
Certain tax deposits rules were modified for 1997 and 1998.
These provisions generally apply to transportation beginning after September 30, 1997. See, also, the provisions in Part One, above.
Extend diesel fuel excise tax rules to kerosene.--The 1997 Act provided 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 were provided allowing undyed kerosene to be sold without tax for certain aviation and industrial 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 was effective after June 30, 1998. See, also, Part Six, below, describing a provision which suspended the dyeing mandate for two years.
Reinstate Leaking Underground Storage Trust Fund excise tax.--The 1997 Act reinstated 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 1997 Act clarified 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 1997 Act substituted a credit for tire tax paid for a prior-law tax deduction in calculating the 12-percent retail excise on heavy highway vehicles. The provision was effective after December 31, 1997.
6. Provisions relating to exempt organizations
Extend UBIT rules to second-tier subsidiaries and amend control test.--The 1997 Act modified section 512(b)(13) (which treats otherwise excluded rent, royalty, annuity, and interest income as unrelated business taxable income if such income is received or accrued from certain controlled subsidiaries of a tax-exempt organization). The 1997 Act provided 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 1997 Act applied the constructive ownership rules of section 318 for purposes section 512(b)(13). The provision generally applies to taxable years beginning after August 5, 1997. However, the provision does not apply to payments received or accrued during the first two taxable years beginning on or after August 5, 1997, if such payments are received or accrued pursuant to a binding written contract in effect on June 8, 1997, and at all times thereafter before such payment, but not pursuant to any contract provision that permits optional accelerated payments.
Repeal grandfather rule with respect to pension business of certain insurers.--The 1997 Act repealed 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.
7. Foreign provisions
Inclusion of income from notional principal contracts and stock lending transactions under subpart F.--The 1997 Act added 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 1997 Act provided an expanded dealer exception from the definition of foreign personal holding company income.
Restrict like-kind exchange rules for certain personal property.-Under present law, 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 1997 Act provided 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 1997 Act disallowed 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 stock.
Limitation on treaty benefits for payments to hybrid entities.--The 1997 Act limited 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 1997 Act provided 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 1997 Act provided 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 1997 Act repealed this special exception for taxable years beginning after August 5, 1997.
8. Pension and employee benefit revenue-increase provisions
The 1997 Act contained several revenue-increasing 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, effective for plan years beginning after August 5, 1997; (2) repeal the 15-percent excise tax applicable to excess plan distributions and excess retirement plan accumulations, effective for estates of decedents dying after December 31, 1996; (3) increase the penalty tax on prohibited transactions from 10 percent to 15 percent, effective with respect to prohibited transactions occurring after August 5, 1997; (4) revise the basis recovery rules related to retirement plan payments, effective with respect to annuity starting dates beginning after December 31, 1997; and (5) permit employees to elect cash compensation in lieu of nontaxable parking benefits, effective for taxable years beginning after December 31, 1997.
9. Other revenue-increase provisions
Phase out suspense accounts for certain large farm corporations.--The 1997 Act repealed the 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 1997 Act repealed the 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 1997 Act limited the NOL carryback period to two years (from three years) and extended the NOL carryforward period to 20 years (from 15 years). The three-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 was effective for NOLs arising in taxable years beginning after August 5, 1997.
Expand the limitations on deductibility of premiums and interest with respect to life insurance, endowment and annuity contracts.--Under the 1997 Act, the 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 8, 1997.
Allocation of basis of properties distributed to a partner by a partnership.--The 1997 Act modified the basis allocation rules for distributee partners, so that the basis of distributed property generally is allocated in proportion to the fair market values of the property. The provision applied to partnership distributions after August 5, 1997.
Treatment of inventory items of a partnership.--The 1997 Act eliminated 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 was effective for sales and exchanges, and distributions after August 5, 1997, with an exception for written binding contracts in effect on June 8, 1997.
Treatment of appreciated property contributed to a partnership.--The 1997 Act extended from five years to seven years the period in which a partner recognizes pre-contribution gain with respect to property contributed to a partnership. The provision was effective for property contributed to a partnership after June 8, 1997. An exception was 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 1997 Act, 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 apply 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, 1996.
b. Recertification required when taxpayer found to be ineligible for EIC in past
Under the 1997 Act, 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 31, 1996.
c. Due diligence requirements for paid preparers
Under the 1997 Act, 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, 1996.
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 1997 Act modified 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 1997 Act also increased 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 was effective for taxable years beginning after December 31, 1997.
Eligibility for income forecast method.--The 1997 Act limited the types of property to which the income forecast method may be applied. Under the 1997 Act, 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 Treasury. 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 August 5, 1997.
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 1997 Act expanded the 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.
Repeal of installment sale accounting for certain manufacturers.--The 1997 Act repealed a provision that permits the use of the installment method of accounting for certain sales by manufacturers to dealers effective for taxable years beginning August 5, 1998.
Extension of Federal unemployment surtax.--The 1997 Act extended the temporary surtax rate through December 31, 2007. It also increased 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 1997 Act, 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 1997 Act required 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 July 28, 1997. The 1997 Act contained special rules that deal with revocations and reformations of trusts 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 July 28, 1997, or the settlor is under a mental disability on that date. Finally, the 1997 Act provided 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 trust.
Modify general business credit carryback and carryforward rules.--The 1997 Act reduced the carryback period for the general business credit to one year (from three years) and extended the carryforward period to 20 years (from 15 years). The provision was 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 also may 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. Under the 1997 Act, 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 provision was effective February 1, 1998.
Treatment of amounts received under the work requirements of the Personal Responsibility and Work Opportunity Act of 1996.--The 1997 Act provided that workfare payments are not wages for purposes of the earned income credit. No inference was 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, no inference was intended with respect to whether workfare payments are wages for purposes of the earned income credit before enactment of this provision.
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 1997 Act changed 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 1997 Act. See, also, the provision modifying the individual estimated tax safe harbor rules in Part Eight, below.
TITLE XI.--FOREIGN TAX PROVISIONS
1. Simplify foreign tax credit limitation for individuals
The 1997 Act exempted 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, effective for taxable years beginning after December 31, 1997.
2. Simplify translation of foreign taxes
The 1997 Act generally provided for accrual-basis taxpayers to translate foreign taxes at the average exchange rate for the taxable year to which such taxes relate. The 1997 Act also provided 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 of payment. The provision is effective for taxes that relate to taxable years beginning after December 31, 1997.
3. Election to use simplified foreign tax credit limitation for alternative minimum tax purposes
The 1997 Act permitted 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, effective for taxable years beginning after December 31, 1997.
4. Simplify treatment of personal transactions in foreign currency
The 1997 Act applied nonrecognition treatment to any exchange gain that results from an individual's acquisition of foreign currency and disposition of it in a personal transaction, provided that such gain does not exceed $200, effective for taxable years beginning after December 31, 1997.
5. Simplify foreign tax credit limitation for dividends from 10/50 companies
Under the 1997 Act, 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.
6. General provisions affecting treatment of controlled foreign corporations
The 1997 Act made several modifications to the treatment of controlled foreign corporations and lower-tier controlled foreign corporations. In addition, the 1997 Act extended the application of the indirect foreign tax credit to taxes paid or accrued by fourth- through sixth-tier controlled foreign corporations.
7. 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 1997 Act, a shareholder that is subject to the subpart F rules with respect to stock of a passive foreign investment company that also is a controlled foreign corporation is not subject also to the passive foreign investment c