Full Text: Senate Finance Committee Report On Revenue Provisions Of Omnibus Budget Reconciliation Act Of 1993 -- Individual Income, Estate Tax Provisions.

II. REVENUE-RAISING PROVISIONS

A. INDIVIDUAL INCOME AND ESTATE AND GIFT TAX PROVISIONS

1. INCREASED TAX RATES FOR HIGHER INCOME INDIVIDUALS (SECS. 8201-

Present Law

Regular tax rates

For 1993, the individual income tax rates are as follows --

If taxable income is:              Then income tax equals:

                         Single individuals

$0-$22,100                         15 percent of taxable income.

                         Heads of household

$0-$29,600                         15 percent of taxable income.

              Married individuals filing joint returns

$0-$36,900                         15 percent of taxable income.

             Married individuals filing separate returns

$0-$18,450                         15 percent of taxable income.

                         Estates and trusts

$0-$3,750                          15 percent of taxable income.

Net capital gains income is subject to a maximum tax rate of 28 percent.

The individual income tax brackets are indexed each year for inflation.

Alternative minimum tax

An individual taxpayer is subject to an alternative minimum tax (AMT) to the extent that the taxpayer's tentative minimum tax exceeds the taxpayer's regular tax liability. A taxpayer's tentative minimum tax generally equals 24 percent of alternative minimum taxable income (AMTI) in excess of an exemption amount. The exemption amount is $40,000 for married taxpayers filing joint returns, $30,000 for unmarried taxpayers filing as single or head of household, and $20,000 for married taxpayers filing separate returns, estates, and trusts. The exemption amount is phased out for taxpayers with AMTI above specified thresholds. These thresholds are: $150,000 for married taxpayers filing joint returns, $112,500 for unmarried taxpayers filing as single or head of household, and $75,000 for married taxpayers filing separate returns, estates, and trusts. The exemption is completely phased out for individuals with AMTI above $310,000 (married taxpayers filing joint returns) or $232,500 (unmarried taxpayers filing as single or head of household)

Surtax on higher-income taxpayers

Under present law, there is no surtax imposed on higher-income individuals.

Itemized deduction limitation

Under present law, individuals who do not elect the standard deduction may claim itemized deductions (subject to certain limitations) for certain expenses incurred during the taxable year. Among these deductible expenses are unreimbursed medical expenses, unreimbursed casualty and theft losses, charitable contributions, qualified residence interest, State and local income and property taxes, unreimbursed employee business expenses, and certain other miscellaneous expenses.

Certain itemized deductions are allowed only to the extent that the amount exceeds a specified percentage of the taxpayer's adjusted gross income (AGI). Unreimbursed medical expenses for care of the taxpayer and the taxpayer's spouse and dependents are deductible only to the extent that the total of these expenses exceeds 7.5 percent of the taxpayer's AGI. Nonbusiness, unreimbursed casualty or theft losses are deductible only to the extent that the amount of loss arising from each casualty or theft exceeds $100 and only to the extent that the net amount of casualty and theft losses exceeds 10 percent of the taxpayer's AGI. Unreimbursed employee business expenses and certain other miscellaneous expenses are deductible only to the extent that the total of these expenses exceeds 2 percent of the taxpayer's AGI.

The total amount of otherwise allowable itemized deductions (other than medical expenses, casualty and theft losses, and investment interest) is reduced by 3 percent of the amount of the taxpayer's AGI in excess of $108,450 in 1993 (indexed for inflation). Under this provision, otherwise allowable itemized deductions may not be reduced by more than 80 percent. In computing the reduction of total itemized deductions, all present-law limitations applicable to such deductions are first applied and then the otherwise allowable total amount of deductions is reduced in accordance with this provision.

The reduction of otherwise allowable itemized deductions does not apply to taxable years beginning after December 31, 1995.

Personal exemption phaseout

Present law permits a personal exemption deduction from gross income for an individual, the individual's spouse, and each dependent. For 1993, the amount of this deduction is $2,350 for each exemption claimed. This exemption amount is adjusted for inflation. The deduction for personal exemptions is phased out for taxpayers with AGI above a threshold amount (indexed for inflation) which is based on filing status. For 1993, the threshold amounts are $162,700 for married taxpayers filing joint returns, $81,350 for married taxpayers filing separate returns, $135,600 for unmarried taxpayers filing as head of household, and $108,450 for unmarried taxpayers filing as single.

The total amount of exemptions that may be claimed by a taxpayer is reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. (The phaseout rate is 2 percent for each $1,250 for married taxpayers filing separate returns.) Thus, the personal exemptions claimed are phased out over a $122,500 range, beginning at the applicable threshold.

This provision does not apply to taxable years beginning after December 31, 1996.

Reasons for Change

To raise revenue to reduce the Federal deficit and to make the Federal income tax system more progressive, the committee believes that higher marginal tax rates should be imposed on those taxpayers with the greatest ability to pay income taxes. In a similar manner, the progressivity of the individual income tax system would be enhanced by introducing a two-tier rate schedule for the alternative minimum tax and, for higher-income taxpayers, by permanently extending both the existing limitation on itemized deductions and the existing phaseout of personal deductions.

Explanation of Provisions

New marginal tax rates

The bill imposes a new 36-percent marginal tax rate on taxable income in excess of the following thresholds:

          Filing status                      Applicable threshold

Married individuals filing joint returns          $140,000

For estates and trusts, the 15-percent rate will apply to income up to $1,500, the 28-percent rate will apply to income between $1,500 and $3,500, and the 31-percent rate will apply to income between $3,500 and $5,500. Under this modified tax rate schedule for estates and trusts, the benefits of the rates below the 39.6-percent surtax- included rate (described below) approximate the benefits of the 15- and 28-percent rates under present law.

For taxable years beginning in 1993, a blended rate (described below) would be used.

As under present law, the tax rate bracket thresholds will be indexed for inflation. However, indexing of thresholds for the 36- percent rate will apply to taxable years beginning after December 31, 1994.

Alternative minimum tax

The bill provides a two-tiered graduated rate schedule for the AMT for taxpayers other than corporations. A 26-percent rate will apply to the first $175,000 of a taxpayer's AMTI in excess of the exemption amount, and a 28-percent rate will apply to AMTI more than $175,000 above the exemption amount. For married individuals filing separate returns, the 28-percent rate will apply to AMTI more than $87,500 above the exemption amount. The bill increases the exemption amount to $45,000 for married individuals filing joint returns, to $33,750 for unmarried individuals, and to $22,500 for married individuals filing separate returns, estates, and trusts.

Surtax on higher-income taxpayers; surtax on net capital gain

The bill imposes a 10-percent surtax on individuals with taxable income in excess of $250,000 and on estates and trusts with taxable income in excess of $7,500. For married taxpayers filing separate returns, the threshold amount for the surtax would be $125,000. The surtax will be computed by applying a 39.6-percent rate to taxable income in excess of the applicable threshold. In a similar manner, an individual's net capital gain will be subject to the surtax by applying a maximum rate of 30.8 percent (instead of the present-law maximum rate of 28 percent) to capital gains income to the extent an individual's taxable income exceeds $250,000.

The thresholds for the surtax will be indexed for inflation in the same manner as other individual income tax rate thresholds for taxable years beginning after December 31, 1994.

Itemized deduction limitation and phaseout of personal exemptions

The bill makes permanent the provisions that limit itemized deductions and phase out personal exemptions.

Effective Date

The provision is effective for taxable years beginning after December 31, 1992. For taxable years beginning in 1993, blended tax rates will be used: the 36-percent tax rate will be reduced to 33.5 percent and the 39.6-percent rate will be reduced to 35.3 percent. In addition, the 30.8-percent maximum rate on capital gains income will be reduced to 29.4 percent for taxable years beginning in 1993. Similarly, for taxable years beginning in 1993, the 26-percent and 28-percent alternative minimum tax rates will be reduced to 25 percent and 26 percent, respectively. The permanent rate levels will be used for 1994 and later years.

Withholding tables for 1993 will not be revised to reflect the changes in tax rates. Penalties for the underpayment of estimated taxes will be waived for underpayments of 1993 taxes attributable to these changes in tax rates.

2. PROVISIONS TO PREVENT CONVERSION OF ORDINARY INCOME TO CAPITAL

a. RECHARACTERIZATION OF CAPITAL GAIN AS ORDINARY INCOME FOR

Present Law

Under present law, the maximum rate of individual income tax on ordinary income is 31 percent. Interest from a loan generally is treated as ordinary income.

Gain or loss from the sale or exchange of a capital asset generally is treated as capital gain or loss. Net capital gain (i.e., net long-term capital gain less net short-term capital loss) of an individual is subject to a maximum tax rate of 28 percent. Capital losses are deductible only to the extent of capital gains for the year plus, in the case of noncorporate taxpayers, ordinary income of up to $3,000.

Reasons for Chance

The committee is aware that taxpayers are able to enter into transactions the economic substance of which is indistinguishable from loans in terms of the return anticipated and the risks borne by the taxpayer. However, because of their form, these transactions may permit taxpayers to take the position for tax purposes that their return is capital gain rather than ordinary income. The committee is concerned that, because of the increased differential between the rates of tax on ordinary income and capital gain that results from this bill, taxpayers may enter into such transactions for purposes of avoiding the intended higher rates on ordinary income. In addition, the committee is concerned that these transactions can be used to circumvent the capital loss limitation rules. Accordingly, the committee believes that providing rules that would treat gain from such transactions as ordinary income is appropriate.

EXPLANATION OF PROVISION

Under the provision, capital gain from the disposition or other termination of any position that was part of a "conversion transaction" will be recharacterized as ordinary income, /1/ with certain limitations discussed below. No inference is intended as to when income from a conversion transaction is properly treated as capital gain under present law.

A conversion transaction is a transaction, generally consisting of two or more positions taken with regard to the same or similar property, where substantially all of the taxpayer's return is attributable to the time value of the taxpayer's net investment in the transaction. In a conversion transaction, the taxpayer is in the economic position of a lender -- he has an expectation of a return from the transaction which in substance is in the nature of interest and he undertakes no significant risks other than those typical of a lender.

A transaction, however, is not a conversion transaction subject to the provision unless it also satisfies one of the following four criteria: (1) the transaction consists of the acquisition of property by the taxpayer and a substantially contemporaneous agreement to sell the same or substantially identical property in the future; (2) the transaction is a straddle, within the meaning of section 1092 /2/; (3) the transaction is one that was marketed or sold to the taxpayer on the basis that it would have the economic characteristics of a loan but the interest-like return would be taxed as capital gain; or (4) the transaction is described as a conversion transaction in regulations to be promulgated on a prospective basis by the Secretary of the Treasury.

In addition, transactions (which may include positions other than options or section 1256 contracts) of options dealers and commodities traders in the normal course of their trade or business of dealing in options or trading section 1256 contracts, respectively, generally will not be considered conversion transactions. The term "options dealer" generally means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. The term "commodities trader" generally means any person who is a member of a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission. Commodities traders also, to the extent permitted by Treasury regulations, include persons entitled to trade as a member (e.g., persons who are registered with a board of trade as users of memberships or who are eligible for member rates for the clearing of trades on the board of trade). Special rules limit the availability of the options dealer and commodities trader exception for limited partners or limited entrepreneurs in an entity that is an options dealer or a commodities trader.

Under the provision, gain realized by a taxpayer from disposition or other termination of a position that was part of a conversion transaction that would otherwise be treated as capital gain will be treated as ordinary income (but not as interest) for all purposes of the Internal Revenue Code. The amount of gain so recharacterized will not exceed the amount of interest that would have accrued on the taxpayer's net investment for the relevant period at a yield equal to 120% of the "applicable rate". This limit is subject to appropriate reduction to reflect prior inclusion of ordinary income items from the conversion transaction or the capitalization of interest on acquisition indebtedness under section 263(g). The "applicable rate" is the applicable Federal rate under section 1274(d) at the time the taxpayer enters into the conversion transaction (if the conversion transaction has a definite term) or the Federal short term rate determined under section 6621(b) (if the conversion transaction has an indefinite term).

For example, assume that X purchases stock for $100 on January 1, 1994, and on that same day agrees to sell it to Y on January 1, 1996 for $115. Assume that the applicable rate is 5%. /3/ On January 1, 1996, X delivers the stock to Y in exchange for $115 in satisfaction of their agreement. Assume that, under current law, X would have recognized a capital gain of $15. Under the provision, $12.36 of that amount would be recharacterized as ordinary income (i.e., 120% of 5% compounded for two years, applied to an investment of $100).

In determining a taxpayer's net investment in a conversion transaction, the source of the taxpayer's funds generally will not be taken into account. Assume in the above example that X borrowed $90 of the purchase price of the stock from a bank and was required under section 263(g) to capitalize $10 of interest on that debt into the cost of the stock. Then X's net investment in the transaction will still be $100, even though X's basis is $110 to reflect the capitalized $10 of interest. However, of the gain of $5, only $2.36 will be recharacterized as ordinary income under the provision. This is because the limitation amount of $12.36 will be reduced by the $10 of capitalized interest.

A special rule is included for situations in which the taxpayer has a built-in loss with respect to a position that becomes part of a conversion transaction. Assume that, prior to January 1, 1994, X had purchased the stock in the previous example for $150, and had used that stock as part of a conversion transaction entered into on January 1, 1994, when the stock's value had declined to $100. Under these facts, the stock would be valued at $100 for purposes of this provision, and the results would be the same as in the example, except that X also would recognize the $50 built-in loss when the asset was delivered to Y. The character of that $50 loss would not be affected by this provision.

Amounts that a taxpayer may be committed to provide in the future generally will not be treated as an investment until such time as such amounts are committed to the transaction and unavailable to the taxpayer to invest in other ways. For example, assume that on January 1, 1994, X enters into a long futures contract committing X to purchase a certain quantity of gold on March 1 for $1,000. Also on January 1, 1994, X enters into a short futures contract to sell the same quantity of gold on April 1 for $1,006. Under these contracts, X is not required to make any investment at the time they are entered into, but is required to make a "margin" deposit (which may or may not bear interest), as securIty for his obligations thereunder. Suppose X terminates both contracts on February 1 for a net profit of $2. No part of that $2 is subject to recharacterization under this provision, since X has no investment in the transaction on which the $2 could be considered to be an interest equivalent return.

A taxpayer's net investment in a conversion transaction generally will be the aggregate amount invested by the taxpayer in the conversion transaction less any amount received by the taxpayer as consideration for entering into any position held as part of the conversion transaction, such as when the taxpayer is the grantor of an option. For example, suppose that on January 1, 1994, X acquires non-publicly-traded common stock for $100 and, on the same day grants Y a call option on the same stock for $106, exercisable any time prior to February 1, 1995. Y pays X a premium of $10 for the call option. At the time X grants Y the call option, there is no substantial certainty that Y will exercise the option. Under these facts, X's net investment in the transaction comprised of the stock purchase and the granting of the option would be $90 (i.e., the $100 paid for the stock minus the $10 received for granting the option). X's return on that investment will be $16 if Y exercises the call option (the excess of $106 of sales proceeds over the net investment of $90). However, if Y does not exercise the option, X's return will be the difference between $90 and the value of the stock on February 1, 1995. The transaction consisting of the stock purchase and the grant of the option is one in which X takes on a risk not typical of a lender and is not a conversion transaction.

Effective Date

The provision is effective for conversion transactions entered into after April 30, 1993.

b. REPEAL OF CERTAIN EXCEPTIONS TO THE MARKET DISCOUNT RULES

Present Law

Generally, a market discount bond is a bond that is acquired for a price that is less than the principal amount of the bond. /4/ Market discount generally arises when the value of a debt obligation declines after issuance (typically, because of an increase in prevailing interest rates or a decline in the credit-worthiness of the borrower).

Gain on the disposition of a market discount bond generally must be recognized as ordinary income to the extent of the market discount that has accrued. This ordinary income rule, however, does not apply to tax-exempt obligations or to market discount bonds issued on or before July 18, 1984. Under current law, income attributable to accrued market discount on tax-exempt bonds is not tax-exempt but is taxable as capital gain if the bond is held as a capital asset.

Reasons for Chance

The committee is concerned about taxpayers being able to purchase market discount bonds as a means of converting returns on investments that are in the nature of interest on debt to capital gains. The committee therefore believes that the market discount rule should apply to tax-exempt bonds and to all taxable bonds, regardless of whether they were issued after July 18, 1984.

Explanation of Provision

The bill extends the ordinary income rule to tax-exempt obligations and to market discount bonds issued on or before July 18, 1984. Thus, gain on the disposition of a tax-exempt obligation or any other market discount bond that is acquired for a price that is less than the principal amount of the bond generally will be treated as ordinary income (instead of capital gain) to the extent of accrued market discount.

Effective Date

The provision is effective for bonds purchased after April 30, 1993. Thus, current owners of tax-exempt bonds and other market discount bonds issued on or before July 18, 1984, will not be required to treat accrued market discount as ordinary income, if they acquired their bonds before May 1, 1993.

c. ACCRUAL OF INCOME BY HOLDERS OF STRIPPED PREFERRED STOCK

Present Law

In general, if a bond is issued at a price approximately equal to its redemption price at maturity, the expected return to the holder of the bond is in the form of periodic interest payments. In the case of original issue discount ("OID") bonds, however, the issue price is below the redemption price, and the holder receives part or all of his expected return in the form of price appreciation. The difference between the issue price and the redemption price is the OID, and a portion of the OID is required to be accrued and included in the income of the holder annually. Similarly, for certain preferred stock that is issued at a discount from its redemption price, a portion of the redemption premium must be included in income annually.

A stripped bond (i.e., a bond issued with interest coupons some of which are subsequently "stripped" so that the ownership of the bond is separated from the ownership of the interest coupons) generally is treated as a bond issued with OID equal to (1) the stated redemption price of the bond at maturity minus (2) the amount paid for the stripped bond.

If preferred stock is stripped of some of its dividend rights, however, the stripped stock is not subject to the rules that apply to stripped bonds or to the rules that apply to bonds and certain preferred stock issued at a discount.

Reasons for Change

The committee believes that the purchaser of stripped preferred stock may, in effect, be purchasing at a discount the right to a fixed amount payable at a future date. The committee is concerned that taxpayers may purchase stripped preferred stock as a means of converting ordinary income to capital gains. Therefore, under these circumstances, the committee believes that the rules that apply to stripped bonds provide the appropriate tax treatment.

Explanation of Provision

The bill treats the purchaser of stripped preferred stock (and a person who strips preferred stock and disposes of the stripped dividend rights) in generally the same way that the purchaser of a stripped bond would be treated under the OID rules. Thus, stripped stock is treated like a bond issued with OID equal to (1) the stated redemption price of the stock minus (2) the amount paid for the stock. The discount accrued under the provision is treated as ordinary income and not as interest or dividends.

Stripped preferred stock is defined as any preferred stock where the ownership of the stock has been separated from the right to receive any dividend that has not yet become payable. The provision applies to stock that is limited and preferred as to dividends, does not participate in corporate growth to any significant extent, and has a fixed redemption price.

No inference is intended as to the treatment of stripped preferred stock for tax purposes with respect to any issues not directly addressed by this legislation, including the availability of the dividends received deduction to a holder of dividends stripped from preferred stock, the allocation of basis by the creator of stripped preferred stock, or the proper characterization of a purported sale of stripped dividend rights.

Effective Date

The bill is effective for stripped stock that is purchased after April 30, 1993.

d. TREATMENT OF NET CAPITAL GAINS AS INVESTMENT INCOME (SEC.

Present Law

In the case of a taxpayer other than a corporation, deductions for interest on indebtedness that is allocable to property held for investment ("investment interest") are limited to the taxpayer's net investment income for the taxable year. Disallowed investment interest is carried forward to the next taxable year. Investment income includes gross income (other than gain on disposition) from property held for investment and any net gain attributable to the disposition of property held for investment.

Investment interest that is allowable is deductible against income taxable at ordinary income rates. The net capital gain (i.e., net long-term capital gain less net short-term capital loss) of a noncorporate taxpayer is taxed at a maximum rate of 28 percent.

Prior to 1986, when a significant rate differential existed between long-term capital gains and ordinary income, long-term capital gains were not included in investment income for purposes of computing the investment interest limitation.

Reasons for Chance

The committee believes it is inappropriate for a taxpayer who recognizes long term capital gain taxable at favorable rate to be able to use that gain to deduct otherwise non-deductible investment interest against ordinary income. Because the bill increases the rate differential between ordinary income and the net capital gains rate, the possibility of such inappropriate rate arbitrage is increased. The committee believes that the opportunities for this type of rate conversion should be reduced.

Explanation of Provision

The bill generally excludes net capital gain attributable to the disposition of property held for investment from investment income for purposes of computing the investment interest limitation. A taxpayer, however, can elect to include so much of his net capital gain in investment income as the taxpayer chooses if he also reduces the amount of net capital gain eligible for the 28-percent maximum capital gains rate by the same amount.

Effective Date

The provision is effective for taxable years beginning after December 31, 1992.

e. DEFINITION OF "SUBSTANTIALLY APPRECIATED" INVENTORY (SEC.

Present Law

Under present law, amounts received by a partner in exchange for his interest in a partnership are treated as ordinary income to the extent they are attributable to substantially appreciated inventory of the partnership. In addition, distributions by a partnership in which a partner receives substantially appreciated inventory in exchange for his interest in certain other partnership property (or receives certain other property in exchange for substantially appreciated inventory) are treated as a taxable sale or exchange of property, rather than as a nontaxable distribution.

For these purposes, inventory is treated as substantially appreciated if the value of the partnership's inventory exceeds both 120 percent of its adjusted basis and 10 percent of the value of all partnership property (other than money).

Reasons for Chance

The committee believes that the 10-percent exception creates opportunities for avoidance of the appreciated inventory rule through the manipulation of the partnership's gross assets. The committee also believes that disregarding inventory that is acquired principally to avoid the appreciated inventory rule is necessary to prevent circumvention of the rule.

Explanation of Provision

The bill eliminates the requirement that the partnership's inventory exceed 10 percent of the value of all partnership property in order to be substantially appreciated. Thus, if the partnership's inventory is worth more than 120 percent of its adjusted basis, the inventory is treated as substantially appreciated. In addition, any inventory property acquired with a principal purpose to reduce the appreciation to less than 120 percent in order to avoid ordinary income treatment will be disregarded in applying the 120-percent test.

Effective Date

The provision applies to sales, exchanges, and distributions after April 30, 1993.

FOOTNOTES TO PART A.2

/1/ The provision is not intended to change the treatment of gain from the sale of property for purposes such as the unrelated business income tax for tax-exempt organizations and the gross income requirement for regulated investment companies.

/2/ Except that stock also is treated as personal property in defining a straddle for purposes of the conversion transaction provision.

/3/ For simplicity, the applicable rate is assumed to be compounded on an annual basis.

/4/ Or, in the case of a bond issued with original issue discount (OID), a price that is less than the amount of the issue price plus accrued OID.

END OF FOOTNOTES

3. REPEAL HEALTH INSURANCE WAGE BASE CAP (SEC. 8207 OF THE BILL AND

Present Law

As part of the Federal Insurance Contributions Act (FICA), a tax is imposed on employees and employers up to a maximum amount of employee wages. The tax is comprised of two parts: old-age, survivor, and disability insurance (OASDI) and Medicare hospital insurance (HI). For wages paid in 1993 to covered employees, the HI tax rate is 1.45 percent on both the employer and the employee on the first $135,000 of wages and the OASDI tax rate is 6.2 percent on both the employer and the employee on the first $57,600 wages.

Under the Self-Employment Contributions Act of 1954 (SECA), a tax is imposed on an individual's self-employment income. The self- employment tax rate is the same as the total rate for employers and employees (i.e., 2.9 percent for HI and 12.40 percent for OASDI). For 1993, the HI tax is applied to the first $135,000 of self-employment income and the OASDI tax is applied to the first $57,600 self- employment income. In general, the tax is reduced to the extent that the individual had wages for which employment taxes were withheld during the year.

The cap on wages and self-employment income subject to FICA and SECA taxes is indexed to changes in the average wages in the economy.

Reasons for Change

The committee believes that eliminating the cap on wages and self-employment income subject to the HI tax will increase the progressivity of the tax system. In addition, the increased revenues will provide necessary funding for the Hospital Insurance Trust Fund and will enhance its long-term solvency.

Explanation of Provision

The bill repeals the dollar limit on wages and self-employment income subject to HI taxes.

Effective Date

The provision is effective for wages and income received after December 31, 1993.

4. REINSTATE TOP ESTATE AND GIFT TAX RATES AT 53 PERCENT AND 55

Present Law

A Federal gift tax is imposed on transfers by gift during life and a Federal estate tax is imposed on transfers at death. The Federal estate and gift taxes are unified, so that a single graduated rate schedule is applied to an individual's cumulative gifts and bequests. For decedents dying (or gifts made) after 1992, the estate and gift tax rates begin at 18 percent on the first $10,000 of taxable transfers and reach a maximum of 50 percent on taxable transfers over $2.5 millIon. Previously, for the nine-year period beginning after 1983 and ending before 1993, two additional brackets applied at the top of the rate schedule: a rate of 53 percent on taxable transfers exceeding $2.5 million and below $3 million, and a maximum marginal tax rate of 55 percent on taxable transfers exceeding $3 million. The generation-skipping transfer tax is computed by reference to the maximum Federal estate tax rate (sec. 2641).

In order to phase out the benefit of the graduated brackets and unified credit, the estate and gift tax is increased by five percent on cumulative taxable transfers between $10 million an1d $18,340,000, for decedents dying and gifts made after 1992. /1/ (Prior to 1993, this phase out of the graduated rates and unified credit applied to cumulative taxable transfers between $10 million and $21,040,000.)

Reasons for Change

To raise revenue to address the Federal deficit, to improve tax equity, and to make the tax system more progressive, the committee believes that the top two estate and gift tax rates which expired at the end of 1992 should be reinstated.

Explanation of Provision

The bill provides that, for taxable transfers over $2.5 million but not over $3 million, the estate and gift tax rate is 53 percent. For taxable transfers over $3 million, the estate and gift tax rate is 55 percent. The phase out of the graduated rates and unified credit applies with respect to cumulative taxable transfers between $10 million and $21,040,000. Also, since the generation-skipping transfer tax is computed by reference to the maximum Federal estate tax rate, the rate of tax on generation-skipping transfers under the bill is 55 percent.

Effective Date

The provision is effective for decedents dying, gifts made, and generation skipping transfers occurring after December 31, 1992.

FOOTNOTE TO PART A.4

/1/ The additional five percent rate applies to the taxable transfers of a nonresident noncitizen in excess of $10 million only to the extent necessary to phase out the graduated rates and unified credit actually allowed, either by statute or by treaty (where applicable).

END OF FOOTNOTE

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Effective Date

The provision is effective for taxable years beginning after December 31, 1993.

6. DENY DEDUCTION FOR CLUB DUES (SEC. 8210 OF THE BILL AND SEC.

Present Law

No deduction is permitted for club dues unless the taxpayer establishes that his or her use of the club was primarily for the furtherance of the taxpayer's trade or business and the specific expense was directly related to the active conduct of that trade or business (Code Sec. 274(a)). No deduction is permitted for an initiation or similar fee that is payable only upon joining a club if the useful life of the fee extends over more than one year. Such initial fees are nondeductible capital expenditures. /1/

Reasons for Change

Under present law, taxpayers can obtain a tax deduction for dues for a club (such as a country club) with respect to which some element of personal pleasure and enjoyment is present. The committee believes that it is inappropriate to permit a deduction for such expenditures. Denying a deduction for club dues also simplifies present law, in that a strict nondeductibility rule is easier to comply with than the present-law rule requiring an assessment of the primary purpose of the use of the club.

Explanation of Provision

Under the bill, no deduction is permitted for club dues. This rule applies to all types of clubs, including business, social, athletic, luncheon, and sporting clubs. Specific business expenses (e.g., meals) incurred at a club are deductible only to the extent they otherwise satisfy the standards for deductibility.

Effective Date

The provision is effective for taxable years beginning after December 31, 1993.

FOOTNOTE TO PART A.6

/1/ Kenneth D. Smith, 24 TCM 899 (1965)

END OF FOOTNOTE

7. DENY DEDUCTION FOR EXECUTIVE PAY OVER $1 MILLION (SEC. 8211 OF THE

Present Law

The gross income of an employee includes any compensation received for services rendered. An employer is allowed a corresponding deduction for reasonable salaries and other compensation. Whether compensation is reasonable is determined on a case-by-case basis. However, the reasonableness standard has been used primarily to limit payments by closely-held companies where nondeductible dividends bay be disguised as deductible compensation.

Reasons for Change

Recently, the amount of compensation received by corporate executives has been the subject of scrutiny and criticism. The committee believes that excessive compensation will be reduced if the deduction for compensation (other than performance-based compensation) paid to the top executives of publicly held corporations is limited to $1 million per year.

Explanation of Provision

In general

Under the bill, for purposes of the regular income tax and the alternative minimum tax, the otherwise allowable deduction for compensation paid or accrued with respect to a covered employee of a publicly held corporation is to be limited to no more than $1 million per year. /1/

Definition of publicly held corporation

For this purpose, a corporation is treated as publicly held if the corporation has a class of common equity securities that is required to be registered under section 12 of the Securities Exchange Act of 1934. In general, the Securities Exchange Act requires a corporation to register its common equity securities under section 12 if (1) the securities are listed on a national securities exchange or (2) the corporation has $5 million or more of assets and 500 or more holders of such securities. A corporation is not considered publicly held under the bill if registration of its equity securities is voluntary. Such a voluntary registration might occur, for example, if a corporation that otherwise is not required to register its equity securities does so in order to take advantage of other procedures with regard to public offerings of debt securities.

Covered employees

Covered employees are defined by reference to the Securities and Exchange Commission (SEC) rules governIng disclosure of executive compensation. Thus, with respect to a taxable year, a person is a covered employee if (1) the employee is the chief executive officer of the corporation (or an individual acting in such capacity) as of the close of the taxable year or (2) the employee's total compensation is required to be reported for the taxable year under the Securities Exchange Act of 1934 because the employee is one of the four highest compensated officers for the taxable year (other than the chief executive officer). If disclosure is required with respect to fewer than four executives (other than the chief executive officer) under the SEC rules, then only those for whom disclosure is required are covered employees.

Compensation subject to the deduction limitation

In general

Unless specifically excluded, the deduction limitation applies to all remuneration for services, including cash and the cash value of all remuneration (including benefits) paid in a medium other than cash. If an individual is a covered employee for a taxable year, the deduction limitation applies to all compensation not explicitly excluded from the deduction limitation, regardless of whether the compensation is for services as a covered employee and regardless of when the compensation was earned. The $1 million cap is reduced by excess parachute payments (as defined in sec. 280G) that are not deductible by the corporation.

The deduction limitation applies when the deduction would otherwise be taken. Thus, for example, in the case of a nonqualified stock option, the deduction is normally taken in the year the option is exercised, even though the option was granted with respect to services performed in a prior year. /2/

Certain types of compensation are not subject to the deduction limit and are not taken into account in determining whether other compensation exceeds $1 million. The following types of compensation are not taken into account: (1) remuneration payable on a commission basis; (2) remuneration payable solely on account of the attainment of one or more performance goals if certain outside director and shareholder approval requirements are met; (3) payments to a tax- qualified retirement plan (including salary reduction contributions), (4) amounts that are excludable from the executive's gross income (such as employer-provided health benefits and miscellaneous fringe benefits (sec. 132)), and (5) any remuneration payable under a written binding contract which was in effect on February 17, 1993, and all times thereafter before such remuneration was paid and which was not modified thereafter in any material respect before such remuneration was paid.

Commissions

In order to qualify for the exception for compensation paid in the form of commissions, the commission must be payable solely on account of income generated directly by the individual performance of the executive receiving such compensation. Thus, for example, compensation that equals a percentage of sales made by the executive qualifies for the exception. Remuneration does not fail to be attributable directly to the executive merely because the executive utilizes support services, such as secretarial or research services, in generating the income. However, compensation is paid on account of broader performance standards, such as income produced by a business unit of the corporation, the compensation would not qualify for the exception because it is not paid with regard to income that is directly attributable to the individual executive.

Other performance-based compensation

Compensation qualifies for the exception for performance-based compensation only if (1) it is paid solely on account of the attainment of one or more performance goals, (2) the performance goals are established by a compensation committee consisting solely of two or more outside directors, (3) the material terms under which the compensation is to be paid, including the performance goals, are disclosed to and approved by the shareholders in a separate vote prior to payment, and (4) prior to payment, the compensation committee certifies that the performance goals and any other material terms were in fact satisfied.

Compensation is not treated as paid solely on account of the attainment of one or more performance goals unless it is paid pursuant to a preestablished objective formula or standard that precludes discretion. In general, this means that a third party with knowledge of the relevant performance results could calculate the amount to be paid. It is intended that what constitutes a performance goal be broadly defined, and include, for example, any performance standard that is applied to the individual executive, a business unit (e.g., a division or a line of business), or the corporation as a whole. Performance standards could include, for example, increases in stock price, market share, sales, or earnings per share.

Compensation does not qualify for the performance-based exception if the executive has a right to receive the compensation notwithstanding the failure of (1) the compensation committee to certify attainment of the performance goal or (2) the shareholders to approve the compensation.

Stock options or other stock appreciation rights generally are treated as meeting the exception for performance-based compensation, provided that the requirements for outside director and shareholder approval are met (without the need for certification that the performance standards have been met), because the amount of compensation attributable to the options or other rights received by the executive would be based on an increase in the corporation's stock price. This does not apply, however, to stock-based compensation that is dependent on factors other than corporate performance. For example, if a stock option is granted to an executive with an exercise price that is less than the current fair market value of the stock at the time of grant, then the executive would have the right to receive compensation on the exercise of the option even if the stock price decreases or stays the same. Thus, stock options that are granted with an exercise price that is less than the fair market value of the stock at the time of grant do not meet the requirements for performance-based compensation. Similarly, if the executive is otherwise protected from decreases in the value of the stock (such as through automatic repricing), the compensation is not performance-based.

In contrast to options or other stock appreciation rights, grants of restricted stock are not inherently performance-based because the executive may receive compensation even if the stock price decreases or stays the same. Thus, a grant of restricted stock is treated like cash compensation and does not satisfy the definition of performance-based compensation unless the grant or vesting of the restricted stock is based upon the attainment of a performance goal and otherwise satisfies the standards for performance-based compensation under the bill.

For purposes of the exception for performance-based compensation, a director is considered an outside director if he or she is not a current employee of the corporation (or related entities), is not a former employee of the corporation (or related entities) who is receiving compensation for prior services (other than benefits under a tax-qualified pension plan), was not an officer of the corporation (or related entities) at any time, and is not currently receiving compensation for personal services in any capacity (e.g., for services as a consultant) other than as a director.

In order to meet the shareholder approval requirement, the material terms under which the compensation is to be paid must be disclosed. In developing standards as to whether disclosure is adequate, it is intended that the Secretary take into consideration the SEC rules regarding disclosure.

The shareholder approval requirement is met if, after disclosure of material terms, the compensation is approved in a separate vote by a majority of shares voting in the separate vote.

In the case of compensation paid pursuant to a plan (including a stock option plan), the shareholder approval requirement generally is satisfied if the shareholders approve the specific terms of the plan and the class of executives to which it applies and the amount of compensation payable under the plan is not subject to discretion. Further shareholder approval of payments under the plan is not required after the plan has been approved. Of course, if there are material changes to the plan, shareholder approval would have to be obtained again in order for the exception to apply to payments under the modified plan.

Under present law, in the case of a privately held company that becomes publicly held, the prospectus is subject to the rules similar to those applicable to publicly held companies. Thus, if there has been disclosure that would satisfy the rules described above, persons who buy stock in the publicly held company will be aware of existing compensation arrangements. No further shareholder approval is required of compensation arrangements existing prior to the time the company became public unless there is a material modification of such arrangements.

Compensation payable under a written binding contract

Remuneration payable under a written binding contact which was in effect on February 17, 1993, and at all times thereafter before such remuneration was paid is not subject to the deduction limitation. Compensation paid pursuant to a plan qualifies for this exception provided that the right to participate in the plan is part of a written binding contract with the covered employee in effect on February 17, 1993. For example, suppose a covered employee was hired by XYZ Corporation on January 17, 1993, and one of the terms of the written employment contract is that the executive is eligible to participate in the "XYZ Corporation Executive Deferred Compensation Plan" in accordance with the terms of the plan. Assume further that the terms of the plan provide for participation after 6 months of employment, amounts payable under the plan are not subject to discretion, and the corporation does not have the right to amend materially the plan or terminate the plan. Provided that the other conditions of the binding contract exception are met (e.g., the plan itself is in writing), payments under the plan are grandfathered, even though the employee was not actually a participant in the plan on February 17, 1993.

The fact that a plan was in existence on February 17, 1993, is not by itself sufficient to qualify the plan for the exception for binding written contracts.

The exception for remuneration paid pursuant to a binding written contract ceases to apply to amounts paid after there has been a material modification to the terms of the contract. The exception does not apply to new contracts entered into or renewed after February 17, 1993. For purposes of this rule, any contract that is entered into on or before February 17, 1993, and that is renewed after such date is treated as a new contract entered into on the day the renewal takes effect. A contract that is terminable or cancelable unconditionally at will by either party to the contract without the consent of the other, or by both parties to the contract, is treated as a new contract entered into on the date any such termination or cancellation, if made, would be effective. However, a contract is not treated as so terminable or cancelable if it can be terminated or cancelled only by terminating the employment relationship of the covered employee.

Effective Date

The provision applies to compensation that is otherwise deductible by the corporation in a taxable year beginning on or after January 1, 1994.

FOOTNOTES TO PART A.7

/1/ The provision does not modify the present-law requirement that, in order to be deductible, compensation must be reasonable. Thus, as under present law, in under certain circumstances compensation less than $1 million may not be deductible.

/2/ Of course, if the executive is no longer a covered employee at the time the options are exercised, then the deduction limitation would not apply.

END OF FOOTNOTES

8. REDUCE COMPENSATION TAKEN INTO ACCOUNT FOR QUALIFIED RETIREMENT

Present Law

Under present law, the amount of a participant's compensation that can be taken into account under a tax-qualified pension plan is limited (sec. 401(a)(17)). The limit applies for determining the amount of the employer's deduction for contributions to the plan as well as for determining the amount of the participant's benefits. The limit on includible compensation is $235,840 for 1993, and is adjusted annually for inflation. The limit in effect at the beginning of a plan year applies for the entire plan year. The indexed limit in effect for a plan year does not apply to any prior plan years.

Reasons for Change

The limit on compensation taken into account under a qualified pension plan serves as a useful backstop to the nondiscrimination requirements applicable to qualified plans. By limiting the compensation taken into account under a plan, an employer is deemed to be providing greater benefits as a percentage of pay to an employee with compensation in excess of the cap than would be the case if all of the employee's compensation were taken into account. As a result, under the nondiscrimination rules rank-and-file employees be entitled to benefits that are a larger percentage of their pay.

The committee believes that the goal of reducing the extent to which employers discriminate in the provision of pension benefits in favor of highly compensated employees can be better served by reducing further the compensation taken into account under qualified plans.

The committee is aware that in some cases State constitutions preclude benefit formulas from being reduced. Accordingly, the committee believes it is appropriate to provide a limited transition rule for existing employees of governmental organizations. However, the committee also believes that State and local governments should be encouraged to conform their tax-qualified pension plans to Federal requirements and so, as a condition of the transition relief, requires the Federal compensation limit to be incorporated into the plan by reference.

The committee believes it is appropriate to provide a delayed effective date in the case of collectively bargained plans.

Explanation of Provision

Under the bill, the limit on compensation taken into account under a qualified plan (sec. 401(a)(17)) is reduced to $150,000. This limit is indexed for cost-of-living adjustments in increments of $10,000. Corresponding changes are also made to other provisions (secs. 404(l), 408(k)(3)(C), (6)(D)(ii), and (8), and 505(b)(7)) that take into account the section 401(a)(17) limit.

Effective Date

The provision is generally effective for benefits accruing in plan years beginning after December 31, 1993. Special transition rules apply in the case of governmental plans and plans maintained pursuant to a collective bargaining agreement.

In the case of an eligible participant in a plan maintained by a State or local government, the limit on compensation taken into account is the greater of the limit under the proposal and the compensation allowed to be taken into account under the plan as in effect on July 1, 1993. For purposes of this rule, an eligible participant is an individual who first became a participant in the plan during a plan year beginning before the first plan year beginning after the earlier of: (1) the plan year in which the plan is amended to reflect the proposal, or (2) December 31, 1995. This special rule does not apply unless the plan is amended to incorporate the dollar limit in effect under section 401(a)(17) by reference, effective with respect to persons other than eligible participants for benefits accruing in plan years beginning after December 31, 1995 (or earlier if the plan amendment so provides).

In the case of a plan maintained pursuant to one or more collective bargaining agreements ratified before the date of enactment, the provision does not apply to contributions or benefits accruing under such agreements in plan years beginning before the earlier of (1) the latest of (a) January 1, 1994, (b) the date on which the last of such collective bargaining agreements terminates (without regard to any extension or modification on or after the date of enactment), or (c) in the case of a plan maintained pursuant to collective bargaining under the Railway Labor Act, the date of execution of an extension or replacement of the last of such collect bargaining agreements in effect on the date of enactment, or (2) January 1, 1997.

9. DEDUCTION FOR MOVING EXPENSES FOR MEALS AND REAL ESTATE EXPENSES

Present law

An employee or self-employed individual may claim a deduction from gross income for certain expenses incurred as a result of moving to a new residence in connection with beginning work at a new location (sec. 217). The deduction is not subject to the floor that generally limits a taxpayer's allowable miscellaneous itemized deductions to those amounts that exceed two percent of the taxpayer's adjusted gross income. Any amount received directly or indirectly by such individual as a reimbursement of moving expenses must be included in the taxpayer's gross income as compensation (sec. 82). The taxpayer may offset this income by deducting the moving expenses that would otherwise qualify as deductible items under section 217.

Deductible moving expenses are the expenses of transporting the taxpayer and members of the taxpayer's household, as well as household goods and personal effects, from the old residence to the new residence; the cost of meals and lodging enroute; the expenses for pre-move househunting trips; temporary living expenses for up to 30 days in the general location of the new job; and certain expenses related to either the sale or settlement of a lease on the old residence or the purchase of or the acquisition of a lease on a new residence in the general location of the new job.

The moving expense deduction is subject to a number of limitations. A maximum of $1,500 can be deducted for pre-move househunting and temporary living expenses in the general location of the new job. A maximum of $3,000 (reduced by any deduction claimed for househunting or temporary living expenses) can be deducted for certain qualified expenses for the sale or purchase of a residence or settlement or acquisition of a lease. If both a husband and wife begin new jobs in the same general location, the move is treated as a single commencement of work. If a husband and wife file separate returns, the maximum deductible amounts available to each are one- half the amounts otherwise allowed.

Also, in order for a taxpayer to claim a moving expense deduction, the taxpayer's new principal place of work must be at least 35 miles farther from the taxpayer's former residence than was the taxpayer's former principal place of work (or at least 35 miles from the taxpayer's former residence, if the taxpayer has no former place of work).

Reasons for Change

The committee believes that no deduction is justified for certain expenses that do not directly relate to the cost of moving. Such expenses include those related to: (1) sale of the old residence, (2) settlement of a lease on the old residence, (3) acquisition of a lease on or purchase of a new residence in the general location of the new job. /1/ Also, the committee believes that it is unfair to provide a deduction for such expenses under sec. 217 to some taxpayers while denying it to others.

Further, the committee believes that the expense of meals in this context are primarily a personal living expense rather than an expense incurred for business purposes and should be afforded similar tax treatment to other personal expenses, namely nondeductibility.

Finally, the committee believes that the $10,000 overall cap is necessary to eliminate excessive moving expense deductions.

Explanation of Provision

The provision excludes from the definition of moving expenses: (1) the costs of selling (or settling an unexpired lease on) the old residence and buying (or acquiring a lease on) the new residence, and (2) the costs of meals consumed while traveling and while living in temporary quarters near the new workplace. In addition, an overall $10,000 cap is imposed on allowable moving expenses (including expenses subject to the limit on househunting and temporary living expenses) for each qualified move (including foreign moves). The $10,000 amount is indexed for inflation occurring after December 31, 1993.

Effective Date

Generally, the provision is effective for expenses incurred after December 31, 1993.

FOOTNOTE TO PART A.9

/1/ These amounts may generally be capitalized into the basis of the underlying asset.

END OF FOOTNOTE

10. MODIFY ESTIMATED TAX REQUIREMENTS FOR INDIVIDUALS (SEC. 8214 OF

Present Law

Under present law, an individual taxpayer generally is subject to an addition to tax for any underpayment of estimated tax. An individual generally does not have an underpayment of estimated tax if he or she makes timely estimated tax payments at least equal to: (1) 100 percent of the tax shown on the return of the individual for the preceding year (the "100 percent of last year's liability safe harbor") or (2) 90 percent of the tax shown on the return for the current year. Income tax withholding from wages is considered to be a payment of estimated taxes. For estimated tax purposes, some trusts and estates are treated as individuals.

In addition, for taxable years beginning after 1991 and before 1997, a special rule provides the 100 percent of last year's liability safe harbor generally is not available to a taxpayer that (1) has a modified adjusted gross income (AGI) in the current year that exceeds the taxpayer's AGI in the preceding year by more than $40,000 ($20,000 in the case of a separate return by a married individual) and (2) has a modified AGI in excess of $75,000 in the current year ($37,500 in the case of a separate return by a married individual).

Reasons for Change

The committee believes that the application of the special rule that denies the use of the 100 percent of last year's liability safe harbor is unduly cumbersome. In order to simplify the calculation of estimated taxes for individuals, the special rule is replaced with a new, permanent safe harbor that applies to individuals with a preceding year AGI above a certain threshold.

Explanation of Provisions

The special rule that denies the use of the 100 percent of last year's liability safe harbor is repealed for taxable years beginning after 1993. However, the 100 percent of last year's liability safe harbor is modified to be a 110 percent of last year's liability safe harbor for any individual with an AGI of more than $150,000 ($75,000 in the case of a married individual filing a separate return in the current year) as shown on the return for the preceding taxable year. For this purpose, the AGI of a trust or an estate is determined pursuant to rules similar to those in Code section 67(e).

For taxable years beginning after 1993, the bill does not change the availability of (1) the 100 percent of last year's liability safe harbor for an individual with a preceding year AGI of $150,000 or less, or (2) the present-law rule that allows any individual to base estimated tax payments on 90 percent of the tax shown on the return for the current year.

Effective Date

The provision is effective for estimated tax payments applicable to taxable years beginning after December 31, 1993.

11. INCREASE TAXABLE PORTION OF SOCIAL SECURITY AND RAILROAD

Present Law

Under present law, a portion of Social Security and Railroad Retirement Tier 1 benefits is includible in gross income for taxpayers whose provisional incomes exceed a threshold amount. For purposes of this computation, a taxpayer's provisional income includes modified adjusted gross income (adjusted gross income plus tax-exempt interest plus certain foreign source income) plus one-half of the taxpayer's Social Security or Railroad Retirement Tier 1 benefit. The threshold amount is $25,000 for unmarried taxpayers, $32,000 for married taxpayers filing joint returns, and $0 for married taxpayers filing separate returns. A taxpayer is required to include in gross income the lesser of: (1) 50 percent of the taxpayer's Social Security or Railroad Retirement Tier benefit, or (2) 50 percent of the excess of the taxpayer's provisional income over the applicable threshold amount.

Proceeds from the income taxation of these benefits are credited quarterly to the Old-Age and Survivors Insurance Trust Fund, the Disability Insurance Trust Fund, or the Social Security Equivalent Benefit Account (of the Railroad Retirement system), as appropriate.

Reasons for Change

The committee desires to more closely conform the income tax treatment of Social Security benefits and private pension benefits by increasing the amount of Social Security benefits included in gross income for certain higher-income beneficiaries. Moreover, the committee recognizes that reducing the exclusion of these benefits would enhance both the horizontal and vertical equity of the individual income tax system by treating all income in a more similar manner. To limit the effect of this provision to taxpayers with a greater ability to pay taxes, a second threshold would be created at a level greater than the present-law threshold for Social Security benefit inclusion. Further, the committee believes that revenues attributable to the increased portion of Social Security benefits included in gross income should be dedicated to the Medicare Hospital Insurance (HI) Trust Fund because this fund is currently in a weak financial position.

Explanation of Provision

The bill creates a second tier of Social Security benefit inclusion in gross income. Present-law inclusion rules will apply to taxpayers with provisional income below $32,000 for unmarried taxpayers or $40,000 for married taxpayers filing joint returns.

For taxpayers with provisional incomes above these higher thresholds, gross income will include the lesser of:

(1) 85 percent of the taxpayer's Social Security benefit or

(2) the sum of:

(a) the smaller of (i) the amount included under present

plus,

(b) 85 percent of the excess of the taxpayer's provisional

For married taxpayers filing separate returns, gross income will include the lesser of 85 percent of the taxpayer's Social Security benefit or 85 percent of the taxpayer's provisional income.

For purposes of this computation, a taxpayer's provisional income (modified adjusted gross income plus one-half of the taxpayer's Social Security or Railroad Retirement Tier 1 benefit) is calculated the same as under present law.

Revenues from the income taxation of Social Security and Railroad Retirement Tier 1 benefits attributable to the increased portion of benefits included in gross income will be transferred to the Medicare Hospital Insurance (HI) Trust Fund.

Effective Date

The provision is effective for taxable years beginning after December 31, 1993.

FOOTNOTE TO PART A.11

/1/ These figures equal 50 percent of the difference between the present law thresholds for 50 percent Social Security benefit inclusion and the proposed new thresholds for 85 percent Social Security benefit inclusion.

END OF FOOTNOTE