Joint Committee Report JCS-23-97: General Explanation of Tax Legislation Enacted in 1997

² See also section 1031 of the Taxpayer Relief Act of 1997 (H.R. 2014, P.L. 105-34) in Part Two of this pamphlet for subsequent extension and modifications to the Airport and Airway Trust fund excise taxes.

³ P.L. 105-2; February 28, 1997. H.R. 668 was reported by the House Committee on Ways and Means on February 13, 1997 (H. Rept. 105-5). The bill was passed by the House on February 26, 1997, and by the Senate on February 27, 1997. H.R. 668 was signed by the President on February 28, 1997.

See also Part Two for a description of the subsequent 10-year extension and modification of the Airport Trust Fund excise taxes in the Taxpayer Relief Act of 1997 (sec. 1031 of H.R. 2014).

⁴ Air carriers generally make this election because it allows them to delay remitting tax beyond the date when remittance otherwise would be required.

⁵ P.L. 105-34; August 5, 1997. H.R. 2014 was reported by the House Committee on the Budget on June 24, 1997 (H. Rept. 105-148), after the revenue reconciliation provisions were approved by the House Committee on Ways and Means on June 13, 1997. The bill, as amended, was passed by the House on June 26, 1997.

S. 949 was reported by the Senate Committee on Finance on June 20, 1997 (S. Rept. 105-33). The bill was considered by the Senate on June 25-27, 1997, and the provisions of the bill as amended, were incorporated in the Senate-passed version of H.R. 2014 on June 27, 1997. A conference report on H.R. 2014 was filed in the House on July 30, 1997 (H. Rept. 105-220); the House agreed to the conference report on July 31, 1997; and the Senate also agreed to the conference report on July 31, 1997. H.R. 2014 was signed by the President on August 5, 1997.

Two provisions in the conference agreement on H.R. 2014 as passed by the House and the Senate were canceled by the President under the Line Item Veto Act: (1) temporary exceptions under subpart F for certain active financing income; and (2) nonrecognition of gain on the sale of stock in agricultural processors facilities to certain farmer's cooperatives. Modified versions of these two canceled provisions were passed by the House in H.R. 2513, as amended, on November 8, 1997. (See report of the Committee on Ways and Means on H.R. 2513; H. Rept. 105-318, Part I, October 9, 1997. H.R. 2513 was referred to the House Committee on the Budget, and the bill was discharged from the Committee on the Budget on October 22, 1997.)

Further, section 977 of H.R. 2014 (relating to carryback of existing net operating losses of the National Railroad Passenger Corporation (Amtrak)) was contingent on the enactment of Amtrak reform legislation. S. 738 ("Amtrak Reform and Accountability Act of 1997") was reported by the Senate Committee on Commerce, Science, and Transportation on May 14, 1997 (S. Rept. 105-85), and was passed by the Senate, as amended, on November 7, 1997. S. 738 was passed by the House, with amendment, on November 13, 1997, and the Senate agreed to the House amendment on November 13, 1997. S. 738 was signed by the President on December 2, 1997 (P.L. 105-134).

⁶ The provision is described as set forth in Title VI (sec. 603(a)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁷ For this purpose, the earned income credit is determined without regard to the supplemental earned income credit discussed below.

⁸ The provision is described as set forth in Title VI (sec. 603(b)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁹ No inference is intended as to the tax treatment of other types of State-sponsored organizations.

¹⁰ If the aggregate redemption amount (i.e., principal plus interest) of all Series EE bonds redeemed by the taxpayer during the taxable year exceeds the qualified education expenses incurred, then the excludable portion of interest income is based on the ratio that the education expenses bear to the aggregate redemption amount (sec. 135(b)).

¹¹ The Act amended section 135 to allow taxpayers to redeem U.S. Savings Bonds and be eligible for the exclusion under that section (as if the proceeds were used to pay qualified higher education expenses) provided that the proceeds from the redemption are contributed to a qualified State tuition program defined under section 529, or to an education IRA defined under section 530, on behalf of the taxpayer, the taxpayer's spouse, or a dependent. Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, includes a technical correction provision that conforms the definition of "eligible educational institution" under section 135 to the broader definition of that term under sections 529 and 530. The result of this technical correction would be that, for purposes of section 135, as under sections 529 and 530, the term "eligible educational institution" would be defined as an institution which is (1) described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and (2) eligible to participate in Department of Education student aid programs.

¹² A special rule provides that qualified tuition reductions under section 117(d) may be provided for graduate-level courses in cases of graduate students who are engaged in teaching or research activities for the educational organization (sec. 117(d)(5)).

¹³ Thus, an eligible student who incurs $1,000 of qualified tuition and related expenses is eligible (subject to the AGI phaseout) for a $1,000 HOPE credit; and if such a student incurs $2,000 of qualified tuition and related expenses, then he or she is eligible for a $1,500 HOPE credit.

¹⁴ The maximum HOPE credit amount will be indexed for inflation occurring after the year 2000, by increasing the cap on qualified tuition and related expenses subject to the 100-percent credit rate and the cap on such tuition and related expenses subject to the 50-percent credit rate, both caps rounded down to the closest multiple of $100. (Some printed versions of the Act incorrectly indicated that the caps would be rounded down to the closest multiple of $1,000.) The first taxable year for which the inflation adjustment could be made to increase the caps on qualified tuition and related expenses will be 2002.

¹⁵ The HOPE credit may not be claimed against a taxpayer's alternative minimum tax (AMT) liability.

¹⁶ If a taxpayer is married (within the meaning of section 7703), the HOPE credit may be available only if the taxpayer and his or her spouse file a joint return for the taxable year.

¹⁷ For any taxable year, a taxpayer may claim the HOPE credit for qualified tuition and related expenses paid with respect to one student and also claim the Lifetime Learning credit or the section-530 exclusion with respect to one or more other students. If the HOPE credit is claimed with respect to one student for one or two taxable years, then the Lifetime Learning credit or the section-530 exclusion may be available with respect to that same student for subsequent taxable years.

¹⁸ In addition, the Act amends section 135 to provide that the amount of qualified higher education expenses taken into account for purposes of that section is reduced by the amount of such expenses taken into account in determining the HOPE credit claimed by any taxpayer with respect to the student for the taxable year.

¹⁹ Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, includes a provision that clarifies that, under section 6050S, information returns containing information with respect to qualified tuition and related expenses must be filed by a person that is not an eligible educational institution only if such person is engaged in a trade or business of making payments to any individual under an insurance arrangement as reimbursements or refunds (or similar payments) of qualified tuition and related expenses. Section 6050S will continue to require the filing of information returns by persons engaged in a trade or business if, in the course of such trade or business, the person receives from any individual interest aggregating $600 or more for any calendar year on one or more qualified education loans within the meaning of section 221(e)(1).

²⁰ If a taxpayer is married (within the meaning of section 7703), the Lifetime Learning credit may be available only if the taxpayer and his or her spouse file a joint return for the taxable year.

²¹ The HOPE credit is available only with respect to the first two years of a student's undergraduate education.

²² In addition, the Act amends present-law section 135 to provide that the amount of qualified higher education expenses taken into account for purposes of that section is reduced by the amount of such expenses taken into account in determining the Lifetime Learning credit claimed by any taxpayer with respect to the student for the taxable year.

²³ Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, includes a provision that clarifies that, under section 6050S, information returns containing information with respect to qualified tuition and related expenses must be filed by a person that is not an eligible educational institution only if such person is engaged in a trade or business of making payments to any individual under an insurance arrangement as reimbursements or refunds (or similar payments) of qualified tuition and related expenses.

²⁴ For purposes of section 137, adjusted gross income is determined without regard to the deduction for student loan interest.

²⁵ For purposes of sections 86, 135, 219, and 469, adjusted gross income is determined without regard to the deduction for student loan interest.

²⁶ Such guidance could provide, for example, that interest on loans (or other lines of credit) the proceeds of which are used in part to pay qualified higher education expenses and in part to pay other expenses cannot be reported as qualified education loan interest under this provision unless the portion of the loan or line of credit that is attributable to the qualified higher education expenses is separately stated and accounted for. Under such an approach, interest on a revolving line of credit that is used in part to pay qualified higher education expenses and in part to pay other, nonqualifying expenses generally could not be reported as qualified education loan interest. However, if the amount of the line of credit or loan that is attributable to the higher education expenses is identified at the time the loan is made or the account is established, and such amount is separately accounted for such that the applicable 60-month period and other requirements of the provision, including the lender reporting requirements, can be satisfied, then the interest could be reported as qualified education loan interest.

²⁷ If the aggregate redemption amount (i.e., principal plus interest) of all Series EE bonds redeemed by the taxpayer during the taxable year exceeds the qualified expenses incurred, then the excludable portion of interest income is based on the ratio that the education expenses bears to the aggregate redemption amount (sec. 135(b)).

²⁸ The Act amended section 135 to allow taxpayers to redeem U.S. Savings Bonds and be eligible for the exclusion under that section (as if the proceeds were used to pay qualified higher education expenses) provided that the proceeds from the redemption are contributed to a qualified State tuition program defined under section 529, or to an education IRA defined under section 530, on behalf of the taxpayer, the taxpayer's spouse, or a dependent. Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, includes a technical correction provision that conforms the definition of "eligible educational institution" under section 135 to the broader definition of that term under sections 529 and 530. The result of this technical correction would be that, for purposes of section 135, as under sections 529 and 530, the term "eligible educational institution" would be defined as an institution which is (1) described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and (2) eligible to participate in Department of Education student aid programs.

²⁹ Specifically, section 529(c)(3)(A) provides that any distribution under a qualified State tuition program shall be includible in the gross income of the distributee in the same manner as provided under present-law section 72 to the extent not excluded from gross income under any other provision of the Code.

³⁰ For this purpose, the term "member of the family" was defined under prior law by reference to section 2032A(e)(2).

³¹ The Act provides that, after 1998, the annual gift-tax exclusion of $10,000 in the case of an individual, or $20,000 in the case of a married couple that splits their gifts, will be indexed for inflation.

³² The Act increases the income phase-out limits for active participants in employer-sponsored retirement plans and modifies the limit for an individual who is not an active participant but whose spouse is. The Act also creates a new nondeductible IRA called a "Roth IRA." If certain conditions are satisfied, distributions from a Roth IRA are not includible in income. (See Title III.A., below.)

³³ Under the Act, nondeductible contributions are permitted to the extent the individual can not or does not make deductible contributions or contributions to a Roth IRA. (See Title III., A, below.)

³⁴ The Act provides an exception from the early withdrawal tax for withdrawals for qualified higher education expenses (see 3., above) and for withdrawals for first-time home purchase (up to $10,000). (See Title III. A., below.)

³⁵ "Education IRAs"--although they are referred to as "IRAs" and are subject to some of the same rules as individual retirement arrangements--are not, in fact, individual retirement arrangements within the meaning of the Code.

³⁶ The Act also provides a special rule that, in the case of any contract issued prior to August 20, 1996 (i.e., the date of enactment of section 529), section 529(c)(3)(C) will be applied without regard to the requirement that a distribution be transferred to a member of the family (or the requirement that a change in beneficiaries may be made only to a member of the family) in order for such distribution or change in beneficiaries to be tax free.

³⁷ Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, clarifies that, under rules contained in present-law section 72, distributions from qualified State tuition programs are treated as representing a pro-rata share of the principal (i.e., contributions) and accumulated earnings in the account, and also makes certain conforming changes to section 72. In particular, the Tax Technical Corrections Act of 1997 provides that, under section 72(e)(8)(B), the determination of the ratio that the aggregate amount of contributions to a qualified State tuition program on behalf of a beneficiary bears to the total balance (or value) of the account for the beneficiary is to be made at the time of the distribution or at such other time as the Secretary of the Treasury may prescribe.

³⁸ In cases where in-kind benefits are provided to a beneficiary under a qualified State tuition program, section 529(c)(3)(B) provides that the provision of such benefits is treated as a distribution to the beneficiary. Thus, to the extent such in-kind benefits, if paid for by the beneficiary, would constitute payment of qualified tuition and fees for purposes of the HOPE credit or Lifetime Learning credit, the beneficiary (or another taxpayer claiming the beneficiary as a dependent) may be able to claim the HOPE credit or Lifetime Learning credit with respect to payments that are deemed to be made by the beneficiary with respect to the in-kind benefit.

³⁹ Education IRAs generally are not subject to Federal income tax, but are subject to the unrelated business income tax ("UBIT") imposed by section 511.

⁴⁰ The Act allows taxpayers to redeem U.S. Savings Bonds and be eligible for the exclusion under section 135 (as if the proceeds were used to pay qualified higher education expenses) if the proceeds from the redemption are contributed to an education IRA (or qualified State tuition program) on behalf of the taxpayer, the taxpayer's spouse, or a dependent. In such a case, the beneficiary's basis in the bond proceeds contributed on his or her behalf to the education IRA or qualified tuition program will be the contributor's basis in the bonds (i.e., the original purchase price paid by the contributor for such bonds).

⁴¹ An excise tax penalty may be imposed under present-law section 4973 to the extent that excess contributions above the $500 annual limit are made to an education IRA. However, Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, clarifies that neither the excise tax penalty under section 4973 nor the additional 10-percent tax under section 530(d)(4) (described infra) may be imposed in cases where contributions (and any earnings thereon) are distributed from the education IRA before the date that a return is required to be filed (including extensions of time) by the beneficiary for the year in which the contribution was made (or, if the beneficiary is not required to file such a return, April 15th of the year following the taxable year during which the contribution was made).

⁴² The exclusion will not be a preference item for alternative minimum tax (AMT) purposes.

⁴³ If a HOPE credit or Lifetime Learning credit was claimed with respect to a student for an earlier taxable year, the exclusion provided for by the Act may be claimed with respect to the same student for a subsequent taxable year with respect to a distribution from an education IRA made in that subsequent taxable in order to cover qualified higher education expenses incurred during that year. Conversely, if an exclusion is claimed for a distribution from an education IRA with respect to a particular student, then a HOPE credit or Lifetime Learning credit will be available in a subsequent taxable year with respect to that same student (provided that no exclusion is claimed in such other taxable years for distributions from an education IRA on behalf of that student and provided that the requirements of the HOPE credit or Lifetime Learning credit are satisfied in the subsequent taxable year).

⁴⁴ Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, clarifies that, under rules contained in present-law section 72, distributions from education IRAs are treated as representing a pro-rata share of the principal (i.e., contributions) and accumulated earnings in the account, and also makes certain conforming changes to section 72. In particular, the Tax Technical Corrections Act of 1997 provides that, under section 72(e)(8)(B), the determination of the ratio that the aggregate amount of contributions to an education IRA bears to the account balance is to be made at the time of the distribution or at such other time as the Secretary of the Treasury may prescribe.

⁴⁵ For example, if an education IRA has a total balance of $10,000, of which $4,000 represents principal (i.e., contributions) and $6,000 represents earnings, and if a distribution of $2,000 is made from such an account, then $800 of that distribution will be treated as a return of principal (which under no event is includible in the gross income of the distributee) and $1,200 of the distribution will be treated as accumulated earnings. In such a case, if qualified higher education expenses of the beneficiary during the year of the distribution are at least equal to the $2,000 total amount of the distribution (i.e., principal plus earnings), then the entire earnings portion of the distribution will be excludible under new Code section 530, provided that a HOPE credit or Lifetime Learning credit is not claimed for that same taxable year on behalf of the beneficiary. If, however, the qualified higher education expenses of the beneficiary for the taxable year are less than the total amount of the distribution, then only a portion of the earnings will be excludable from gross income under section 530. Thus, in the example discussed above, if the beneficiary incurs only $1,500 of qualified higher education expenses in the year that a $2,000 distribution is made, then only $900 of the earnings will be excludable from gross income under section 530 (i.e., an exclusion will be provided for the pro-rata portion of the earnings, based on the ratio that the $1,500 of qualified higher education expenses bears to the $2,000 distribution) and the remaining $300 of the earnings portion of the distribution will be includible in the distributee's gross income.

⁴⁶ A technical correction is needed to section 530(d)(4) to clarify that the 10-percent additional tax should not be imposed in cases where a distribution (although used to pay for qualified higher education expenses) is includible in gross income because the taxpayer elects the HOPE or Lifetime Learning credit on behalf of the student for the same taxable year.

⁴⁷ For this purpose, a "member of the family" means persons described in paragraphs (1) through (8) of section 152(a) -- e.g., sons, daughters, brothers, sisters, nephews and nieces, certain in-laws, etc. -- and any spouse of such persons.

⁴⁸ A technical correction providing that any balance remaining in an education IRA will be deemed distributed within 30 days after the date that the designated beneficiary reaches age 30 is included in Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁴⁹ The Act provides that, after 1998, the annual gift-tax exclusion of $10,000 in the case of an individual, or $20,000 in the case of a married couple that splits their gifts, will be indexed for inflation.

⁵⁰ The legislative history reflects congressional intent that the provision expire with respect to courses beginning after May 31, 1997.

⁵¹ See colloquy between Senators Moynihan and Roth, Cong. Record, July 31, 1997, S8466-67, clarifying that bonds to which the $150 million limit does not apply under the Act are not taken into account in applying the $150 million limit to other bonds.

⁵² The amount of the deduction allowable for a taxable year with respect to a charitable contribution may be reduced depending on the type of property contributed, the type of charitable organization to which the property is contributed, and the income of the taxpayer (secs. 170(b) and 170(e)). Corporations are entitled to claim a deduction for charitable contributions, generally limited to 10 percent of their taxable income (computed without regard to the contributions) for the taxable year.

⁵³ S corporations are not eligible donors for purposes of section 170(e)(3) or section 170(e)(4).

⁵⁴ Treas. Reg. sec. 1.170A-4(b)(2)(ii)(F) defines an "infant" as a minor child (as determined under the laws of the jurisdiction in which the child resides). Treas. Reg. sec. 1.170A-4(b)(2)(ii)(G) provides that the "care of an infant" means performance of parental functions and provision for the physical, mental, and emotional needs of the infant.

⁵⁵ Eligible donees under section 170(e)(3) are public charities (but not governmental units) and private operating foundations. Eligible donees under section 170(e)(4) are limited to post-secondary educational institutions, scientific research organizations, and certain other organizations that support scientific research.

⁵⁶ For purposes of section 170(e)(3), however, no deduction is allowed for any portion of gain that would have been recognized as ordinary income (had the property been sold) because of the application of the recapture provisions in sections 617, 1245, 1250, or 1252. No such limitation applies under section 170(e)(4) because qualified contributions for purposes of section 170(e)(4) are limited to nondepreciable inventory property.

⁵⁷ In the case of depreciable trade or business property, the limitation of section 170(e)(3)(C) does not apply for purposes of determining the amount of the deduction under the provision. Thus, a deduction is allowed under the provision for a portion of the gain that would have been recognized as ordinary income (had the property been sold) because of the application of the recapture provisions relating to depreciation, certain mining and exploration expenditures, certain soil and water conservation expenditures, and certain land-clearing expenditures.

⁵⁸ In the case of contributions made through private foundations, the Act permits the payment by the ultimate recipient to the private foundation of shipping, transfer, and installation costs.

⁵⁹ A technical correction is necessary to provide that the provision is effective for contributions made during a three-year period ending December 31, 2000.

⁶⁰ A technical correction is required to clarify that gross income does not include amounts from the forgiveness of loans made by educational organizations and certain tax-exempt organizations to refinance any existing student loan (and not just loans made by educational organizations). A provision to this effect is included in Title VI (sec. 604(e)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁶¹ A technical correction is required to clarify that refinancing loans made by educational organizations and certain tax-exempt organizations must be made pursuant to a program of the refinancing organization (e.g., school or private foundation) that requires the student to fulfill a public service work requirement. A provision to this effect is included in Title VI (sec. 604(e)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁶² A technical correction may be necessary to clarify that the credit also may be claimed against estimated tax liability on the credit allowance date.

⁶³ The Act also provides for penalty-free withdrawals from IRAs for education expenses. (See Title II.A.3., above.) The penalty-free withdrawal exceptions for first-time homebuyer and education expenses do not apply to distributions from employer-sponsored retirement plans. A technical correction may be necessary to prevent the avoidance of the early withdrawal tax by participants in employer-sponsored retirement plans who roll over hardship distributions into an IRA and withdraw the funds from the IRA. A technical correction to that effect is included in Title VI (sec. 605) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997. The technical correction would provide that hardship distributions cannot be rolled over into an IRA.

⁶⁴ The Act also provides for penalty-free withdrawals from IRAs for education expenses. (See Title II.A.3., above.) The penalty-free withdrawal exceptions for first-time homebuyer and education expenses do not apply to distributions from employer-sponsored retirement plans. A technical correction may be necessary to prevent the avoidance of the early withdrawal tax by participants in employer-sponsored retirement plans who roll over hardship distributions into an IRA and withdraw the funds from the IRA. A technical correction to that effect is included in Title VI (sec. 605) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997. The technical correction would provide that hardship distributions cannot be rolled over into an IRA.

⁶⁵ The Act does not modify the prior-law rule permitting IRAs to be invested in State coins and certain coins issued by the U.S. Mint.

⁶⁶ For this purpose, AGI does not include amounts includible in income as a result of a conversion of an IRA into a Roth IRA. It was intended that the phase-out range for married taxpayers filing separately be $0 to $10,000. A technical correction is necessary so that the statute reflects this intent. See Title VI (sec. 605) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁶⁷ As is the case with IRAs generally, contributions to a Roth IRA may be made for a year by the due date for the individual's tax return for the year (determined without regard to extensions). In the case of a contribution to a Roth IRA made after the end of the taxable year, the 5-year holding period begins with the taxable year to which the contribution relates, rather than the year in which the contribution is actually made.

⁶⁸ If the conversion is made by means of an actual withdrawal followed by a rollover contribution to a Roth IRA, the withdrawal must occur in 1998 for the 4-year income inclusion rule to apply. In such a case, the 4-year income inclusion begins with the year in which the withdrawal was made, even if the rollover to the Roth IRA does not occur until 1999. As is the case with rollovers generally, a rollover to a Roth IRA must be made within 60 days of the withdrawal from the IRA.

⁶⁹ In the case of conversions from an IRA to a Roth IRA, the 5-taxable year holding period begins with the taxable year in which the conversion was made.

⁷⁰ For this purpose, AGI is determined before any amount includible in income as a result of the conversion.

⁷¹ The rules relating to conversions of IRAs into Roth IRAs were not intended to allow individuals receiving premature distributions from a Roth conversion IRA while retaining the benefits of 4-year income averaging and the nonpayment of the early withdrawal tax. A technical correction may be necessary so that the statute reflects this intent. See Title VI (sec. 605) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997. In general, the proposed technical correction would provide that, if converted amounts are withdrawn within the 5-year period beginning with the year of conversion, then amounts withdrawn which were includible in income due to the conversion would be subject to the 10-percent early withdrawal tax and, if the 4-year income inclusion rule applied to the conversion, an additional 10-percent tax. If the 4-year income inclusion rule applied to the conversion, the converted amounts would still be includible in income under such rule, that is, there would be no acceleration of the income inclusion.

⁷² The Act is described as it would be modified by the technical corrections set forth in a letter dated September 29, 1997, to Donald Lubick, Acting Assistant Secretary for Tax Policy, from Chairman Archer, Chairman Roth, Congressman Rangel, and Senator Moynihan. These changes are included in Title VI (sec. 605(d)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁷³ Gain from the sale of a capital asset held more than one year remains "long-term capital gain" for purposes of the Code. Thus, for example, the deduction for charitable contributions of appreciated property (under sec. 170(e)) is not changed by this provision.

⁷⁴ Only gains taken into account in computing gross income, and only losses taken into account in computing taxable income are included in collectibles gains and losses. See section 1222(l)-(4) for a similar rule in defining various categories of capital gain. A look-through rule is provided in the case of the sale of a partnership interest.

⁷⁵ For example, assume an individual has $300,000 gain from the sale of qualified stock in a small business corporation and $120,000 of the gain (50 percent of $240,000) is excluded from gross income under section 1202, as limited by section 1202(b). The entire $180,000 of gain included in gross income is included in the computation of net capital gain and $120,000 of that gain will be taken into account in computing 28-percent rate gain. The combination of the 50-percent exclusion and the 28-percent maximum rate will result in a maximum effective regular tax rate of 14 percent on the $240,000 gain from the sale of the small business stock to which the 50-percent section 1202 exclusion applies, and the maximum rate on the remaining $60,000 of gain is 20 percent.

⁷⁶ Section 1250 will continue to treat gain attributable to certain depreciation (generally the amount of depreciation in excess of the amount allowable under the straight-line method) as ordinary income. Thus, for example, assume a taxpayer sold a building for $1 million, which originally cost $500,000, and the taxpayer was allowed $400,000 depreciation of which $100,000 is additional depreciation (as defined in section 1250(b)). As under prior law, $100,000 is treated as ordinary income under section 1250, and $800,000 is treated as long-term capital gain (assuming that section 1231(a)(2) does not apply). Under the Act, $300,000 will be taken into account in computing unrecaptured section 1250 gain since, if section 1250 had applied to all depreciation (rather than only additional depreciation), $300,000 of the $800,000 long-term capital gain would have been treated as ordinary income, and only $500,000 would have been treated as long-term capital gain.

In the case of a disposition of a partnership interest held more than 18 months, the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income under section 751(a) if section 1250 applied to all depreciation, will be taken into account in computing unrecaptured section 1250 gain.

⁷⁷ In order to arrive at this result, section 1(h)(1) provides that the amount taxed at a 25-percent rate is limited to the net capital gain and is further adjusted to take into account amounts otherwise taxed at the 15-percent rate (or not taxed at all by reason of a taxpayer's ordinary loss), and that the amount taxed at a 28-percent rate is the amount of taxable income reduced by the sum of the amounts taxed at the regular section 1 rates and the 10-, 20-, and 25-percent capital gains rates.

⁷⁸ The amount taxed at 25 percent is determined by starting with the $10,000 unrecaptured section 1250 gain and subtracting $10,000, which is the excess of $90,000 (i.e., the sum of the amount taxed at the regular rates ($40,000) plus the net capital gain ($50,000)) over $80,000 (i.e., the taxable income). This results in no amount taxed at 25 percent.

⁷⁹ The option rule applies solely for purposes of determining whether the property meets the requirement that the holding period began on or after January 1, 2001, in order to determine whether the gain qualifies for the 18-percent maximum rate. It does not apply for determining the holding period for any other purpose of the Code, including whether the 5-year holding period is met.

⁸⁰ These provisions were not contained in the 1997 Act itself but are contained the Tax Technical Corrections Act of 1997, Title VI of H.R. 2676 as passed by the House on November 5, 1997.

⁸¹ See IRS Notice 97-59 (Oct. 27, 1997) for rules relating to recharacterizing section 1231 gains under section 1231(c).

⁸² The amount of net capital gain, adjusted net capital gain, unrecaptured section 1250 gain and 28-percent rate gain will be computed with any adjustments (such as differences in adjusted bases) used in computing alternative minimum taxable income.

⁸³ See Title VI (sec. 605(d)(3)) of H.R. 2676, the Tax Technical Corrections Act of 1997 as passed by the House on November 5, 1997.

⁸⁴ The partial exclusion is a fraction of the maximum exclusion (i.e., $250,000 or $500,000 if married filing a joint return), not the realized gain on the sale or exchange. A technical correction may be needed so that the statute reflects this intent. See Title IV (sec. 605(e)) of H.R. 2676, The Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁸⁵ A technical correction may be needed so that the statute reflects Congressional intent that the prior-law election be available to sales or exchanges on the date of enactment. See Title VI (sec. 605(e)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁸⁶ Title VI (sec. 605(f)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed the House on November 5, 1997, provides that a partnership or S corporation can roll over gain from small business stock held more than six months if (and only if) all the interests in the partnership or S corporation are held by individuals or estates at all times during the taxable year. The term "estate" is intended to include both the estate of a decedent and the estate of an individual in bankruptcy.

⁸⁷ Legislative history erroneously refers to the three-year period beginning after December 31, 1994.

⁸⁸ Notice 97-13, January 28, 1997.

⁸⁹ Prior to 1977, separate tax rate schedules applied to the gift tax and the estate tax.

⁹⁰ Thus, if a taxpayer made cumulative taxable transfers equaling $21,040,000 or more, his or her average transfer tax rate was 55 percent. The phaseout has the effect of creating a 60-percent marginal transfer tax rate on transfers in the phaseout range.

⁹¹ A technical correction may be necessary to clarify that indexing of the $1,000,000 generation-skipping transfer tax exemption is effective with respect to all generation-skipping transfers (i.e., direct skips, taxable terminations, and taxable distributions) made after 1998. See Title VI (sec. 606(a)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁹² A technical correction may be necessary to properly phase out the benefits of the unified credit and the graduated rates.

⁹³ A technical correction may be necessary to revise the rules correlating the increase in the unified credit with a decrease in the family-owned business exclusion to ensure that there is neither an increase nor a decrease in the total estate tax on estates holding family-owned businesses as increases in the unified credit are phased in. See Title VI (sec. 606(b)(1)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997. A further modification may be necessary to reflect Congressional intent.

⁹⁴ A technical correction may be necessary to clarify the formula for determining the amount of gifts of family-owned business interests made to members of the decedent's family that are not otherwise includible in the decedent's gross estate. See Title VI (sec. 606(b)(2)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁹⁵ The $1,000,000 threshold is indexed under other provisions of the Act.

⁹⁶ A technical correction may be necessary to clarify that deferred payments of estate tax on holding companies and non-readily tradable business interests do not qualify for the 2-percent interest rate, but instead are subject to a non-deductible interest rate of 45 percent of the regular deficiency rate. See Title VI (sec. 606(c)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁹⁷ A technical correction may be necessary to clarify that the jurisdiction of the U.S. Tax Court to determine whether an estate qualifies for installment payment of estate tax on closely-held businesses extends to determining which businesses in an estate are eligible for the deferral. See Title VI (sec. 606(d)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

⁹⁸ A technical correction to this provision may be necessary. See Title VI (sec. 606(e)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997. The technical correction would clarify that in determining the amount of taxable gifts made in preceding calendar periods, the value of prior gifts is the value of such gifts as finally determined, even if no gift tax was assessed or paid on that gift. For this purpose, final determinations would include, e.g., the value reported on the gift tax return (if not challenged by the IRS prior to the expiration of the statute of limitations), the value determined by the IRS (if not challenged through the declaratory judgment procedure by the taxpayer), the value determined by the courts, or the value agreed to by the IRS and the taxpayer in a settlement agreement.

⁹⁹ The conduit treatment is achieved by allowing the trust a deduction for amounts distributed to beneficiaries during the taxable year to the extent of distributable net income and by including such distributions in the beneficiaries' income.

¹⁰⁰ When originally enacted, the research tax credit applied to qualified expenses incurred after June 30, 1981. The credit was modified several times and was extended through June 30, 1995. The credit later was extended for the period July 1, 1996, through May 31, 1997 (with a special 11-month extension for taxpayers that elect to be subject to the alternative incremental research credit regime).

¹⁰¹ The Small Business Job Protection Act of 1996 expanded the definition of "start-up firms" under section 41(c)(3)(B)(i) to include any firm if the first taxable year in which such firm had both gross receipts and qualified research expenses began after 1983.

A special rule (enacted in 1993) is designed to gradually recompute a start-up firm's fixed-base percentage based on its actual research experience. Under this special rule, a start-up firm will be assigned a fixed-base percentage of 3 percent for each of its first five taxable years after 1993 in which it incurs qualified research expenditures. In the event that the research credit is extended beyond the scheduled expiration date, a start-up firm's fixed-based percentage for its sixth through tenth taxable years after 1993 in which it incurs qualified research expenditures will be a phased-in ratio based on its actual research experience. For all subsequent taxable years, the taxpayer's fixed-based percentage will be its actual ratio of qualified research expenditures to gross receipts for any five years selected by the taxpayer from its fifth through tenth taxable years after 1993 (sec. 41(c)(3)(B)).

¹⁰² Under a special rule enacted as part of the Small Business Job Protection Act of 1996, 75 percent of amounts paid to a research consortium for qualified research is treated as qualified research expenses eligible for the research credit (rather than 65 percent under the general rule under section 41(b)(3) governing contract research expenses) if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6) and is organized and operated primarily to conduct scientific research, and (2) such qualified research is conducted by the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer.

¹⁰³ The amount of the deduction allowable for a taxable year with respect to a charitable contribution may be reduced depending on the type of property contributed, the type of charitable organization to which the property is contributed, and the income of the taxpayer (secs. 170(b) and 170(e)).

¹⁰⁴ As part of the Omnibus Budget Reconciliation Act of 1993, Congress eliminated the treatment of contributions of appreciated property (real, personal, and intangible) as a tax preference for alternative minimum tax (AMT) purposes. Thus, if a taxpayer makes a gift to charity of property (other than short-term gain, inventory, or other ordinary income property, or gifts to private foundations) that is real property, intangible property, or tangible personal property the use of which is related to the donee's tax-exempt purpose, the taxpayer is allowed to claim the same fair-market-value deduction for both regular tax and AMT purposes (subject to present-law percentage limitations).

¹⁰⁵ The special rule contained in section 170(e)(5), which was originally enacted in 1984, expired January 1, 1995. The Small Business Job Protection Act of 1996 reinstated the rule for 11 months--for contributions of qualified appreciated stock made to private foundations during the period July 1, 1996, through May 31, 1997.

¹⁰⁶ The estimate includes interaction with the welfare-to-work tax credit; see explanation of section 801 of the Act.

¹⁰⁷ The orphan drug tax credit originally was enacted in 1983 and was extended on several occasions. The credit expired after December 31, 1994, and later was reinstated for the period July 1, 1996, through May 31, 1997.

¹⁰⁸ The Act authorizes the designation of two additional urban empowerment zones that would be eligible for the tax incentives available in empowerment zones designated under OBRA 1993. The Act also authorizes the designation of an additional 20 empowerment zones. Within these 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. However, such businesses are not eligible to receive the present-law wage credit. The 20 additional empowerment zones are described in detail in Act secs. 951-956, below.

¹⁰⁹ The Act generally reduces the maximum rate of tax on the net capital gain of an individual from 28 percent to 20 percent, and makes certain other modifications to the maximum capital gains rates applicable to certain assets. These modifications are described in detail under Act sec. 311, above. In addition, Code section 1202 provides a 50-percent exclusion for gain from the sale of certain small business stock acquired at original issue and held for at least five years. However, the lower rates provided by the Act do not apply to the includable portion of the gain from the qualifying sale of small business stock. (See Act sec. 313, above, for a detailed description of the modifications made by the Act to the small business stock rules.)

¹¹⁰ A technical correction is necessary to clarify that the determination of whether a census tract in the District of Columbia satisfies the applicable poverty criteria for inclusion in the D.C. Enterprise Zone for purposes of the wage credit, expensing, and special tax-exempt financing incentives (poverty rate of not less than 20 percent) or for purposes of the zero-percent capital gains rate (poverty rate of not less than 10 percent), is based on 1990 decennial census data. A provision to this effect is included in Title VI (sec. 607) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997. This technical correction would clarify that data from the 2000 decennial census will not result in the expansion or other reconfiguration of the D.C. Enterprise Zone.

¹¹¹ The status of certain census tracts within the District as an enterprise community designated under section 1391 also terminates on December 31, 2002.

¹¹² Similarly, one category of targeted individuals for purposes of the work opportunity tax credit is "high risk youth," defined as individuals certified by the designated local agency as being 18-24 years old, and having a principal place of abode in an empowerment zone or enterprise community. Accordingly, individuals between the ages of 18 and 24 who live in the portions of the District that are designated as the D.C. Enterprise Zone may qualify as members of a targeted group for purposes of the work opportunity tax credit.

¹¹³ Proposed Treasury regulations provide that an employer may use either each pay period or the entire calendar year as the relevant period in determining whether a particular employee satisfies the "location-of-services" requirement. For each taxable year, the employer must use the same method for all its employees. Prop. Treas. Reg. sec. 1.1396-1. Under the proposed regulations, an employee would not satisfy the "location of services" requirement during the applicable period (either the pay period or the calendar year) unless substantially all of the services performed by the employee for the employer during that period are performed within the zone in a trade or business of the employer. Prop. Treas. Reg. sec. 1.1396-1(b)(1)(ii) and Prop. Treas. Reg. sec. 1.1396-1(b)(2)(ii).

¹¹⁴ Thus, the D.C. wage credit does not phase down to 15 percent in the year 2002 as does the empowerment zone wage credit under present-law section 1396(b).

¹¹⁵ To prevent avoidance of the $15,000 limit, all employers of a controlled group of corporations (or partnerships or proprietorships under common control) will be treated as a single employer.

¹¹⁶ Code secs. 1396(d)(2)(D) and (E).

¹¹⁷ Code sec. 280C(a).

¹¹⁸ Code sec. 1396(c)(3)(A) and Code sec. 51A(d)(2).

¹¹⁹ Code sec. 1396(c)(3)(B) and Code sec. 51A(d)(2).

¹²⁰ Code sec. 38(c)(2).

¹²¹ The requirements of an "enterprise zone business" under section 1397B were developed as part of OBRA 1993 in the context of authorizing the designation of nine unspecified empowerment zones located throughout the nation. Congress may wish to reconsider the applicability of certain of these requirements in defining a qualified D.C. Zone business given the nature of the District's economy and the type of economic activity that Congress intended to encourage.

¹²² Section 1400(e) eliminates this requirement contained in section 1397B(b)(6) with respect to corporations and partnerships and in section 1397B(c)(5) with respect to proprietorships.

¹²³ A technical correction may be necessary to clarify that, for purposes of this provision, as well as for purposes of defining a "qualified business", the term "trade or business" encompasses activities carried out on a not-for-profit, as well as on a for-profit basis. For example, a trade association could be a qualified D.C. Zone business if it satisfies all of the requirements enumerated above.

¹²⁴ This requirement does not apply to a business carried on by an individual as a proprietorship.

¹²⁵ Regulations issued under section 1394 give an example of a business that would satisfy this test. The regulations describe a mail order clothing business which is located in an empowerment zone. The business purchases its supplies from suppliers located both within and outside of the zone and expects that orders will be received both from customers who will reside or work within the zone and from others outside of the zone. All orders are received and filled at, and are shipped from, the clothing business located in the zone. Under the regulations, this clothing business meets the requirement that at least 80 percent (as required under prior law) of its gross income is derived from the active conduct of business within the zone. Treas. Reg. sec. 1.1394-1(p), Example (3).

¹²⁶ Nonqualified financial property is defined in Code section 1397B(e) to mean debt, stock, partnership interest, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property. The term does not include reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less, or accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of inventory property.

¹²⁷ For purposes of determining status as a qualified D.C. Zone business, limited liability companies will be characterized as corporations or partnerships in accordance with the so-called "check-the-box" regulations (Treas. Reg. sec. 301.7701-3). A single member limited liability company that is disregarded for Federal income tax purposes under the check-the-box regulations would be treated as a proprietorship or branch for purposes of determining its status as a qualified D.C. Zone business.

¹²⁸ Code section 1397B(f).

¹²⁹ Portions of the District of Columbia were designated as an enterprise community under section 1391 in 1994. Accordingly, the District was entitled to issue tax-exempt enterprise zone facility bonds under section 1394. In fact, however, the District did not issue any such bonds.

¹³⁰ The exception to the volume cap that is available with respect to new empowerment zone facility bonds (described in section 1394(f)) does not apply to D.C. enterprise zone facility bonds.

¹³¹ In general, the term "principal user" means the owner of the financed property. However, in the case of rental property, if an owner of real property financed with enterprise zone facility bonds is not an enterprise zone business, but the rental of the property is a qualified business (i.e., 50 percent of the gross rental income is derived from enterprise zone businesses), then the term "principal user" for purposes of sections 1394 (b) and (e) means the lessee(s). Treas. Reg. sec. 1.1394-1(j). See also Treas. Reg. sec. 1.1394-1(p), Example (8).

¹³² Treas. Reg. sec. 1.1394-1(h) defines the term "original use" to mean the first use to which the property is put within the zone. Under a special rule, if property is vacant for at least a one-year period including the date of the zone designation, then use prior to that period is disregarded for purposes of determining original use.

¹³³ Code section 1394(b)(2)(B).

¹³⁴ For example, an establishment that is part of a national chain could qualify as a D.C. Zone business for purposes of the tax-exempt financing incentive, provided that such establishment would satisfy the definition of a D.C. Zone business if it were separately incorporated.

¹³⁵ To be eligible for this special rule after the end of the 3-year testing period, a business must remain a trade or business that does not (1) consist predominantly of the development or holding of intangibles for sale or license, (2) involve the operation of a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or liquor store, and (3) have as its principal activity farming with respect to certain large farms.

¹³⁶ Section 1394(b)(3)(B)(iii) waives all of the requirements of an enterprise zone business described in sections 1397B(b) or (c) for certain businesses after the prescribed testing period except the requirement that at least 35 percent of the employees of such business be residents of the empowerment zone or enterprise community. However, the 35-percent zone resident requirement does not apply with respect to qualified D.C. Zone businesses (sec. 1400(e)). Accordingly, a technical correction is necessary to clarify that qualified D.C. Zone businesses that take advantage of the special tax-exempt financing incentives do not become subject to a 35-percent zone resident requirement after the close of the testing period.

¹³⁷ A technical correction to section 1400B(c) is necessary to clarify that a proprietorship can constitute a D.C. Zone business for purposes of the zero-percent capital gains rate.

¹³⁸ In the case of a new corporation, it is sufficient if the corporation is being organized for purposes of being a qualified D.C. Zone business.

¹³⁹ D.C. Zone business stock does not include any stock acquired from a corporation which made substantial stock redemption of distribution (without a bona fide business purpose therefor) in an attempt to avoid the purposes of the provision. A similar rule applies with respect to D.C. Zone partnership interests.

¹⁴⁰ In the case of a new partnership, it is sufficient if the partnership is being formed for purposes of being a qualified D.C. Zone business.

¹⁴¹ D.C. Zone business property is limited to tangible property. Thus, for example, D.C. Zone businesses that are qualified proprietorships cannot claim the zero-percent rate on capital gain from the sale of any intangible property. Similarly, corporations or partnerships cannot claim the zero-percent rate on capital gain from the direct sale of intangible property. However, the zero-percent rate does apply to qualified gain from the sale of D.C. Zone business stock or a D.C. Zone partnership interest that is attributable to the value of intangible assets held by the entity, provided such assets are an integral part of a D.C. Zone business.

¹⁴² A technical correction is necessary to clarify that there is no requirement that D.C. Zone business property be acquired by a subsequent purchaser prior to January 1, 2003, to be eligible for this special rule.

¹⁴³ The termination of the D.C. Zone designation will not, by itself, result in property failing to be treated as a qualified D.C. Zone asset. However, capital gain eligible for the zero-percent capital gains rate does not include any gain attributable to periods after December 31, 2007.

¹⁴⁴ However, as described above, sole proprietorships and other taxpayers selling assets directly cannot claim the zero-percent rate on capital gain from the sale of any intangible property (i.e., the integrally related test does not apply).

¹⁴⁵ Code secs. 1400B(f) and 1202(g). The legislative history of the Act incorrectly describes the operation of this special rule.

¹⁴⁶ A technical correction is necessary to clarify that the term "purchase price" means the adjusted basis of the principal residence on the date the residence is purchased. A newly constructed residence is treated as purchased by the taxpayer on the date the taxpayer first occupies such residence. Provisions to this effect are included in Title VI (sec. 607) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

¹⁴⁷ The provision of the Act that excludes sales of certain personal residences from the real estate transaction reporting requirement (see Act sec. 312, above) may not apply to sales of personal residences in the District of Columbia. In this regard, the Congress anticipated that the Secretary of Treasury will require such information as may be necessary to verify eligibility for the D.C. first-time homebuyer credit.

¹⁴⁸ A technical correction is required to clarify the statute in this regard. A provision to this effect is included in Title VI (sec. 607) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

¹⁴⁹ A technical correction is required to clarify the statute in this regard. A provision to this effect is included in Title VI (sec. 607) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

¹⁵⁰ A technical correction is required to clarify the statute in this regard. A provision to this effect is included in Title VI (sec. 607) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

¹⁵¹ The estimate includes interaction with the work opportunity tax credit; see explanation of section 603 of the Act.

¹⁵² Historically, the Mass Transit Account has received 20 percent of the increase in motor fuels tax. 20 percent of 4.3 cents is 0.86 cents. To effectuate this, a technical correction to credit 2.86 cents per gallon to the Mass Transit Account is included in Title VI (sec. 608(b)) the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

¹⁵³ Section 901 of the Act provides that revenues from all but 0.1-cent-per gallon of the taxes on highway fuels is to be deposited in the Highway Trust Fund; the remaining 0.1-cent-per gallon (which was reinstated by sec. 1033 of the Act) is dedicated to the Leaking Underground Storage Tank Trust Fund.

¹⁵⁴ A technical correction may be necessary to implement this provision. Such a correction is included in Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House November 5, 1997.

¹⁵⁵ A technical correction may be required to clarify that the reduced rate of tax provided by this provision applies only to apple cider taxable as a still wine under prior law.

¹⁵⁶ A technical correction may be necessary to clarify the circumstances in which homebuyers qualify for these exceptions from the qualified mortgage bond financing rules.

¹⁵⁷ This requirement was enacted in 1993 (sec. 523 of P.L. 103-182).

¹⁵⁸ Treasury had earlier developed TAXLINK as the prototype for EFTPS. TAXLINK has been operational for several years; EFTPS is currently operational. Employers currently using TAXLINK will ultimately be required to participate in EFTPS.

¹⁵⁹ Section 1809 of P.L. 104-188.

¹⁶⁰ IR-97-32.

¹⁶¹ If an employer provides access to suitable space on the employer's premises for the conduct by an employee of particular duties, then, if the employee opts to conduct such duties at home as a matter of personal preference, the employee's use of the home office is not "for the convenience of the employer." See, e.g., W. Michael Mathes, T.C. Memo 1990-483.

¹⁶² In response to the Supreme Court's decision in Soliman, the IRS revised its Publication 587, Business Use of Your Home, to more closely follow the comparative analysis used in Soliman by focusing on the following two primary factors in determining whether a home office is a taxpayer's principal place of business: (1) the relative importance of the activities performed at each business location; and (2) the amount of time spent at each location.

¹⁶³ The term "farming business" has the same meaning given such term by sec. 263A(e)(4).

¹⁶⁴ The amount of elected farm income of a taxpayer for a taxable year may not exceed the taxable income attributable to any farming business for the year.

¹⁶⁵ Rev. Rul. 94-38 generally rendered moot the holding in TAM 9315004 (December 17, 1992) requiring a taxpayer to capitalize certain costs associated with the remediation of soil contaminated with polychlorinated biphenyls (PCBs).

¹⁶⁶Commissioner v. Idaho Power Co., 418 U.S. 1 (1974) (holding that equipment depreciation allocable to the taxpayer's construction of capital facilities must be capitalized under section 263(a)(1)).

¹⁶⁷ Thus, the 22 additional empowerment zones authorized to be designated under the Act, as well as the D.C. Enterprise Zone established under Title VII of the Act, are "targeted areas" for purposes of this provision.

¹⁶⁸ The six designated urban empowerment zones are located in New York City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-Camden (New Jersey). The three designated rural empowerment zones are located in Kentucky Highlands (Clinton, Jackson, and Wayne counties, Kentucky), Mid-Delta Mississippi (Bolivar, Holmes, Humphreys, Leflore counties, Mississippi), and Rio Grande Valley Texas (Cameron, Hidalgo, Starr, and Willacy counties, Texas).

¹⁶⁹ For wages paid in calendar years during the period 1994 through 2001, the credit rate is 20 percent. The credit rate will be reduced to 15 percent for calendar year 2002, 10 percent for calendar year 2003, and 5 percent for calendar year 2004. No wage credit will be available after 2004.

¹⁷⁰ A qualified proprietorship is not required to meet a requirement that every trade or business of the proprietor is the active conduct of a qualified business within the empowerment zone or enterprise community.

¹⁷¹ Also, a qualified business does not include certain facilities described in section 144(c)(6)(B)(i.e., a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises) or certain large farms.

¹⁷² For purposes of the tax-exempt financing rules, an "enterprise zone business" also includes a business located in a zone or community which would qualify as an enterprise zone business if it were separately incorporated.

¹⁷³ The wage credit available in the two new urban empowerment zones is modified slightly to provide that the credit rate will be 20 percent for calendar years 2000-2004, 15 percent for calendar year 2005, 10 percent for calendar year 2006, and 5 percent for calendar year 2007. No wage credit will be available in the two new urban empowerment zones after 2007.

¹⁷⁴ In contrast to OBRA 1993, areas located within Indian reservations are eligible for designation as one or more of the additional 20 empowerment zones under the Act.

¹⁷⁵ In lieu of the poverty criteria, out migration may be taken into account in designating one rural empowerment zone.

¹⁷⁶ A special rule enacted as part of the Act modifies the present-law empowerment zone and enterprise community designation criteria so that any zones or communities designated in the future in the States of Alaska or Hawaii will not be subject to the general size limitations, nor will such zones or communities be subject to the general poverty-rate criteria. Instead, nominated areas in either State will be eligible for designation as an empowerment zone or enterprise community if, for each census tract or block group within such area, at least 20 percent of the families have incomes which are 50 percent or less of the State-wide median family income. Such zones and communities will be subject to the population limitations under present-law section 1392(a)(1).

¹⁷⁷ However, the additional section 179 expensing is not available for any property substantially all the use of which is within the additional 2,000 acres allowed to be included under the Act within an empowerment zone.

¹⁷⁸ A technical correction may be necessary to clarify that, for purposes of this provision, as well as for purposes of defining the term "qualified business," the term "trade or business" encompasses activities carried on a not-for-profit, as well as a for-profit basis. For example, a trade association could be an "enterprise zone business" if all the requirements of section 1397B were satisfied.

¹⁷⁹ In addition, the modifications to the enterprise zone business definition generally apply (with certain exceptions) for purposes of defining a "D.C. Zone business" under certain provisions of the Act that provide tax incentives for the District of Columbia (as described in Title VII, above).

¹⁸⁰ "New empowerment zone facility bonds" may not be issued with respect to the two urban empowerment zones to be designated under the Act with the same tax incentives as the previously designated empowerment zones.

¹⁸¹ Treas. Reg. sec. 1.471-2(d).

¹⁸² 101 T.C. 462 (1993).

¹⁸³ T.C. Memo 1997-260.

¹⁸⁴Wal-Mart v. Commissioner, T.C. Memo 1997-1 and Kroger v. Commissioner, T.C. Memo 1997-2.

¹⁸⁵ Related coverage that is incidental to workmen's compensation insurance includes liability under Federal workmen's compensation laws, the Jones Act, and the Longshore and Harbor Workers Compensation Act, for example.

¹⁸⁶ Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203), sec. 10211(c).

¹⁸⁷ See United States v. American College of Physicians, 475 U.S. 834 (1986) (holding that the activity of selling advertising in a medical journal was not substantially related to the organization's exempt purposes and, as a separate business under section 513(c), was subject to tax).

¹⁸⁸ See Prop. Treas. Reg. sec. 1.513-4 (issued January 19, 1993, EE-74-92, IRB 1993-7, 71). These proposed regulations generally exclude from the UBIT financial arrangements under which the tax-exempt organization provides so-called "institutional" or "good will" advertising.

¹⁸⁹ In determining whether a payment is a qualified sponsorship payment, it is irrelevant whether the sponsored activity is related or unrelated to the organization's exempt purpose.

¹⁹⁰ As provided under Prop. Treas. Reg. sec. 1.513-4, the use of promotional logos or slogans that are an established part of the sponsor's identity would not, by itself, constitute advertising for purposes of determining whether a payment is a qualified sponsorship payment.

¹⁹¹ For guidance regarding the treatment of periodical advertising under the UBIT, see section 513(c), United States v. American College of Physicians, 475 U.S. 834 (1986); Treas. Reg. 1.513-1(d)(4)(iv), Example 7; Rev. Rul. 82-139, 1982-2 C.B. 108; Rev. Rul. 74-38, 1974-1 C.B. 144; PLR 9137049; and PLR 9234002. For guidance regarding the treatment of donor acknowledgments under the UBIT, see Rev. Rul. 76-93, 1976-1 C.B. 170; PLR 8749085; and PLR 9044071. In the interest of administrative convenience, the Treasury Department is encouraged to permit tax-exempt entities to provide combined reporting of payments that are both qualified sponsorship payments and nontaxable payments made in exchange for donor acknowledgments in a periodical or in connection with a qualified convention or trade show. In addition, to the extent tax-exempt entities are required to allocate portions of payments, the Treasury Department is encouraged to minimize the reporting burden associated with any such allocation.

¹⁹² For example, the provision will not apply to payments that lead to acknowledgments in a monthly journal, but will apply if a sponsor receives an acknowledgment in a program or brochure distributed at a sponsored event.

¹⁹³ A modified version of this provision is included in H.R. 2513 as passed by the House on November 8, 1997. (See report of the House Committee on Ways and Means; H. Rept. 105-318, Part I, October 9, 1997).

¹⁹⁴ 106 T.C. 343 (1996).

¹⁹⁵ U.S. D.C. Nev. CV-5-94-1146-HDM (LRL) (September 26, 1996).

¹⁹⁶ Treasury Regulation section 1.170A-1(g) allows taxpayers to deduct only their own unreimbursed expenses incurred in performing services for a qualified charitable organization, and not expenses incident to a third party's performance of services. See Davis v. United States, 495 U.S. 472 (1990).

¹⁹⁷ A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 608(c)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

¹⁹⁸ Section 301(b) of the Amtrak Reform and Accountability Act of 1997 (P.L. 105-134), passed by the House and Senate on November 13, 1997 and signed by the President on December 2, 1997, states that such Act constitutes Amtrak reform legislation within the meaning of this provision.

¹⁹⁹ A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 609(a)(1)) of H.R. 2676, the Tax Technical Corrections Act of 1997, passed by the House on November 5, 1997.

²⁰⁰ A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 609(a)(2)) of H.R. 2676, the Tax Technical Corrections Act of 1997, passed by the House on November 5, 1997.

²⁰¹ A standard similar to that of Treas. reg. sec. 1.246-5 would be appropriate for determining whether the relationship between the stock held and the group of stocks shorted is sufficient for constructive sale purposes.

²⁰² "A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 609(a)(4)) of H.R. 2676, of the Tax Technical Corrections Act of 1997, passed by the House on November 5, 1997.

²⁰³ A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 609(a)(3)) the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁰⁴ Until such regulations are issued, it is intended that the Treasury regulations promulgated under the similar provisions of section 731(c)(2) generally will apply. Specifically, it is intended that an entity will meet the "substantially all" requirement if 90 percent or more of its assets are listed assets (Treas. Reg. sec. 1.731-2(c)(3)(i)). Similarly, with respect to partnerships and other non-corporate entities, it is intended that, where 20 percent or more (but less than 90 percent) of the entity's assets consist of listed assets, a pro rata portion of the interest in the entity will be treated as a listed asset (Treas. Reg. sec. 1.731-2(c)(3)(ii)).

²⁰⁵ Code section 1221 defines a capital asset to mean property held by the taxpayer other than (1) property properly includible in inventory of the taxpayer or primarily held for sale to customers in the ordinary course of the taxpayer's trade or business, (2) depreciable and real property used in the taxpayer's trade or business, (3) a copyright, a literary musical, or artistic composition, letter or memorandum, or similar property that was created by the taxpayer (or whose basis is determined, in whole or in part, by reference to the basis of the creator), (4) accounts or notes receivable acquired in the ordinary course of the taxpayer's trade or business, and (5) a publication of the United States Government which was received from the Government other than by sale.

²⁰⁶Helvering v. William Flaccus Oak Leather Co., 313 U.S. 247 (1941).

²⁰⁷ The result in this case was overturned by enactment in 1934 of the predecessor of present law section 1271(a); see below. See section 117 of the Revenue Act of 1934, 28 Stat. 680, 714-715.

²⁰⁸ Treasury Regulations generally define "actively traded" as any personal property for which there is an established financial market. In addition, those regulations provide that a "notional principal contract constitutes personal property of a type that is actively traded if contracts based on the same or substantially similar specified indices are purchased, sold, or entered into on an established financial market" and that "rights and obligations of a party to a notional principal contract are rights and obligations with respect to personal property and constitute an interest in personal property." Treas. Reg. sec. 1.1092(d)-1(c).

²⁰⁹ A "section 1256 contract" means any (1) regulated futures contract, (2) foreign currency contract, (3) nonequity option, or (4) dealer equity option.

²¹⁰ The present-law provision (sec. 1234A) which treats cancellation, lapse, expiration, or other termination of a right or obligation with respect to personal property as a sale of a capital asset was added by Congress in 1981 when Congress adopted a number of provisions dealing with tax straddles. These are two components or "legs" to a straddle, where the value of one leg changes inversely with the value of the other leg. Without a special rule, taxpayers were able to "leg-out" of the loss leg of the straddle, while retaining the gain leg, resulting in the creation of an ordinary loss. In 1981, Congress believed that the effective ability of taxpayers to elect the character of a gain or loss leg of a straddle was unwarranted and provided the present law rule. However, since straddles were the focus of the 1981 legislation, that legislation was limited to types of property which were the subject of straddles, i.e., personal property (other than stock) of a type which is actively traded which is, or would be on acquisition, a capital asset in the hands of the taxpayer. The provision subsequently was extended to section 1256 contracts.

²¹¹ The issuer of a debt instrument with OID generally accrues and deducts the discount, as interest, over the life of the obligations even though the amount of such interest is not paid until the debt matures. The holder of such a debt instrument also generally includes the OID in income as it accrues as interest. The mandatory inclusion of OID in income does not apply, among other exceptions, to obligations issued by a natural person before March 2, 1984, and loans of less than $10,000 between natural persons if such loan is not made in the ordinary course of business of the lender (secs. 1272(a)(2)(D) and (E)).

²¹² See Billy Rose Diamond Horseshoe, Inc. v. Commissioner, 448 F.2d 549 (1971), where the Second Circuit held that payments were not entitled to capital gain treatment because there was no sale or exchange. See also, Sirbo Holdings, Inc. v. Commissioner, 509 F.2d 1220 (2d Cir. 1975).

²¹³ See U.S. Freight Co. v. U.S., 422 F.2d 887 (Ct. Cl. 1970), holding that forfeiture was an ordinary loss.

²¹⁴ See, IRS Notice 97-67, issued November 14, 1997, advising of upcoming guidance providing procedures for automatically changing methods of accounting with respect to grace period interest.

²¹⁵ See H. Rept. 99-841, II-166, 99th Cong. 2d Sess. (September 18, 1986).

²¹⁶ See Treas. Reg. sec. 1.701-2(f), Example (2).

²¹⁷ For example, it has been reported that Seagram Corporation intends to take the position that the corporate dividends-received deduction will eliminate tax on significant distributions received from DuPont Corporation in a redemption of almost all the DuPont stock held by Seagram, coupled with the issuance of certain rights to reacquire DuPont stock. See e.g., Landro and Shapiro, "Hollywood Shuffle," Wall Street Journal, pp. A1 and A11 (April 7, 1995); Sloan, "For Seagram and DuPont, a Tax Deal that No One Wants to Brandy About," Washington Post, p. D3 (April 11, 1995); Sheppard, "Can Seagram Bail Out of DuPont without Capital Gain Tax," Tax Notes Today, (April 10, 1995, 95 TNT 75-4).

²¹⁸ Thus, for example, where a portion of such a distribution would not have been treated as a dividend due to insufficient earnings and profits, the rule applies to the portion treated as a dividend.

²¹⁹ For redemptions, the reduction in basis of stock is treated as occurring at the beginning of the date holders of the stock become entitled to receive the redemption proceeds.

²²⁰ Thus, for example, in the case of a distribution prior to the effective date, the provisions of present law would continue to apply, including the provisions of present-law sections 1059(a) and 1059(d)(1), requiring reduction in basis immediately before any sale or disposition of the stock, and requiring recognition of gain at the time of such sale or disposition.

²²¹ If a controlled corporation is acquired after a distribution, an issue may arise whether the acquisition can be viewed under step-transaction concepts as having occurred before the distribution, with the result that the distributing corporation would not be viewed as having distributed the necessary 80 percent control. The Internal Revenue Service had indicated that it would not rule on requests for section 355 treatment in cases in which there have been negotiations, agreements, or arrangements with respect to transactions or events which, if consummated before the distribution, would result in the distribution of stock or securities of a corporation which is not "controlled" by the distributing corporation. Rev. Proc. 96-39, 1996-33 I.R.B. 11, as incorporated in Rev. Proc. 97-3, 1997-1 I.R.B. 85 at sec. 5.17, modified by Rev. Proc. 97-53, 1997-47 I.R.B. 10 to delete sec. 5.17; see also Rev. Rul. 96-30, 1996-1 C.B. 36; Rev. Rul. 70-225, 1970-1 C.B. 80.

²²² Excess loss accounts in consolidation generally are created when a subsidiary corporation makes a distribution (or has a loss that is used by other members of the group) that exceeds the parent's basis in the stock of the subsidiary. In general, such excess loss accounts in consolidation are permitted to be deferred rather than causing immediate taxable gain. Nevertheless, they are recaptured when a subsidiary leaves the group or in certain other situations. However, such excess loss accounts are not recaptured in certain cases where there is an internal spin-off prior to the subsidiary leaving the group. See, Treas. Reg. sec. 1.1502-19(g). In addition, an excess loss account may not be created at all in certain cases that are similar economically to a distribution that would reduce the stock basis of the distributing subsidiary corporation, if the distribution from the subsidiary is structured to meet the form of a section 355 distribution.

²²³ There is no intention to limit the otherwise applicable Treasury regulatory authority under section 336(e) of the Code. There is also no intention to limit the otherwise applicable provisions of section 1367 with respect to the effect on shareholder stock basis of gain recognized by an S corporation under this provision.

²²⁴ A technical correction may be needed so that the statute reflects this result. See Title VI (sec. 609(b)(2)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²²⁵ The example assumes that A did not acquire his or her stock in P as part of a plan or series of related transactions that results in the direct or indirect ownership of 50 percent or more of S or P separately by A. If A's stock in P was acquired as part of such a plan, the transaction would be one requiring gain recognition on the spin-off of S.

²²⁶ This example reflects the technical correction contained in Title VI (sec. 609(b)(2)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²²⁷ Examples of approaches that the Treasury Department may consider are discussed in connection with section 358(g), infra.

²²⁸ A technical correction may be needed so that the statute reflects this result. See Title VI (sec. 609(b)(1)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²²⁹ In determining the holding period of stock deemed to have been contributed and redeemed under the provision, the tacking of holding period rules applicable under section 351 apply for purposes of the provision.

²³⁰ A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 609(c)(1)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²³¹ Conversely, in a case involving a corporation that has (or any related corporation of which has) any class of readily tradable stock, or that is to become such a corporation, suppose a shareholder (A) exchanges appreciated common stock of corporation X for preferred stock of corporation Y in a transaction otherwise qualifying as a section 351 exchange. The preferred stock is limited and preferred as to dividends, does not participate in corporate growth to any significant extent, and is redeemable at the end of 21 years from the date of issuance or upon the death of A. At the time of the exchange, A is 80 years old (or is in ill health). If, under actuarial tables or under the facts and circumstances of A's case the contingency of A's death (which is certain to occur) is likely to occur within 20 years of the date of the exchange, then the preferred stock is nonqualified preferred stock if corporation X or Y (or any related corporation of corporation X or Y) has any class of stock that is readily tradable, or if X or Y (or any related corporation of X or Y) is to become such a corporation.

²³² A technical correction may be needed so that the statute reflects this intent. See Title VI (sec. 609(c)(2)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²³³ Notice and demand is the notice given to a person liable for tax stating that the tax has been assessed and demanding that payment be made. The notice and demand must be mailed to the person's last known address or left at the person's dwelling or usual place of business (Code sec. 6303).

²³⁴ Code sec. 6331.

²³⁵ Code sec. 6335-6343.

²³⁶ Code sec. 6331(b).

²³⁷ Code sec. 6331(c).

²³⁸ Code sec. 6331(e).

²³⁹ Code sec. 6334(a)(9).

²⁴⁰ Code sec. 6334(d).

²⁴¹ Standard deduction of $6,700 plus four personal exemptions at $2,550 each equals $16,900, which when divided by 52 equals $325.

²⁴² See Title VI (sec. 609(d)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁴³ Code sec. 6334(a)(7).

²⁴⁴ Code sec. 6334(a)(6).

²⁴⁵ Sec. 6334(a)(4).

²⁴⁶ Sec. 6334(a)(11).

²⁴⁷ See Part One of this pamphlet for a description of H.R. 668 (P.L. 105-2; February 28, 1997).

²⁴⁸ For example, travel from New York to San Francisco, with an intermediate stop in Chicago, would consist of two flights segments (without regard to whether the passenger changed aircraft in Chicago).

²⁴⁹ The Act directs the Treasury Department to publish an annual list of qualified rural airports, based on passenger enplanements for the requisite calendar year.

²⁵⁰ The tax rate was 24.3 cents per gallon before reinstatement of the Leaking Underground Storage Tank Trust Fund rate as of October 1, 1997, by section 1033 of the Act. (See item D.3., following.)

²⁵¹ A technical correction may be required to clarify that payments to a communications service provider from a third party such as a joint venture credit card company are treated as payments made by the holder of the credit card to obtain communications services.

²⁵² For this purpose, a "controlled organization" is defined under section 368(c). Under present law, rent, royalty, annuity, and interest payments are treated as UBI when received by the parent organization based on the percentage of the subsidiary's income that is UBI (either in the hands of the subsidiary if the subsidiary is tax-exempt, or in the hands of the parent organization if the subsidiary is taxable).

²⁵³ Treas. Reg. sec. 1.512(b)-1(l)(4)(I)(a).

²⁵⁴ Treas. Reg. sec. 1.512(b)-1(l)(4)(I)(b).

²⁵⁵ See PLR 9338003 (June 16, 1993) (holding that because no indirect ownership rules are applicable under section 512(b)(13), rents paid by a second-tier taxable subsidiary are not UBI to a tax-exempt parent organization). In contrast, an example of an indirect ownership rule can be found in Code section 318. Section 318(a)(2)(C) provides that if 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly by or for such corporation, in the proportion the value of the person's stock ownership bears to the total value of all stock in the corporation.

²⁵⁶ See PLR 9542045 (July 28, 1995) (holding that first-tier holding company and second-tier operating subsidiary were organized with bona fide business functions and were not agents of the tax-exempt parent organization; therefore, rents, royalties, and interest received by tax-exempt parent organization from second-tier subsidiary were not UBI).

²⁵⁷ In this regard, a technical correction is required to correctly cross reference section 513(a) in the parenthetical contained in section 512(b)(13)(B)(i)(I).

²⁵⁸ A technical correction is required to clarify the statute in this regard.

²⁵⁹ Section 1604(d) of the 1997 Act clarifies this rule to provide that, for purposes of the section 833 deduction, liabilities incurred during the taxable year under cost-plus contracts are added to claims incurred, and expenses incurred under cost-plus contracts are added to expenses incurred.

²⁶⁰ Exceptions to this nonrecognition rule apply: (1) when money (and the fair market value of marketable securities) received exceeds a partner's adjusted basis in the partnership (sec. 731(a)(1)); (2) when only money, inventory and unrealized receivables are received in liquidation of a partner's interest and loss is realized (sec. 731(a)(2)); (3) to certain disproportionate distributions involving inventory and unrealized receivables (sec. 751(b)); and (4) to certain distributions relating to contributed property (secs. 704(c) and 737). In addition, if a partner engages in a transaction with a partnership other than in its capacity as a member of the partnership, the transaction generally is considered as occurring between the partnership and one who is not a partner (sec. 707).

²⁶¹ A special rule allows a partner that acquired a partnership interest by transfer within two years of a distribution to elect to allocate the basis of property received in the distribution as if the partnership had a section 754 election in effect (sec. 732(d)). The special rule also allows the Service to require such an allocation where the value at the time of transfer of the property received exceeds 110 percent of its adjusted basis to the partnership (sec. 732(d)). Treas. Reg. sec. 1.732-1(d)(4) generally requires the application of section 732(d) where the allocation of basis under section 732(c) upon a liquidation of the partner's interest would have resulted in a shift of basis from non-depreciable property to depreciable property.

²⁶² "The failure of these rules to take fair market value into account puts a high premium on tax planning in connection with in-kind liquidating distributions. Allocation of the portion of the basis in excess of the partnerships basis in the distributed assets according to their relative market values would be a conceptually sound approach, and would eliminate the strange results and manipulation possibilities ..." W. McKee, W. Nelson and R. Whitmire, Federal Taxation of Partnerships and Partners (3rd ed. 1997), sec. 19.06.

²⁶³ The 1984 ALI study on partnership rules referred to the substantial appreciation requirement as subject to manipulation and tax planning (American Law Institute, Federal Income Tax Project: Subchapter K: Proposals on the Taxation of Partners, (R. Cohen, reporter, 1984), 26. In 1993 the definition of substantially appreciated inventory was modified, and the present-law test relating to a principal purpose of avoidance was added (Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, sec. 13206(e)(1)). Nevertheless, the substantial appreciation requirement is still criticized as ineffective (W. McKee, W. Nelson and R. Whitmire, Federal Taxation of Partners and Partnerships, (3rd ed. 1997) sec. 16.04[2]).

²⁶⁴ See section 1541 of the Act relating to adoption of plan amendments.

²⁶⁵ This favorable tax treatment is available only if the policyholder has an insurable interest in the insured when the contract is issued and if the life insurance contract meets certain requirements designed to limit the investment character of the contract (sec. 7702). Distributions from a life insurance contract (other than a modified endowment contract) that are made prior to the death of the insured generally are includible in income, to the extent that the amounts distributed exceed the taxpayer's investment in the contract; such distributions generally are treated first as a tax-free recovery of the investment in the contract, and then as income (sec. 72(e)). In the case of a modified endowment contract, however, in general, distributions are treated as income first, loans are treated as distributions (i.e., income rather than basis recovery first), and an additional 10 percent tax is imposed on the income portion of distributions made before age 59-1/2 and in certain other circumstances (secs. 72(e) and (v)). A modified endowment contract is a life insurance contract that does not meet a statutory "7-pay" test, i.e., generally is funded more rapidly than 7 annual level premiums (sec. 7702A). Certain amounts received under a life insurance contract on the life of a terminally or chronically ill individual, and certain amounts paid for the sale or assignment to a viatical settlement provider of a life insurance contract on the life of a terminally ill or chronically ill individual, are treated as excludable as if paid by reason of the death of the insured (sec. 101(g)).

²⁶⁶ In the case of contracts purchased after June 20, 1986, phase-in generally apply with respect to otherwise deductible interest paid or accrued after December 31, 1995, and before January 1, 1999, in the case of debt incurred before January 1, 1996. In addition, transition rules apply.

²⁶⁷ Since 1942, a limitation has applied to the deductibility of interest with respect to single premium contracts (sec. 264(a)(2)). For this purpose, a contract is treated as a single premium contract if (1) substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is purchased, or (2) an amount is deposited with the insurer for payment of a substantial number of future premiums on the contract. Further, under a limitation added in 1964, no deduction is allowed for any amount paid or accrued on debt incurred or continued to purchase or carry a life insurance, endowment, or annuity contract pursuant to a plan of purchase that contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of the contract (sec. 264(a)(3)). An exception to the latter rule is provided, permitting deductibility of interest on bona fide debt that is part of such a plan, if no part of 4 of the annual premiums due during the first 7 years is paid by means of debts (the "4-out-of-7 rule") (sec. 264(c)(1)). In addition to the specific disallowance rules of section 264, generally applicable principles of tax law apply.

²⁶⁸ Special rules apply for certain tax-exempt obligations of small issuers (sec. 265(b)(3)).

²⁶⁹ See "Fannie Mae Designing a Program to Link Life Insurance, Loans," Washington Post, p. E3, February 8, 1997; "Fannie Mae Considers Whether to Bestow Mortgage Insurance," Wall St. Journal, p. C1, April 22, 1997.

²⁷⁰ It was intended that if coverage for each insured individual under a master contract is treated as a separate contract for purposes of sections 817(h), 7702, and 7702A of the Code, then coverage for each such insured individual is treated as a separate contract, for purposes of the exception to the pro rata interest disallowance rule for a policy or contract covering an individual who is a 20-percent owner, employee, officer or director of the trade or business at the time first covered. A master contract does not include any contract if the contract (or any insurance coverage provided under the contract) is a group life insurance contract within the meaning of Code section 848(e)(2). No inference was intended that coverage provided under a master contract, for each such insured individual, is not treated as a separate contract for each such individual for other purposes under present law. A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁷¹ A technical correction may be needed so that the statute reflects this intent.

²⁷² A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁷³ This rule is consistent with the intended treatment of coverage of insured individuals under master contracts under the provision (as described above). A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁷⁴ In the case of a married individual who files a joint return with his or her spouse, the income for purposes of these tests is the combined income of the couple.

²⁷⁵ This estimate includes outlay reduction of $254 million for 1997-2002 and $650 million for 1997-2007.

²⁷⁶ See, e.g., Rev. Rul. 60-358, 1960-2 C.B. 68; Rev. Rul. 64-273, 1964-2 C.B. 62; Rev. Rul 79-285, 1979-2 C.B. 91; and Rev. Rul. 89-62, 1989-1 C.B. 78.

²⁷⁷ See, ABC Rentals of San Antonio v. Comm., 97 F.3d 392 (10th Cir., 1996), pet. for rehg. filed (Nov. 16, 1996) where the Tenth Circuit decision reversed the holding of ABC Rentals of San Antonio v. Comm., 68 TCM 1362 (1994) and held that consumer durable property subject to short-term, "rent-to-own" leases were eligible for the income forecast method. For decisions supporting the Tax Court memorandum decision denying eligibility for certain tangible personal property, see El Charro TV Rental v. Comm., 79 F.3d 1145 (5th Cir., 1996) (rent-to-own property not eligible) and Carland, Inc. v. Comm., 90 T.C. 505 (1988), aff'd on this issue, 909 F.2d 1101 (8th Cir., 1990) (railroad rolling stock subject to a lease not eligible).

²⁷⁸ I.e., the sale of the property must be intended to be for resale or leasing by the dealer.

²⁷⁹ A technical correction is necessary to accomplish this result.

²⁸⁰ See, Mihir A. Desai and James R. Hines, Jr., "'Basket' Cases: International Joint Ventures after the Tax Reform Act of 1986," National Bureau of Economic Research, Working Paper #5755, September 1996.

²⁸¹ In the case of an option-holder, a technical correction may be necessary to reflect this intent that the elimination of the overlap apply only to the extent the person is subject to the current inclusion rules of subpart F with respect to the corporation.

^281a In light of this Congressional intent to allow an election with respect to either unrealized appreciation or accumulated earnings, it is hoped that the provision of the Treasury regulations which limits the availability of the latter election will be withdrawn. See Treas. Reg. sec. 1.129111-9(i).

²⁸² A technical correction may be necessary to clarify this result. See Title VI (sec. 10(b)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁸³ See report of the House Committee on Ways and Means, H. Rept. 105-318, Part I, October 9, 1997.

²⁸⁴ Projected to be $700 for 1998.

²⁸⁵ Projected to be $700 for 1998.

²⁸⁶ Projected to be $700 for 1998.

²⁸⁷ Projected to be $1,400 for 1998.

²⁸⁸ Projected to be $700 for 1998.

²⁸⁹ See Title VI (sec. 611(a)) of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

²⁹⁰ The overpayment rate equals the applicable Federal short-term rate plus two percentage points. This rate is adjusted quarterly by the IRS. Thus, in applying the look-back method for a contract year, a taxpayer may be required to use five different interest rates.

²⁹¹ The Tax Reform Act of 1986 ("1986 Act") modified the Accelerated Cost Recovery System ("ACRS") to institute MACRS. Prior to the adoption of ACRS by the Economic Recovery Act of 1981, taxpayers were allowed to depreciate the various components of a building as separate assets with separate useful lives. The use of component depreciation was repealed upon the adoption of ACRS. The denial of component depreciation also applies under MACRS, as provided by the 1986 Act.

²⁹² Former Code sections 168(f)(6) and 178 provided that in certain circumstances, a lessee could recover the cost of leasehold improvements made over the remaining term of the lease. These provisions were repealed by the 1986 Act.

²⁹³John B. White, Inc. v. Comm., 55 T.C. 729 (1971), aff'd per curiam 458 F. 2d 989 (3d Cir.), cert. denied, 409 U.S. 876 (1972). However, see, e.g., Federated Department Stores v. Comm., 51 T.C. 500 (1968) aff'd 426 F. 2d 417 (6th Cir. 1970) and The May Department Stores Co. v. Comm., 33 TCM 1128 (1974), aff'd 519 F. 2d 1154 (8th Cir. 1975) with respect to the application of section 118 to certain payments.

²⁹⁴ Section 311 of the 1997 Act, as proposed to be amended by Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997, provides a 28-percent rate for the net capital gain attributable to collectibles, certain gain from small business stock, gains and losses from capital assets held more than one year but not more than 18 months, the net short-term capital loss, and any long-term capital loss carryover. It also provides a 25-percent rate for the net capital gain attributable to unrecaptured section 1250 depreciation (in the case of section 1231 dispositions, this is limited to the net section 1231 gain), reduced by any net loss from items taken into account in computing the 28-percent gain. It also provides a 20-percent rate on the net capital gain, reduced by the amount of the 28-percent rate gain and the unrecaptured section 1250 depreciation. These provisions generally become effective during 1997. Finally, beginning in 2001 and 2006, it also provides two categories of gain for certain assets held more than five years.

²⁹⁵ An individual who actively participates in rental real estate activity and holds at least a 10-percent interest may deduct up to $25,000 of passive losses. The $25,000 amount phases out as the individual's income increases from $100,000 to $150,000.

²⁹⁶ In determining the amounts required to be separately taken into account by a partner, those provisions of the large partnership rules governing computations of taxable income are applied separately with respect to that partner by taking into account that partner's distributive share of the partnership's items of income, gain, loss, deduction or credit. This rule permits partnerships to make otherwise valid special allocations of partnership items to partners.

²⁹⁷ An electing large partnership is allowed a deduction under section 212 for expenses incurred for the production of income, subject to 70-percent disallowance. No income from an electing large partnership is treated as fishing or farming income.

²⁹⁸ The term "net capital gain" has the same meaning as in section 1222(11). The term "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the gains from sales or exchanges of capital assets. Thus, the partnership cannot offset any portion of capital losses against ordinary income.

²⁹⁹ The 70 percent figure is intended to approximate the amount of such deductions that would be denied at the partner level as a result of the two-percent floor.

³⁰⁰ It is understood that the rehabilitation and low-income housing credits which are subject to the same passive loss rules (i.e., in the case of the low-income housing credit, where the partnership interest was acquired or the property was placed in service before 1990) could be reported together on the same line.

³⁰¹ A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

³⁰² A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

³⁰³ A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

³⁰⁴ A technical correction may be needed so that the statute reflects this intent. See Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House on November 5, 1997.

³⁰⁵ Tax Equity and Fiscal Responsibility Act of 1982.

³⁰⁶ Application of the separate share rule is not elective; it is mandatory if there are separate shares in the trust.

³⁰⁷ Note that in some civil law States (e.g., Louisiana), an entity similar to a trust, called a usufruct, exists.

³⁰⁸ The Act, in a separate provision (sec. 1031), modified the tax on commercial aviation and extended all aviation excise taxes for 10 years.

³⁰⁹ See Announcement 96-13 and Announcement 97-52.

³¹⁰ Generally, the amount of the first quarter payment must be at least 25 percent of the lesser of (1) the preceding year's tax liability, as shown on the foundation's Form 990-PF, or (2) 95 percent of the foundation's current-year tax liability.

³¹¹ A technical correction may be necessary so that the statute reflects this intent with respect to SIMPLE 401(k) plans.

³¹² This special rule applied to participants (1) in a defined benefit plan of a State or local government plan, and (2) with respect to whom the period of service taken into account in determining the amount of the benefit under such plan includes at least 15 years of service of the participant as (a) a full-time employee of a police or fire department organized by a State or political subdivision to provide police protection, firefighting services, or emergency medical services or (b) as a member of the Armed Services of the United States.

³¹³ The 60-percent requirement is determined assuming that outstanding options have been exercised.

³¹⁴ Notice 96-65, 1996-2 C.B. 232. See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 104th Congress (JCS-12-96), December 12, 1996, pp. 277-278.

³¹⁵ For this purpose, a "qualified liquidation" has the same meaning as it does purposes of the exemption from the tax on prohibited transactions of a real estate mortgage investment conduit ("REMIC") in section 860F(a)(4).

³¹⁶ See report of the House Committee on Ways and Means (H. Rept. 104-506) accompanying H.R. 2377, p. 59.

³¹⁷ A separate provision in the Act makes a technical correction to section 4962(b) to permit the abatement of first-tier penalty excise taxes imposed under section 4958.

^317a See House Document 105-116, Cancellation of Limited Tax Benefit, Message from the President of the United States. A bill that would restore and modify these canceled provisions, H.R. 2513, was reported by the House Committee on Ways and Means (Rept. 105-318 Part 1) on October 9, 1997, and passed by the House on November 8, 1997.

³¹⁸ P.L. 105-33; August 5, 1997. H.R. 2015 was reported by the House Committee on the Budget on June 24, 1997 (H. Rept. 105-149). The Committee on Ways and Means approved its health and human resources reconciliation provisions on June 9 and 10, 1997, respectively, which were incorporated in H.R. 2015 as reported. The bill, as amended, was passed by the House on June 25, 1997.

S. 947 was reported by the Senate Committee on the Budget on June 20, 1997 (no written report). S. 947 included the health and human resources reconciliation provisions as approved by the Committee on Finance on June 18, 1997. S. 947 was considered by the Senate on June 23 and 24, 1997, and was passed, as amended, on June 25, 1997.

H.R. 2015, as amended by the Senate provisions of S. 947, was passed by the Senate on June 25, 1997. A conference report was filed in the House on July 30, 1997 (H. Rept. 105-217); the House agreed to the conference report on July 30, 1997; and the Senate agreed to the conference report on July 31, 1997. H.R. 2015 was signed by the President on August 5, 1997.

H.R. 2015, as enacted, includes the revenue-related provisions described in this Part.

³¹⁹ The number of MSAs which can be established is subject to a cap.

³²⁰ As under prior law, individuals who are eligible for Medicare are not eligible for an MSA that is not a Medicare+Choice MSA.

³²¹ Medicare+Choice MSAs are not taken into account for purposes of the cap on non-Medicare+Choice MSAs, nor are they subject to that cap.

³²² For example, no Medicare+Choice MSA assets could be invested in life insurance contracts, Medicare+Choice MSA assets can not be commingled with other property except in a common trust fund or common investment fund, and an account holder's interest in a Medicare+Choice MSA would be nonforfeitable. In addition, if an account holder engages in a prohibited transaction with respect to a Medicare+Choice MSA or pledges assets in a Medicare+Choice MSA, rules similar to those for IRAs would apply, and any amounts treated as distributed to the account holder under such rules would be treated as not used for qualified medical expenses.

³²³ Under the provision, medical expenses of the account holder's spouse or dependents are not treated as qualified medical expenses.

³²⁴ The numbers are provided for illustrative purposes only.

³²⁵ See IRS General Counsel Memorandum 39862; Announcement 92-83, 1992-22 I.R.B. 59 (IRS Audit Guidelines for Hospitals). Even where no prohibited private inurement exists, however, more than incidental private benefit conferred on individuals may result in the organization not being operated "exclusively" for an exempt purpose. See, e.g., American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989).

³²⁶ The qualification of a hospital as a tax-exempt charitable organization under section 501(c)(3) is determined as under present law. See Rev. Rul. 69-545, 1969-2 C.B. 117.

³²⁷ This provision was repealed under section 519 of the Fiscal Year 1998 Appropriations for Labor, Health and Human Resources (H.R. 2264) as passed by the Congress and signed by the President (P.L. 105-78, November 13, 1997).

³²⁸ P.L. 105-35; August 5, 1997. H.R. 1226 was reported by the House Committee on Ways and Means on April 14, 1997 (H. Rept. 105-51). The bill, as amended, passed the House on April 15, 1997, and was passed by the Senate on July 23, 1997. H.R. 1226 was signed by the President on August 5, 1997.

³²⁹ IRS Declaration of Privacy Principles, May 9, 1994.

³³⁰U.S. v. Czubinski, DTR 2/25/97, p. K-2.

³³¹ P.L. 104-294, sec. 201 (October 11, 1996).

³³² Pursuant to 18 U.S.C. sec. 3571 (added by the Sentencing Reform Act of 1984), the amount of the fine is not more than the greater of the amount specified in this new Code section or $100,000.

³³³ P.L. 105-130; December 1, 1997 (Section 9 of the Surface Transportation Extension Act of 1997). S. 1519 was passed by the Senate on November 10, 1997, and by the House on November 12, 1997. The Act was signed by the President on December 1, 1997.

³³⁴ The other authorizing Acts referenced in the Highway Trust Fund are the Highway Revenue Act of 1956, Titles I and II of the Surface Transportation Assistance Act of 1982, and the Surface Transportation and Uniform Relocation Act of 1987.

³³⁵ No amounts have actually been transferred yet to the National Recreational Trails Trust Fund because no obligations have been made for that Trust Fund.

³³⁶ This Act includes an authorization from the Highway Trust Fund for the National Recreational Trails Program.