Joint Committee Report JCS-7-79: General Explanation of the Revenue Act of 1978

"SECTION 1. TAX IMPOSED.

"(a) MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES.--There is hereby imposed on the taxable income of--

 "If taxable income is:      The tax is:

 "If taxable income is:      The tax is:

 "If taxable income is:      The tax is:

 "If taxable income is:      The tax is:

¹ Title VII of the Act, which contains technical corrections to the Tax Reform Act of 1976, was considered as a separate bill, H.R. 6715, by the House of Representatives and Senate Committee on Finance. That bill was reported by the House Committee on Ways and Means on October 12, 1977, passed by the House of Representatives on October 17, 1977, and reported by the Senate Committee on Finance on April 17, 1978. The provisions of H.R. 6715, as approved by the Senate Finance Committee, were added to the Revenue Act of 1978, with several minor changes by a Senate floor amendment. The following portion of this part, Sources of Legislative History, provides references to the relevant committee reports for these provisions and for other provisions which were added to the Revenue Act of 1978 by the Senate and which were identical or similar to provisions contained in other bills reported separately in the 95th Congress. Footnotes in the text also refer to the appropriate House and Senate reports for these other tax bills, provisions of which were included in the Revenue Act of 1978.

II.

¹The revenue loss from the capital gains tax cut for individuals, except for the special provision for residences, is reduced by one-third ($1 billion in calendar year 1979. $1 billion in 1980, and $0.1 billion in fiscal year 1979) to take account of the offsetting revenue gain expected from additional sales of appreciated assets resulting from the capital gains tax reduction.

V.Title I.A.3.

¹ Under the withholding rate schedules adopted by the Treasury Department pursuant to the Act, some taxpayers received a withholding increase beginning in January 1979. This occurred because the $35 per-exemption credit was built into the withholding rate schedules as if it were an increase in the zero bracket amount (one for single returns and 3 for joint returns). This credit expired at the end of 1978. Lower- and middle-income single taxpayers who claim no exemptions for withholding, and married couples who claim zero or few withholding exemptions, experienced an increase in withholding tax because the withholding increase from repeal of the general tax credit outweighs the reduction from the increase in the personal exemption from $750 to $1,000 and the rate cuts.

This withholding increase was unavoidable for taxpayers who claim zero or few withholding exemptions without significantly changing the withholding system because of the way the general tax credit had been built into the withholding system as if it were an increase in the zero bracket amount.

These increases are relatively small and taxpayers may avoid them by claiming one or more additional withholding exemptions. They should note that one exemption will reduce withholding by $150 to $390 per year (generally about $250) and this could cause underwithholding. Moreover, taxpayers who claim additional withholding allowances because of large itemized deductions or credits should review their number of withholding allowances on the revised form W-4, and perhaps submit a new form claiming fewer withholding allowances. Otherwise they may be unexpectedly underwithheld for 1979 since the value of these additional exemptions has increased from $750 to $1,000 for withholding purposes but there has been no corresponding reduction in tax liability.

V.Title I.A.4

¹ Technically the total amount of advance payments is to be treated as an additional amount of tax owed by the employee on his tax return, but the actual earned income credit is allowed in full against that tax liability. Thus, the taxpayer will have a net increase or decrease in tax, depending on whether his advance payments are greater or less than his actual credit. Any individual who receives advance payments will be required to file an income tax return.

² The certificate of an employee making his first application to the employer will take effect at the beginning of the first payroll period, or at the first payment of wages on or after the date on which the certificate is furnished. For subsequent certificates, however, the employer may delay putting the certificate into effect for at least 30 days, but no later than the next status determination date (January 1, May 1, July 1, or October 1) following the expiration of the 30-day period.

³ For example, suppose that an individual works part-time with an annual wage of $4,800 and that the employer makes monthly wage payments of $400. If the individual's spouse is not claiming advance payments, then the employer would compute the advance payment from a table designed for this category of employee; the amount would be less than or equal to $40 (i.e., 10 percent of $4,800 divided by 12, the number of pay periods in the year). If the individual's spouse is claiming advance payments, then the table for this category of employee would be less than or equal to $2.08 (i.e., $250 minus 12.5 percent of $1,800 ($4,800 - $3,000), divided by 12).

⁴ Reduced payments of FICA taxes will not affect appropriations to the Social Security trust funds, since those appropriations are determined by FICA liabilities, not collections.

V.Title I.B.1.

¹ For taxpayers in Hawaii, county gasoline taxes had to be calculated from receipts and added to the table amount.

V.Title I.B.2.

¹ The relevant rulings are I.T. 3230, 1938-2 C.B. 136 (payments by a State agency out of funds received from the Federal Unemployment Trust Fund); Rev. Rul. 55-652, 1955-2 C.B. 21 (unemployment compensation payments to Federal employees by State or Federal agencies); Rev. Rul. 70-280, 1970-1 C.B. 13 (payments by a State agency out of funds received from the Federal Unemployment Trust Fund); Rev. Rul. 73-154, 1973-1 C.B. 40 (unemployment compensation payments made under the Emergency Unemployment Compensation Act of 1971); Rev. Rul. 76-63, 1976-1 C.B. 14 (unemployment compensation payments made under the Emergency Jobs and Unemployment Assistance Act of 1974 and the Emergency Unemployment Compensation Act of 1974); Rev. Rul. 76-144, 1976-1 C.B. 17 (payments made under the Disaster Relief Act of 1974); and Rev. Rul. 76-229, 1976-1 C.B. 19 (trade readjustment allowances paid under the Trade Act of 1974).

² Rev. Rul. 75-499, 1975-2 C.B. 43 and Rev. Rul. 75-479, 1975-2 C.B. 44. Such plans presently are in effect in New York, New Jersey, Hawaii, California, Rhode Island, and Puerto Rico.

³ I.T. 1918, III-1 C.B. 121 (1924); Rev. Rul. 56-249, 1956-1 C.B. 488; Rev. Rul. 57-383, 1957-2 C.B. 44; Rev. Rul. 58-128, 1958-1 C.B. 89; Rev. Rul. 59-5, 1959-1 C.B. 12; and Rev. Rul. 71-70, 1971-1 C.B. 27.

⁴ The operation of these rules may be illustrated by the following example. H and W are married taxpayers. H is disabled and receives $4,500 of disability income of a type eligible for exclusion under section 105(d). W works for part of the year and earns $20,000, but is laid off and receives $5,000 in unemployment compensation under a government program during the remainder of the year. H and W file a joint return. Their income including disability income and unemployment compensation is $29,500 (the sum of $4,500 disability income, $20,000 salary, and $5,000 unemployment compensation). The excess of $29,500 over their base amount, $25,000 is $4,500, and one-half of the excess is $2,250. Accordingly, $2,250 of W's $5,000 of unemployment compensation is included in gross income and the remaining $2,750 is excluded.

⁵ See note 2, supra.

V.Title I.B.3.

¹ Apart from the political contribution deduction and credit provisions, section 6096 of the Code allows a taxpayer to earmark $1 ($2 on a joint return) of his or her Federal income tax liability for contribution to the public financing of Presidential campaigns.

V.Title I.B.4.

¹ The Act does not make any change in the sec. 3121(b)(3) definition of "employment" for purposes of social security taxes.

V.Title I.C.1.

¹See Jackson v. Smietanka, 272 F. 970 (7th Cir. 1921); E. F. Cremin, 5 B.T.A. 1164 (1927), acq. VI-I C.B. 2 (1927); C. Florian Zittel, 12 B.T.A. 675, 677 (1928).

²See James F. Oats, 18 T.C. 570 (1952); aff'd. 207 F. 2d 711 (7th Cir. 1953), acq. (and prior nonacq. withdrawn) 1960-1 C.B. 5; Howard Veit, 8 T.C. 809 (1947), acq. 1947-2 C.B. 4; cf. Kay Kimbell, 41 B.T.A. 940 (1940), acq. and nonacq. 1940-2 C.B. 5, 12; J. D. Amend, 13 T.C. 178 (1949), acq. 1950-1 C.B. 1; James Gould Cozzens, 19 T.C. 663 (1953); Howard Veit, 8 CCH Tax Ct. Mem. 919 (1949).

³ 1960-1 C.B. 174.

⁴ At the same time the Service withdrew its prior nonacquiescence and acquiesced in the decision in James F. Oates, supra. See 1960-1 C.B. 5.

⁵ See Revenue Ruling 68-99, 1968-1 C.B. 193, where the employer purchased an insurance policy on the life of the employee to insure that funds would be available to meet its obligation to make deferred compensation payments. The ruling held that the employee did not receive a present economic benefit when the employer purchased the insurance contract since all rights to any benefits under the contract were solely the property of the employer and the proceeds of the contract were payable by the insurance company only to the employer.

See also Revenue Ruling 72-25, 1972-1 C.B. 127, where the employer funded its deferred compensation obligation with the purchase of an annuity contract.

⁶ These deferred compensation plans typically involve an agreement between the employee and the State or local government, under which the employee agrees to defer an amount of compensation not yet earned. Frequently, these plans permit the employee to specify how the deferred compensation is to be invested by choosing among various investment alternatives provided by the plan. (However, the employer must be the owner and beneficiary of all such investments and the employee or his beneficiary cannot have a vested, secured, or preferred interest in any of the employer's assets.) Benefits under these plans (including gains and losses and investment income on investments made with the deferred compensation) typically are paid to the employees upon retirement or separation from service with the employer, or, in the case of the death of an employee, to the designated beneficiary. Typically, plans provide also for the payment of benefits in case of an emergency beyond the employee's control. Many plans also provide for optional modes of distributing benefits (e.g., lump-sum payment or installments over 10 years) upon the occurrence of the event which causes benefits to be paid.

⁷ IR-1881 (9/7/77).

⁸ Prop. Regs. sec. 1.61-16, published in the Federal Register for February 3, 1978 (43 F.R. 4638).

⁹ Of course, it would be permissible for a participant merely to elect the time that benefit payments are to begin, and then, at a later date, to select among various payment options offered by the plan.

¹⁰ While any deferred compensation arrangement between a State or local government and a partnership or service corporation would benefit the partners or shareholders who actually provide the services, it was considered unnecessary to provide deferred compensation through funded tax-qualified plans. In addition, a service corporation can maintain a nonqualified unfunded arrangement (without any limitations on the amount of compensation that can be deferred) for the benefit of its highly-compensated employees.

¹¹ The Secretary of the Treasury will prescribe by regulations what constitutes "separation from service" for an independent contractor.

¹² The applicable limitations would be computed as follows:

¹ Prop. Treas. Regs. sec. 1.61-16, at 43 F.R. 4638.

² 18 T.C. 570 (1952).

³ 44 T.C. 20 (1965).

⁴ Example 1 of Revenue Ruling 60-31, 1960-1 C.B. 174.

V.Title I.C.3.

¹ Sec. 404(a)(5); Treas. Regs. sec. 1.404(a)-12(b).

² Treas. Regs. sec. 1.404(b)-l.

V.Title I.C.5.

¹ Accordingly, employer contributions to these cash or deferred profit-sharing plans were not includible in the income of covered employees, provided the plans satisfied the requirements of pre-1972 law and otherwise complied with the standards of the Code for tax-qualified plans.

² In determining the actual deferral percentage of a participant, it is intended that both mandatory and optional deferrals are to be taken into account. Thus, a plan could be assured of satisfying the nondiscrimination requirement as to contributions if the employer contributions are allocated to participants in proportion to their base pay and at least two-thirds of the contribution allocated to each participant has to be deferred. However, it is not intended that a plan will be permitted to require a larger mandatory deferral percentage for lower-paid participants than it requires for higher-paid participants (e.g., it could not require 50-percent deferral for the lowest paid two-thirds of the participants and permit the highest paid one-third of the participants to defer whatever percentage they chose).

³ This requirement prevents a plan from permitting lower-paid participants to elect to take all of their allocated contributions in cash while permitting higher-paid participants to defer the portion of their allocated contributions equal to 3 percent of compensation.

V.Title I.D.1.

¹ Only the first $100,000 of an employee's compensation is considered for this purpose.

² Under prior law, there were no voting requirements with respect to stock held by an ESOP or any other type of qualified plan other than a TRASOP.

V.Title I.E.6.a.

¹ These provisions were added to the Revenue Act of 1978 by a Senate floor amendment. The provisions were the subject of a separate bill, H.R. 13619, which was reported by the House Ways and Means Committee. The committee report for that bill is House Rep. No. 95-1739, 95th Cong., 2d Sess. (1978).

V.Title I.E.6.c.

¹ As under prior law, the 6-percent excess contribution tax would not apply to the year of withdrawal.

V.Title I.E.6.f.

¹ There is a limited exception to this rule under certain circumstances where the employee receives a lump distribution of stock in his employer. In this case, the employee is generally not required to include in gross income the unrealized appreciation in the value of the stock which occurred after the stock was contributed to the plan. Of course, when the stock is sold, the employee will recognize capital gain or loss.

² The property must actually be sold for such a designation to be available.

V.Title I.F.2.

¹ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision had earlier been added by Senate floor amendment to a separate bill, H.R. 112, as passed by the Senate, with amendments, on August 23, 1978.

V.Title I.F.4.

¹ To some extent, qualifications differ for individuals who are candidates for degrees and individuals who are not degree candidates. A degree candidate cannot exclude any amount to the extent it represents compensation for teaching, research, or other part-time services which the individual is required to render in order to obtain the grant unless such services required of all candidates for a particular degree as a condition for receiving the degree.

In the case of a non-degree candidate, the exclusion is available only for up to $300 per month for no more than 36 months and then only if the grantor of the scholarship is a qualified governmental unit, charity, or international organization.

²Bingler v. Johnson, 394 U.S. 741 (1969).

³ In situations where an employer acquires items with a useful life in excess of one year and uses them for the direct furnishing of educational assistance to employees, the cost would have to be recovered through deductions for depreciation over the useful lives of such items. In other situations, the deductions would normally be allowed when the amount is paid or incurred (depending on the employer's method of accounting).

⁴ See Treas. Reg. secs. 31.3121(a)-1(h), 31.3306(b)-1(h), and 31.3401(a)-1(b)(2); Rev. Ruls. 78-184, 1978-1 C.B. 304; 76-62, 1976-1 C.B. 12; 76-71, 1976-1 C.B. 308; and 76-352, 1976-2 C.B. 37.

⁵ However, such a distinction still would have to be made in situations where the education is not excluded under this provision.

V.Title II.A.

¹ It is contemplated, however, that in certain instances the Internal Revenue Service, pursuant to its authority to do so, will prescribe regulations Providing for permissible aggregation of other activities with a real estate activity if the other activities do not have significant tax shelter characteristics, such as nonrecourse financing.

² If a partnership ("investing partnership") is a partner in another partner-ship ("primary partnership") and the primary partnership is engaged in a real-estate activity which is not subject to the at risk rules, the partners of the investing partnership would not be subject to the at risk rule with respect to its activity of investing in the primary partnership to the extreme that such investment is attributable to the real estate activity.

³ In the case of a nursing home or old age home, the health care and meals provided would not be considered part of the real estate activity. Providing health care and food service are not incidental to making real property available as living accommodations. Consequently, a separation of the real property activity and the health care and meals activity (or activities) would be required.

⁴ For example, assume that an individual owns and operates a restaurant and the individual incurs a loss of $100,000 which is determined as follows: $500,000 gross receipts, $400,000 cost of goods sold, $50,000 restaurant expenses (including depreciation on restaurant personal property) and $150,000 for real estate taxes, depreciation on the structure, repairs and maintenance to the structure, and interest on the mortgage secured by the real property. In this instance, $125,000 of the gross receipts would be allocated to the real property, computed as follows:

$150,000 real property expenses divided by $600,000 total expenses multiplied by $500,000 income equals $125,000

Consequently, the real property activity would be treated as having incurred a loss of $25,000 ($125,000 - $150,000) and the restaurant activity a loss of $75,000 ($375,000 - $450,000). Only the restaurant activity loss would be subject to the at risk limitation.

⁵ Thus, if in the example set forth under footnote 4, the taxpayer could establish that the annual fair rental value of the land and structure involved was $100,000, that amount (as opposed to the $125,000 derived under the allocation formula) would be treated as the receipts allocable to the real property.

⁶ The partnership a risk rule of prior law applied to corporate partners in a partnership which was engaged in activities which were neither subject to the provisions of the specific at risk rule nor involve real property (other than mineral property). Consequently, the repeal of the partnership at risk rule (even with the extension of the specific at risk rule to certain closely-held corporations) results in the elimination of the applicability of the at risk rule to more widely held corporations.

⁷ The provision continues to apply to all subchapter S corporations.

⁸ For example, the gross receipts from the sale and servicing of computers would be included if the corporation also leased computers, notwithstanding that the computers involved had different functional capacities. The gross receipts from the sale, servicing, and lease of office equipment would be combined for purposes of this test, as would the gross receipts from the sale, servicing, and lease of automobiles.

⁹ For the purposes of this provision, computer software is to be considered equipment.

¹⁰ Thus, amounts paid or incurred with respect to the equipment leasing activity for taxable years beginning prior to the year of disqualification, and deducted in such taxable years, will, generally treated as reducing first that portion of the taxpayer's basis which is attributable to amounts not at risk. On the other hand, withdrawals made in taxable years beginning before the year of disqualification will be treated as reducing the amount which the taxpayer is at risk.

V.Title II.B.

¹ This rule applies to an election made under either subdivision (i) or (ii) of Treasury Regulation sec. 1.761-2(b)(2), relating to the method of electing not to be treated as a partnership.

² For example, assume a partnership tiering arrangement that consists of Partnership A (the first tier partnership) that has as partners Partnership B, a simple trust and a subchapter S corporation. Partnership B has as partners Partnership C and a regular corporation. Assume further that Partnership A properly disclose the identity of its three partners; Partnership B does not disclose the identity of any of its partners; Partnership C discloses the identity of its partners and the trust and the subchapter S corporation properly disclose their beneficiaries and stockholders, respectively. In this instance, the partners of Partnership C and the regular corporation will not have satisfied the notification requirement because the reporting of their chain of ownership to Partnership A (the partnership in which the partnership item arose) is broken at Partnership B. On the other hand, the beneficiaries of the trust and shareholders of the subchapter S corporation will have satisfied the notification requirement because the reporting of their line of ownership to Partnership A is unbroken.

³ Thus, for example, if a partnership with a taxable year ending January 31, 1980 files its return by the May 17, 1980 due date, these special rules provide that the Service may assess deficiencies with respect to partnership items through May 15, 1984. However, if a partner of that partnership files his calendar year 1980 income tax return (which is the return in which he would report these partnership items) by an extended due date of June 15, 1981, the IRS may assess deficiencies attributable to any item in his return, including partnership items, through June 15, 1984 under present law period of limitation rules.

⁴ For example, if a federally registered partnership has additional gross income, which results in an individual partner having additional adjusted gross income, the partner's medical deduction (under section 213) may be reduced because his 3-percent adjusted gross income floor is increased. The reduction in the medical deduction will treated as a partnership item and the amount of the additional tax attributable to the decreased medical deduction may be assessed during the 4-year period of limitations.

⁵ These general rules may be illustrated with the following example. Assume that partnership A (the first tier partnership) is a federally registered partnership. It has as partners Partnership B (a non-federally registered partnership), a simple trust, and a subchapter S corporation (collectively, the second tier partners). Each of the partners, beneficiaries or shareholders, respectively, of the second tier partners is an individual taxpayer (ultimate taxpayers). Assume further that the Service assesses a deficiency against each of the ultimate taxpayers based on a disallowance of a deduction claimed by Partnership A. The deduction claimed by Partnership A is a partnership item as to each of the ultimate taxpayers for the following reasons. The deduction is taken into account under the provisions of subchapter K in computing the gross income and deductions of the second tier partners (i.e., Partnership B, the trust and the subchapter S corporation). As such it is a partnership item of each of those entities. The item is a partnership item to the partners of Partnership B, the beneficiaries of the trust, and the shareholders of the subchapter corporation. because the taxable income of Partnership B, the distributable net income of the trust, and the undistributed taxable income of the subchapter S corporation, all of which are taxable to the ultimate taxpayers, are each affected by the partnership item flowing from Partnership A. Furthermore, it does not matter that the intervening partnership B is a nor Federally registered partnership because once a partnership item has arisen in a federally registered partnership, or passed through a federally registered partnership, it retains its status as a partnership item to all subsequent tiers.

V.Title III.A.

¹ For example controlled groups (under section 1561) are limited to one $50,000 surtax exemption which is apportioned among the members of the group. In order to conform to the graduated rate schedules, section 1561 is changed to limit a controlled group to a total of only $25,000 of taxable income in each of the rate brackets below the 46-percent bracket. Thus, if there are three members of a controlled group and if no plan for unequal apportionment is adopted, each member will be subject to tax at a rate of 17 percent of the first $8,333 of taxable income, 20 percent of its second $8,333, 30 percent on its third $8,333, 40 percent on its fourth $8,333 and 46 percent on its taxable income in excess of $33,333.

V.Title III.B.1.

¹ The provisions of section 46(a)(2) were also amended by the Energy Tax Act of 1978. Since this legislation was considered by the Congress prior to the Revenue Act of 1978, these amendments were considered on the basis of the law in effect at that time which was the temporary 10-percent investment tax credit. The Revenue Act of 1978 was signed into law by the President on November 6, 1978, and then the Energy Tax Act of 1978 was signed on November 9, 1978. It is the intention of Congress that the provisions of the Revenue Act of 1978 will be implemented as passed by the Congress and conflicts with the Energy Tax Act will be resolved by treating the Revenue Act of 1978 as having been enacted last. It is expected that Congress will re-enact the provisions of the Revenue Act of 1978 if necessary to make the 10-percent investment credit permanent.

V.Title III.B.4.

¹ Rev. Rul. 66-89, 1966-1 Cum. Bull. 7.

²Ibid.

³ Regs. sec. 1.48-1(e)(1).

⁴ S. Rept. No. 92-437, 92d Cong., 1st Sess. (1971), 29-30.

⁵Melvin Satrum, 62 T.C. 413 (1974), nonacq., 1978-23 Int. Rev. Bull. 7 (June 5, 1978); Starr Farms, Inc. v. U.S., 78-1 U.S.T.C. par. 9183 (W.D. Ark. 1977); Walter Sheffield Poultry Co., T.C. Memo 1978-308.

⁶Sunnyside Nurseries, 59 T.C. 113 (1972); Arne Thirup, 59 T.C. 122 (1972).

⁷Thirup et al. v. Comm., 508 F. 2d 918, 75-1 U.S.T.C. par. 9158 (9th Cir. 1974). This case was followed in Stuppy, Inc. v. United States, 78-2 U.S.T.C. par. 9664 (W.D. Mo. 1978).

⁸ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. A similar provision was the subject of a separate bill, H.R. 12846, which was reported by the House Ways and Means Committee (H. Rept. No. 95-1761, October 11, 1978), and was passed by the House on October 13, 1978.

V.Title III.B.5.

¹ Buildings used for lodging generally will not be eligible (sec. 48(a)(3)). However, the exception for lodging facilities would not apply to rehabilitation of hotels and motels where the predominant portion of the accommodations is used by transients and section 48(a)(3), by its terms, does not apply.

² Under present law, it may be difficult to classify certain items as either tangible personal property which is eligible for the investment tax credit or as structural components of a building which are ineligible. To the extent attributable to a qualified rehabilitation the classification problem for these items would be eliminated because they would be eligible for the credit under either classification.

V.Title III.B.7.

¹ The facilitating legislation for the transfers was the Regional Rail Reorganization Act of 1973 (P.L. 93-236, approved January 2, 1974) and the Railroad Revitalization and Regulatory Reform Act of 1976 (P.L. 94-210, approved February 5, 1976).

² P.L. 94-253, approved March 31, 1976.

³ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision was included in a separate bill, H.R. 10653, which was reported by the House Ways and Means committee (H. Rept. No. 95-1539, September 6, 1978) and was passed by the House on October 3, 1978.

V.Title III.C.1.

¹ For 1978, the FUTA wage base went up to $6,000. In order to make the 1978 wage base comparable with 1977 for purposes of the jobs credit, prior law required that only the first $4,200 of the FUTA wage base for each employee be included in the computation.

² Generally, employers who employ one or more employees in covered employment for at least 20 weeks in the current or preceding calendar year or who pay wages of $1,500 or more during any calendar quarter of the current or preceding calendar year are covered under FUTA.

³ For example, if an employer with a calendar year taxable year hires an eligible employee who begins work on September 1, 1979, and pays him $2,500 in that taxable year, the employer is eligible for a credit of 50 percent of the $2.500, or $1,250 in that taxable year. For the next taxable year, the employer also is eligible for a 50-percent credit on the next $3,500 paid to that employee through August 31, 1980 . No credit is allowed on any additional wages paid to that employee through August 31, 1890. However, the employer is eligible for the 25-percent credit on any wages paid to the employee beginning September 1, 1950 until the total wages paid to the employee from that date (through August 30, 1981) equal $6,000 (assuming that, for 1981 wages, corrective legislation as mentioned previously is enacted).

V.Title III.C.2.

¹ For example, if a trade or business employer with a calendar year taxable year hires a eligible employee on September 1, 1979, and pays him $2,500 in that taxable year, the employer is eligible for a credit of 50 percent of $2,500, or $1,250 in that taxable year. For the next taxable year, the employer is also eligible for a 50 percent credit on the next $3,500 paid to that employee through August 31, 1980. No credit is allowed on any additional wages paid to that employee through August 31, 1980. However, the employer is eligible for the 25-percent credit on any wages paid to the employee beginning September 1, 1980, until the total wages paid to the employee from that date (through August 30, 1981) equal $6,000.

V.Title III.D.1.d.

¹ In general, refunding issues are bonds of which the proceeds are used to redeem outstanding bonds. Refunding issues are issued typically to take advantage of lower current interest rates, or to remove restrictive covenants in the original bond issue. Advance refunding issues are bonds issued prior to the maturity date of the original bond. In an advance refunding of tax-exempt industrial development bonds both the original issue and the refunding issue remain outstanding, thereby significantly increasing the amount of tax-exempt bonds outstanding for any project.

V.Title III.E.1.c.

¹ A virtually identical provision was enacted by sec. 5 of P.L. 95-628. The effective date of that provision is for elections made after January 9, 1979, in taxable years beginning after that date. Thus, technically the provision in the Revenue Act will apply only to elections for taxable years beginning after December 31, 1978, and before January 10, 1979, and the provision in P.L. 95-628 will apply to taxable years beginning after January 9, 1979. However, the two provisions are identical in substance. In addition, the provision in P.L. 95-628 provides certain retroactive relief.

V.Title III.E.2.

¹ An individual who is a partner in a partnership would he entitled to this special treatment only if he were a partner in the partnership when the partnership acquired the section 1244 stock and the loss from the disposition of the stock is reflected in his distributive share of partnership items.

² Thus, if a married individual files a joint return with his spouse and during the taxable year disposed of section 1244 stock at a loss of $75,000, only $50,000 of the loss would be treated as an ordinary loss and the excess of $25,000 will be treated as a capital loss. Alternatively, if the individual in this example were to have disposed of his section 1244 stock in two taxable years, and if his loss in each of the two taxable years was $37,500, the loss sustained in each of the two taxable years would be treated as an ordinary loss, because the limitation is determined annually.

³ This requirement must be satisfied at the time of the disposition of the stock.

⁴ This requirement must be satisfied both at the time of plan adoption and during the two-year plan period.

V.Title III.F.1.

¹ However, a farmer has not been allowed to deduct the purchase price of livestock, such as cattle which he intends to fatten for sale as beef.

² T.T. 1368, I-1 C.B. 72 (1922).

³ Rev. Rul. 76-242, 1976-1 C.B. 132. The ruling was to be effective for taxable years beginning on or after June 28, 1976. Under the crop method of accounting, if a farmer is engaged in producing crops, and the process of gathering and disposing of them is not completed in the year in which the crops are planted, the costs of producing, gathering, and disposing of the crops are taken into account in the taxable year the income from the crop is realized. Treas. Reg. sec. 1.162-12(a).

⁴ Rev. Rul. 77-64, 1977-1 C.B. 136. Also, the IRS has recently announced that a taxpayer affected by Rev. Rul. 76-242 could change to the cash method of accounting for the first taxable year beginning on or after January 1, 1978 unless the taxpayer is required to use the accrual method of accounting under section 447 of the Code. Rev. Proc. 78-22, 1978-34 I.R.B. 26, also released as IRS Information Release 2017, July 18, 1978.

⁵ The 1976 Act also provides special rules which permit certain corporations to use an "annual accrual method of accounting." An annual accrual method of accounting is a method of accounting under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive period expenses incurred during the taxable year are charged to crops harvested during that year or are deducted currently. To be eligible to use this method, a corporation (or its predecessors) must have used this method for a 10-year period ending with its first taxable year beginning after December 31, 1975, and substantially all the crops grown by the corporation must be harvested not less than twelve months after planting

⁶ Prior to the enactment of this act, section 447 (f) gave the Treasury Department broad regulatory discretion to alter this 10-year period. Section 701(l)(1) of this Act provided more specific rules as to when the adjustments were to be taken into account over shorter periods.

V.Title III.F.2.

¹ I.T. 1368, I-1 C.B. 72 (1922).

² O.D. 995, 5 C.B. 63 (1921).

³ Rev. Rul. 76-242, 1976-1 C.B. 132. Under the crop method of accounting, if a farmer is engaged in producing crops and the process of gathering and disposing of them is not completed in the year in which the crops are planted, the costs of producing, gathering, and disposing of the crops are taken into account in the taxable year the income from the crop is realized. Treas. Reg. sec. 1.162-12(a).

⁴ Rev. Rul. 77-64, 1977-1 C.B. 136.

⁵ Rev. Proc. 78-22, 1978-34 I.R.B. 26, also published as IRS Information Release 2017.

⁶ Congress also made certain changes as to the timing of certain deductions for farming syndicates (sec. 464).

⁷ The taxpayer may elect to change his method of accounting for growing crops while still being under the accrual method pursuant to this section if he had changed to, or adopted, an accrual method of accounting in which growing crops were inventoried pursuant to the Internal Revenue Service's published position in Rev. Rul. 76-242. If he has made such an election or change of method, it is intended that he should be able to change to an accrual method of accounting not involving the inventorying of growing crops under the authority of this section.

V.Title III.G.1.

¹ While dues or fees paid to any social, athletic, or sporting club or organization were considered to be expenses incurred with respect to an entertainment facility, clubs operated solely to provide lunches under circumstances generally considered to be conducive to business discussions are exempted both under prior and present law. Cf. Treas. Regs. sec. 1.274-2(e)(3)(ii). In addition, dues paid to professional associations and civic organizations generally are exempt. Rev. Rul. 63-144, 1963-2 C.B. 129, 138-139. An initiation or similar fee which is payable only upon joining a club, and the useful life of which extends over more than one year, is a nondeductible capital expenditure. Kenneth D. Smith, 24 TCM 899 (1965).

² Such a facility would be considered to be an asset which is used for personal, living, or family purposes, and not as an asset used in the taxpayer's trade or business, or in a profit-seeking endeavor. As such, the investment tax credit would not be available upon the acquisition of such a facility.

³ The language of the Act limits this exception to "country clubs". However, it is understood that the exception was intended to apply to all clubs with respect to which the taxpayer satisfies the business usage test. It is anticipated that the statutory language will be considered in connection with technical corrections to the 1978 Act.

V.Title III.G.2.

¹ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision was the subject matter of a separate bill, H.R. 6877, which was reported by the House Ways and Means Committee (H. Rept. 95-1537, September 6, 1978) and passed by the House on October 3, 1978.

V.Title III.G.4.

¹ Proposed regulations under sec. 118 were published May 30, 1978 (43 Fed. Reg. 22997).

² A qualified expenditure is an amount which is expended for the acquisition or construction of tangible property described in sec. 1231(b), where the acquisition or construction of the facility was the purpose motivating the contribution. For this purpose, a capital asset includes all expenditures which must be capitalized for such facilities under the normal rules of tax accounting (sec. 263). The assets must be used predominantly (i.e., 80 percent or more) in a trade or business of furnishing water or sewerage services to the utility's customers.

³ Expenditures must be made by the end of the second taxable year after the year in which the money was received.

^3[a] Accurate records must be kept of the amounts contributed on the basis of the project for which the contribution was made and by year of contribution.

⁴ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision was the subject matter of a separate bill, H.R. 11741, which was reported by the House Ways and Means Committee (H. Rep. No. 95-1577, September 18, 1978) and was passed by the House on October 3, 1978.

⁵ Under present law, customer connection fees include amounts paid to connect the customer's "property" to a main water or server line. The Act revises the statutory language to refer to amounts paid to connect the customer's "line" to a main line. This language change was made to reflect the inclusion of public electric utilities. Thus, it is clear under the Act that where the main line is located on or under the property of the customer, a customer connection fee does not include amounts for the installation of the main line. However, a customer connection fee includes amounts for the installation of the connecting line between the main line and the customer's line located in his home (or other place where the customer's ownership of the line begins) regardless of whether that connecting line was located on or under his property or the property of another.

V.Title III.G.5.

¹ Section 357(c) also applies to reorganizations within the meaning of section 368(a)(1)(D).

²Raich v. Comm'r, 46 T.C. 604 (1966); Thatcher v. Comm'r, 61 T.C. 28 (1973), rev'd in part and aff'd in part, 533 F. 2d 1114 (9th Cir. 1976); Bongiovanni v. Comm'r, 30 CCH Tax Ct. Mem. 1124 (1971), rev'd 470 F. 2d 921 (2d Cir 1972).

³James M. Pierce Corp. v. Comm'r, 326 F. 2d 67 (8th Cir. 1964).

⁴Thatcher v. Comm'r, 61 T.C. 28, 43 (1973) (Hall, J., dissenting), rev'd on this issue, 533 F. 2d 114 (9th Cir. 1976).

⁵Focht v. Comm'r, 68 T.C. 223 (1977).

⁶ Section 736(a) applies only to payments made to a retiring partner or to a deceased partner's successor in interest in liquidation of such partner's active interest in the partnership. If such payments meet the requirements of section 736, they are considered either as a distributive share of partnership income to the recipient or as guaranteed payments. If the payments are considered a distributive share of partnership income, then the distributive shares of the other partners are reduced. If payments are guaranteed payments, then they are deductible under section 162 by the partnership.

In either instance, for cash basis taxpayers the obligation to make payments is similar to the partnership's obligation with respect to its (deductible) accounts payable since both would constitute ordinary deductions or would reduce gross income to the non-retiring partners when the obligations are paid. Accordingly, under the Act, section 736(a) payments would be excluded in determining the amounts of liabilities assumed or to which the property transferred is subject for purposes of sections 357(c) and 358(d).

⁷ The exception for obligations which give rise to basis would apply, for example, where a cash-basis taxpayer purchases small tools on credit and, prior to paying for the tools, transfers them along with the related obligation to a new corporation in a section 351 transaction. While the transferor would have been entitled to a deduction if he had paid off the obligation, pending payment he would have a basis in the tools equal to the amount of the unpaid obligation. Under the provision, that obligation would constitute a "liability" for purposes of section 357(c); but the amount of this liability would be offset by the basis in the transferred tools.

V.Title III.G.9.

¹ The facilitating legislation for the transfers was the Regional Rail Reorganization Act of 1973 (P.L. 93-236, approved January 2, l974) and the Railroad Revitalization and Regulatory Reform Act of 1976 (P.L. 94-210, approved February 5, 1976).

² P.L. 94-253, approved March 31, 1976.

³ Under present law, the transferor railroads are generally entitled to 5-year carryover periods for these losses.

⁴ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision was included in a separate bill, H.R. 10653, which was reported by the House Ways and Means Committee (H. Rept. No. 95-1539, September 6, 1978) and was passed by the House on October 3, 1978.

⁵ The statutory provision refers to an affiliated group for a taxable year which included March 31, 1967. The date intended for this purpose was March 31, 1976. The year 1967 under the statute resulted from a clerical error.

V.Title III.G.10.

¹ This provision was added to the Revenue Act of 1978 by a Senate floor amendment. The provision was the subject matter of a separate bill, H.R. 12352, which was reported by the House Ways and Means Committee (H. Rept. 95-1561, September 12, 1978), and was passed by the House on September 25, 1978.

V.Title III.G.11.

¹ The operation of this rule is illustrated as follows: Assume a taxpayer incurs a net operating loss for the taxable year of $80,000, of which $60,000 is attributable to product liability. Assume further that taxable income for each of the 10 years immediately preceding the loss year is $5,000. The product liability loss of $60,000 may first be carried back to the 10th through the 4th preceding years, thus absorbing $35,000 of the loss. The remaining $25,000 of product liability loss is added to the "regular" net operating loss of $20,000 (for a total of $45,000) and is carried to the 3rd through 1st preceding years, which utilizes $15,000 of the loss. The remaining loss ($30,000) is carried forward to future years under existing rules, without regard to the source of the loss. Of course, in computing the amount of loss that may be carried from one preceding year to another, the normal adjustments under section 172 (such as the adjustment for the capital gain exclusion or excess of nonbusiness deductions over nonbusiness income would continue to be applicable even in the extended carryback years.

² For example, the costs incurred by a taxpayer in repairing or replacing defective products under the terms of a warranty, express or implied, are not product liability losses. On the other hand, the taxpayer's liability for damages to other property or persons attributable to a defective product may be product liability losses.

³ Amounts paid for malpractice claims or judgments related to professional services, as well as certain ancillary legal and court expenses, which arise from allegedly negligent acts, may be deductible currently as business expenses under section 162 of the Code. Rev. Rul. 78-210, 1978-23 I.R.B. 8.

In addition, a trust created by a tax-exempt hospital to accumulate and hold funds designated for use to satisfy malpractice claims may qualify for a section 501(c)(3) tax exemption. Rev. Rul. 78-41, 1978-5 I.R.B. 9.

V.Title III.G.12.

¹ This provision was added to the Revenue Act of 1978 by a Senate floor amendment. The provision was the subject matter of a separate bill, H.R. 3050, which was reported by the House ways and Means Committee (H. Rept. No. 95-1091, May 1, 1978) and was passed by the House on May 23, 1978. The provision was also reported by the Senate Finance Committee as part of H.R. 3050, amended (S. Rept. 95-1278, October 5, 1978).

² Under regulations to issued by the Treasury Department, an electing taxpayer may select a shorter merchandise return period than that otherwise applicable. Any change in the merchandise return period after its initial establishment will be treated as a change in method of accounting, subject to the rules applicable to such changes.

³ Thus, a change to another method of reporting merchandise returns would be a change in method of accounting subject to the applicable rules governing accounting changes. As stated in note 2, supra, a change in the merchandise return period after its initial establishment also constitutes a change in method of accounting.

⁴ In the example, the three years prior to the taxable year (calendar 1980) are 1977, 1978, and 1979. Accordingly, the merchandise-return periods for those years (as if the election had then been in effect), in the case of paperbacks, are the first 4 months and 15 days of 1978, 1979, and 1980.

V.Title III.G.13.

¹ Rev. Rul. 73-415, 1973-2 C.B. 154, and Rev. Rul. 78-212, I.R.B. 1978-23, p. 11.

² A typical discount coupon promotion program would operate in the following manner. Assume that a manufacturer of cereal desires to promote a new brand of cereal beginning October 1 of the current year. During September, the manufacturer sells large quantities of the new cereal to retailers so 'that they will have sufficient inventory on hand during the promotion period. The manufacturer also arranges to have coupons, allowing 50 cents off on the purchase of a box of the new cereal, distributed by newspaper, by direct mail, and by inclusion in packages of other products sold by the manufacturer.

Before the end of December (the close of the manufacturer's taxable year), perhaps as many as 75 percent of the coupons that will ultimately be redeemed will be tendered to retailers by consumers. The manufacturer, however, may not receive these coupons from the retailers for several months. This time lag between receipt by the retailer and redemption by the manufacturer occurs because the coupons usually go through a redemption process that includes grouping, counting, and verification by both the retailer and an intermediary party called a "redemption agent."

³ An electing taxpayer may select a redemption period shorter than six months. And change in the redemption period after its initial establishment is a change in method of accounting, subject to the rules applicable to such changes.

⁴ This provision was added to the Revenue Act of 1978 by a Senate floor amendment. The provision was the subject matter of a separate bill, H.R. 13047, which was reported by the House Ways and Means Committee (H. Rept. No. 95-1707, October 4, 1978) and was passed by the House on October 13, 1978.

⁵ A well-known example of a premium coupon is the type of coupon issued with each pack of certain brands of cigarettes.

⁶ The provision is intended to allow a deduction with respect to coupons turned in by the consumer before the close of the issuer's taxable year, but where, because of the time lag inherent in the chain of redemption, the coupons are not received by the issuer until some time after the close of its taxable year. If a coupon is redeemed directly by the issuer, no such time lag exists.

⁷ In the example, the three years prior to the taxable year (calendar 1979) are 1976, 1977, and 1978. Accordingly, the statutory redemption periods for those years (as if the election had then been in effect) are the first 6 months of 1977, 1978, and 1979.

⁸ For 1981, the amount deductible as actual coupon redemptions (for the first six months of 1982) is $12. The opening balance for 1981 is $10. The annual adjustment to the suspense account is an increase of only $1, however, since the account is not to be increased to an amount in excess of the initial opening balance ($11, in the example). As shown in the illustration, the net amount deductible for 1981 is $11.

⁹ The determination of whether the accounting method was used for all discount coupons is not to be made by looking separately at each trade or business of the taxpayer in which discount coupons were issued. The suspense account requirement (otherwise applicable beginning with the electing taxpayer's first taxable year ending after December 31, 1978) is waived only if such accounting method was used for all discount coupons issued by the taxpayer in all its separate trades or businesses in which any discount coupons were issued by the taxpayer during the pertinent period.

V.Title IV.A.1.

¹ The Act inadvertently omitted a technical change necessary for the correct calculation of the alternative tax for 1978 capital gains. The alternative tax formula for computing the partial tax on taxable income, reduced by the amount of the net capital gain included in income, should have been conformed to reflect the increase in the capital gains deduction. Thus, section 1201(b)(1) and (c) of the Code should be read as requiring an adjustment of taxable income by the amount of the includible net capital gains rather than 50 percent of the net capital gains. Without this conforming amendment under section 1201(b)(1), taxable income would be reduced by an amount of capital gains greater than that which was included in income and, under section 1201(c), taxable income would be increased by too large an amount with respect to gains in excess of $50,000. It is anticipated that this technical error will be corrected by legislation in the 96th Congress.

V.Title IV.A.5.

¹ Under section 1034, gain is recognized only to the extent that the a sales price of the old residence exceeds the taxpayer's cost of purchasing the new residence.

² The operation of the generally applicable provisions of prior law can be illustrated by the following example:

¹ Effective for taxable years beginning after December 31, 1978, the Act eliminates these items as tax preferences under the add-on minimum tax, but characterizes them as such for purposes of the alternative minimum tax.

² No special rule is provided similar to the rule under section 56(b) relating to the deferral of minimum tax liability in the case of net operating losses. In computing the net operating loss for any taxable year, the capital gains deduction under section 1202 is not taken into account and nonbusiness deductions are generally limited to the amount of nonbusiness income (sec. 172(c) and (d)). In addition, in determining the amount of a net operating loss carryover to the current taxable year, the reduction for prior years' taxable income is computed without regard to the prior years' section 1202 deduction (sec. 172(b)(2)(A)). Therefore, generally these preferences cannot create a net operating loss.

However, a taxpayer having adjusted itemized deductions in the current taxable year may receive the benefit of having certain nonpreferential deductions (including deductions under section 172) reduce the alternative minimum tax ) income in the current year and still be available as a net operating loss carryover to succeeding years. It is intended that any deduction, to the extent it may be carried to another year, is not to reduce alternative minimum taxable income for the current year.

³ Similarly, assume that the 90 percent investment tax credit limitation is in effect, and that a taxpayer has regular tax liability before credits of $100,000, investment tax credits of $120,000, and a potential alternative minimum tax (before regular tax offset) of $60,000. The taxpayer will pay a tax of $60,000 (consisting of regular tax of $10,000, and alternative minimum tax of $50,000). Here the taxpayer has used $90,000 of the $120,000 of investment tax credits against regular tax, but has received a benefit only from $40,000 of those credits. Thus, the remaining $50,000 of credits, for which no tax reduction was obtained, is available as an additional carryover (together with any other credits available to be carried over) to the next year to which the credit would be carried under the usual rules if the credit carryover did not expire.

Where the amount of credits from which no benefit is obtained involves more than one tax credit, the additional credit allowed as a carryover is first to be allocated to the credit which is taken last under the normal Code rules.

⁴ This rule may be illustrated by modifying the example in the text so that the $30,000 ordinary loss is composed in part of a deduction for accelerated depreciation which exceeds straight-line depreciation by $20,000, on which the taxpayer pays add-on minimum tax of $1,500. His pre-credit alternative minimum tax is $25,000, the difference between his gross alternative minimum tax of $29,500 and his regular tax of $4,500 ($3,000 plus $1,500). The taxpayer's alternative minimum tax foreign tax credit limitation is $16,471 (($25,000 plus $3,000) times $100,000/$170,000), and his alternative minimum tax after the foreign tax credit is $8,529 ($25,000 less $16,471). The taxpayer will therefore pay a net basic income tax of $3,000, and add-on minimum tax of $1,500, and an alternative minimum tax of $8,529 for a total of $13,029. The excess credits which may be carried to another year are $3,529--the excess of the $32,000 foreign taxes paid or deemed paid ($20,000 plus $12,000)) over the $28,471 foreign tax credits taken against the regular tax ($12,000) and against the alternative minimum tax ($16,471).

V.Title V.A.1.

¹ If, because of tip-splitting or tip pooling, the amount of charge tips reported by an employee on his or her Federal income tax return differs from the amount of charge tips reported by the employer for that employee on Form W-2, the rulings permit the employee to attach an explanation of the difference to his or her income tax return.

² Under the facts of Rev. Rul. 76-231, supra, the employer received customer charge tickets from waiters and reviewed the tickets in order to determine the amounts payable to the employees as tips, thereby becoming aware of the amounts of such tips, whether or not later reported by the waiters to their employer.

³ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision was the subject matter of a separate bill, H.R. 13592, which was reported by the House Ways and Means Committee (H. Rept. No. 95-1679, October 2, 1978).

⁴ Under current sec. 6041, the IRS takes the position (in Rev. Rul. 76-231, supra) that employers also must report to the IRS charge account tips paid over to employees but not reported to the employer by the employee.

V.Title V.A.2.

¹ This provision was added to the Revenue Act of 1978 by a Senate floor amendment. The provision was the subject matter of a separate bill, H.R. 13O92, which was reported by the House Ways and Means Committee (H. Rept. No. 95-1609, September 22, 1978) and passed by the House on October 10, 1978.

V.Title V.B.2.

¹ This provision was added to the Revenue Act of 1978 by a Senate floor amendment. The provision was included in a separate bill, H.R. 12578, which was reported by the House Ways and Means Committee (H. Rept. No. 95-1286, June 12, 1978) and passed by the House on September 12, 1978.

² Code section 6166(b)(2)(C) sets forth the applicable indirect ownership attribution rules.

In addition, under section 6166(h)(2)(B). Certain interests held jointly by a husband and wife are treated as owned by one shareholder or partner, as the case may be. Thus, if a decedent's brother and the brother's wife hold stock in a corporation as joint tenants (and own no other stock), the decedent, his brother, and his brother's wife will be treated as one shareholder, for purposes of determining the number of shareholders in the corporation. Also, the stock held by the brother and his wife will be treated as included in the decedent's gross estate for purposes of applying the 20-percent test.

V.Title V.C.1.

¹ This provision was added to the Revenue Act of 1978 by a Senate Finance Committee amendment. The provision was the subject matter of a separate bill. H.R. 112, which was reported by the House Ways and Means Committee (H. Rept. No. 95-842, January 19, 1978) and passed by the House on February 28, 1978. This provision was also reported by the Finance Committee as part of H.R. 112 (S. Rept. 95-790, May 9, 1978) and passed by the Senate, with amendments, on August 23, 1978.

V.Title V.D.1.

¹ The text of this provision, which originated as a Senate floor amendment, is similar to a separately reported bill, H.R. 14159, which was reported by the House Ways and Means Committee (H. Rept. 95-1748, October 10, 1978).

V.Title V.D.3.

¹ This provision was added to the Revenue Act of 1978 as a Senate Finance Committee amendment. The provision was also the subject matter of a separate bill. H.R. 13758, which was reported by the House and Means Committee (H. Rept. 95-1745, October 6, 1978) and passed by the House on October 13, 1978.

V.Title V.D.5.

¹ The destruction of livestock by or on account of disease, or the sale or exchange of livestock because of disease, is treated as an involuntary conversion (sec. 1033(d)).

V.Title VII.

¹ In general, these provisions were contained in a separate bill, H.R. 6715, passed by the House and reported by the Senate Finance Committee. Except for several changes incorporated in the Senate amendment to the Revenue Act of 1978, the relevant legislative history is contained in House Report No. 95-700 and Senate Report No. 95-1263.

V.Title VII.A.1.

¹ The community property rules are to he observed in the case of married couples filing separate returns (who must live apart for the entire taxable year in order to do so and also claim the credit). They are to apply in order to avoid the confusion that would result from requiring two sets of calculations, one for the computation of tax and the other for the computation of the credit, and the inequity which would result in such case if an individual were taxed on his or her share of community retirement income without being able to claim any retirement income credit on that income.

V.Title VII.A.2.c.

¹ Charitable remainder trusts (sec. 664) created after the Tax Reform Act of 1969 are generally exempt from both the income tax and the minimum tax and, consequently, no exception is necessary for these trusts.

V.Title VII.A.9.

¹ Section 337 will not be available under this provision if gain is not recognized to the shareholders in whole or part pursuant to section 333. Thus, even if part of a shareholder's gain is taxable by reason of the special limitations in section 333, section 337 will not be available to the subsidiary.

² An includible corporation is determined under sec. 1504(a) by reference to 80 percent or greater ownership of a corporation by the common parent or one or more other includible corporations. To illustrate the operation of this definition, assume that a common parent, P, owns all the stock of sister subsidiaries S-1 and SS-1. S-1 owns 90 percent of the stock of a second-tier subsidiary, S-2. SS-1 owns the remaining 10 percent of the stock of S-2 and all the stock of its subsidiary, SS-2. If S-2 adopts a plan under section 337 and sells its assets, the corporations which must liquidate under this provision (in addition to S-2) are S-1, SS-1, and P.

The existence of an includible corporation continues to be determined without regard to the exceptions contained in section 1504 (b).

³ For example, if a common parent, P, owns all the stock of S-1, which in turn owns all the stock of S-2, which in turn owns all the stock of S-3, section 337 can apply to a sale of property by S-3 if the selling company liquidates into S-2. S-2 liquidates into S-1. S-1 liquidates into P, and P liquidates completely within 12 months after S-3 adopted its plan. If P had owned a separate group of subsidiaries, none of which owns any stock in the companies just described, none of the subsidiaries in the separate chain would be required to liquidate in order for section 337 to benefit S-3's sale. P's shareholders would be required, however, to receive P's stock in the parallel chain as part of P's liquidation.

V.Title VII.A.21.i.

¹ Section 4 of the Foreign Earned Income Act of 1978 deferred the effective date of the amendments to section 911 until taxable years beginning in 1978, and section 202(a) of the Foreign Earned Income Act of 1978 amended section 911(a) so as to repeal the amendment made by this section generally for taxable years beginning after 1977. Thus, the amendment made by this section will apply only to those taxpayers who elect, pursuant to section 209(e) of the Foreign Earned Income Act of 1978, to not have amendments made by that Act apply for 1978.

V.Title VII.A.24.

¹ These payments would be eligible for the maximum tax rate because they are defined as earned income under section 911(b) although, under section 911(c)(5), no foreign source income exclusion is allowed under section 911(a) for deferred compensation.

V.Title VII.A.27.

¹ If the contribution exceeds the 15-percent limit but not the applicable maximum dollar ceiling, the excise tax can be avoided if the excess is withdrawn before the end of the taxable year in which it was contributed.

V.Title VII.B.1.

¹ However, a distribution in redemption of section 306 stock to pay death taxes which qualifies under section 303 is treated as an amount realized from the sale or exchange of a capital asset rather than as dividend income. See sec. 306(b)(5) of the Code as added by sec. 702(a)(2) of the Act.

V.Title VII.B.3.

¹ It is possible that the combined deduction for estate taxes attributable to the income in respect of a decedent (up to 70 percent) and the capital gains deduction (60 percent) can exceed the amount of the capital gain and can be used to offset other ordinary income of the taxpayer.

V.Title VII.B.15.

¹ The effective date of this provision is deferred until 1980 as a result of the 3-year deferral to the carryover basis provisions made by section 515 of the 1978 Act. In addition, section 702(c)(1) of the 1978 Act provides that the basis of farm property for which special valuation is elected and which is acquired from a decedent dying during 1977, 1978 or 1979 is the amount determined under the special valuation provision. The interaction of these two provisions will cause gain other than that attributable to post-death appreciation to be realized on the satisfaction of a pecuniary bequest of farm recapture property acquired from a decedent dying before 1980. It is anticipated the corrective legislation will be enacted In order to change this result.

V.Title VII.B.23.

¹ However, the estate tax exclusion is limited to an annuity receivable under a qualifying program.

V.Title VII.B.27.

¹ These are the same standards presently contained in sec. 2041 of the Code which are used in defining what is not a general power of appointment.

V.Title VII.B.31.

¹ See H. Rept. 94-1380, p. 51 and n. 6.

² Other rules under the generation-skipping provisions generally insure that a tax will not be imposed twice with respect to transfers of the same trust in the same generation. Therefore, double taxation will not occur under this amendment, even if a beneficiary's future or contingent interest in the trust should later become a present interest which subsequently terminates.

V.Title VII.C.5.

¹ This provision was repealed by other legislation (section 202(e) of the Foreign Earned Income Act of 1978).