**DESCRIPTION OF REVISED MODIFICATIONS**

**TO CHAIRMAN'S MARK**

**OF AN AMENDMENT TO S. 1133**

**("PARENT AND STUDENT SAVINGS ACCOUNT PLUS ACT")**

Scheduled for Markup

By the

SENATE COMMITTEE ON FINANCE

on February 10, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

February 10, 1998

JCX-9-98

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**CONTENTS**

INTRODUCTION		

- Increase arbitrage rebate exception for public school bonds issued by small governments	 Clarification of treatment of after-school program K-12 expenses for purposes of education IRAs	National Health Corps Scholarship exclusion		
- Modify foreign tax credit carryover rules    **INTRODUCTION**  	The Senate Committee on Finance has scheduled a markup on February 10, 1998, on aproposed Chairman's amendment ("Chairman's mark") to S. 1133 ("Parent and Student SavingsAccount Plus Act").   A description of the proposed Chairman's amendment in the nature of asubstitute is contained in *Description of Chairman's Mark of an Amendment to S. 1133 ("Parentand Student Savings Account Plus Act")* (JCX-5-98), February 6, 1998, prepared by the staff ofthe Joint Committee on Taxation.  A description of certain modifications to the proposedChairman's mark is contained in *Description of Modifications to Chairman's Mark of anAmendment to S. 1133 ("Parent and Student Savings Account Plus Act")* (JCX-7-98), February10, 1998, prepared by the staff of the Joint Committee on Taxation.  	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of revised modifications to the Chairman's mark.  It contains a description of aprovisions that increase the arbitrage rebate exception for public school bonds issued by smallgovernments; revise the treatment of National Health Corps Scholarships; clarify the treatment ofafter-school programs for purposes of education IRAs; and modify the foreign tax creditcarryover rules.    **1.  Increase arbitrage rebate exception for public school bonds issued by small governments**  **Present Law
	Interest on State and local government bonds generally is excluded from income if thebonds are issued to finance activities carried out and paid for with revenues of these governments. Interest on bonds issued by these governments to finance activities of other persons (e.g. privateactivity bonds) is taxable unless a specific exception is included in the Code.  In the case of bonds,the interest on which is excluded from income, generally, all arbitrage profits earned oninvestments unrelated to the purpose of the borrowing ("nonpurpose investments") must berebated to the Federal Government.  An exception (the "small issuer exception") allows governmental units having general taxing powers to issue up to $5 million of governmental bondsduring a calendar year without being subject to the arbitrage rebate requirement.  This limit isincreased to $10 million for governmental units that issue at least $5 million of public schoolbonds during the calendar year.

**Description of Proposal**

	The proposal would increase the small issuer exception to $15 million, provided that atleast $10 million of the bonds are issued to finance public schools.

**Effective Date**

	The proposal would apply to bonds issued in calendar years beginning after December 31,1998.

**2.  Clarification of treatment of after-school program K-12 expenses for purposes ofeducation IRAs.**

**Present Law**

	Amounts distributed from education IRAs (as described in sec. 530) are excludable fromgross income to the extent that the amounts distributed do not exceed qualified higher educationexpenses of the designated beneficiary during the year the distribution is made (provided that aHOPE credit or Lifetime Learning credit is not claimed under sec. 25A with respect to thebeneficiary for the same taxable year.

**Description of Chairman's Mark**

	For purposes of the Chairman's mark--which, with respect to contributions made duringthe period 1999 through 2002 (and earnings attributable thereto), would allow tax-freedistributions from education IRAs to cover qualified elementary and secondary educationexpenses--the proposal would clarify that such expenses would include expenses incurred inconnection with after-school programs administered for students enrolled in the grades K through12.

**Effective Date**

	The proposal would be effective for expenses paid in taxable years beginning afterDecember 31, 1998.

**3.  National Health Corps Scholarship exclusion**

**Present Law**

	Section 117 excludes from gross income amounts received as a qualified scholarship by anindividual who is a candidate for a degree and used for tuition and fees required for the enrollmentor attendance (or for fees, books, supplies, and equipment required for courses of instruction) at aprimary, secondary, or post-secondary educational institution.  The tax-free treatment provided bysection 117 does not extend to scholarship amounts covering regular living expenses, such asroom and board.  In addition to the exclusion for qualified scholarship, section 117 provides anexclusion from gross income for qualified tuition reductions for certain education provided toemployees (and their spouses and dependents) of certain educational organizations.

	Section 117(c) specifically provides that the exclusion for qualified scholarships andqualified tuition reductions does not apply to any amount received by a student that representspayment for teaching, research, or other services by the student required as a condition forreceiving the scholarship or tuition reduction.

**Description of Chairman's Mark**

	S. 1286 (introduced by Senator Jeffords on October 9, 1997) would provide that amountsreceived by an individual under the National Health Corps Scholarship Program--administeredunder section 338A(g)(1)(A) of the Public Health Service Act--would be eligible for tax-freetreatment as a qualified scholarship under section 117, without regard to the fact that the recipientof the scholarship is obligated to later provide medical services in a geographic area (or to anunderserved population group or designated facility) identified by the Public Health Service ashaving a shortage of health care professionals.  The tax-free treatment would not apply toamounts received by students to cover living regular living expenses, such as room and board.

**Effective Date**

	The proposal would apply to amounts received in taxable years beginning after December31, 1993.

**4.  Modify foreign tax credit carryover rules**

**Present Law**

	U.S. persons may credit foreign taxes against U.S. tax on foreign source income. Theamount of foreign tax credits that can be claimed in a year is subject to a limitation that preventstaxpayers from using foreign tax credits to offset U.S. tax on U.S. source income. Separateforeign tax credit limitations are applied to specific categories of income.

	The amount of creditable taxes paid or accrued (or deemed paid) in any taxable yearwhich exceeds the foreign tax credit limitation is permitted to be carried back two years andforward five years.  The amount carried over may be used as a credit in a carryover year to theextent the taxpayer otherwise has excess foreign tax credit limitation for such year. The separateforeign tax credit limitations apply for purposes of the carryover rules.

**Description of Chairman's Mark**

	The revised Chairman's mark would modify the effective date of the proposal reducing theforeign tax credit carryback from two years to one year and extending the foreign tax creditcarryforward from five years to seven years.  

**Effective Date**

	Under the proposal, the modifications to the foreign tax credit carryover rules would beeffective for foreign taxes paid or accrued in taxable years beginning after December 31, 1999.

1.   This document may be cited as follows: Joint Committee on Taxation, *Description ofRevised Modifications to Chairman's Mark of an Amendment to S. 1133 ("Parent and StudentSavings Account Plus Act")* (JCX-9-98), February 10, 1998.**