**DESCRIPTION OF REVENUE OFFSETS**

**FOR MEDICAL SAVINGS ACCOUNT PROVISIONS**

**CONTAINED IN H.R. 4250,**

**THE "PATIENT PROTECTION ACT OF 1998"**

******Prepared by the Staff**

**of the**

**JOINT COMMITTEE ON TAXATION**

**July 23, 1998**

**JCX-56-98**

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**CONTENTS**

INTRODUCTION		

DESCRIPTION OF REVENUE OFFSETS		

	A.	Restrict 10-Year Net Operating Loss Carryback Rules for Specified Liability Losses 		

	B.	Clarify the Meaning of "Subject to" Liabilities Under Section 357(c)		

	C.	Limit Use of Non-Accrual Experience Method of Accounting to Amounts		to Be Received for the Performance of Qualified Professional Services		

	D.  Information Returns Relating to the Discharge of Indebtedness by Certain	Entities		

	E.	Clarify and Expand Mathematical Error Procedures		

	F.	Add Vaccines Against Rotavirus Gastroenteritis to the List of Taxable	Vaccines		

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**INTRODUCTION**

	On July 23, 1998, the House Committee on Rules is scheduled to consider a rule for H.R.4250, the "Patient Protection Act of 1998."

	This document,(1) prepared by the staff of the Joint Committee on Taxation, describescertain proposals to be offered as an amendment to the bill.  These proposals are intended toprovide revenue offsets to the provisions of section 3201 of the bill, relating to expansion of theavailability of medical savings accounts.  In addition to these revenue offsets, it is intended thatthe net total of H.R. 2676, the "Internal Revenue Service Restructuring and Reform Act of1998," which was reserved for future tax reductions, will be used to the extent necessary to offsetthe revenue effects of section 3201 of the bill.

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**DESCRIPTION OF REVENUE OFFSETS**

**A.  Restrict 10-Year Net Operating Loss Carryback Rules for Specified Liability Losses**

**Present Law**

	Under present law, that portion of a net operating loss that qualifies as a "specifiedliability loss" may be carried back 10 years rather than being limited to the general two-yearcarryback period.  A specified liability loss includes amounts allowable as a deduction withrespect to product liability, and also certain liabilities that arise under Federal or State law or outof any tort of the taxpayer.  In the case of a liability arising out of a Federal or State law, the act(or failure to act) giving rise to the liability must occur at least 3 years before the beginning ofthe taxable year.  In the case of a liability arising out of a tort, the liability must arise out of aseries of actions (or failures to act) over an extended period of time a substantial portion of whichoccurred at least three years before the beginning of the taxable year.  A specified liability losscannot exceed the amount of the net operating loss, and is only available to taxpayers that usedan accrual method of accounting throughout the period that the acts (or failures to act) occurred. 

**Description of Proposal**

	Under the proposal, specified liability losses would be limited to product liability lossesand amounts allowable as a deduction (other than a deduction under section 468(a)(1) or468A(a)) that are in satisfaction of a liability under a Federal or State law requiring thereclamation of land, decommissioning of a nuclear power plant (or any unit thereof),dismantlement of a drilling platform, remediation of environmental contamination, or a paymentunder any workers compensation act (within the meaning of section 461(h)(2)(C)(i)), if the act(or failure to act) giving rise to such liability occurs at least 3 years before the beginning of thetaxable year.  As under present law, the specified liability loss (as redefined) cannot exceed theamount of the net operating loss and is only available to taxpayers that used an accrual method ofaccounting throughout the period that the act (or failure to act) giving rise to the liabilityoccurred.  No inference regarding the interpretation of the specified liability loss carryback rulesunder present law is intended.

**Effective Date**

	The proposal would be effective for net operating losses arising in taxable years ending after the date of enactment.

**B.  Clarify Definition of "Subject to" Liabilities Under Section 357(c)**

**Present Law**

	Present law provides that the transferor of property recognizes no gain or loss if theproperty is exchanged solely for qualified stock in a controlled corporation (sec. 351).  Codesection 357(c) provides that the transferor generally recognizes gain to the extent that the sum ofthe liabilities assumed by the controlled corporation and the liabilities to which the transferredproperty is subject exceeds the transferor's basis in the transferred property.  If the transferredproperty is "subject to" a liability, Treasury regulations have indicated that the amount of theliability is included in the calculation regardless of whether the underlying liability is assumed bythe controlled corporation.  Treas. Reg. sec. 1.357-2(a).

	The gain recognition rule of section 357(c) is applied separately to each transferor in asection 351 exchange.

	The basis of the property in the hands of the controlled corporation equals the transferor'sbasis in such property, increased by the amount of gain recognized by the transferor, includingsection 357(c) gain.

	Section 357(c) also applies to reorganizations described in section 368(a)(1)(D).

**Description of Proposal**

	Under the proposal, the distinction between the assumption of a liability and theacquisition of an asset subject to a liability is generally eliminated.   First, except as provided inregulations, a  recourse liability or any portion thereof is treated as having been assumed if, asdetermined on the basis of all facts and circumstances, the transferee has agreed and is expectedto satisfy the liability or portion thereof  (whether or not the transferor has been relieved of theliability).  Thus, where more than one person agrees to satisfy a liability or portion thereof, onlyone would be expected to satisfy such liability or portion thereof.  Second, except as provided inregulations, a nonrecourse liability is treated as having been assumed by the transferee of anyasset subject to such liability.

	In determining any increase to the basis of  property transferred to the transferee as aresult of gain recognized because of the assumption of liabilities under section 357, such increaseshall not cause the basis to exceed the fair market value of the property (determined withoutregard to section 7701(g)).  In addition, if gain is recognized to the transferor as the result of anassumption by a corporation of a nonrecourse liability that is also secured by any assets nottransferred to the corporation, and if no person is subject to tax under the Internal Revenue Code on such gain, then for purposes of determining the basis of assets transferred, the amount of gaintreated as recognized as the result of such assumption of liability shall be determined as if theliability assumed by the transferee equaled such transferee's ratable portion of the liability, based on the relative fair market values (determined without regard to section 7701(g)) of allassets subject to such nonrecourse liability.

	The Treasury Department has authority to prescribe such regulations as may be necessaryto carry out the purposes of the provision.  Where appropriate, the Treasury Department may alsoprescribe regulations which provide that the manner in which a liability is treated as assumedunder the provision is applied elsewhere in the Code.

	No inference regarding the tax treatment under present law is intended.

**Effective Date**

	The proposal would be effective for transfers after the date of enactment.

**C.  Limit Use of Non-Accrual Experience Method of Accounting to Amounts to Be Received for the Performance of Qualified Professional Services**

**Present Law**

	An accrual method taxpayer generally must recognize income when all events haveoccurred that fix the right to its receipt and its amount can be determined with reasonableaccuracy.  An accrual method taxpayer may deduct the amount of any receivable that waspreviously included in income if the receivable becomes worthless during the year.

	Accrual method taxpayers are not required to include in income amounts to be receivedfor the performance of services which, on the basis of experience, will not be collected (the "non-accrual experience method").  The availability of this method is conditioned on the taxpayer notcharging interest or a penalty for failure to timely pay such amount.  

**Description of Proposal**

	The non-accrual experience method would apply only to amounts to be received for theperformance of qualified personal services.  Amounts to be received for the performance of allother services would be subject to the general rule regarding inclusion in income. Qualifiedpersonal services are personal services in the fields of health, law, engineering, architecture,accounting, actuarial science, performing arts or consulting.  As under present law, theavailability of the method would be conditioned on the taxpayer not charging interest or apenalty for failure to timely pay such amounts.

**Effective Date**

	The proposal would be effective for taxable years beginning after December 31, 1998.  Any change required as a result of the proposal would be considered a change in the taxpayer'smethod of accounting, initiated by the taxpayer with the consent of the Secretary.  Any requiredsection 481(a) adjustment would be taken into account ratably over a three-year period.

**D.  Information Returns Relating to the Discharge of Indebtedness by Certain Entities**

**Present Law**

	Under section 61(a)(12), a taxpayer's gross income includes income from the dischargeof indebtedness.  Section 6050P requires "applicable entities" to file information returns with theIRS regarding any discharge of indebtedness of $600 or more.

	The information return must set forth the name, address, and taxpayer identificationnumber of the person whose debt was discharged, the amount of debt discharged, the date onwhich the debt was discharged, and any other information that the IRS requires to be provided. The information return must be filed in the manner and at the time specified by the IRS.  Thesame information also must be provided to the person whose debt is discharged by January 31 ofthe year following the discharge.

	"Applicable entities" include: (1) the FDIC, the RTC, the National Credit UnionAdministration, and any successor or subunit of any of them; (2) any financial institution (asdescribed in secs. 581 (relating to banks) or 591(a) (relating to savings institutions)); (3) anycredit union; (4) any corporation that is a direct or indirect subsidiary of an entity described in (2)or (3) which, by virtue of being affiliated with such entity, is subject to supervision andexamination by a Federal or State agency regulating such entities; and (5) an executive, judicial,or legislative agency (as defined in 31 U.S.C. sec. 3701(a)(4)).

	The penalties for failure to file correct information reports with the IRS and to furnishstatements to taxpayers are similar to those imposed with respect to a failure to provide otherinformation returns.  For example, the penalty for failure to furnish statements to taxpayers isgenerally $50 per failure, subject to a maximum of $100,000 for any calendar year.  Thesepenalties are not applicable if the failure is due to reasonable cause and not to willful neglect.

**Description of Proposal**

	The proposal would require that information reporting on discharges of indebtedness alsobe done by any organization a significant trade or business of which is the lending of money(such as finance companies and credit card companies whether or not affiliated with financialinstitutions).

**Effective Date**

	The proposal would be effective with respect to discharges of indebtedness afterDecember 31, 1998.

**E.  Clarify and Expand Mathematical Error Procedures**

**Present Law**

**Taxpayer identification numbers ("TIN"s)**

	The Internal Revenue Service ("IRS") may deny a personal exemption for a taxpayer, thetaxpayer's spouse or the taxpayer's dependents if the taxpayer fails to provide a correct TIN foreach person for whom the taxpayer claims an exemption.  This TIN requirement also indirectlyaffects other tax benefits currently conditioned on a taxpayer being able to claim a personalexemption for a dependent (e.g., head-of-household filing status and the dependent care credit). Other tax benefits, including the adoption credit, the child tax credit, the Hope Scholarship creditand Lifetime Learning credit, and the earned income credit also have TIN requirements.  Formost individuals, their TIN is their Social Security Number ("SSN").  The mathematical andclerical error procedure currently applies to the omission of a correct TIN for purposes ofpersonal exemptions and all of the credits listed above except for the adoption credit.

**Mathematical or clerical errors**

	The IRS may summarily assess additional tax due as a result of a mathematical or clericalerror without sending the taxpayer a notice of deficiency and giving the taxpayer an opportunityto petition the Tax Court.  Where the IRS uses the summary assessment procedure formathematical or clerical errors, the taxpayer must be given an explanation of the asserted errorand a period of 60 days to request that the IRS abate its assessment.  The IRS may not proceed tocollect the amount of the assessment until the taxpayer has agreed to it or has allowed the 60-dayperiod for objecting to expire.  If the taxpayer files a request for abatement of the assessmentspecified in the notice, the IRS must abate the assessment.  Any reassessment of the abatedamount is subject to the ordinary deficiency procedures.  The request for abatement of theassessment is the only procedure a taxpayer may use prior to paying the assessed amount in orderto contest an assessment arising out of a mathematical or clerical error.  Once the assessment issatisfied, however, the taxpayer may file a claim for refund if he or she believes the assessmentwas made in error.

**Description of Proposal**

	For purposes of the mathematical and clerical error procedure, the proposal wouldprovide that a correct TIN is a TIN assigned by the Social Security Administration (or in certainlimited cases, the IRS) to the individual identified on the return.  The IRS would be authorized todetermine that the individual identified on the tax return corresponds in every aspect (includingname, age, date of birth, and SSN) to the individual to whom the TIN is issued.  The IRS wouldbe authorized to use the mathematical and clerical error procedure to deny eligibility for thedependent care tax credit, the child tax credit, and the earned income credit even though a correctTIN has been supplied if the IRS determines that the statutory age restrictions for eligibility forany of the respective credits is not satisfied (e.g., the TIN issued for the child claimed as the basisof the child tax credit identifies the child as over the age of 17 at the end of the taxable year).

**Effective Date**

	The proposal would be effective for taxable years ending after the date of enactment.

**F.  Add Vaccines Against Rotavirus Gastroenteritis to the List of Taxable Vaccines**

**Present Law**

	A manufacturer's excise tax is imposed at the rate of 75 cents per dose (sec. 4131) on thefollowing vaccines routinely recommended for administration to children:  diphtheria, pertussis,tetanus, measles, mumps, rubella, polio, HIB (haemophilus influenza type B),  hepatitis B, andvaricella (chicken pox).  The tax applied to any vaccine that is a combination of vaccinecomponents equals 75 cents times the number of components in the combined vaccine.

	Amounts equal to net revenues from this excise tax are deposited in the Vaccine InjuryCompensation Trust Fund to finance compensation awards under the Federal Vaccine InjuryCompensation Program for individuals who suffer certain injuries following administration ofthe taxable vaccines.  This program provides a substitute Federal "no fault" insurance system forthe State-law tort and private liability insurance systems otherwise applicable to vaccinemanufacturers.  All persons immunized after September 30, 1988, with covered vaccines mustpursue compensation under this Federal program before bringing civil tort actions under Statelaw.

**Description of Proposal**

	The proposal would add vaccines against rotavirus gastroenteritis to the list of taxablevaccines.

**Effective Date**

	The proposal would be effective for vaccine purchases the day after the date ofenactment.  No floor stocks tax would be collected for amounts held for sale on that date.

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1.   This document may be cited as follows: Joint Committee on Taxation, *Description ofRevenue Offsets for Medical Savings Account Provisions Contained in H.R. 4250, the "PatientProtection Act of 1998"* (JCX-56-98), July 23, 1998.