**DESCRIPTION OF SENATE FINANCE COMMITTEE**

**CHAIRMAN'S MARK OF**

**TAX TECHNICAL CORRECTIONS PROVISIONS**

Scheduled for Markup

By the 

SENATE COMMITTEE ON FINANCE

on March 31, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

March 26, 1998

JCX-18-98****
**CONTENTS**

**INTRODUCTION**

**I.	DESCRIPTION OF TECHNICAL CORRECTIONS TO THE TAXPAYER RELIEF ACT OF 1997**

A.  Amendments to Title I of the 1997 Act Relating to the Child 			Credit
1.	Stacking rules for the child credit under the limitations based on tax liability

2.	Treatment of a portion of the child credit as a supplemental child credit

B.	Amendments to Title II of the 1997 Act Relating to Education 		Incentives		

			1.	Clarifications to HOPE and Lifetime Learning tax credits 		

			2.	Educations IRAs		

			3.	Treatment of cancellation of certain student loans		

			4.	Deductibility of student loan interest		

			5.	Enhanced deduction for corporate donations of computers		

			6.	Qualified State tuition programs		

			7.	Qualified zone academy bonds		

		C.	Amendments to Title III of the 1997 Act Relating to Savings 		Incentives		

			1.	Conversions of IRAs into Roth IRAs		

			2.	Penalty-free distributions from IRAs for education expenses and		purchase of first homes		

			3.	Limits based on modified adjusted gross income		

			4.	Contribution limit to Roth IRAs	

			5.	Contribution limitations for active participation in an IRA		

		D.	Amendments to Title III of the 1997 Act Relating to Capital Gains		

			1.	Individual capital gain rate reductions		

			2.	Rollover of gain from sale of qualified stock		

			3.	Exclusion of gain on the sale of a principal residence owned and			used less than two years		

			4.	Effective date of the exclusion of gain on the sale of a principal			residence		

	E.	Amendments to Title IV of the 1997 Act Relating to Alternative 			Minimum Tax		

			1.	Election to use AMT depreciation for regular tax purposes		

			2.	Clarification of small business exemption		

		F.	Amendments to Title V of the 1997 Act Relating to Estate and Gift		Taxes		

			1.	Clarification of phaseout range for 5-percent surtax to phase out benefits of the unified credit and graduated rates		

			2.	Clarification of effective date for indexing of generation-skipping				exemption		

			3.	Coordination between unified credit and family-owned business			exclusion		

			4.	Clarification of businesses eligible for family-owned business		exclusion		

			5.	Clarification that interests eligible for family-owned business exclusion must			be passed to a qualified heir		

			6.	Clarification of "trade or business" requirement for family-owned business			exclusion		

			7.	Conversion of qualified family-owned business exclusion into a 			deduction		

			8.	Other modifications to the qualified family-owned business provision		

			 9.	Clarification of interest on installment payment of estate tax on			holding companies		

			10.	Clarification on declaratory judgment jurisdiction of U.S. Tax			Court regarding installment payment of estate tax		

			11.	Clarification of rules governing revaluation of gifts		

			12.	Clarification with respect to post-mortem conservation easements			

		G.	Amendments to Title VII of the 1997 Act Relating to Incentives for the		District of Columbia		

		H.	Amendments to Title IX of the 1997 Act Relating to Miscellaneous	Provisions		

	1.	Clarification of effect on certain transfers to Highway Trust Fund		
	2.	Clarification of Mass Transit Account portions of highway 			motor fuels taxes		
			3.	Clarification of qualification for reduced rate of tax on certain			hard ciders		

			4.	Combined employment tax reporting demonstration project		

			5.	Election for 1987 partnerships to continue exception from treatment of 			publicly traded partnerships as corporations		

			6.	Depreciation limitations for electric vehicles		

			7.	Modification of operation of elective carryback of existing net			operating losses of the National Railroad Passenger Corporation 			("Amtrak")		

I.	Amendments to Title X of the 1997 Act Relating to Revenue-Raising	Provisions	

		1.	Exemption from constructive sales rules for certain debt positions	

		2.	Definition of forward contract under constructive sales rules		
		3.	Treatment of mark-to-market gains of electing traders		
		4.	Special effective date for constructive sale rules		

		5.	Gain recognition for certain extraordinary dividends		

6.	Treatment of certain corporate distributions		

		7.	Certain preferred stock treated as "boot"--statute of limitations

		8.	Certain preferred stock treated as "boot"--treatment of transferor	
		9.	Application of section 304 to certain international transactions		

		10.	Establish IRS continuous levy and improve debt collection		

		11.	Clarification regarding aviation gasoline excise tax		

		12.	Clarification of requirement that registered fuel terminals offer 		dyed fuel		

		13.	Clarification of treatment of prepaid telephone cards		

		14.	Modify UBIT rules applicable to second-tier subsidiaries		

		15.	Clarification to provision expanding the limitations on deductibility		of premiums and interest with respect to life insurance, endowment			and annuity contracts		

		16.	Clarification of allocation of basis of properties distributed by a		partnership		

		17.	Clarification to the definition of modified adjusted gross income		for purposes of the earned income credit phaseout		

	J.	Amendments to Title XI of the 1997 Act Relating to Foreign		Provisions		

			1.	Application of attribution rules under PFIC provisions		

			2.	Treatment of PFIC option holders		

			3.	Application of PFIC mark-to-market rules to RICs		

			4.	Interaction between the PFIC provisions and other mark-to-market			rules		

			5.	Application of foreign tax credit holding period rule to RICs		

	K.	Amendments to Title XII of the 1997 Act Relating to Simplification			Provisions		

			1.	Travel expenses of Federal employees participating in a Federal			criminal investigation		

			2.	Effective date for provisions relating to electing large partnerships,			partnership returns required on magnetic media, and treatment of			partnership items of individual retirement arrangements	

			3.	Modification of distribution rule for REITS		

		L.	Amendments to Title XIII of the 1997 Act Relating to Estate, Gift and		Trust Simplification		

			1.	Clarification of treatment of revocable trusts for purposes of the			generation-skipping transfer tax		

			2.	Provision of regulatory authority for simplified reporting of funeral trusts 			terminated during taxable year		

		M.	Amendments to Title XV of the 1997 Act Relating to Pensions and		Employee Benefits		

			1.	Treatment of certain disability payments to public safety employees		

		N.	Amendments to Title XVI of the 1997 Act Relating to Technical		Corrections		

			1.	Application of requirements for SIMPLE IRAs in the case of		mergers and acquisitions		

			2.	Treatment of Indian tribal governments under section 403(b)		

**II.	TECHNICAL CORRECTIONS TO OTHER TAX LEGISLATION**

		A.	Treatment of Adoption Tax Credit Carryovers		

		B.	Disclosure Requirements for Apostolic Organizations		

		C.	Allow Deduction for Unused Employer Social Security Credit		

		D.	Earned Income Credit Qualification Rules		

**III.	DIFFERENCES BETWEEN PROPOSED TECHNICAL 	CORRECTIONS CONTAINED IN THE CHAIRMAN'S MARK AND THE PROVISIONS OF TITLE VI OF H.R. 2676**

**INTRODUCTION**

	The Senate Committee on Finance has scheduled a markup of technical correctionsprovisions on March 31, 1998.  This document,(1) prepared by the staff of the Joint Committee onTaxation, provides a description of the Chairman's mark for various technical corrections topreviously enacted tax legislation, primarily the Taxpayer Relief Act of 1997 ("1997 Act").   Asnoted in the descriptions, these technical corrections generally are proposed to be effective as if included in the original provisions to which they relate.  Proposed technical corrections that areclerical in nature generally are not described in this document.

	Part I of the document is a description of technical corrections to the Taxpayer Relief Actof 1997, and Part II is a description of other technical correction provisions.  Part III is a briefdescription of the differences between the proposed technical corrections in the Chairman's markand those included in Title VI of H.R. 2676 ("Tax Technical Corrections Act of 1997") as passedby the House on November 5, 1997.(2)

**I.  DESCRIPTION OF TECHNICAL CORRECTIONS TO THE TAXPAYER RELIEF ACT OF 1997**

**A.  Amendments to Title I of the 1997 Act Relating to the Child Credit**

**1. Stacking rules for the child credit under the limitations based on tax liability (sec. 101 ofthe 1997 Act and sec. 24 of the Code)**

**Present Law**

	Present law provides a $500 ($400 for taxable year 1998) tax credit for each qualifyingchild under the age of 17.  A qualifying child is defined as an individual for whom the taxpayer canclaim a dependency exemption and who is a son or daughter of the taxpayer (or a descendent ofeither), a stepson or stepdaughter of the taxpayer or an eligible foster child of the taxpayer. Fortaxpayers with modified adjusted gross income in excess of certain thresholds, the allowable childcredit is phased out.  The length of the phase-out range is affected by the number of thetaxpayer's qualifying children.

	Generally, the maximum amount of a taxpayer's child credit for each taxable year islimited to the excess of the taxpayer's regular tax liability over the taxpayer's tentative minimumtax liability (determined without regard to the alternative minimum foreign tax credit).  In the caseof a taxpayer with three or more qualifying children, the maximum amount of the taxpayer's childcredit for each taxable year is limited to the greater of: (1) the amount computed under the ruledescribed above, or (2) an amount equal to the excess of the sum of the taxpayer's regular incometax liability and the employee share of FICA taxes (and one-half of the taxpayer's SECA taxliability, if applicable) reduced by the earned income credit.  In the case of a taxpayer with three ormore qualifying children, the excess of the amount allowed in (2) over the amount computed in(1) is a refundable credit.   

	Nonrefundable credits may not be used to reduce tax liability below a taxpayer's tentativeminimum tax.  Certain credits not used as result of this rule may be carried over to other taxableyears, while others may not.  Special stacking rules apply in determining which nonrefundablecredits are used in the current year.  Generally, the stacking rules require that nonrefundablepersonal credits be considered first,(3) followed by other credits, (e.g., the business credits). Refundable credits, which are not limited by the minimum tax, are not stacked until after thenonrefundable credits. 

**Description of Proposal**

	The proposal would clarify the application of the income tax liability limitation to therefundable portion of the child credit by treating the refundable portion of the child credit in thesame way as the other refundable credits.  Specifically, after all the other credits are appliedaccording to the stacking rules of the income tax limitation then the refundable credits would beapplied first to reduce the taxpayer's tax liability for the year and then to provide a credit in excessof income tax liability for the year.

**Effective Date**

	The proposal would be effective for taxable years beginning after December 31, 1997.

**2. Treatment of a portion of the child credit as a supplemental child credit (sec. 101 of the1997 Act and sec. 32(m) of the Code)**

**Present Law**

	A portion of  the child credit may be treated as a supplemental child credit.  The amountof the supplemental child credit, if any, equals the excess of (1) $500 times the number ofqualifying children up to the excess of the taxpayer's income tax liability (net of applicable creditsother than the earned income credit) over the taxpayer's tentative minimum tax (determinedwithout regard to the alternative minimum foreign tax credit) over (2) the sum of the taxpayer'sregular income tax liability (net of applicable credits other than the earned income credit) and theemployee share of FICA taxes (and one-half of the taxpayer's SECA tax liability, if applicable)reduced by any earned income credit amount.  The supplemental child credit is treated as providedunder the earned income credit and the child credit amount is reduced by the amount of thesupplemental child credit.

**Description of Proposal**

	The proposal would clarify that the treatment of a portion of the child credit as asupplemental child credit under the earned income credit (sec. 32) and the offsetting reduction ofthe child credit (sec.24) does not effect any other credit available to the taxpayer.  It would alsoclarify that the earned income credit rules (e.g., the phaseout of the earned credit) generally donot apply to the supplemental child credit.

**Effective Date**

	The proposal would be effective for taxable years beginning after December 31, 1997. 

**B.  Amendments to Title II of the 1997 Act Relating to Education Incentives**

**1.  Clarifications to HOPE and Lifetime Learning tax credits (sec. 201 of the 1997 Act andsecs. 25A and 6050S of the Code)**

**Present Law**

	Individual taxpayers are allowed to claim a nonrefundable HOPE credit against Federalincome taxes up to $1,500 per student for qualified tuition and fees paid during the year on behalfof a student (i.e., the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer) who isenrolled in a post-secondary degree or certificate program at an eligible post-secondary institutionon at least a half-time basis.  The HOPE credit is available only for the first two years of astudent's post-secondary education.  The credit rate is 100 percent of the first $1,000 of qualifiedtuition and fees and 50 percent on the next $1,000 of qualified tuition and fees.  The HOPE creditamount that a taxpayer may otherwise claim is phased out for taxpayers with modified adjustedgross income (AGI) between $40,000 and $50,000 ($80,000 and $100,000 for joint returns).  Fortaxable years beginning after 2001, the $1,500 maximum HOPE credit amount and the AGIphase-out range will be indexed for inflation.  The HOPE credit is available for expenses paidafter December 31, 1997, for education furnished in academic periods beginning after such date.

	If a student is not eligible for the HOPE credit (or in lieu of claiming a HOPE credit withrespect to a student), individual taxpayers are allowed to claim a nonrefundable Lifetime Learningcredit against Federal income taxes equal to 20 percent of qualified tuition and fees paid duringthe taxable year on behalf of the taxpayer, the taxpayer's spouse, or a dependent.  In contrast tothe HOPE credit, the student need not be enrolled on at least a half-time basis in order to beeligible for the Lifetime Learning credit, which is available for an unlimited number of years ofpost-secondary training.  For expenses paid before January 1, 2003, up to $5,000 of qualifiedtuition and fees per taxpayer return will be eligible for the Lifetime Learning credit (i.e., themaximum credit per taxpayer return will be $1,000).  For expenses paid after December 31, 2002,up to $10,000 of qualified tuition and fees per taxpayer return will be eligible for the LifetimeLearning credit (i.e., the maximum credit per taxpayer return will be $2,000).  The LifetimeLearning credit amount that a taxpayer may otherwise claim is phased out over the same modifiedAGI phase-out range as applies for purposes of the HOPE credit.  The Lifetime Learning credit isavailable for expenses paid after June 30, 1998, for education furnished in academic periodsbeginning after such date.

	Section 6050S provides that certain educational institutions and other taxpayers engagedin a trade or business must file information returns with the IRS and certain individual taxpayers,as required by regulations prescribed by the Secretary of the Treasury, containing information onindividuals who made payments for qualified tuition and related expenses or to whomreimbursements or refunds were made of such expenses.

**Description of Proposal**

	The proposal would clarify that, under section 6050S, information returns containinginformation with respect to qualified tuition and fees 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.  As under present law, section 6050Salso would 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.

**Effective Date**

	The proposal would be effective as if included in the 1997 Act--i.e., for expenses paidafter December 31, 1997, for education furnished in academic periods beginning after such date.

**2.  Education IRAs (sec. 213 of the 1997 Act and sec. 530 of the Code)**

**Present Law**

	Section 530 provides that taxpayers may establish "education IRAs," meaning certaintrusts or custodial accounts created exclusively for the purpose of paying qualified highereducation expenses of a named beneficiary.  Annual contributions to education IRAs may notexceed $500 per designated beneficiary, and may not be made after the designated beneficiaryreaches age 18.  Contributions to an education IRA may not be made by certain high-incometaxpayers--i.e., the contribution limit is phased out for taxpayers with modified adjusted grossincome between $95,000 and $110,000 ($150,000 and $160,000 for taxpayers filing jointreturns).  No contribution may be made to an education IRA during any year in which anycontributions are made by anyone to a qualified State tuition program on behalf of the samebeneficiary.

	Until a distribution is made from an education IRA, earnings on contributions to theaccount generally are not subject to tax.(4)  In addition, distributions from an education IRA areexcludable from gross income to the extent that the distribution does not exceed qualified highereducation expenses incurred by the beneficiary during the year the distribution is made (providedthat a HOPE credit or Lifetime Learning credit is not claimed with respect to the beneficiary forthe same taxable year).  The earnings portion of an education IRA distribution not used to payqualified higher education expenses is includible in the gross income of the distributee andgenerally is subject to an additional 10-percent tax.(5)  However, the additional 10-percent tax doesnot apply if a distribution is made of excess contributions above the $500 limit (and any earningsattributable to such excess contributions) if the distribution is made on or before the date that areturn is required to be filed (including extensions of time) by the contributor for the year in whichthe excess contribution was made.  In addition, section 530 allows tax-free rollovers of accountbalances from an education IRA benefiting one family member to an education IRA benefitinganother family member.  Section 530 is effective for taxable years beginning after December 31,1997.

**Description of Proposal**

	Consistent with the legislative history to the 1997 Act, the proposal would provide thatany balance remaining in an education IRA would be deemed to be distributed within 30 daysafter the date that the named beneficiary reaches age 30 (or, if earlier, within 30 days of the datethat the beneficiary dies).

	Under the proposal, the additional 10-percent tax provided for by section 530(d)(4) wouldnot apply to a distribution from an education IRA, which (although used to pay for qualifiedhigher education expenses) is includible in the beneficiary's gross income solely because thetaxpayer elects to claim a HOPE or Lifetime Learning credit with respect to the beneficiary.  Theproposal further would provide that the additional 10-percent tax would not apply to thedistribution of any contribution to an education IRA made during a taxable year if suchdistribution is made on or before the date that a return is required to be filed (including extensionsof time) by the beneficiary for the taxable year during 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).  In addition, the proposal would amend section 4973(e)to provide that the excise tax penalty applies under that section for each year that an excesscontribution remains in an education IRA (and not merely the year that the excess contribution ismade).

	The proposal would clarify that, in order for taxpayers to establish an education IRA, thedesignated beneficiary must be a life-in-being.  The proposal also would clarify 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.(6)

	The proposal also would provide that, if any qualified higher education expenses are takeninto account in determining the amount of the exclusion under section 530 for a distribution froman education IRA, then no deduction (under section 162 or any other section), or exclusion(under section 135) or credit would be allowed under the Internal Revenue Code with respect tosuch qualified higher education expenses.

	In addition, because the 1997 Act allows taxpayers to redeem U.S. Savings Bonds and beeligible for the exclusion under present-law section 135 (as if the proceeds were used to payqualified higher education expenses) provided the proceeds from the redemption are contributedto an education IRA (or to a qualified State tuition program defined under section 529) on behalfof the taxpayer, the taxpayer's spouse, or a dependent, the proposal would conform the definitionof "eligible educational institution" under section 135 to the broader definition of that term underpresent-law section 530 (and section 529).  Thus, for purposes of section 135, as under present-law sections 529 and 530, the term "eligible educational institution" would be defined as aninstitution which (1) is described in section 481 of the Higher Education Act of 1965 (20 U.S.C.1088) and (2) is eligible to participate in Department of Education student aid programs.

**Effective Date**

	The provisions would be effective as if included in the 1997 Act--i.e., for taxable yearsbeginning after December 31, 1997.

**3.  Treatment of cancellation of certain student loans (sec. 225 of the 1997 Act and sec.108(f) of the Code)**

**Present Law**

	Under present law, an individual's gross income does not include forgiveness of loansmade by tax-exempt educational organizations if the proceeds of such loans are used to pay costsof attendance at an educational institution or to refinance outstanding student loans and thestudent is not employed by the lender organization.  The exclusion applies only if the forgivenessis contingent on the student's working for a certain period of time in certain professions for any ofa broad class of employers. In addition, the student's work must fulfill a public servicerequirement.

**Description of Proposal**

	The proposal would 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).  Inaddition, the proposal would 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.

**Effective Date**

	The proposal would be effective as of August 5, 1997, the date of enactment of the 1997Act.

**4.  Deduction for student loan interest (sec. 202 of the 1997 Act and sec. 221 of the Code)**

**Present Law**

	Certain individuals who have paid interest on qualified education loans may claim anabove-the-line deduction for such interest expenses, up to a maximum deduction of $2,500 peryear.  The deduction is allowed only with respect to interest paid on a qualified education loanduring the first 60 months in which interest payments are required.  Months during which thequalified education loan is in deferral or forbearance do not count against the 60-month period. No deduction is allowed to an individual if that individual is claimed as a dependent on anothertaxpayer's return for the taxable year.

	A qualified education loan generally is defined as any indebtedness incurred to pay for thequalified higher education expenses of the taxpayer, the taxpayer's spouse, or any dependent ofthe taxpayer as of the time the indebtedness was incurred in attending (1) post-secondaryeducational institutions and certain vocational schools defined by reference to section 481 of theHigher Education Act of 1965, or (2) institutions conducting internship or residency programsleading to a degree or certificate from an institution of higher education, a hospital, or a healthcare facility conducting postgraduate training. 

**Description of Proposal**

	The proposal would clarify that the student loan interest deduction may be claimed only bya taxpayer who is required to make the interest payments pursuant to the terms of the loan.  Thus,nonmandatory payments of interest, whether by the borrower or another person, are notdeductible.

**Effective Date**

	The proposal would be effective for interest payments due and paid after December 31,1997, on any qualified education loan.

**5.  Enhanced deduction for corporate contributions of computer technology and equipment(sec. 224 of the 1997 Act and sec. 170(e)(6) of the Code)**

**Present Law**

	 In computing taxable income, a taxpayer who itemizes deductions generally is allowed todeduct the fair market value of property contributed to a charitable organization.  However, in thecase of a charitable contribution of inventory or other ordinary-income property, short-termcapital gain property, or certain gifts to private foundations, the amount of the deduction islimited to the taxpayer's basis in the property.  In the case of a charitable contribution of tangiblepersonal property, a taxpayer's deduction is limited to the adjusted basis in such property if theuse by the recipient charitable organization is unrelated to the organization's tax-exempt purpose.

	The Taxpayer Relief Act of 1997 provided that certain contributions of computer andother equipment to eligible donees to be used for the benefit of elementary and secondary schoolchildren qualify for an augmented deduction.   Under this special rule, the amount of theaugmented deduction available to a corporation making a qualified contribution generally is equalto its basis in the donated property plus one-half of the amount of ordinary income that wouldhave been realized if the property had been sold.  However, the augmented deduction cannotexceed twice the basis of the donated property.  To qualify for the augmented deduction, thecontribution must satisfy various requirements.

	The legislative history of the provision states that the special tax treatment forcontributions of computer and other equipment was to be effective for contributions made duringa three-year period in taxable years beginning after December 31, 1997, and before January 1,2001.(7)  However, as a result of a drafting error, the statutory provision does not apply tocontributions made during taxable years beginning after December 31, 1999.

**Description of Proposal
	The proposal would correct the termination date of the provision to provide that thespecial rule applies to contributions made during taxable years beginning after December 31,1997, and before December 31, 2000.  

	In addition, the proposal would clarify that the requirement set forth in section170(e)(6)(B)(vi) that the donated property fit productively into an education plan applies toproperty donated to educational organizations as well as to certain tax-exempt charitable entities. Similarly, the requirement regarding permissible use and disposition of the property set forth insection 170(e)(6)(B)(vii) applies both to educational organizations and certain tax-exemptcharitable entities.

**Effective Date**

	The proposal would be effective as of August 5, 1997, the date of enactment of the 1997Act.

**6.  Qualified State tuition programs (sec. 211 of the 1997 Act and sec. 529 of the Code)**

**Present Law
	Section 529 provides tax-exempt status to "qualified State tuition programs," meaningcertain programs established and maintained by a State (or agency or instrumentality thereof)under which persons may (1) purchase tuition credits or certificates on behalf of a designatedbeneficiary that entitle the beneficiary to a waiver or payment of qualified higher educationexpenses of the beneficiary, or (2) make contributions to an account that is established for thepurpose of meeting qualified higher education expenses of the designated beneficiary of theaccount.  The term "qualified higher education expenses" means expenses for tuition, fees, books,supplies, and equipment required for the enrollment or attendance at an eligible post-secondaryeducational institution, as well as room and board expenses (meaning the minimum room andboard allowance applicable to the student as determined by the institution in calculating costs ofattendance for Federal financial aid programs under sec. 472 of the Higher Education Act of1965) for any period during which the student is at least a half-time student. 

	Section 529 also provides that no amount shall be included in the gross income of acontributor to, or beneficiary of, a qualified State tuition program with respect to any distributionfrom, or earnings under, such program, except that (1) amounts distributed or educational benefitsprovided to a beneficiary (e.g., when the beneficiary attends college) will be included in thebeneficiary's gross income (unless excludable under another Code section) to the extent suchamounts or the value of the educational benefits exceed contributions made on behalf of thebeneficiary, and (2) amounts distributed to a contributor or another distributee (e.g., when aparent receives a refund) will be included in the contributor's/distributee's gross income to theextent such amounts exceed contributions made on behalf of the beneficiary.  Earnings on anaccount may be refunded to a contributor or beneficiary, but the State or instrumentality mustimpose a more than de minimis monetary penalty unless the refund is (1) used for qualified highereducation expenses of the beneficiary, (2) made on account of the death or disability of thebeneficiary, or (3) made on account of a scholarship received by the designated beneficiary to theextent the amount refunded does not exceed the amount of the scholarship used for highereducation expenses.

	A transfer of credits (or other amounts) from one account benefiting one designatedbeneficiary to another account benefiting a different beneficiary will be considered a distribution(as will a change in the designated beneficiary of an interest in a qualified State tuition program),unless the beneficiaries are members of the same family.  For this purpose, the term "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.

**Description of Proposal**

	The proposal would clarify 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.

	In addition, the proposal would modify section 529(e)(2) to clarify that--for purposes oftax-free rollovers and changes of designated beneficiaries--a "member of the family" includes thespouse of the original beneficiary.

**Effective Date**

	The proposal would be effective for distributions made after December 31, 1997.

**7.  Qualified zone academy bonds (sec. 226 of the 1997 Act and sec. 1397E of the Code)**

**Present Law**

	Certain financial institutions (i.e., banks, insurance companies, and corporations activelyengaged in the business of lending money) that hold "qualified zone academy bonds" are entitledto a nonrefundable tax credit in an amount equal to a credit rate (set monthly by the TreasuryDepartment(8)) multiplied by the face amount of the bond (sec. 1397E).  The credit rate applies toall such bonds issued in each month.  A taxpayer holding a qualified zone academy bond on thecredit allowance date (i.e., each one-year anniversary of the issuance of the bond) is entitled to acredit.  The credit is includible in gross income (as if it were an interest payment on the bond), andmay be claimed against regular income tax and AMT liability.

 	"Qualified zone academy bonds" are defined as any bond issued by a State or localgovernment, provided that (1) at least 95 percent of the proceeds are used for the purpose ofrenovating,  providing equipment to, developing course materials for use at, or training teachersand other school personnel in a "qualified zone academy"--meaning certain public schools locatedin empowerment zones or enterprise communities or with a certain percentage of students fromlow-income families--and (2) private entities have promised to make contributions to the qualifiedzone academy with a value equal to at least 10 percent of the bond proceeds.

	A total of $400 million of "qualified zone academy bonds" may be issued in each of 1998and 1999.  The $400 million aggregate bond cap will be allocated each year to the Statesaccording to their respective populations of individuals below the poverty line.(9)  Each State, inturn, will allocate the credit to qualified zone academies within such State.  A State may carryover any unused allocation into subsequent years.

**Description of Proposal**

	The proposal would modify section 6655(g)(1)(B) to provide that the credit for certainholders of qualified zone academy bonds may be claimed for estimated tax purposes.  Similarly,the proposal would clarify under section 6401(b)(1) the manner in which the credit is taken intoaccount when determining whether a taxpayer has made an overpayment of tax.

**Effective Date**

	The proposal would be effective for obligations issued after December 31, 1997.

**C.  Amendments to Title III of the 1997 Act Relating to Savings Incentives**

**1.  Conversions of IRAs into Roth IRAs (sec. 302 of the 1997 Act and secs. 408A and 72(t)of the Code)**

**Present Law**

	A taxpayer with adjusted gross income of less than $100,000 may convert a present-lawdeductible or nondeductible IRA into a Roth IRA at any time.  The amount converted is includiblein income in the year of the conversion, except that if the conversion occurs in 1998, the amountconverted is includible in income ratably over the 4-year period beginning with the year in whichthe conversion occurs.(10)  Amounts includible in income as a result of the conversion are not takeninto account in determining whether the $100,000 threshold is exceeded.  The 10-percent tax onearly withdrawals does not apply to conversions of IRAs into Roth IRAs. 

	In general, distributions of earnings from a Roth IRA are excludable from income if theindividual has had a Roth IRA for at least 5 years and certain other requirements are satisfied. The 5-year holding period with respect to conversion Roth IRAs begins from the year of theconversion.  (Distributions that are excludable from income are referred to as qualifieddistributions.)

	Present law does not contain a specific rule addressing what happens if an individual diesduring the 4-year spread period for 1998 conversions.

**Description of Proposal**

**Distributions of converted amounts**

Distributions before the end of the 4-year spread

	The proposal would modify the rules relating to conversions of IRAs into Roth IRAs inorder to prevent taxpayers from receiving premature distributions from a Roth conversion IRAwhile retaining the benefits of 4-year income averaging. In the case of conversions to which the4-year income inclusion rule applies, income inclusion would be accelerated with respect to anyamounts withdrawn before the final year of inclusion.  Under this rule, a taxpayer that withdrawsconverted amounts prior to the last year of the 4-year spread would be required to include inincome the amount otherwise includible under the 4-year rule, plus the lesser of (1) the taxableamount of the withdrawal, or (2) the remaining taxable amount of the conversion (i.e., the taxableamount of the conversion not included in income under the 4-year rule in the current or a priortaxable year).  In subsequent years (assuming no such further withdrawals), the amount includiblein income under the 4-year will be the lesser of (1) the amount otherwise required under the 4-year rule (determined without regard to the withdrawal) or (2) the remaining taxable amount ofthe conversion.

	Under the proposal, application of the 4-year spread would be elective.  The electionwould be made in the time and manner prescribed by the Secretary.  An election with respect tothe 4-year spread could not be changed after the due date for the return for the first year of theincome inclusion (including extensions). 

	The following example illustrates the application of these proposed rules.

Example:   Taxpayer A has a nondeductible IRA with a value of $100 (and no otherIRAs).  The $100 consists of $75 of contributions and $25 of earnings.  A converts theIRA into a Roth IRA in 1998 and elects the 4-year spread.  As a result of the conversion,$25 is includible in income ratably over 4 years ($6.25 per year).  The 10-percent earlywithdrawal tax does not apply to the conversion.  At the beginning of 1999, the value ofthe account is $110, and A makes a withdrawal of $10.  Under the proposal, thewithdrawal would be treated as attributable entirely to amounts that were includible inincome due to the conversion.  In the year of withdrawal, $16.25 would be includible inincome (the $6.25 includible in the year of withdrawal under the 4-year rule, plus $10 ($10is less than the remaining taxable amount of $12.50 ($25-$12.50)).  In the next year, $2.50would be includible in income under the 4-year rule.  No amount would be includible inincome in year 4 due to the conversion.

	Application of early withdrawal tax to converted amounts

	The proposal would modify the rules relating to conversions to prevent taxpayers fromreceiving premature distributions (i.e., within 5 years) while retaining the benefit of thenonpayment of the early withdrawal tax.  Under the proposal, if converted amounts arewithdrawn within the 5-year period beginning with the year of the conversion, then, to the extentattributable to amounts that were includible in income due to the conversion, the amountwithdrawn would be subject to the 10-percent early withdrawal tax.(11)

	Applying this rule to the example above, the $10 withdrawal would be subject to the 10-percent early withdrawal tax (unless as exception applies).

Application of 5-year holding period

	The proposal would also eliminate the special rule under which a separate 5-year holdingperiod begins for purposes of determining whether a distribution of amounts attributable to aconversion is a qualified distribution; thus, the 5-year holding rule for Roth IRAs would beginwith the year for which a contribution is first made to a Roth IRA.  A subsequent conversionwould not start the running of a new 5-year period.

Ordering rules

	Ordering rules would apply to determine what amounts are withdrawn in the event a RothIRA contains both conversion amounts (possibly from different years) and other contributions. Under these rules, regular Roth IRA contributions would be deemed to be withdrawn first, thenconverted amounts (starting with the amounts first converted).  Withdrawals of convertedamounts would be treated as coming first from converted amounts that were includible in income. As under present law, earnings would be treated as withdrawn after contributions.  For purposesof these rules, all Roth IRAs would be considered a single Roth IRA.

Corrections

	In order to assist individuals who erroneously convert IRAs into Roth IRAs or otherwisewish to change the nature of an IRA contribution, contributions to an IRA (and earnings thereon)may be transferred from any IRA to another IRA by the due date for the taxpayer's return for theyear of the contribution (including extensions).  Any such transferred contributions will be treatedas if contributed to the transferee IRA (and not to the transferor IRA).  

**Effect of death on 4-year spread**

	Under the proposal, in general, any amounts remaining to be included in income as a resultof a 1998 conversion would be includible in income on the final return of the taxpayer.  If thesurviving spouse is the beneficiary of the Roth IRA, the spouse could continue the deferral byincluding the remaining amounts in his or her income over the remainder of the 4-year period. 

**Calculation of AGI limit for conversions**

	The proposal would clarify that, for purposes of applying the $100,000 AGI limit on IRAconversions into Roth IRAs, the conversion amount (to the extent otherwise includible in AGI) issubtracted from AGI as determined under the rules relating to IRAs (sec. 219).  Thus, forexample, the AGI-based phase out of the exemption from the disallowance for passive activitylosses form rental real estate activities (sec. 469(i)(3)) would be applied taking into account theamount of the conversion that is includible in AGI, and then the amount of the conversion wouldbe subtracted from AGI in determining whether a taxpayer is eligible to convert and IRA into aRoth IRA.

**Effective Date**

	The provision would be effective as if included in the 1997 Act, i.e., for taxable yearsbeginning after December 31, 1997.

**2.  Penalty-free distributions for education expenses and purchase of first homes (secs. 203and 303 of the 1997 Act and sec. 402 of the Code)**

**Present Law
The 10-percent early withdrawal tax does not apply to distributions from an IRA if thedistribution is for first-time homebuyer expenses, subject to a $10,000 life-time cap, or for highereducation expenses. These exceptions do not apply to distributions from employer-sponsoredretirement plans. A distribution from an employer-sponsored retirement plan that is an "eligiblerollover distribution" may be rolled over to an IRA. The term "eligible rollover distribution"means any distribution to an employee of all or a portion or the balance to the credit of theemployee in a qualified trust. Distributions from cash or deferred arrangements made on accountof hardship are eligible rollover distributions. An eligible rollover distribution which is nottransferred directly to another retirement plan or an IRA is subject to 20-percent withholding onthe distribution.    

**Description of Proposal**
Under present law, participants in employer-sponsored retirement plans can avoid theearly withdrawal tax applicable to such plans by rolling over hardship distributions to an IRA andwithdrawing the funds from the IRA.  The proposal would modify the rules relating to the abilityto roll over hardship distributions from employer-sponsored retirement plans in order to preventsuch avoidance of the 10-percent early withdrawal tax. The proposal would provide thatdistributions from cash or deferred arrangements and similar arrangements made on account ofhardship of the employee are not eligible rollover distributions.  Such distributions would not besubject to the 20-percent withholding applicable to eligible rollover distributions.

**Effective Date**
The proposal would be effective for distributions after December 31, 1998.

**3.  Limits based on modified adjusted gross income (sec. 302(a) of the 1997 Act**

**and sec. 72(t) of the Code)**

**Present Law
The $2,000 Roth IRA maximum contribution limit is phased out for individual taxpayerswith adjusted gross income ("AGI") between $95,000 and $110,000 and for married taxpayersfiling a joint return with AGI between $150,000 and $160,000. The maximum deductible IRAcontribution is phased out between $0 and $10,000 of AGI in the case of married couples filing aseparate return. 

**Description of Proposal**
The proposal would clarify the phase-out range for the Roth IRA maximum contributionlimit for a married individual filing a separate return and conform it to the range for deductibleIRA contributions. Under the proposal, the phase-out range for married individuals filing aseparate return would be $0 to $10,000 of AGI.

**Effective Date**
The proposal would be effective as if included in the 1997 Act, i.e., for taxable yearsbeginning after December 31, 1997.

**4.  Contribution limit to Roth IRAs (sec. 302 of the 1997 Act and sec. 408A(c) of the Code)**

**Present Law
An individual who is an active participant in an employer-sponsored plan may deductannual IRA contributions up to the lesser of $2,000 or 100 percent of compensation if theindividual's adjusted gross income ("AGI") does not exceed certain limits. For 1998, the limit isphased-out over the following ranges of AGI: $30,000 to $40,000 in the case of a single taxpayerand $50,000 to $60,000 in the case of married taxpayers. An individual who is not an activeparticipant in an employer-sponsored retirement plan (and whose spouse is not an activeparticipant) may deduct IRA contributions up to the limits described above without limitationbased on income. An individual who is not an active participant in an employer-sponsoredretirement plan (and whose spouse is such an active participant) may deduct IRA contributions upto the limits described above if the AGI of the such individuals filing a joint return does notexceed certain limits. The limit is phased for out for such individuals with AGI between $150,000and $160,000.

	An individual may make nondeductible contributions up to the lesser of $2,000 or 100percent of compensation to a Roth IRA if the individual's AGI does not exceed certain limits. Anindividual may make nondeductible contributions to an IRA to the extent the individual does notor cannot make deductible contributions to an IRA or contributions to a Roth IRA. Contributionsto all an individual's IRAs for a taxable year may not exceed $2,000.

**Description of Proposal**
The proposal would clarify the intent of the Act that an individual may contribute up to$2,000 a year to all the individual's IRAs. Thus, for example, suppose an individual is not eligibleto make deductible IRA contributions because of the phase-out limits, and is eligible to make a$1,000 Roth IRA contribution. The individual could contribute $1,000 to the Roth IRA and$1,000 to a nondeductible IRA. 

**Effective Date**
The proposal would be effective as if included in the 1997 Act, i.e., for taxable yearsbeginning after December 31, 1997. 

**5.  Contribution limitations for active participants in an IRA (sec. 301(b) of the 1997 Actand sec. 219(g) of the Code)**

**Present Law
Under present law, if a married individual (filing a joint return) is an active participant inan employer-sponsored retirement plan, the $2,000 IRA deduction limit is phased out over thefollowing levels of adjusted gross income ("AGI"): 
	Taxable years beginning in:Phase-out Range1997$40,000 to $50,0001998$50,000 to $60,0001999$51,000 to $61,0002000$52,000 to $62,0002001$53,000 to $63,0002002$54,000 to $64,0002003$60,000 to $70,0002004$65,000 to $75,0002005$70,000 to $80,0002006$75,000 to $85,0002007$80,000 to $100,000
	An individual is not considered an active participant in an employer-sponsored retirementplan merely because the individual's spouse is an active participant. The $2,000 maximumdeductible IRA contribution for an individual who is not an active participant, but whose spouseis, is phased out for taxpayers with AGI between $150,000 and $160,000.  

**Description of Proposal**
The proposal would clarify the intent of the Act relating to the AGI phase-out ranges formarried individuals who are active participants in employer-sponsored plans and the AGI phase-out range for spouses of such active participants as described above.

**Effective Date**

	The proposal would be effective as if included in the 1997 Act, i.e., for taxable yearsbeginning after December 31, 1997.

**D.  Amendments to Title III of the 1997 Act Relating to Capital Gains**

**1.  Individual capital gain rate reductions (sec. 311 of the 1997 Act and sec. 1(h) of theCode)**

**Present Law**

	The 1997 Act provided lower capital gains rates for individuals.  Generally, the 1997 Actreduced the maximum capital gains rate from 28 percent to 20 percent and provided a 10-percentrate for capital gains otherwise taxed at a 15-percent rate.  The 1997 Act generally retained a 28-percent maximum rate for gain from collectibles, gain included in income from the sale of certainsmall business stock, net gain properly taken into account before May 7, 1997, and net gainproperly taken into account after July 28, 1997, from property held more than one year but notmore than 18 months.  In addition, a maximum rate of 25 percent is provided for the long-termcapital gain attributable to real estate depreciation.  Lower rates are also provided in the future forcertain property held more than five years.  

	Under the provisions of the 1997 Act, net short-term capital losses and long-term capitalloss carryovers offset gain taxed at a 20-percent rate before offsetting gain taxed at the 25- or 28-percent rates.

**Description of Proposal**

	The proposal would make the following technical corrections to the individual capital gainrate reduction provisions of the 1997 Act:  

	Collectibles gains and losses, certain small business stock gain included in income, capitalgains and losses properly taken into account after July 28, 1997, from the disposition of propertyheld more than one year but not more than 18 months, and long-term capital gains and lossesproperly taken into account before May 7, 1997, would be placed in one basket ("28-percent rategain") taxed a maximum rate of 28 percent.  All the gains and losses in this basket would benetted for purposes of determining the amount taxed at a maximum 28-percent rate.

	Any net short-term capital loss for the taxable year and any long-term capital losscarryover to the taxable year would be placed in the 28-percent rate gain basket.  This wouldallow these capital losses to offset gain taxed at the 28-percent rate before offsetting gain taxed atlower rates.  Any net loss in the 28-percent rate gain basket next would offset gain taxed at the25-percent rate. 

	Several conforming amendments would be made to coordinate the multiple holdingperiods with other provisions of the Code.  Inherited property and certain patents would bedeemed to have a holding period of more than 18 months, thus, allowing the lower 10- and 20-percent rates to apply.  The proposal would clarify that long-term capital gain or loss on a section1256 contract would be treated as gain or loss from property held more than 18 months.  Also, the short sale holding period rules of section 1233 and the holding period rules of section 1092(f)would be amended to conform those rules with the new 12-18 month holding period.  Amountstreated as ordinary income by reason of section 1231(c) would be allocated among categories ofgain in accordance with IRS forms or regulations.  

	Finally, the proposal would reorder some of the provisions and make other minor technicalchanges, including a provision to reduce the minimum tax preference on small business stock to28 percent, beginning in 2006.

**Effective Date**

	The proposal would be effective for taxable years ending after May 6, 1997.

**2.  Rollover of gain from sale of qualified stock (sec. 313 of the 1997 Act and sec. 1045 of theCode)**

**Present Law
	The 1997 Act provided that gain from the sale of qualified small business stock held by anindividual for more than 6 months can be "rolled over" tax-free to other qualified small businessstock.

**Description of Proposal
	Under the proposal, a partnership or an S corporation can roll over gain from qualifiedsmall business stock held more than 6 months if (and only if) all the interests in the partnership orS corporation are held by individuals, estates, or trusts (other than trusts with corporations asbeneficiaries) at all times during the taxable year.

**Effective Date**

	The proposal would be effective on August 5, 1997, the date of enactment of the 1997Act.

**3.  Exclusion of gain on the sale of a principal residence owned and used less than two years(sec. 312(a) of the 1997 Act and sec. 121 of the Code)**

**Present Law**

	Under present law, a taxpayer generally is able to exclude up to $250,000 ($500,000 ifmarried filing a joint return) of gain realized on the sale or exchange of a principal residence.  Tobe eligible for the exclusion, the taxpayer must have owned the residence and used it as a principalresidence for at least two of the five years prior to the sale or exchange.  A taxpayer who fails tomeet these requirements by reason of a change of place of employment, health, or unforeseencircumstances is able to exclude a fraction of the taxpayer's realized gain equal to the fraction ofthe two years that the requirements are met.

**Description of Proposal**

	The proposal would clarify that an otherwise qualifying taxpayer who fails to satisfy thetwo-year ownership and use requirements is able to exclude an amount equal to the fraction of the$250,000 ($500,000 if married filing a joint return), not the fraction of the realized gain which isequal to the fraction of the two years that the ownership and use requirements are met.  Forexample, an unmarried taxpayer who owns and uses a principal residence for one year then sells atrealized gain of $500,000 may exclude $125,000 of gain (one-half of $250,000) not $250,000 ofgain (one-half of the realized gain).  Similarly, an unmarried taxpayer who owns and uses aprincipal residence for one year then sells at a realized gain of $50,000 may exclude the entire$50,000 of gain since it is less than one half of $250,000.  The exclusion is not limited to $25,000(one-half of the $50,000 realized gain).

	In addition, the proposal would provide that if a married couple filing a joint return doesnot qualify for the $500,000 exclusion, the amount of the exclusion claimed by the couple will bethe sum of each spouse's exclusion determined on a separate basis. 

**Effective Date**

	The proposal would be effective as if included in section 312 of the 1997 Act.

**4.  Effective date of the exclusion of gain on the sale of a principal residence (sec. 312(d)(2)of the 1997 Act and sec. 121 of the Code)**

**Present law**

	The exclusion for gain on sale of a principal residence under the 1997 Act generallyapplies to sales or exchanges occurring after May 6, 1997.  A taxpayer may elect, however,  toapply prior law to a sale or exchange (1) made before the date of enactment of the Act, (2) madeafter the date of enactment pursuant to a binding contract in effect on such date, or (3) where areplacement residence was acquired on or before the date of enactment (or pursuant to a bindingcontract in effect on the date of enactment) and the prior-law rollover provision would apply.

**Description of Proposal**

	The proposal would clarify that a taxpayer may elect to apply prior law with respect to asale or exchange on the date of enactment of section 312 of the 1997 Act.

**Effective Date**

	The proposal would be effective as if included in section 312 of the 1997 Act.

**E.  Amendments to Title IV of the 1997 Act Relating to Alternative Minimum Tax**

**1.  Election to use AMT depreciation for regular tax purposes (sec. 402 of the Act and sec.168 of the Code)**

**Present Law 
	For regular tax purposes, depreciation deductions for certain shorter-lived tangibleproperty may be determined using the 200-percent declining balance method over 3-, 5-, 7-, or10-year recovery periods (depending on the type of property).  For alternative minimum tax("AMT") purposes, depreciation on such property placed in service after 1986 and before 1999 iscomputed by using the 150-percent declining balance method over the longer class livesprescribed by the alternative depreciation system of section 168(g).  A taxpayer may elect to usethe methods and lives applicable to AMT depreciation for regular tax purposes.

	The 1997 Act conformed the recovery periods (but not the methods) used for purposes ofthe AMT depreciation to the recovery periods used for purposes of the regular tax, for propertyplaced in service after 1998.  The 1997 Act did not make a conforming change to the election touse the pre-1998 AMT recovery methods and recovery periods for regular tax purposes.

**Description of Proposal
	For property placed in service after 1998, a taxpayer would be allowed to elect, forregular tax purposes, to compute depreciation on tangible personal property otherwise qualifiedfor the 200-percent declining balance method by using the 150-percent declining balance methodover the recovery periods applicable to the regular tax (rather than the longer class lives of thealternative depreciation system of sec. 168(g)). 

**Effective Date
	The proposal would be effective for property placed in service after December 31, 1998.

**2.  Clarification of the small business exemption (sec. 401 of the Act and sec. 55 of theCode)**

	The corporate alternative minimum tax is repealed for small corporations for taxable yearsbeginning after December 31, 1997.  A small corporation is one that had average gross receipts of$5 million or less for a prior three-year period.  A corporation that meets the $5 million grossreceipts test will continue to be treated as a small corporation exempt from the alternativeminimum tax so long as its average gross receipts do not exceed $7.5 million. 

**Description of Proposal**

	The proposal would clarify the application of the $5 million and $7.5 million gross receiptstests that a corporation must meet to be a small corporation exempt from the AMT.  For example,in order for an existing corporation to qualify as a small corporation for its first taxable yearbeginning after December 31, 1997, (1) the corporation's average gross receipts for the three-taxable year period beginning after December 31, 1993 must be $5 million or less and (2) thecorporation's average gross receipts for the three-taxable year period beginning after December31, 1994 must be $7.5 million or less.  

**Effective Date
	The proposal would be effective for taxable years beginning after December 31, 1997.

**F.  Amendments to Title V of the 1997 Act Relating to Estate and Gift Taxes**

**1.  Clarification of phaseout range for 5-percent surtax to phase out the benefits of theunified credit and graduated rates (sec. 501 of the 1997 Act and sec. 2001(c)(2) of the Code)**

**Present Law**

	Prior to the 1997 Act, a 5-percent surtax was imposed upon cumulative taxable transfersbetween $10 million and $21,040,000 to phase out the benefits of the graduated rates and theunified credit.  The 1997 Act increased the unified credit beginning in 1998, from an effectiveexemption of $600,000 to an effective exemption of $1,000,000 in 2006.  A conformingamendment was made to the 5-percent surtax provision in section 2001(c)(2) that was intended toreflect the increased unified credit.  However, the conforming amendment was drafted in a mannerthat had the effect of phasing out the benefits of the graduated rates but not the unified credit.

**Description of Proposal**

	The proposal would clarify section 2001(c)(2) to properly phase out the benefits of boththe graduated rates and the unified credit.

**Effective Date**

	The proposal would be effective for decedents dying, and gifts made, after December 31,1997.

**2.  Clarification of effective date for indexing of generation-skipping exemption (secs.501(d) and (f) of the 1997 Act and sec. 2631(c) of the Code)**

**Present Law**

	The 1997 Act provided for the indexation of the $1 million exemption from generation-skipping transfers effective for decedents dying after December 31, 1998. 

**Description of Proposal**
	The proposal would clarify that the indexing of the exemption from generation-skippingtransfers would be effective with respect to all generation-skipping transfers (i.e., direct skips,taxable terminations, and taxable distributions) made after 1998.  

	With respect to existing trusts, transferors would be permitted to make a late allocation ofany additional GST exemption amount attributable to indexing adjustments in accordance with thepresent-law rules applicable to late allocations as set forth in sections 2632 and 2642, and theregulations promulgated thereunder.  For example, assume an individual transferred $2 million toa trust in 1995, and allocated his entire $1 million GST exemption to the trust at that time(resulting in an inclusion ratio of .50).  Assume further that in 2001, the GST exemption hasincreased to $1,100,000 as the result of indexing, and that the value of the trust assets is now $3million.  If the individual is still alive in 2001, he would be permitted to make a late allocation of$100,000 of GST exemption to the trust, resulting in a new inclusion ratio of 

1-(($1,500,000+100,000)/$3,000,000), or .467.

**Effective Date**

	The proposal would be effective for generation-skipping transfers made after December31, 1998.

**3.  Coordination between unified credit and family-owned business exclusion (sec. 502 of the 1997 Act and sec. 2033A(a) of the Code)**

**Present Law**

	The 1997 Act effectively increased the amount of  lifetime gifts and transfers at death thatare exempt from unified estate and gift tax from $600,000 to $1,000,000 over the period 1997 to2006, through increases in an individual's unified credit.  In addition, the 1997 Act provided alimited exclusion for certain family-owned business interests.  The exclusion for family-ownedbusiness interests may be taken only to the extent that the exclusion for family-owned businessinterests, plus the amount effectively exempted by the unified credit, does not exceed $1.3 million. As a result, for years after 1998, the maximum amount of exclusion for family-owned businessinterests is reduced by increases in the dollar amount of transfers effectively exempted through theunified credit.

	Because the structure of the 1997 Act increases the unified credit over time (until 2006)while decreasing over the same period the benefit of the closely-held business exclusion, the estatetax on estates with family-owned businesses increases over time until 2006.  This increase inestate tax results from the fact that increases in the unified credit provide a benefit at thedecedent's lowest estate tax brackets, while the exclusion for family-owned businesses provides abenefit at the decedent's highest estate tax brackets.

**Description of Proposal**

	Under the proposal, if an executor elects to utilize the qualified family-owned businessexclusion, the estate tax liability would be calculated as if the estate were allowed a maximumqualified family-owned business exclusion of $675,000 and an applicable exclusion amount undersection 2010 (i.e., the amount exempted by the unified credit) of $625,000, regardless of the yearin which the decedent dies.  If the estate includes less than $675,000 of qualified family-ownedbusiness interests, the applicable exclusion amount would be increased on a dollar-for-dollar basis,but only up to the applicable exclusion amount generally available for the year of death.  

	For example, assume the decedent dies in 2005, when the applicable exclusion amountunder section 2010 is $800,000.  If the estate includes qualified family-owned business interestsvalued at $675,000 or more, the estate tax liability would be calculated as if the estate wereallowed a qualified family-owned business exclusion of $675,000, and the applicable exclusionamount under section 2010 would be limited to $625,000.  If the estate includes qualified family-owned business interests of $500,000 or less, all of the qualified family-owned business interestscould be excluded from the estate, and the applicable exclusion amount under section 2010 wouldbe $800,000.  If the estate includes qualified family-owned business interests valued between$500,000 and $675,000, all of the qualified family-owned business interests could be excludedfrom the estate, and the applicable exclusion amount under section 2010 would be calculated asthe excess of $1.3 million over the amount of qualified family-owned business interests.  (Forexample, if the qualified family-owned business interests were valued at $600,000, the applicableexclusion amount under section 2010 would be $700,000.)

	If a recapture event occurs with respect to any qualified family-owned business interest,the total amount of estate taxes potentially subject to recapture would be calculated as thedifference between the actual amount of estate tax liability for the estate, and the amount of estatetaxes that would have been owed had the qualified family-owned business election not been made.

**Effective Date**
	The proposal would be effective for decedents dying after December 31, 1997.

**4.  Clarification of  businesses eligible for family-owned business exclusion (sec. 502 of the 1997 Act and sec. 2033A(b)(3) of the Code)**

**Present Law**

	In order to be eligible to exclude from the gross estate a portion of the value of a family-owned business, the sum of (1) the adjusted value of family-owned business interests includible inthe decedent's estate, and (2) the amount of gifts of family-owned business interests to familymembers of the decedent that are not included in the decedent's gross estate, must exceed 50percent of the decedent's adjusted gross estate.

**Description of Proposal**

	The proposal would 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.

**Effective Date
	The proposal would be effective with respect to decedents dying after December 31,1997.

**5.  Clarification that interests eligible for family-owned business exclusion must be passed to a qualified heir (sec. 502 of the Act and sec. 2033A(a)(1) of the Code)**

**Present Law**

	The 1997 Act provided a new exclusion for qualified family-owned business interests. One of the requirements for the exclusion is that such interests must pass to a "qualified heir,"which includes members of the decedent's family and any individual who has been activelyemployed by the trade or business for at least 10 years prior to the date of the decedent's death.

**Description of Proposal**

	The proposal would clarify section 2033A(a)(1) to provide that qualified family-ownedbusiness interests must be passed to a qualified heir in order to qualify for the exclusion.

**Effective Date**

	The proposal would be effective with respect to estates of decedents dying after December31, 1997.

**6.  Clarification of "trade or business" requirement for family-owned business exclusion (sec. 502 of the Act and sec. 2033A(e) of the Code)**

**Present Law**

	A qualified family-owned business interest is defined as any interest in a trade or businessthat meets certain requirements--e.g., the decedent and members of his family must own certainpercentages of the trade or business, the decedent or members of his family must have materiallyparticipated in the trade or business for five of the eight years preceding the decedent's death, andthe qualified heir or members of his family must materially participate in the trade or business forat least five years of any eight-year period within 10 years following the decedent's death.

**Description of Proposal**

	The proposal would clarify that an individual's interest in property used in a trade orbusiness may qualify for the qualified family-owned business exclusion as long as such property isused in a trade or business by the individual or a member of the individual's family.  Thus, forexample, if a brother and sister inherit farmland upon their father's death, and the sister cash-leases her portion to her brother, who is engaged in the trade or business of farming, the "trade orbusiness" requirement is satisfied with respect to both the brother and the sister.

**Effective Date**

	The proposal would be effective with respect to estates of decedents dying after December31, 1997.

**7.  Conversion of qualified family-owned business exclusion into a deduction (sec. 502 of the Act and sec. 2033A of the Code)**

**Present Law**

	The qualified family-owned business provision in the 1997 Act provides an exclusion fromestate taxes for certain qualified family-owned business interests.  It is unclear whether theprovision provides an exclusion of value or an exclusion of property from the estate, and thus it isunclear how the new provision interacts with other provisions in the Internal Revenue Code (e.g.,secs. 1014, 2032A, 2056, 2612, and 6166).

**Description of Proposal**

	The proposal would convert the qualified family-owned business exclusion into adeduction.  The requirements of the provision would otherwise remain unchanged.  The qualifiedfamily-owned business deduction would not be available for generation-skipping tax purposes.

**Effective Date**

	The proposal would be effective with respect to estates of decedents dying after December31, 1997.

**8.  Other modifications to the qualified family-owned business provision (sec. 502 of the 1997 Act and sec. 2033A of the Code)**

**Present Law**

	The qualified family-owned business provision incorporates by cross-reference severalother provisions of the Code, including a number of provisions in section 2032A and the personalholding company rules of section 543(a).

**Description of Proposal**

	The proposal would modify section 2033A(g) (relating to the security requirements fornoncitizen qualified heirs) by deleting the cross-reference to section 2033A(i)(3)(M), which doesnot appear to be appropriate.  The proposal also would make rules similar to those set forth insection 2032A(h) and (i) (relating to conversions and exchanges of property under sections 1031and 1033) applicable for purposes of section 2033A.  Finally, the proposal would clarify that, inidentifying assets that produce (or are held for the production of) income of a type described insection 543(a), section 543(a) would be applied without regard to section 543(a)(2)(B) (thedividend requirement for corporate entities).

**Effective Date
	The proposal would be effective with respect to estates of decedents dying after December31, 1997.

**9.  Clarification of interest on installment payment of estate tax on holding companies (sec. 503 of the 1997 Act and secs. 6166(b)(7)(A) and 6166(b)(8)(A) of the Code)**

**Present Law**

	If certain conditions are met, a decedent's estate may elect to pay the estate taxattributable to certain closely-held businesses over a 14-year period.  The 1997 Act provided for a2-percent interest rate on the estate tax on first $1 million in value of interests in qualified closely-held businesses, and a rate equal to 45 percent of the regular deficiency rate on the amount inexcess of the portion eligible for the 2-percent rate, but also provided that none of interest on thedeferred payment of estate taxes would be deductible for income or estate tax purposes.  Interestsin holding companies and non-readily-tradeable business interests are not eligible for the 2-percentrate.

**Description of Proposal**

	The proposal would 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 rate of 45 percent of the regular deficiency rate.  Such interest payments are notdeductible for income or estate tax purposes.

**Effective Date
	The proposal generally would be effective for decedents dying after December 31, 1997.

**10.  Clarification on declaratory judgment jurisdiction of U.S. Tax Court regardinginstallment payment of estate tax (sec. 505 of the 1997 Act and sec. 7479(a) of the Code)**

**Present Law**

	If certain conditions are met, a decedent's estate may elect to pay estate tax attributable tocertain closely-held business over a 14-year period.  The 1997 Act provided that the U.S. TaxCourt would have jurisdiction to determine whether the estate of a decedent qualifies for the 14-year installment payment of estate tax.

**Description of Proposal**

	The proposal would 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.

**Effective Date
	The proposal would be effective for decedents dying after the date of enactment of the1997 Act.

**11.  Clarification of rules governing revaluation of gifts (sec. 506 of the 1997 Act and sec.2504(c) of the Code)**

**Present Law**

	The valuation of a gift becomes final for gift tax purposes after the statute of limitations onany gift tax assessed or paid has expired.  The 1997 Act extended that rule to apply for estate taxpurposes, provided for a lengthened statute of limitations for gift tax purposes if certaininformation is not disclosed with the gift tax return, and provided jurisdiction to the U.S. TaxCourt to determine the value of any gift.

**Description of Proposal**

	The proposal 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.

**Effective Date
	The proposal would be effective with respect to gifts made after the date of enactment ofthe 1997 Act.  

**12.  Clarification with respect to post-mortem conservation easements (sec. 506 of the 1997Act and sec. 2031(c) of the Code)**

**Present Law**

	A deduction is allowed for estate tax purposes for a contribution of a qualified realproperty interest to a charity (or other qualified organization) exclusively for conservationpurposes (sec. 2055(f)).  The 1997 Act also provided an election to exclude from the taxableestate 40 percent of the value of any land subject to a qualified conservation easement that meetscertain requirements.  The 1997 Act provided that the executor of the decedent's estate, or thetrustee of a trust holding the land, could grant a qualifying easement after the decedent's death, aslong as the easement is granted prior to the date of the election (generally, within nine monthsafter the date of the decedent's death).

**Description of Proposal**

	The proposal would clarify that, in the case of a qualified conservation contribution madeafter the date of the decedent's death, an estate tax deduction would be allowed under section2055(f).  However, no income tax deduction would be allowed to the estate or the qualified heirswith respect to such post-mortem conservation easements.    

**Effective Date**

	The proposal would be effective with respect to estates of decedents dying after December31, 1997.

**G.   Amendments to Title VII of the 1997 Act Relating to Incentives for the District of Columbia (sec. 701 of the 1997 Act and secs. 1400, 1400B and 1400C of the Code)
**Present Law**

**Designation of D.C. Enterprise Zone**

	Certain economically depressed census tracts within the District of Columbia aredesignated as the "D.C. Enterprise Zone," within which businesses and individual residents areeligible for special tax incentives.  The census tracts that compose the D.C. Enterprise Zone forpurposes of the wage credit, expensing, and tax-exempt financing incentives include all censustracts that presently are part of the D.C. enterprise community and census tracts within theDistrict of Columbia where the poverty rate is not less than 20 percent. The D.C. Enterprise Zonedesignation generally will remain in effect for five years for the period from January 1, 1998,through December 31, 2002.

**Empowerment zone wage credit, expensing, and tax-exempt financing**

	The following tax incentives generally are available in the D.C. Enterprise Zone: (1) a 20-percent wage credit for the first $15,000 of wages paid to D.C. residents who work in the D.C.Enterprise Zone; (2) an additional $20,000 of expensing under Code section 179 for qualifiedzone property placed in service by a "qualified D.C. Zone business"; and (3) special tax-exemptfinancing for certain zone facilities.  

**Qualified D.C. Zone business**

	For purposes of the increased expensing under section 179, as well as for purposes of thezero percent capital gains rate (described below),  a corporation or partnership is a qualified D.C.Zone business if: (1) the sole trade or business of the corporation or partnership is the activeconduct of a "qualified business" (defined below) within the D.C. Zone; (2) at least 50 percent (80percent for purposes of the zero percent capital gains rate) of the total gross income of such entityis derived from the active conduct of a qualified business within the D.C. Zone; (3) a substantialportion of the use of the entity's tangible property (whether owned or leased) is within the D.C.Zone; (4) a substantial portion of the entity's intangible property is used in the active conduct ofsuch business; (5) a substantial portion of the services performed for such entity by its employeesare performed within the D.C. Zone;  and (6) less than 5 percent of the average of the aggregateunadjusted bases of the property of such entity is attributable to (a) certain financial property, or(b) collectibles not held primarily for sale to customers in the ordinary course of an active trade orbusiness.  Similar rules apply to a qualified business carried on by an individual as aproprietorship.

	In general, a "qualified business" means any trade or business.  However, a "qualifiedbusiness" does not include any trade or business that consists predominantly of the developmentor holding of intangibles for sale or license.  In addition, a qualified business does not include anyprivate or commercial golf course, country club, massage parlor, hot tub facility, suntan facility,racetrack or other facility used for gambling, liquor store, or certain large farms (so-called"excluded businesses").  The rental of residential real estate is not a qualified business.  The rentalof commercial real estate is a qualified business only if at least 50 percent of the gross rentalincome from the real property is from qualified D.C. Zone businesses.  The rental of tangiblepersonal property to others also is not a qualified business unless at least 50 percent of the rentalof such property is by qualified D.C. Zone businesses or by residents of the D.C. Zone.

	For purposes of the tax-exempt financing provisions, the term "D.C. Zone business"generally is defined as for purposes of the increased expensing under section 179.  However,  aqualified D.C. Zone business for purposes of the tax-exempt financing provisions includes abusiness located in the D.C. Zone that would qualify as a D.C. Zone business if it were separatelyincorporated.  In addition, under a special rule applicable only for purposes of  the tax-exemptfinancing rules, a business is not required to satisfy the requirements applicable to a D.C. Zonebusiness until the end of a startup period if, at the beginning of the startup period, there is areasonable expectation that the business will be a qualified D.C. Zone business at the end of thestartup period and the business makes bona fide efforts to be such a business.  With respect toeach property financed by a bond issue, the startup period ends at the beginning of the firsttaxable year beginning more than two years after the later of (1) the date of the bond issuefinancing such property, or (2) the date the property was placed in service (but in no event morethan three years after the date of bond issuance).  In addition, if a business satisfies certainrequirements applicable to a qualified D.C. Zone business for a three-year testing period followingthe end of the start-up period and thereafter continues to satisfy certain business requirements,then it will be treated as a qualified D.C. Zone business for all years after the testing periodirrespective of whether it satisfies all of the requirements of a qualified D.C. Zone business.

**Zero-percent capital gains rate**

	A zero-percent capital gains rate applies to capital gains from the sale of certain qualifiedD.C. Zone assets held for more than five years.  For purposes of the zero-percent capital gainsrate, the D.C. Enterprise Zone is defined to include all census tracts within the District ofColumbia where the poverty rate is not less than 10 percent.  Only capital gain that is attributableto the 10-year period beginning December 31, 1997, and ending December 31, 2007, is eligiblefor the zero-percent rate. 

	 In general, qualified "D.C. Zone assets" mean stock or partnership interests held in, ortangible property held by, a D.C. Zone business.  Such assets must generally be acquired afterDecember 31, 1997, and before January 1, 2003.  However, under a special rule, qualified D.C.Zone assets include property that was a qualified D.C. Zone asset in the hands of a prior owner,provided that at the time of acquisition, and during substantially all of the subsequent purchaser'sholding period, either (1) substantially all of the use of the property is in a qualified D.C. Zonebusiness, or (2) the property is an ownership interest in a qualified D.C. Zone business.

**First-time homebuyer tax credit**

	First-time homebuyers of a principal residence in the District are eligible for a tax credit ofup to $5,000 of the amount of the purchase price, except that the credit phases out for individualtaxpayers with adjusted gross income ("AGI") between $70,000 and $90,000 ($110,000-$130,000 for joint filers).  The credit is available with respect to property purchased after the dateof enactment and before January 1, 2001.  Any excess credit may be carried forward indefinitelyto succeeding taxable years.

**Description of Proposals**
**Eligible census tracts**

	The proposal would 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), would be based on 1990 decennial census data.  Thus, data from the2000 decennial census would not result in the expansion or other reconfiguration of the D.C.Enterprise Zone.

**Qualified D.C. Zone business**

	The proposal would modify section 1400B(c) to clarify that a proprietorship canconstitute a D.C. Zone business for purposes of the zero-percent capital gains rate.

	The proposal also would 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.

**Zero-percent capital gains rate**

	The proposal would 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 the special ruleapplicable to subsequent purchasers.

	In addition, the proposal would clarify that the termination of the D.C. Enterprise Zonedesignation at the end of 2002 will not, by itself, result in property failing to be treated as aqualified D.C. Zone asset for purposes of the zero-percent capital gains rate, provided that the 

property would otherwise continue to qualify were the D.C. Zone designation in effect.

**First-time homebuyer credit**

	The proposal would clarify that, for purposes of the first-time homebuyer credit, a "first-time homebuyer" means any individual if such individual (and, if married, such individual'sspouse) did not have a present ownership interest in a principal residence in the District ofColumbia during the one-year period ending on the date of the purchase of the principal residenceto which the credit applies.

	The proposal also would clarify that the phaseout of the credit for individual taxpayerswith adjusted gross income between $70,000 and $90,000 ($110,000-$130,000 for joint filers)applies only in the year the credit is generated, and does not apply in subsequent years to whichthe credit may be carried over.

	In addition, the proposal would clarify that the term "purchase price" means the adjustedbasis of the principal residence on the date the residence is purchased.  Newly constructedresidences would be treated as purchased by the taxpayer on the date the taxpayer first occupiessuch residence.

	The proposal would clarify that the first-time homebuyer credit is a nonrefundablepersonal credit and would provide that the first-time homebuyer credit is claimed after the creditsdescribed in Code sections 25 (credit for interest on certain home mortgages) and 23 (adoptioncredit).

	Finally, the proposal would clarify that the first-time homebuyer credit would be availableonly for property purchased after August 4, 1997, and before January 1, 2001.  Thus, the creditwould be available to first-time home purchasers who acquire title to a qualifying principalresidence on or after August 5, 1997, and on or before December 31, 2000, irrespective of thedate the purchase contract was entered into.

**Effective Date**

	The proposal would be effective as of August 5, 1997, the date of enactment of the 1997Act.

**H.  Amendments to Title IX of the 1997 Act Relating to Miscellaneous Provisions**

**1.  Clarification of effect of certain transfers to Highway Trust Fund (sec. 901 of the 1997Act, and sec. 9503 of the Code)(12)**

**Present Law
	The 1997 Act provided for the transfer of an additional 4.3 cents per gallon of thehighway motor fuels tax revenues from the General Fund to the Highway Trust Fund, andprovided that revenues transferred to the Trust Fund under this provision could not be used in amanner resulting in changes in direct spending.  The 1997 Act further changed the dates by whichcertain taxes would be required to be deposited with the Treasury in fiscal year 1998.

**Description of Proposal**
	The proposal would clarify that the tax deposit delays included in the provisions affectingtransfers to the Highway Trust Fund, like the revenue transfers themselves, do not affect directspending from the Trust Fund.

**Effective Date**
	The proposal would be effective as if included in the 1997 Act.

**2.  Clarification of Mass Transit Account portions of highway motor fuels taxes (sec. 907 ofthe 1997 Act, and sec. 9503 of the Code)(13)**

**Present Law**

The 1997 Act provided for the transfer to the Highway Trust Fund of revenuesattributable to a General Fund fuels tax rate of 4.3 cents per gallon.  That Act further enactedreduced rates, based on energy content, for propane, liquefied natural tax, compressed naturalgas, and methanol produced from natural gas.  When deposited in the Highway Trust Fund,revenues from the taxes on each of these products are divided between the Trust Fund's HighwayAccount and the Mass Transit Account.  

**Description of Proposal**

	The proposal would clarify that the Mass Transit Account portion of the highway motorfuels taxes generally is 2.86 cents per gallon and that taxes on the four fuels eligible for reducedrates are divided between the Highway Account and the Mass Transit Account in the sameproportion as is the tax on gasoline.

**Effective Date**

	The proposal would be effective as if included in the 1997 Act.

**3.  Clarification of qualification for reduced rate of tax on certain hard ciders (section 908of the 1997 Act and section 5041 of the Code)**

**Present Law**

	Distilled spirits are taxed at a rate of $13.50 per proof gallon; beer is taxed at a rate of $18per barrel (approximately 58 cents per gallon); and still wines of 14 percent alcohol or less aretaxed at a rate of 1.07 per wine gallon.  The Code defines still wines as wines containing not morethan 0.392 gram of carbon dioxide per hundred milliliters of wine.  Higher rates of tax are appliedto wines with greater alcohol content, to sparkling wines (e.g., champagne), and to artificiallycarbonated wines.

	Certain small wineries may claim a credit against the excise tax on wine of 90 cents perwine gallon on the first 100,000 gallons of still wine produced annually (i.e., net tax rate of 17cents per wine gallon on wines with an alcohol content of 14 percent or less).  No credit isallowed on sparkling wines.  Certain small breweries pay a reduced tax of $7.00 per barrel(approximately 22.6 cents per gallon) on the first 50,000 barrels of beer produced annually.  

	Hard cider is a wine fermented solely from apples or apple concentrate and water,containing no other fruit product and containing at least one-half of one percent and less thanseven percent alcohol by volume.  The 1997 Act provided a lower excise tax rate of 22.6 centsper gallon on hard cider.  Qualifying small producers that produce 250,000 gallons or less of hardcider and other wines in a calendar year may claim a credit of 5.6 cents per wine gallon on the first100,000 gallons of hard cider produced.  This credit produces an effective tax rate of 17 cents pergallon, the same effective rate as that applied to small producers of still wines having an alcoholcontent of 14 percent or less.  This credit is phased out for production in excess of 100,000gallons but less than 250,000 gallons annually.  

**Description of the Proposal**

	The proposal would clarify that the 22.6-cents-per-gallon tax rate applies only to applecider that otherwise would be a still wine.

**Effective Date**

	The proposal would be effective as if included in the 1997 Act.

**4.  Combined employment tax reporting demonstration project (sec. 976 of the 1997 Actand sec. 6103 of the Code)**

**Present Law**

	Traditionally, Federal tax forms are filed with the Federal Government and State tax formsare filed with individual states. This necessitates duplication of items common to both returns. Some States have recently been working with the IRS to implement combined State and Federalreporting of certain types of items on one form as a way of reducing the burdens on taxpayers. The State of Montana and the IRS have cooperatively developed a system to combine State andFederal employment tax reporting on one form. The one form would contain exclusively Federaldata, exclusively State data, and information common to both: the taxpayer's name, address, TIN,and signature.

	The Internal Revenue Code prohibits disclosure of tax returns and return information,except to the extent specifically authorized by the Internal Revenue Code (sec. 6103). Unauthorized disclosure is a felony punishable by a fine not exceeding $5,000 or imprisonment  ofnot more than five years, or both (sec. 7213).  An action for civil damages also may be broughtfor unauthorized disclosure (sec. 7431).  No tax information may be furnished by the InternalRevenue Service ("IRS") to another agency unless the other agency establishes proceduressatisfactory to the IRS for safeguarding the tax information it receives (sec. 6103(p)).

	Implementation of the combined Montana-Federal employment tax reporting project hadbeen hindered because the IRS interprets section 6103 to apply that provision's restrictions ondisclosure to information common to both the State and Federal portions of the combined form,although these restrictions would not apply to the State with respect to the State's use of State-requested information if that information were supplied separately to both the State and the IRS.

	The 1997 Act permits implementation of a demonstration project to assess the feasibilityand desirability of expanding combined reporting in the future. There are several limitations on thedemonstration project. First, it is limited to the State of Montana and the IRS.  Second, it islimited to employment tax reporting. Third, it is limited to disclosure of  the name, address, TIN,and signature of the taxpayer, which is information common to both the Montana and Federalportions of the combined form.  Fourth, it is limited to a period of five years.

**Description of Proposal**

	The proposal would permit Montana to use this information as if it had collected itseparately by eliminating Federal penalties for disclosure of this information.  The proposal wouldalso correct a cross-reference to the provision.

**Effective Date**

	The proposal would be effective on the date of enactment of the 1997 Act (August 5,1997), and will expire on the date five years after the date of enactment of the 1997 Act.

**5.  Election for 1987 partnerships to continue exception from treatment of publicly tradedpartnerships as corporations (sec. 964 of the 1997 Act and sec. 7704 of the Code)**

**Present Law
**In general**

	In the case of an electing 1987 partnership that elects to be subject to a 3.5-percent tax ongross income from the active conduct of a trade or business, the general rule treating a publiclytraded partnership as a corporation does not apply.  The 3.5-percent tax was intended toapproximate the corporate tax the partnership would pay if it were treated as a corporation forFederal tax purposes.

**Tax on partnership**

	The 3.5-percent tax is imposed on the electing 1987 partnership under the provision (sec.7704(g)(3)).  The provision does not specifically make inapplicable, however, the general rule thata partnership as such is not subject to income tax, but rather, the partners are liable for the tax intheir separate or individual capacities (sec. 701).

**Estimated tax payments**

	The provision does not specifically make applicable the requirements for payment ofestimated tax that apply generally to payments of corporate tax.

**Description of Proposal
**Tax on partnership**

	The proposal would clarify that the general rule of section 701(a) that a partnership assuch is not subject to income tax, but rather, the partners are liable for the tax in their separate orindividual capacities does not apply to the payment of the 3.5-percent tax by the partnership. Thus, the proposal would clarify that the partnership pays the tax.

**Estimated tax payments**

	The proposal would make applicable to the 3.5-percent tax payable by an electing 1987partnership the requirements for payment of estimated tax that apply generally to payments ofcorporate tax.

**Effective Date
**Tax on partnership**

	The proposal would be effective as if enacted with the 1997 Act.

**Estimated tax payments**

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

**6.  Depreciation limitations for electric vehicles (sec. 971 of the Act and sec. 280F of theCode)**

**Present Law
	Annual depreciation deductions with respect to passenger automobiles are limited tospecified dollar amounts, indexed for inflation.  Any cost not recovered during the 6-yearrecovery period of such vehicles may be recovered during the years succeeding the recoveryperiod, subject to similar limitations. The recovery-period limitations are trebled for vehicles thatare propelled primarily by electricity.

**Description of Proposal**

	The depreciation limitations applicable to post-recovery periods would be trebled forvehicles that are propelled primarily by electricity.

**Effective Date**

	The proposal would be effective for property placed in service after August 5, 1997 andbefore January 1, 2005.

**7.  Modification of operation of elective carryback of existing net operating losses of theNational Railroad Passenger Corporation ("Amtrak") (sec. 977 of the 1997 Act)**

**Present Law**

	The 1997 Act provides elective procedures that allow Amtrak to consider the taxattributes of its predecessors (i.e., those railroads that were relieved of their responsibility toprovide intercity rail passenger service as a result of the Rail Passenger Service Act of 1970) inthe use of Amtrak's net operating losses.  The benefit allowable under these procedures is limitedto the least of: (1) 35 percent of Amtrak's existing qualified carryovers, (2) the net tax liability forthe carryback period, or (3) $2,323,000,000.  One half of the amount so calculated will be treatedas a payment of the tax imposed by chapter 1 of the Internal Revenue Code of 1986 for Amtrak'staxable year ending December 31, 1997, and a similar amount for Amtrak's taxable year endingDecember 31, 1998.

	The availability of the elective procedures is conditioned on Amtrak (1) agreeing to makepayments of one percent of the amount it receives to each of the non-Amtrak States to offsetcertain transportation related expenditures and (2) using the balance for certain qualifiedexpenses.  Non-Amtrak States are those States that are not receiving Amtrak service at any timeduring the period beginning on the date of enactment and ending on the date of payment.

**Description of Proposal
	The proposal would provide that a State would not lose its status as a non-Amtrak Statewith respect to any payment by reason of acquiring Amtrak service with any payment fromAmtrak under the 1997 Act provision.

**Effective Date**

	The proposal would be effective as if included in section 977 of the 1997 Act.

**I.  Amendments to Title X of the 1997Act Relating to Revenue-Raising Provisions**

**1.  Exception from constructive sales rules for certain debt positions****(sec. 1001(a) of the1997 Act and sec. 1259(b)(2) of the Code)**

**Present Law**

	A taxpayer is required to recognize gain (but not loss) upon entering into a constructivesale of an "appreciated financial position," which generally includes an appreciated position withrespect to any stock, debt instrument or partnership interest.  An exception is provided forpositions with respect to debt instruments that have an unconditionally payable principal amount,that are not convertible into the stock of the issuer or a related person, and the interest on whichis either fixed, payable at certain variable rates or based on certain interest payments on a pool ofmortgages.

**Description of Proposal**

	The proposal would clarify that, to qualify for the exception for positions with respect todebt instruments, the position would have to either itself meet the requirements as tounconditional principal amount, non-convertibility and interest terms or, alternatively, be a hedgeof a position meeting these requirements.  A hedge for this purpose would include any positionthat reduces the taxpayer's risk of interest rate or price changes or currency fluctuations withrespect to another position.

**Effective Date**

	The proposal would generally be effective for constructive sales entered into after June 8,1997.

**2.  Definition of forward contract under constructive sales rules (sec. 1001(a) of the 1997Act and sec. 1259(d)(1) of the Code)**

**Present Law**

	A constructive sale of an appreciated financial position generally results when the taxpayerenters into a forward contact to deliver the same or substantially identical property.  A forwardcontract for this purpose is defined as a contract that provides for delivery of a substantially fixedamount of property at a substantially fixed price.

**Description of Proposal**

	The proposal would clarify that the definition of a forward contract includes a contractthat provides for cash settlement with respect to a substantially fixed amount of property at asubstantially fixed price.

**Effective Date**

	The proposal would generally be effective for constructive sales entered into after June 8,1997.

**3.  Treatment of mark-to-market gains of electing traders (sec. 1001(b) of the 1997 Act andsec. 475(f)(1)(D) of the Code)**

**Present Law**

	Securities and commodities traders may elect application of the mark-to-marketaccounting rules.  Gain or loss recognized by an electing taxpayer under these rules is treated asordinary gain or loss.

	Under the Self-Employment Contributions Act ("SECA"), a tax is imposed on anindividual's net earnings from self-employment ("NESE").  Gain or loss from the sale or exchangeof a capital asset is excluded from NESE.  

	A publicly-traded partnership generally is treated as a corporation for Federal taxpurposes.  An exception to this rule applies if 90 percent or more of the partnership's grossincome consists of passive-type income, which includes gain from the sale or disposition of acapital asset.

**Description of Proposal**

	The proposal would clarify that gain or loss of a securities or commodities trader that istreated as ordinary solely by reason of election of mark-to-market treatment would not be treatedas other than gain or loss from a capital asset for purposes of determining  NESE for SECA taxpurposes, determining whether the passive-type income exception to the publicly-tradedpartnership rules is met or for purposes of any other Code provision specified by the TreasuryDepartment in regulations.

**Effective Date**

	The proposal would apply to taxable years of electing securities and commodities tradersending after the date of enactment of the 1997 Act.

**4.  Special effective date for constructive sale rules (sec. 1001(d) of the 1997 Act and sec. 1259 of the Code)**

**Present Law**

	The constructive sales rules contain a special effective date provision for decedents dyingafter June 8, 1997, if (1) a constructive sale of an appreciated financial position occurred beforesuch date, (2) the transaction remains open for not less than two years, (3) the transaction remainsopen at any time during the three years prior to the decedent's death, and (4) the transaction is notclosed within the 30-day period beginning on the date of enactment of the 1997 Act.  If  therequirements of the special effective date provision are met, both the appreciated financialposition and the transaction resulting in the constructive sale are generally treated as propertyconstituting rights to receive income in respect of a decedent under section 691.  However, gainwith respect to a position in a constructive sale transaction that accrues after the transaction isclosed is not included in income in respect of a decedent.

**Description of Proposal**

	The proposal would clarify the special effective date rule to provide that the rule does notapply if  the constructive sale transaction is closed at any time prior to the end of the 30th dayafter the date of enactment of the 1997 Act.  	

**Effective Date**

	The proposal would be effective for decedents dying after June 8, 1997.

**5.  Gain recognition for certain extraordinary dividends (sec. 1011 of the Act and sec. 1059of the Code)**

**Present Law**

	A corporate shareholder generally can deduct at least 70 percent of a dividend receivedfrom another corporation. This dividends received deduction is 80 percent if the corporateshareholder owns at least 20 percent of the distributing corporation and generally 100 percent ifthe shareholder owns at least 80 percent of the distributing corporation.

	Section 1059 of the Code requires a corporate shareholder that receives an "extraordinarydividend" to reduce the basis of the stock with respect to which the dividend was received by thenontaxed portion of the dividend.  Whether a dividend is "extraordinary" is determined, amongother things, by reference to the size of the dividend in relation to the adjusted basis of theshareholder's stock.  In addition, a dividend resulting from a non pro rata redemption or a partialliquidation is an extraordinary dividend.  Gain is recognized if the reduction in basis of stockexceeds the basis in the stock with respect to which an extraordinary dividend is received.

	The consolidated return regulations provide similar basis adjustment rules with respect todividends paid within a consolidated group of corporations.  These rules provide that a dividendpaid from one member of a group to its parent reduces the parent's basis in the stock of the payorand if such reduction exceeds the parent's basis, an "excess loss account" is created or increased. Except as provided in regulations, the extraordinary dividend provisions do not apply to result ina double reduction in basis in the case of distributions between members of an affiliated groupfiling consolidated returns or in the double inclusion of earnings and profits.

**Description of Proposal**

	The proposal would provide coordination between the basis adjustment rules of section1059 and the consolidated return regulations.  These rules generally would provide that, except asprovided in regulations, section 1059 will not cause current gain recognition to the extent that theconsolidated return regulations require the creation or increase of an excess loss account.

**Effective Date**

	The proposal generally would be effective for distributions after May 3, 1995.

**6.  Treatment of certain corporate distributions (sec. 1012 of the 1997 Act and secs. 355(e)(3)(A)(iv) and 358(c) of the Code)**

**Present Law**

	The 1997 Act (sec. 1012(a)) requires a distributing corporation ("distributing") torecognize corporate level gain on the distribution of stock of a controlled corporation("controlled") under section 355 of  the Code if, pursuant to a plan or series of relatedtransactions, one or more persons acquire a 50-percent or greater interest (defined as 50 percentor more of the voting power or value of the stock) of either the distributing or controlledcorporation (Code sec. 355(e)).  Certain transactions are excepted from the definition ofacquisition for this purpose, including, under section 355(e)(3)(A)(iv), the acquisition by a personof stock in a corporation if shareholders owning directly or indirectly stock possessing more than50 percent of the voting power and more than 50 percent of the value of the stock in distributingor any controlled corporation before such acquisition own directly or indirectly stock possessingsuch vote and value in such distributing or controlled corporation after such acquisition.(14)

	In the case of a 50-percent or more acquisition of either the distributing corporation or thecontrolled corporation, the amount of gain recognized is the amount that the distributingcorporation would have recognized had the stock of the controlled corporation been sold for fairmarket value on the date of the distribution.  The Statement of Managers states that noadjustment to the basis of the stock or assets of either corporation is allowed by reason of therecognition of the gain.(15)

	The 1997 Act (sec. 1012(b)(1)) also provides that, except as provided in regulations,section 355 shall not apply to the distribution of stock from one member of an affiliated group ofcorporations (as defined in section 1504(a)) to another member of such group (an intragroupspin-off) if such distribution is part of a such a plan or series of related transactions pursuant towhich one or more persons acquire stock representing a 50-percent or greater interest in adistributing or controlled corporation, determined after the application of the rules of section355(e). 

	In addition, the 1997 Act (sec. 1012(c)) provides that in the case of any distribution ofstock of one member of an affiliated group of corporations to another member under section 355,the Treasury Department has regulatory authority under section 358(c) to provide adjustments tothe basis of any stock in a corporation which is a member of such group, to reflect appropriatelythe proper treatment of such distribution.

	The 1997 Act also modified certain rules for determining control immediately after adistribution in the case of certain divisive transactions in which a controlled corporation isdistributed and the transaction meets the requirements of section 355.  In such cases, undersection 351 and modified section 368(a)(2)(H) with respect to reorganizations under section368(a)(1)(D), those shareholders receiving stock in the distributed corporation are treated as incontrol of the distributed corporation immediately after the distribution if they hold stockrepresenting a greater than 50 percent interest in the vote and value of stock of the distributedcorporation.

	The effective date (Act section 1012(d)(1)) states that the forgoing provisions of the 1997Act apply to distributions after April 16, 1997, pursuant to a plan (or series of relatedtransactions) which involves an acquisition occurring after such date (unless certain transitionprovisions apply).

**Description of Proposal**

**Acquisition of a 50-percent or greater interest**

	The proposal would clarify that the acquisitions described in Code section 355(e)(3)(A)are disregarded in determining whether there has been an acquisition of a 50-percent or greaterinterest in a corporation.  However, other transactions that are part of a plan or series of relatedtransactions could result in an acquisition of a 50-percent or greater interest.

	In the case of acquisitions under section 355(e)(3)(A)(iv), the proposal clarifies that theacquisition of stock in the distributing corporation or any controlled corporation is disregarded tothe extent that the percentage of stock owned directly or indirectly in such corporation by eachperson owning stock in such corporation immediately before the acquisition does not decrease.

Example: Shareholder A owns 10 percent of the vote and value of the stock ofcorporation D (which owns all of corporation C). There are nine other equal shareholders of D. A also owns 100 percent of the vote and value of the stock of unrelated corporation P.  Ddistributes C to all the shareholders of D.  Thereafter, pursuant to a plan or series of relatedtransactions,  D (worth 100x) merges with corporation P (worth 900x).  After the merger, each ofthe former shareholders of corporation D owns stock of the merged entity reflecting the vote andvalue attributable to that shareholder's respective 10 percent former stock ownership of D. Eachof  the former shareholders of D owns 1 percent of the stock of the merged corporation, exceptthat shareholder A (who owned 100 percent of corporation P and 10 percent of corporation Dbefore the merger) now owns 91 percent of the stock of the merged corporation.  In determiningwhether a 50-percent or greater interest in D has been acquired, the interest of each of thecontinuing shareholders is disregarded only to the extent there has been no decrease in suchshareholder's direct or indirect ownership. Thus, the 10 percent interest of A, and the 1 percentinterest of each of the nine other former shareholder of D, is not counted.  The remaining 81percent ownership of the merged corporation, representing a decrease of nine percent in theinterests of each of the nine former shareholders other than A, is counted in determining theextent of an acquisition. Therefore, a 50-percent or greater interest in D has been acquired.

**Treasury regulatory authority**

	The proposal would also clarify that the regulatory authority of the Treasury Departmentunder section 358(c) applies to distributions after April 16, 1997, without regard to whether adistribution involves a plan (or series of related transactions) which involves an acquisition.

As stated in the Conference Report to the Act, with respect to the Treasury Departmentregulatory authority under section 358(c) as applied to intragroup spin-off transactions that arenot part of a plan or series of related transactions that involve an acquisition of a 50-percent ofgreater interest under new section 355(f), it is expected that any Treasury regulations will beapplied prospectively, except in cases to prevent abuse. 

**Section 351(c) and section 368(a)(2)(H) "control immediately after" requirement**

	The proposal would clarify that in the case of certain divisive transactions in which acorporation contributes assets to a controlled corporation and then distributes the stock of thecontrolled corporation in a transaction that meets the requirements of section 355 (or so much ofsection 356 as relates to section 355),  the "control immediately after" requirement of section351(c) and section 368(a)(2)(H) shall be deemed satisfied.

**Effective Date**

	The proposal generally would be effective for distributions after April 16, 1997.

**7.  Certain preferred stock treated as "boot"--statute of limitations (sec. 1014 of the 1997Act and sec. 354(a) of the Code)**

**Present law**

	Under the 1997 Act, certain preferred stock received in otherwise tax-free transactions istreated as "other property."  Exchanges of stock in certain recapitalizations of family-ownedcorporations are excepted from this rule.  A family-owned corporation is defined as anycorporation if at least 50 percent of the total voting power and value of the stock of suchcorporation is owned by the same family for five years preceding the recapitalization.  In addition,a recapitalization does not qualify for the exception if the same family does not own 50 percent ofthe total voting power and value of the stock throughout the three-year period following therecapitalization. 

**Description of Proposal**

The proposal would provide that the statutory period for the assessment of any deficiencyattributable to a corporation failing to be a family-owned corporation shall not expire before theexpiration of three years after the date the Secretary of the Treasury is notified by the corporation(in such manner as the Secretary may prescribe) of such failure, and such deficiency may beassessed before the expiration of such three-year period notwithstanding the provisions of anyother law or rule of law which would otherwise prevent such assessment.

**Effective Date**

	The proposal would apply to transactions after June 8, 1997.

**8.  Certain preferred stock treated as "boot"--treatment of transferor (sec. 1014 of the 1997Act and sec. 351(g) of the Code)**

**Present Law**

	The 1997 Act amended section 351 of the Code to provide that in the case of a personwho transfers property to a controlled corporation and receives nonqualified preferred stock,section 351(b) will apply to such person.  Section 351(b) provides that if section 351(a) of theCode would apply to an exchange but for the fact that there is received, in addition to stockpermitted to be received under section 351(a), other property or money, then gain but no loss tosuch recipient shall be recognized.  The Statement of Managers to the 1997 Act states that ifnonqualified preferred stock is received, gain but not loss shall be recognized. 

**Description of Proposal**

	The proposal would clarify that section 351(b) applies to a transferor who transfersproperty in a section 351 exchange and receives nonqualified preferred stock in addition to stockthat is not treated as "other property" under that section.  Thus, if a transferor received onlynonqualified preferred stock but the transaction in the aggregate otherwise qualified as a section351 exchange, such a transferor would recognize loss and the basis of the nonqualified preferredstock and of the property in the hands of the transferee corporation would reflect the transactionin the same manner as if that particular transferor had received solely "other property" of anyother type.  As under the 1997 Act, the nonqualified preferred stock continues to be treated asstock received by a transferor for purposes of qualification of a transaction under section 351(a),unless and until regulations may provide otherwise. 

**Effective Date**

	The proposal would apply to transactions after June 8, 1997.

**9.  Application of section 304 to certain international transactions (sec. 1013 of the 1997 Actand sec. 304 of the Code)**

**Present Law
	Under section 304, if one corporation purchases stock of a related corporation, thetransaction generally is recharacterized as a redemption.  Under section 304(a), as amended by the1997 Act, to the extent that a section 304 transaction is treated as a distribution under section301, the transferor and the acquiring corporation are treated as if (1) the transferor hadtransferred the stock involved in the transaction to the acquiring corporation in exchange forstock of the acquiring corporation in a transaction to which section 351(a) applies, and (2) theacquiring corporation had then redeemed the stock it is treated as having issued.  In the case of asection 304 transaction, both the amount which is a dividend and the source of such dividend isdetermined as if the property were distributed by the acquiring corporation to the extent of itsearnings and profits and then by the issuing corporation to the extent of its earnings and profits(sec. 304(b)(2)).  Section 304(b)(5), as added by the 1997 Act, provides special rules that apply ifthe acquiring corporation in a section 304 transaction is a foreign corporation.  Under section304(b)(5), the earnings and profits of the acquiring corporation that are taken into account arelimited to the portion of such earnings and profits that (1) is attributable to stock of suchacquiring corporation held by a corporation or individual who is the transferor (or a personrelated thereto) and who is a U.S. shareholder (within the meaning of section 951(b)) of suchcorporation and (2) was accumulated during periods in which such stock was owned by suchperson while such acquiring corporation was a controlled foreign corporation.  For purposes ofthis rule, except as otherwise provided by the Secretary of the Treasury, the rules of section1248(d) (relating to certain exclusions from earnings and profits) apply.  The Secretary is toprescribe regulations as appropriate, including regulations determining the earnings and profitsthat are attributable to particular stock of the acquiring corporation.

	For foreign tax credit purposes, under section 902, a U.S. corporation that receives adividend from a foreign corporation in which it owns at least 10 percent of the voting stock istreated as if it had paid the foreign income taxes paid by the foreign corporation which areattributable to such dividend.  The Internal Revenue Service issued rulings providing that adomestic corporation that is a transferor in a section 304 transaction may compute foreign taxesdeemed paid under section 902 on the dividends from both a foreign acquiring corporation and aforeign issuing corporation. Rev. Rul. 92-86, 1992-2 C.B. 199; Rev. Rul. 91-5, 1991-1 C.B. 114. Both rulings involve section 304 transactions in which both the domestic transferor and theforeign acquiring corporation are wholly owned by a domestic parent corporation.

**Description of Proposal**

	The proposal would eliminate the cross-reference to section 1248(d) for purposes ofdetermining the earnings and profits to be taken into account under section 304(b)(5).  Instead,under the proposal, the direction to the Secretary to issue regulations would specifically includeregulations to prevent the multiple inclusion of an item of income and to provide appropriate basisadjustments.  The 1997 Act amendments to section 304, including the modifications under theproposal, are not intended to change the foreign tax credit results reached in Rev. Rul. 92-86 and91-5.

**Effective Date**

	The proposal generally would be effective for distributions or acquisitions after June 8,1997.

**10.  Establish IRS continuous levy and improve debt collection (secs. 1024, 1025, and 1026of the 1997 Act and secs. 6331 and 6334 of the Code)**

**Present Law**

	If any person is liable for any internal revenue tax and does not pay it within 10 days afternotice and demand by the IRS, the IRS may then collect the tax by levy upon all property andrights to property belonging to the person, unless there is an explicit statutory restriction on doingso.  A levy is the seizure of the person's property or rights to property.  A levy on salary andwages is continuous from the date it is first made until the date it is fully paid or becomesunenforceable.

	The 1997 Act provides that a continuous levy is also applicable to non-means testedrecurring Federal payments and specified wage replacement payments. 

**Explanation of Provision**

	The proposal would clarify that the IRS must approve the use of a continuous levy beforeit may take effect.

**Effective Date**

	The proposal would be effective for levies issued after the date of enactment of the 1997Act (August 5, 1997).

**11.  Clarification regarding aviation gasoline excise tax (sec. 1031 of the 1997 Act, and sec.6421(f) of the Code)**

**Present Law
	Before enactment of the 1997 Act, aviation gasoline was subject to a 19.3-cents-per-gallon tax rate, with 15 cents per gallon being deposited in the Airport and Airway Trust Fundand 4.3 cents per gallon being retained in the General Fund.  The 1997 Act extended the 15-cents-per-gallon rate for 10 years, through September 30, 2007, and expanded deposits to the TrustFund to include revenues from the 4.3-cents-per-gallon rate.  The tax does not apply to fuel usedin flight segments outside the United States or to flight segments from the United States toforeign countries.

**Description of Proposal**

	The proposal would clarify the application of the gasoline tax refund provisions to aviationgasoline used in flight segments outside the United States and to flight segments from the UnitedStates to foreign countries.

**Effective Date**

	The proposal would be effective as if included in the 1997 Act.

**12.  Clarification of requirement that registered fuel terminals offer dyed fuel (sec. 1032 ofthe 1997 Act and sec. 4101 of the Code)(16)**

**Present Law
The 1997 Act provides that fuel terminals are eligible to register to handle non-tax-paiddiesel fuel and kerosene only if the terminal operator offers both undyed (taxable) and dyed(nontaxable) fuel.  

**Description of Proposal**
	The proposal would clarify that the Code requires terminals eligible to handle non-tax-paiddiesel to offer dyed diesel fuel and terminals eligible to handle non-tax-paid kerosene (includingdiesel fuel #1 and kerosene-type aviation fuel) to offer dyed kerosene.  The proposal does notrequire that a terminal offer for sale kerosene as a condition of receiving diesel fuel on a non-tax-paid basis.  Similarly, the proposal does not require terminals that sell only kerosene to offer dieselfuel as a condition of receiving non-tax-paid kerosene.

**Effective Date**
	The proposal would be effective as if included in the 1997 Act.

**13.  Clarification of treatment of prepaid telephone cards (sec. 1034 of the 1997 Act andsec. 4251 of the Code)**

**Present Law**

	A 3-percent excise tax is imposed on amounts paid for local and toll (long-distance)telephone service and teletypewriter exchange service.  The tax is collected by the provider of theservice from the consumer.  In the case of so-called "prepaid telephone cards" the tax is treated aspaid when the card is transferred by any telecommunications carrier to any person who is not atelecommunications carrier.

	A "prepaid telephone card" is defined as any card or other similar arrangement whichpermits its holder to obtain communications services and pay for such services in advance.

**Description of the Proposal**

	The proposal would clarify that payment to a communications service provider from athird party such as a joint venture credit card company is treated as payment made by the holderof the credit card to obtain communication services and the tax is treated as paid in a mannersimilar to that applied to prepaid telephone cards.

**Effective Date**

	The proposal would be effective as if included in the Taxpayer Relief Act of 1997.

**14.  Modify UBIT rules applicable to second-tier subsidiaries (sec. 1041 of the 1997 Act andsec. 512(b)(13) of the Code)**

**Present Law**

	In general, interest, rents, royalties and annuities are excluded from the unrelated businessincome ("UBI") of tax-exempt organizations.  However, section 512(b)(13) treats otherwiseexcluded rent, royalty, annuity, and interest income as UBI if such income is received from ataxable or tax-exempt subsidiary that is controlled by the parent tax-exempt organization.  

	Under the provision, interest, rent, annuity, or royalty payments made by a controlledentity to a tax-exempt organization are subject to the unrelated business income tax to the extentthe payment reduces the net unrelated income (or increases any net unrelated loss) of thecontrolled entity.  In this regard, section 512(b)(13)(B)(i)(I) cross references a non-existent Codesection.

	The provision generally applies to taxable years beginning after the date of enactment. However, the provision does not apply to payments made during the first two taxable yearsbeginning on or after the date of enactment if such payments are made pursuant to a bindingwritten contract in effect as of June 8, 1997, and at all times thereafter before such payment.

**Description of Proposal**

	The proposal would clarify that rent, royalty, annuity, and interest income that wouldotherwise be excluded from UBI is included in UBI under section 512(b)(13) if such income isderived from a taxable or tax-exempt subsidiary that is controlled by the parent tax-exemptorganization.  The proposal further would clarify that the provision does not apply to any paymentmade during the first two taxable years beginning on or after the date of enactment if suchpayment is made pursuant to a binding written contract in effect on June 8, 1997, and at all timesthereafter before such payment (but not pursuant to any contract provision that permits optionalaccelerated payments).

**Effective Date**

	The proposal would be effective as of August 5, 1997, the date of enactment of the 1997Act.

**15.  Clarification of provision expanding the limitations on deductibility of premiums andinterest with respect to life insurance, endowment and annuity contracts (sec. 1084 of the1997 Act and sec. 264 of the Code)**

**Present Law
**Master contracts**

	The 1997 Act provided limitations on the deductibility of interest and premiums withrespect to life insurance, endowment and annuity contracts.  Under the pro rata interestdisallowance provision added by the Act, an exception is provided for any policy or contractowned by an entity engaged in a trade or business, covering an individual who is an employee,officer or director of the trade or business at the time first covered.  The exception applies to anypolicy or contract owned by an entity engaged in a trade or business, which covers one individualwho (at the time first insured under the policy or contract) is (1) a 20-percent owner of the entity,or (2) an individual (who is not a 20-percent owner) who is an officer, director or employee of thetrade or business.(17)  The provision is silent as to the treatment of coverage of such an individualunder a master contract.

**Reporting**

	The provision does not apply to any policy or contract held by a natural person; however,if a trade or business is directly or indirectly the beneficiary under any policy or contract, thepolicy or contract is treated as held by the trade or business and not by a natural person.  Inaddition, the provision includes a reporting requirement.  Specifically, the provision provides thatthe Treasury Secretary shall require such reporting from policyholders and issuers as is necessaryto carry out the rule applicable when the trade or business is directly or indirectly the beneficiaryunder any policy or contract held by a natural person. Any report required under this reportingrequirement is treated as a statement referred to in Code section 6724(d)(1) (relating toinformation returns).  The provision does not specifically refer to Code section 6724(d)(2)(relating to payee statements).

**Description of Proposals
**Master contracts**

	The proposal would clarify 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 would 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 would be 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.

**Reporting**

	The proposal would clarify that the required reporting to the Treasury Secretary is aninformation return (within meaning of sec. 6724(d)(1)), and any reporting required to be made toany other person is a payee statement (within the meaning of sec. 6724(d)(2)).  Thus, the $50-per-report penalty imposed under sections 6722 and 6723 of the Code for failure to file or providesuch an information return or payee statement would apply.  It would be clarified that theTreasury Secretary may require reporting by the issuer or policyholder of any relevant informationeither by regulations or by any other appropriate guidance (including but not limited to publicationof a form).

**Effective Date
	The proposals would be effective as if included in the 1997 Act.

**16.  Clarification of allocation of basis of properties distributed to a partner by apartnership (sec. 1061 of the 1997 Act and sec. 732(c) of the Code)**

**Present Law
	Present law, as amended by the 1997 Act, provides rules for allocating basis to property inthe hands of a partner that receives a distribution from a partnership.  Under these rules, basis isfirst allocated to unrealized receivables and inventory items in an amount equal to thepartnership's adjusted basis in each property.  If the basis to be allocated is less than the sum ofthe adjusted bases of the properties in the hands of the partnership, then, to the extent a decreaseis required to make the total adjusted bases of the properties equal the basis to be allocated, thedecrease is allocated (as described below) for adjustments that are decreases.  To the extent ofany basis not allocated to inventory and unrealized receivables under the above rules, basis isallocated to other distributed properties, first to the extent of each distributed property's adjustedbasis to the partnership.  Any remaining basis adjustment, if an increase, is allocated amongproperties with unrealized appreciation in proportion to their respective amounts of unrealizedappreciation (to the extent of each property's appreciation), and then in proportion to theirrespective fair market values.  If the remaining basis adjustment is a decrease, it is allocatedamong properties with unrealized depreciation in proportion to their respective amounts ofunrealized depreciation (to the extent of each property's depreciation), and then in proportion totheir respective adjusted bases (taking into account the adjustments already made).

	For purposes of these rules, "unrealized receivables" has the meaning set forth in section751(c) (as provided in sec. 732(c)(1)(A)(i)).  Section 751(c) provides that the term "unrealizedreceivables" includes certain accrued but unreported income.  In addition, the last two sentencesof section 751(c) provide that for purposes of certain specified partnership provisions (sections731, 741 and 751), the term "unrealized receivables" includes certain property the sale of whichwill give rise to ordinary income (for example, depreciation recapture under sections 1245 or1250), but only to the extent of the amount that would be treated as ordinary income on a sale ofthat property at fair market value.

**Description of Proposal
	The proposal would clarify that for purposes of the allocation rules of section 732(c),"unrealized receivables" has the meaning in section 751(c) including the last two sentences ofsection 751(c), relating to items of property that give rise to ordinary income.  Thus, in applyingthe allocation rules of section 732(c) to property listed in the last two sentences of section 751(c),such as property giving rise to potential depreciation recapture, the amount of unrealizedappreciation in any such property would not include any amount that would be treated as ordinaryincome if the property were sold at fair market value, because such amount would be treated as aseparate asset for purposes of the basis allocation rules.(18)

	For example, assume that a partnership has 3 partners, A, C and D.  The partnership has 6assets.  Three are capital assets each with adjusted basis equal to fair market value of $20,000. The other three are depreciable equipment each with adjusted basis of $5,000 and fair marketvalue of $30,000.  Each of the pieces of equipment would have $25,000 of depreciation recaptureif sold by the partnership for its $30,000 value.  A has a basis in its partnership interest of$60,000.  Assume that one of the capital assets and one of the pieces of equipment is distributedto A in liquidation of its interest.  A would be treated as receiving three assets: (1) depreciationrecapture (an unrealized receivable) with a basis to the partnership of zero and a value of $25,000;(2) a piece of equipment with a basis to the partnership of $5,000 and a value of $5,000 (its$30,000 value reduced by the $25,000 of depreciation recapture); and (3) a capital asset with abasis to the partnership of $20,000 and a value of $20,000.

	Under the provision, as clarified by the technical correction, A's $60,000 basis in itspartnership interest would be allocated as follows.  First, basis would be allocated to thedepreciation recapture, an unrealized receivable, in an amount equal to the partnership's adjustedbasis in it, or zero (sec. 732(c)(1)(A)(i)).  Then basis would be allocated to the extent of each ofthe other distributed properties' adjusted basis to the partnership, or $5,000 to the equipment (notincluding the depreciation recapture), and $20,000 to the capital asset.  A's remaining $35,000 ofbasis would be allocated next among properties, if any, with unrealized appreciation in proportionto their respective amounts of unrealized appreciation (to the extent of each property'sappreciation), but neither of the distributed properties to which basis may be allocated hasunrealized appreciation.  Basis is then allocated then in proportion to the properties' respectivefair market values ($5,000 for the equipment and $20,000 for the capital asset).  Thus, of theremaining $35,000, $7,000 is allocated to the equipment, so that its total basis in the partner'shands is $12,000; and $28,000 is allocated to the capital asset, so that its total basis in thepartner's hands is $48,000.

**Effective Date
	The proposal would be effective as if enacted with the 1997 Act.

**17.  Clarification to the definition of modified adjusted gross income for purposes of theearned income credit phaseout (sec. 1085(d) of the 1997 Act and sec. 32(c) of the Code)**

**Present Law**

	The earned income credit ("EIC") is phased out above certain income levels.  Forindividuals with earned income (or modified adjusted gross income ("modified AGI"), if greater)in excess of the beginning of the phaseout range, the maximum credit amount is reduced by thephaseout rate multiplied by the amount of earned income (or modified AGI, if greater) in excessof the beginning of the phaseout range.  For individuals with earned income (or modified AGI, ifgreater) in excess of the end of the phaseout range, no credit is allowed.  The definition ofmodified AGI used for the phase out of the earned income credit is the sum of: (1) AGI withcertain losses disregarded, and (2) certain nontaxable amounts not generally included in AGI.  Thelosses disregarded are: (1) net capital losses (if greater than zero); (2) net losses from trusts andestates; (3) net losses from nonbusiness rents and royalties; (4) 75 percent of the net losses frombusiness, computed separately with respect to sole proprietorships (other than in farming), soleproprietorships in farming, and other businesses.(19)  The nontaxable amounts included in modifiedAGI which are generally not included in AGI are: (1) tax-exempt interest; and (2) nontaxabledistributions from pensions, annuities, and individual retirement arrangements (but only if notrolled over into similar vehicles during the applicable rollover period). 

**Description of Proposal**

	The proposal would clarify that the two nontaxable amounts that are added to adjustedgross income to compute modified AGI for purposes of the EIC phaseout are additions toadjusted gross income and not disregarded losses.

**Effective Date**

	The proposal would be effective for taxable years beginning after December 31, 1997.

**J.  Amendments to Title XI of the 1997 Act Relating to Foreign Provisions**

**1.  Application of attribution rules under PFIC provisions (sec. 1121 of the 1997 Act andsec. 1298 of the Code)**

**Present Law**

	Special attribution rules apply to the extent that the effect is to treat stock of a passiveforeign investment company ("PFIC") as owned by a U.S. person.  In general, if 50 percent ormore in value of the stock of a corporation is owned (directly or indirectly) by or for any person,such person is considered as owning a proportionate part of the stock owned directly or indirectlyby or for such corporation, determined based on the person's proportionate interest in the valueof such corporation's stock.  However, this 50-percent limitation does not apply in the case of acorporation that is a PFIC.  Accordingly, a person that is a shareholder of a PFIC is considered asowning a proportionate part of the stock owned directly or indirectly by or for such PFIC,without regard to whether such shareholder owns at least 50 percent of the PFIC's stock byvalue.

	A corporation is not treated as a PFIC with respect to a shareholder during the qualifiedportion of the shareholder's holding period for the stock of such corporation.  The qualifiedportion of the shareholder's holding period generally is the portion of such period which is afterthe effective date of the 1997 Act and during which the shareholder is a United States shareholder(as defined in sec. 951(b)) and the corporation is a controlled foreign corporation.

	If a corporation is not treated as a PFIC with respect to a shareholder for the qualifiedportion of such shareholder's holding period, it is unclear whether the attribution rules that applywith respect to stock owned by or for such corporation apply without regard to the requirementthat the shareholder own 50 percent or more of the corporation's stock.

**Description of Proposal**

	The proposal would clarify that the attribution rules apply without regard to the provisionthat treats a corporation as a non-PFIC with respect to a shareholder for the qualified portion ofthe shareholder's holding period.  Accordingly, stock owned directly or indirectly by or for acorporation that is not treated as a PFIC for the qualified portion of the shareholder's holdingperiod nevertheless will be attributed to such shareholder, regardless of the shareholder'sownership percentage of such corporation.

**Effective Date**

	The proposal would be effective for taxable years of U.S. persons beginning afterDecember 31, 1997 and taxable years of foreign corporations ending with or within such taxableyears of U.S. persons.

**2.  Treatment of PFIC option holders (sec. 1121 of the 1997 Act and secs. 1297 and 1298 ofthe Code)**

**Present Law**

	Under the provisions of subpart F, a controlled foreign corporation (a "CFC") is definedgenerally as any foreign corporation if U.S. persons own more than 50 percent of thecorporation's stock (measured by vote or value), taking into account only those U.S. persons thatown at least 10 percent of the stock (measured by vote only) (sec. 957).  Stock ownershipincludes not only stock owned directly, but also stock owned indirectly through a foreign entity orconstructively (sec. 958).  Pursuant to the constructive ownership rules, a person that has anoption to acquire stock generally is treated as owning such stock (secs. 958(b) and 318(a)(4)).

	The U.S. 10-percent shareholders of a CFC are subject to current U.S. tax on their prorata shares of certain income of the CFC and their pro rata shares of the CFC's earnings investedin certain U.S. property (sec. 951).  For purposes of determining the U.S. shareholder's includiblepro rata share of the CFC's income and earnings, only stock held directly or indirectly through aforeign entity (and not stock held constructively) is taken into account (secs. 951(b) and 958(a)).

	A foreign corporation is a passive foreign investment company (a "PFIC") if it satisfies apassive income test or a passive assets test for the taxable year (sec. 1297).  A U.S. shareholder ofa PFIC generally is subject to U.S. tax, plus an interest charge, on distributions from a PFIC andgain realized upon a disposition of PFIC stock (sec. 1291).  Alternatively, the U.S. shareholdermay elect either to be subject to current U.S. tax on the shareholder's share of the PFIC'searnings or, in the case of PFIC stock that is marketable, to mark to market the PFIC stock (secs.1293 and 1296).  For purposes of the PFIC provisions, constructive ownership rules apply (sec.1298(a)).  Under these rules, an option to acquire stock is treated as stock for purposes ofapplying the interest charge regime to a disposition of such option, and the holding period forstock acquired pursuant to the exercise of an option includes the holding period for such option(sec. 1298(a)(4) and prop. Treas. reg. sec. 1.1291-1(d) and (h)(3)).

	A corporation that is a CFC is also a PFIC if it meets the passive income test or thepassive assets test.  Under section 1297(e), as added by the 1997 Act, a corporation is not treatedas a PFIC with respect to a shareholder during the period after December 31, 1997 in which thecorporation is a CFC and the shareholder is a U.S. shareholder (within the meaning of section951(b)) thereof.  Under this rule eliminating the overlap between the PFIC and CFC provisions, ashareholder that is subject to the subpart F rules with respect to a corporation is not also subjectto the PFIC rules with respect to such corporation.

**Description of Proposal**

	Under the proposal, the elimination of the overlap between the PFIC and the CFCprovisions would not apply to a U.S. person with respect to PFIC stock that such person istreated as owning by reason of an option to acquire such stock.  Accordingly, for example, thePFIC rules would continue to apply to a U.S. person that holds only an option on stock of acorporation that is a CFC because such person does not own stock of such corporation directly orindirectly through a foreign entity and therefore is not subject to the current inclusion rules ofsubpart F with respect to such corporation.

**Effective Date**

	The proposal would be effective for taxable years of U.S. persons beginning afterDecember 31, 1997 and taxable years of foreign corporations ending with or within such taxableyears of U.S. persons.

**3.  Application of PFIC mark-to-market rules to RICs (sec. 1122 of the 1997 Act and sec.1296 of the Code)**

**Present Law**

	Under section 1296, as added by the 1997 Act, a shareholder of a passive foreigninvestment company (a "PFIC") may make a mark-to-market election with respect to the stock ofthe PFIC, provided that such stock is marketable.  Under this election, the shareholder includes inincome each year an amount equal to the excess, if any, of the fair market value of the PFIC stockas of the close of the taxable year over the shareholder's adjusted basis in such stock.  Theshareholder is allowed a deduction for the excess, if any, of the shareholder's adjusted basis in thePFIC stock over its fair market value as of the close of the taxable year, but only to the extent ofany net mark-to-market gains with respect to such stock included by the shareholder undersection 1296 for prior years.

	The mark-to-market election of section 1296 is effective for taxable years of U.S. personsbeginning after December 31, 1997 and taxable years of foreign corporations ending with orwithin such taxable years of U.S. persons.  Prior to the enactment of section 1296, a proposedTreasury regulation provided for a mark-to-market election with respect to PFIC stock held bycertain regulated investment companies ("RICs") (prop. Treas. reg. sec. 1.1291-8).

	Section 1296(j) provides rules applicable in the case of a shareholder that makes a mark-to-market election under section 1296 later than the beginning of the shareholder's holding periodfor the PFIC stock.  Special rules apply in the case of a RIC that makes such a mark-to-marketelection under section 1296 with respect to PFIC stock that the RIC had previously marked tomarket under the proposed Treasury regulation.

**Description of Proposal**

	Under the proposal, for purposes of determining allowable deductions for any excess ofthe shareholder's adjusted basis in PFIC stock over the fair market value of the stock as of theclose of the taxable year, deductions would be allowed to the extent not only of prior mark-to-market inclusions under section 1296 but also of prior mark-to-market inclusions under theproposed Treasury regulation applicable to a RIC that holds stock in a PFIC.

**Effective Date**

	The proposal would be effective for taxable years of U.S. persons beginning afterDecember 31, 1997 and taxable years of foreign corporations ending with or within such taxableyears of U.S. persons.

**4.  Interaction between the PFIC provisions and other mark-to-market rules (sec. 1122 ofthe 1997 Act and secs. 1291 and 1296 of the Code)**

**Present Law
	A U.S. shareholder of a passive foreign investment company (a "PFIC") generally issubject to U.S. tax, plus an interest charge, on distributions from a PFIC and gain realized upon adisposition of PFIC stock (sec. 1291).  As an alternative to this interest charge regime, the U.S.shareholder may elect to be subject to current U.S. tax on the shareholder's share of the PFIC'searnings (sec. 1293).  Section 1296, as added by the 1997 Act, provides another alternativeavailable in the case of a PFIC the stock of which is marketable; under section 1296, a U.S.shareholder of a PFIC may make a mark-to-market election with respect to the stock of the PFIC.

	The interest charge regime generally does not apply to distributions from, and dispositionsof stock of, a PFIC for which the U.S. shareholder has made either a mark-to-market electionunder section 1296 or an election to include the PFIC's earnings in income currently (sec.1291(d)(1)).  However, special coordination rules provide for limited application of the interestcharge regime in the case of a U.S. shareholder that makes a mark-to-market election undersection 1296 later than the beginning of the shareholder's holding period for the PFIC stock (sec.1296(j)).

	Under section 475(a), a dealer in securities is required to mark to market certain securitiesheld by the dealer.  Under section 475(f), as added by the 1997 Act, a trader in securities mayelect to mark to market securities held in connection with the person's trade or business as atrader in securities.  Other provisions similarly allow stock to be marked to market (e.g., sec.1092(b)(1) and temp. Treas. reg. Sec. 1.1092-4T).

**Description of Proposal**

	Under the proposal, the interest charge regime generally would not apply to distributionsfrom, and dispositions of stock of, a PFIC where the U.S. shareholder has marked to market suchstock under section 475 or any other provision (in the same manner that such regime does notapply where the shareholder has marked to market such stock under section 1296).  In addition,under the proposal, coordination rules like those provided in section 1296(j) would apply in thecase of a U.S. shareholder that marks to market PFIC stock under section 475 or any otherprovision later than the beginning of the shareholder's holding period for the PFIC stock.

**Effective Date**

	The proposal would be effective for taxable years of U.S. persons beginning afterDecember 31, 1997 and taxable years of foreign corporations ending with or within such taxableyears of U.S. persons.  No inference would be intended regarding the treatment of PFIC stockthat was marked to market prior to the effective date.

**5.  Application of foreign tax credit holding period rule to RICs (sec. 1053 of the 1997 Actand secs. 853 and 901 of the Code)**

**Present Law
	Section 901(k), as added by the 1997 Act, generally imposes a holding period requirementfor claiming foreign tax credits with respect to dividends.  Under section 901(k), foreign taxcredits with respect to a dividend from a foreign corporation or a regulated investment company(a "RIC") are disallowed if the shareholder has not held the stock for more than 15 days in thecase of common stock or more than 45 days in the case of preferred stock.  This disallowanceapplies both to foreign tax credits for foreign withholding taxes that are paid on the dividendwhere the dividend-paying stock is not held for the required period and to indirect foreign taxcredits for taxes paid by a lower-tier foreign corporation or a RIC where any of the stock in therequired chain of ownership is not held for the required period.  Foreign taxes for which creditsare disallowed under section 901(k) may be deducted.

	Under section 853, a RIC may elect to flow through to its shareholders the foreign taxcredits for foreign taxes paid by the RIC.  Under this election, the RIC is not entitled to adeduction or credit for foreign taxes paid; the shareholders of an electing RIC are treated ashaving paid their proportionate shares of the foreign taxes paid by the RIC.  Accordingly, foreigntax credits are claimed at the shareholder level and not at the RIC level.

**Description of Proposal**

	Under the proposal, the flow-through election of section 853 would not apply to anyforeign taxes paid by the RIC for which a credit is disallowed under section 901(k) because theRIC did not satisfy the applicable holding period.  Accordingly, such taxes would be deductible atthe RIC level.  The election of section 853 would apply only to foreign taxes with respect towhich the RIC has satisfied any applicable holding period requirement.

**Effective Date**

	The proposal would be effective for dividends paid or accrued more than 30 days after thedate of enactment of the 1997 Act.

**K.  Amendments to Title XII of the 1997 Act Relating to Simplification Provisions**

**1.  Travel expenses of Federal employees participating in a Federal criminal investigation (sec. 1204 of the 1997 Act and sec. 162 of the Code)**

**Present Law**

	Unreimbursed ordinary and necessary travel expenses paid or incurred by an individual inconnection with temporary employment away from home (e.g., transportation costs and the costof meals and lodging) are generally deductible, subject to the two-percent floor on miscellaneousitemized deductions.  Travel expenses paid or incurred in connection with indefinite employmentaway from home, however, are not deductible.  A taxpayer's employment away from home in asingle location is indefinite rather than temporary if it lasts for one year or more; thus, nodeduction is permitted for travel expenses paid or incurred in connection with such employment(sec. 162(a)).  If a taxpayer's employment away from home in a single location lasts for less thanone year, whether such employment is temporary or indefinite is determined on the basis of thefacts and circumstances.

	The 1997 Act provided that the one-year limitation with respect to deductibility ofexpenses while temporarily away from home does not include any period during which a Federalemployee is certified by the Attorney General (or the Attorney General's designee) as traveling onbehalf of the Federal Government in a temporary duty status to investigate or provide supportservices to the investigation of a Federal crime.  Thus, expenses for these individuals during theseperiods are fully deductible, regardless of the length of the period for which certification is given(provided that the other requirements for deductibility are satisfied).

**Description of Proposal**

	The proposal would clarify that prosecuting a Federal crime or providing support servicesto the prosecution of a Federal crime is considered part of investigating a Federal crime.

**Effective Date**

	The proposal would be effective for amounts paid or incurred with respect to taxableyears ending after the date of enactment of the 1997 Act.

**2.  Effective date for provisions relating to electing large partnerships, partnership returnsrequired on magnetic media, and treatment of partnership items of individual retirementarrangements (sec. 1226 of the 1997 Act)**

**Present Law
	Rules for simplified flowthrough and simplified audit procedures for electing largepartnerships, as well as a March 15 due date for furnishing information to partners of an electinglarge partnership, were added to present law by the 1997 Act.  The 1997 Act also added a ruleproviding that partnership returns are required on magnetic media, and modified the treatment ofpartnership items of individual retirement arrangements.  The 1997 Act statement of managersprovided that these provisions apply to partnership taxable years beginning after December 31,1997.  The statute provided that the rules for simplified flowthrough for electing largepartnerships apply to partnership taxable years beginning after December 31, 1997 (Act sec.1221(c)), although the statute also provided that all the provisions apply to partnership taxableyears ending on or after December 31, 1997 (Act sec. 1226).

**Description of Proposal
	The proposal would provide that these provisions apply to partnership taxable yearsbeginning after December 31, 1997.

**Effective Date
	The proposal would be effective as if enacted in the 1997 Act.

**3.  Modification of distribution rules for REITs (sec. 1256 of the 1997 Act and sec. 857 ofthe Code)**

**Present Law**

	In general, a real estate investment trust ("REIT") is an entity that receives most of itsincome from passive real estate investments and meets certain other requirements.  A REITreceives conduit treatment (i.e., one level of tax) for income distributed to its shareholders.  AREIT generally must distribute 95 percent of its earnings (sec. 857(a)(1)).  An entity loses itsstatus as a REIT if it retains non-REIT earnings and profits (sec. 857(a)(2)).  A REITsimplification provision in the 1997 Act provides that any distribution from a REIT will bedeemed to first come from the earliest earnings and profits of the entity.  As a result, in the case ofa REIT with accumulated REIT earnings and profits that inherits subsequently earned non-REITearnings and profits (e.g., by way of merger with a C corporation), that the entity must distributeboth the accumulated REIT earnings and profits as well as the inherited non-REIT earnings andprofits under the 1997 Act provision in order to retain its REIT status.  

**Description of Proposal
	The proposal would amend the simplification provision to provide that any distributionfrom a REIT will be deemed to first come from non-REIT earnings and profits.  The proposalwould not change the requirement that a REIT must distribute 95 percent of its REIT earnings.

**Effective Date**

	The proposal would be effective for taxable years beginning after August 5, 1997.

**L.  Amendments to Title XIII of the 1997 Act Relating to Estate, Gift and Trust Simplification**

**1.  Clarification of treatment of revocable trusts for purposes of the generation-skippingtransfer tax (sec. 1305 of the Act and secs. 2652 and 2654 of the Code)**

**Present Law**

	The 1997 Act provided an irrevocable election to treat a qualified revocable trust as partof the decedent's estate for Federal income tax purposes. For this purpose, a qualified revocabletrust is any trust (or portion thereof) which was treated as owned by the decedent with respect towhom the election is being made, by reason of a power in the grantor (i.e., trusts that are treatedas owned by the decedent solely by reason of a power in a nonadverse party would not qualify).  A conforming change was also made to section 2652(b) for generation-skipping tax purposes.

**Description of Proposal**

	The proposal would clarify that the election to treat a qualified revocable trust as part ofthe decedent's estate would apply for generation-skipping tax purposes only with respect to theapplication of section 2654(b)(describing when a single trust may be treated as two or moretrusts).  The election would have no other effect for generation-skipping tax purposes.

**Effective Date**

	The proposal would apply to decedents dying after the date of enactment of the 1997 Act.

**2.  Provision of regulatory authority for simplified reporting of funeral trusts terminatedduring the taxable year (sec. 1309 of the Act and sec. 685(f) of the Code)**

**Present Law**

	The 1997 Act provided an election which allows the trustee of a qualified pre-need funeraltrust to elect special tax treatment for such a trust, to the extent the trust would otherwise betreated as a grantor trust.  As part of this provision, the Secretary of the Treasury was grantedregulatory authority to prescribe rules for simplified reporting of all trusts having a single trustee.

**Description of Proposal**

	The proposal would extend the Secretary's regulatory authority to include rules providingfor the inclusion of trusts terminated during the year (e.g., in the event of the death of thebeneficiary) in the simplified reporting.

**Effective Date**

	The proposal would apply to decedents dying after the date of enactment of the 1997 Act.

**M.  Amendment to Title XV of the 1997 Act Relating to Pensions and Employee Benefits**

**1.  Treatment of certain disability payments to public safety employees (sec. 1529 of the Actand sec. 104 of the Code)**

**Present Law**

	Under present law, certain payments made on behalf of full-time employees of any policeor fire department organized and operated by a State (or any political subdivision, agency, orinstrumentality thereof) are excludable from income.  This treatment applies to payments made onaccount of heart disease or hypertension of the employee and that were received in 1989, 1990, or1991 pursuant to a State law as amended on May 19, 1992, which irrebuttably presumed thatheart disease and hypertension are work-related illnesses (but only for employees separating fromservice before July 1, 1992).  Claims for refund or credit for overpayments resulting from theprovision may be filed up to 1 year after August 5, 1997, without regard to the otherwiseapplicable statute of limitations.

**Description of Proposal**

	In order to address problems taxpayers are encountering with the IRS in seeking refundsunder the present-law provision, the proposal would clarify the scope of the provision.

	The proposal would provide that payments made on account of heart disease orhypertension of the employee and that were received in 1989, 1990, or 1991 pursuant to a Statelaw as described under present law, or received under any other statute, ordinance, laboragreement, or similar provision as a disability pension payment or in the nature of a disabilitypension payment attributable to employment as a police officer or as a fireman would beexcludable from income.

**Effective Date**

	The proposal would be effective as if included in the Taxpayer Relief Act.

**N.  Amendments to Title XVI of the 1997 Act Relating to Technical Corrections**

**1.  Application of requirements for SIMPLE IRAs in the case of mergers and acquisitions (sec. 1601 of the 1997 Act and sec. 408(p)(2) of the Code)**

**Present Law
If an employer maintains a qualified plan and a SIMPLE IRA in the same year due to anacquisition, disposition or similar transaction the SIMPLE IRA is treated as a qualified salaryreduction arrangement for the year of the transaction and the following calendar year providedrules similar to the special coverage rules of section 410(b)(6)(C) apply. There is a similarprovision with respect to an employer who, because of an acquisition, disposition or similartransaction, fails to be an eligible employer because such employer employs more than 100employees. In this situation, the employer is treated as an eligible employer for two yearsfollowing the transaction provided rules similar to the coverage rules of section 410(b)(6)(C)(i)apply. 

**Description of Proposal**

The proposal would conform the treatment applicable to SIMPLE IRAs upon acquisition,disposition or similar transaction for purposes of (1) the 100 employee limit, (2) the exclusive planrequirement, and (3) the coverage rules for participation. In the event of such a transaction, theemployer will be treated as an eligible employer and the arrangement will be treated as a qualifiedsalary reduction arrangement for the year of the transaction and the two following years, providedrules similar to the rules of section 410(b)(6)(C)(i)(II) are satisfied and the arrangement wouldsatisfy the requirements to be a qualified salary reduction arrangement after the transaction if thetrade or business that maintained the arrangement prior to the transaction had remained a separateemployer.

**Effective Date**
The proposal would be effective as if included in the Small Business Job Protection Act of1996.

**2.  Treatment of Indian tribal governments under section 403(b)  (sec. 1601 of the 1997 Actand sec. 403(b) of the Code)**

**Present Law**
Any 403(b) annuity contract purchased in a plan year beginning before January 1, 1995, byan Indian tribal government is treated as purchased by an entity permitted to maintain a tax-sheltered annuity plan. Such contracts may be rolled over into a section 401(k) plan maintained bythe Indian tribal government in accordance with the rollover rules of section 403(b)(8). Anemployee participating in a 403(b) annuity contract of the Indian tribal government may roll overamounts from such contract to a section 401(k) plan maintained by the Indian tribal governmentwhether or not the annuity contract is terminated. 

**Description of Proposal**
The proposal would clarify that an employee participating in a 403(b)(7) custodial accountof the Indian tribal government may roll over amounts from such account to a section 401(k) planmaintained by the Indian tribal government.

**Effective Date**
The proposal would be effective as if included in the Small Business Job Protection Act of1996.

**II.  TECHNICAL CORRECTIONS TO OTHER TAX LEGISLATION**

**A.  Treatment of Adoption Tax Credit Carryovers (sec. 1807(a) of the Small Business JobProtection Act of 1996 and sec. 23 of the Code)**

**Present Law**

	Under present law taxpayers are allowed a maximum nonrefundable credit against incometax liability of $5,000 per child for qualified adoption expenses paid or incurred by the taxpayer.In the case of a special needs adoption, the maximum credit amount is $6,000 ($5,000 in the caseof a foreign special needs adoption).  To the extent the otherwise allowable credit exceeds the taxliability limitation of section 26 (reduced by other personal credits) the excess is carried forwardas an adoption credit into the next taxable year, up to a maximum of five taxable years.

	The credit is phased out ratably for taxpayers with modified adjusted gross income (AGI)above $75,000, and is fully phased out at $115,000 of modified AGI.  For these purposesmodified AGI is computed by increasing the taxpayer's AGI by the amount otherwise excludedfrom gross income under Code sections 911, 931, or 933 (relating to the exclusion of income ofU.S. citizens or residents living abroad; residents of Guam, American Samoa, and the NorthernMariana Islands, and residents of Puerto Rico, respectively).

**Description of Proposal
	The proposal would clarify that the AGI phaseout only applies in the year that the credit isgenerated and is not reapplied to further reduce any carry-forward amounts.

**Effective Date**

	The proposal would be effective as if included in the Small Business Job Protection Act of1996.

**B.  Disclosure Requirements for Apostolic Organizations (sec. 1313 of the Taxpayer Bill of Rights 2 and sec. 6104 of the Code)
**Present Law**

	Section 501(d) provides tax-exempt status to certain religious or apostolic associations orcorporations, if such associations or corporations have a common treasury or communitytreasury, even if such associations or corporations engage in business for the common benefit ofthe members, but only if the members thereof include (at the time of filing their returns) in theirgross income their entire pro rata shares, whether distributed or not, of the taxable income of theassociation or corporation for such year.(20)  Any amount so included in the gross income of amember is treated as a dividend received.  The effect of section 501(d) is to exempt the religiousand apostolic associations or corporations which conduct communal activities (such as farming)from the Federal corporate-level income tax and the undistributed-profits tax, provided thatmembers claim their shares of the corporation's income on their own individual returns.

	Section 6033 generally requires tax-exempt organizations to file annual informationreturns, and such information returns are available for public inspection under sections 6104(b)and 6104(e), except that public disclosure is not required of the identity of contributors to anorganization.  Section 501(d) entities must include with their annual information return (Form1065) a Schedule K-1 that identifies the members of the association or corporation and theirratable portions of net income and expenses.

**Description of Proposal**

	The proposal would amend sections 6104(b) and 6104(e) to provide that public disclosureis not required of a Schedule K-1 filed by a religious or apostolic organization described in section501(d).

**Effective Date**

	The proposal would be effective on the date of enactment.

**C.  Allow Deduction for Unused Employer Social Security Credit (sec. 13443 of theOmnibus Budget Reconciliation Act of 1993 and sec. 196 of the Code)**

****

**Present Law
	The general business credit ("GBC") consists of various individual tax credits (includingthe employer social security credit of Code section 45B) allowed with respect to certain qualifiedexpenditures and activities.  In general, the various individual tax credits contain provisions thatprohibit "double benefits," either by denying deductions in the case of expenditure-related creditsor by requiring income inclusions in the case of activity-related credits.  Unused credits may becarried back one year and carried forward 20 years.  Section 196 allows a deduction to the extentthat certain portions of the GBC expire unused after the end of the carry forward period.  Section196 does not allow a deduction to the extent that the portion of the GBC that expires unused afterthe end of the carry forward period relates to the employer social security credit.

**Description of Proposal**

	The proposal would allow a deduction to the extent that the portion of the GBC relatingto the employer social security credit expires unused after the end of the carry forward period.

**Effective Date**

	The proposal would be effective as if included in the Omnibus Budget Reconciliation Actof 1993.

**D.  Earned Income Credit Qualification Rules (sec. 11111(a) of the Omnibus BudgetReconciliation Act of 1990 as amended by sec. 742 of the Uruguay Round Agreements Actand sec. 451(a) of the Personal Responsibility and Work Opportunity Reconciliation Act of1996 and sec. 32 of the Code)**

**Present Law
**In general**

	In order to claim the earned income credit ("EIC"), an individual must be an eligibleindividual.  To be an eligible individual, an individual must include a taxpayer identificationnumber ("TIN") for the taxpayer and the taxpayer's spouse and must either have a qualifying childor meet other requirements.  In order to claim the EIC without a qualifying child, an individualmust not be a dependent and must be over age 24 and under age 65.	

**Qualifying child**

	A qualifying child must meet a relationship test, an age test, an identification test, and aresidence test.  Under the relationship and age tests, an individual is eligible for the EIC withrespect to another person only if that other person:  (1) is a son, daughter, or adopted child (or adescendent of  a son, daughter, or adopted child); a stepson or stepdaughter; or a foster child ofthe taxpayer (a foster child is defined as a person whom the individual cares for as the individual'schild; it is not necessary to have a placement through a foster care agency); and (2) is under theage of 19 at the close of the taxable year (or is under the age of 24 at the end of the taxable yearand was a full-time student during the taxable year), or is permanently and totally disabled.  Also,if the qualifying child is married at the close of the year, the individual may claim the EIC for thatchild only if the individual may also claim that child as a dependent.

	To satisfy the identification test, an individual must include on their tax return the name,age, and "TIN" of each qualifying child. 

	The residence test requires that a qualifying child must have the same principal place ofabode as the taxpayer for more than one-half of the taxable year (for the entire taxable year in thecase of a foster child), and that this principal place of abode must be located in the United States. For purposes of determining whether a qualifying child meets the residence test, the principalplace of abode shall be treated as in the United States for any period during which a member ofthe Armed Forces is stationed outside the United States while serving on extended active duty.

**Description of Proposal**

	The proposal would clarify that the identification requirement is a requirement for claimingthe EIC, rather than an element of the definitions of "eligible individual" and "qualifying child."

**Effective Date**

	The proposal would be effective as if included in the originally enacted related legislation.

**III.  DIFFERENCES BETWEEN PROPOSED TECHNICAL CORRECTIONSCONTAINED IN THE CHAIRMAN'S MARK AND THE PROVISIONS OF TITLE VI OF H.R. 2676**

	Title VI of H.R. 2676, as passed by the House on November 5, 1997,(21) contains technicalcorrections to the 1997 Act and other legislation.  Except for one instance noted below, theChairman's mark generally contains the provisions of Title VI of H.R. 2676.  Some of theseprovisions would be modified by the Chairman's mark.  In addition, the Chairman's mark containsadditional proposed technical corrections. The differences between the proposed technicalcorrections in the Chairman's mark and the provisions contained in Title VI of H.R. 2676 arebriefly described below.

**1.  Education Incentives of the 1997 Act**

Education IRAs.--The Chairman's mark adds provisions to: (1) provide that the excise taxof section 4973 would apply to each year that an excess contribution remains in an education IRAand (2) clarify that a beneficiary of an education IRA must be a life-in-being.  In addition, theChairman's mark includes tax technical corrections that were included in S. 1133, as reported bythe Senate Finance Committee on February 19, 1998.(22)

Student loan interest.--The Chairman's mark adds a provision to clarify that only theborrower may deduct student loan interest.

Enhanced deduction for corporate donations of computers.--The Chairman's mark adds aprovision to clarify the entities and organizations to which computers may be donated forpurposes of the enhanced deduction.

Qualified State tuition programs.--The Chairman's mark adds a provision that wouldinclude the original beneficiary's spouse within the definition of "member of the family." 

Qualified zone academy bonds.--The Chairman's mark adds a provision that would clarifythe application of the credit to the estimated tax and overpayment rules.

**2.  Savings Incentives of the 1997 Act**

	The Chairman's mark would modify the technical corrections relating to individualretirement arrangements ("IRAs") in H.R. 2676 as passed by the House bill as follows.  

Conversion of IRAs into Roth IRAs.--In the case of conversions of IRAs into Roth IRAs,the taxpayer would be able to elect whether to have the amount converted includible in income inthe year of the conversion (or the year of withdrawal if the conversion is accomplished through aroll over) or ratably over 4 years.  If an individual elects application of the 4-year spread andwithdraws amounts before the entire amount of the conversion has been included in income, theamount withdrawn would be includible in income (in addition to any amount required to beincluded under the 4-year spread).  In no case would the amount includible under this proposalexceed the amount converted.  This proposal would replace the additional 10-percent tax underH.R. 2676 for 1998 conversions.  Under the proposal, a new 5-year holding period fordetermining whether distributions from a Roth IRA are qualified distributions would not apply toconverted amounts.  The proposal would eliminate the rules in H.R. 2676 regarding separateaccounts.  The proposal would also clarify calculation of adjusted gross income for purposes ofapplying the $100,000 adjusted gross income limit on individuals eligible to convert IRAs to RothIRAs.

Penalty-free distributions for education expenses and purchase of first homes.--TheChairman's mark would modify the provision in H.R. 2676 as passed by the House intended toprevent avoidance of the 10-percent early withdrawal tax in the case of hardship distributionsunder qualified plans and similar arrangements by providing that hardship distributions fromqualified cash or deferred arrangements and similar plan are not eligible rollover distributions (andnot subject to 20 percent withholding).  The Chairman's mark would also modify the effectivedate of the House bill provision. 

**3.  Capital Gains Provisions of the 1997 Act**

	The Chairman's mark would modify two provisions of H.R. 2676 to (1) clarify theprovision relating to the holding period of positions in certain short sales and straddles, and (2)provide that new section 1045 (relating to rollovers of small business stock) applies to stock heldby certain partnerships with trusts as partners.  The Chairman's mark adds a provision to clarifythe amount of exclusion applicable to the sale of a principal residence by a married couple filing ajoint return who do not qualify for the full $500,000 exclusion.

**4.  Alternative Minimum Tax Provisions of the 1997 Act**

	The Chairman's mark adds provisions that would (1) conform the regular-tax election touse AMT depreciation to the changes made to AMT depreciation by the 1997 Act and (2) clarifythe eligibility of the small corporation exemption.

**5.  Estate and Gift Tax Provisions of the 1997 Act**

	The Chairman's mark would modify the provisions of H.R. 2676 that: (1) clarify theeffective date for the generation-skipping exemption; (2) coordinate the unified credit and thequalified family-owned business exclusion; and (3) clarify the rules governing revaluation of gifts. The Chairman's mark also adds provisions that would: (1) clarify the phaseout range for the 5-percent surtax to phase out the benefits of the unified credit and graduated rates; (2) clarify thatinterests eligible for the family-owned business exclusion must be passed to a qualified heir; (3)clarify the "trade or business" requirement for the family-owned business exclusion; (4) convertthe family-owned business exclusion into a deduction; (5) make other technical changes to itemscross-referenced in the family-owned business provision; and (6) clarify the treatment of post-mortem conservation contributions.

**6.  D.C. Zone Incentives of the 1997 Act**

	The Chairman's mark would modify provisions of H.R. 2676 to further clarify thedefinitions of businesses and property eligible for special incentives available with respect to theD.C. zone.  In addition, the Chairman's mark would add a provision that provides that the phase-out rules applicable to the D.C. first-time homebuyers credit is not applicable to credit carryovers.

**7.  Miscellaneous Provisions of the 1997 Act**

	The Chairman's mark adds provisions that would: (1) clarify the qualification of thereduced rate of tax on hard ciders; (2) clarify the treatment of the tax paid by electing publiclytreated partnerships; (3) modify the depreciation limitation of electric vehicles; and (4) modify thedefinition of "non-Amtrak State" for purposes of the Amtrak net operating loss provision.

**8.  Revenue-Increase Provisions of the 1997 Act**

	The Chairman's mark adds provisions that would: (1) provide coordination between thebasis adjustment rules relating to extraordinary dividends and similar rules applicable toconsolidated returns; (2) clarify the interaction of section 355 and rules relating to certain divisivetransactions involving asset contributions to a subsidiary; (3) clarify the application of section 304to certain international transactions; (4) clarify the treatment of prepaid telephone cards fortelephone excise tax purposes; (5) modify the unrelated business income tax rules applicable tosecond-tier subsidiaries; and (6) clarify the allocation of basis of properties distributed by apartnership.

**9.  Foreign Provisions of the 1997 Act**

	The Chairman's mark adds provisions that would: (1) clarify the treatment of PFIC optionholders; (2) clarify the application of PFIC mark-to-market rules to RICs; (3) clarify theinteraction between the PFIC and other mark-to-market regimes; and (4) modify the interactionbetween section 901(k) and the foreign tax credit flow-through rules for RICs.

**10.  Simplification Provisions of the 1997 Act**

	The Chairman's mark adds a provision that would provide that distributions from a REITare deemed to first come from any non-REIT earnings.

**11.  Estate, Gift, and Trust Simplification Provisions of the 1997 Act**

	The Chairman's mark adds provisions that would (1) clarify the treatment of revocabletrusts for purposes of the generation-skipping transfer tax, and (2) provide regulatory authorityfor simplified reporting of funeral trusts terminated during the taxable year.

**12.  Pension and Employee Benefits Provisions of the 1997 Act**

	The Chairman's mark adds a clarification to the scope of the provision relating to thetreatment of disability payments made to public safety employees.

**13.  Technical Corrections Relating to Other Legislation**

Adoption credit.--The Chairman's mark would add a provision that would provide that thephase-out rules applicable to the adoption credit is not applicable to credit carryovers.

Disclosure requirements of apostolic organizations.--The Chairman's mark would add aprovision that would provide that section 501(d) apostolic organizations are not required todisclose Schedules K-1.

Earned income credit qualification.--The Chairman's mark would add provisions thatwould clarify the application of the taxpayer identification number rules for purposes ofdetermining eligibility for the earned income credit.

Stapled REIT grandfather rule.--The Chairman's mark does not include the provision ofH.R. 2676 relating to the grandfather rule applicable to stapled REITs.

1.   This document may be cited as follows: Joint Committee on Taxation, *Description ofSenate Finance Committee Chairman's Mark of Tax Technical Corrections Provisions* (JCX-18-98), March 26, 1998.
2.   The "Tax Technical Corrections Act of 1997" was reported by the House Committee onWays and Means in H.R. 2645 (H. Rept. 105-356, October 29, 1997), and the provisions wereadded to H.R. 2676 (Title VI) by a House amendment.
3.   It is understood that there is also a stacking rule under which the income tax liabilitylimitation applies between the nonrefundable personal credits including the nonrefundable portionof the child credit.  Generally, the nonrefundable portion of the child credit and the othernonrefundable personal credits which do not provide a carryforward are grouped together andstacked first followed by the nonrefundable personal credits which provide a carryforward forpurposes of applying the income tax liability limitation.  Therefore, if the sum of the taxpayer'snonrefundable credits exceeds the difference between the taxpayer's regular income tax liabilityand the taxpayer's alternative minimum tax liability (determined without regard to the alternativeminimum foreign tax credit) then the nonrefundable personal credits which do not provide acarryforward would be applied to reduce the income tax liability for that year first and any excesscredits which allow a carryforward would be available to reduce the taxpayer's income taxliability in future years.
4.   However, education IRAs are subject to the unrelated business income tax ("UBIT")imposed by section 511.
5.   This 10-percent additional tax does not apply if a distribution from an education IRA ismade on account of the death, disability, or scholarship received by the designated beneficiary.
6.   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 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.
7.   H. Rept. 105-220, p. 374.
8.   The Treasury Department will set the credit rate each month at a rate estimated to allowissuance of qualified zone academy bonds without discount and without interest cost to the issuer.
9.   See Rev. Proc. 98-9, which sets forth the maximum face amount of qualified zoneacademy bonds that may be issued for each State during 1998; IRS Proposed Rules (REG-119449-97), which provides guidance to holders and issuers of qualified zone academy bonds.
10.   If the conversion is accomplished by means of a withdrawal and a rollover into a RothIRA, the 4-year rule applies if the withdrawal is made during 1998 and the rollover occurs within60 days of the withdrawal.  In such a case, the 4-year period begins with the year in which thewithdrawal was made.  For purposes of this discussion, such conversions are treated as occurringin 1998.
11.   The otherwise available exceptions to the early withdrawal tax, e.g., for distributionsafter age 59-1/2, would apply.
12.   S. 1173, as passed by the Senate, would repeal this provision.
13.   S. 1173, as passed by the Senate includes an identical technical correction.
14.   This exception (as certain other exceptions) does not apply if the stock held before theacquisition was acquired pursuant to a plan (or series of related transactions) to acquire a 50-percent or greater interest in the distributing or a controlled corporation.
15.   The 1997 Act does not limit the otherwise applicable Treasury regulatory authorityunder section 336(e) of the Code. Nor does it 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.
16.   S. 1173, as passed by the Senate, would delay the effective date of this requirement fortwo years, until July 1, 2000.
17.   The exception also applies in the case of a joint-life policy or contract under which thesole insureds are a 20-percent owner and the spouse of the 20-percent owner.  A joint-lifecontract under which the sole insureds are a 20-percent owner and his or her spouse is the onlytype of policy or contract with more than one insured that comes within the exception.
18.   Treasury regulations under section 751(b) provide for a similar bifurcation of assetsamong potential ordinary income amounts and other amounts in applying the definition of"unrealized receivables" for purposes of that section.  Treas. Reg. 1.751-1(c)(4).
19.  The 1997 Act increased the amount of net losses from businesses, computed separatelywith respect to sole proprietorships (other than farming), sole proprietorships in farming, andother businesses disregarded from 50 percent to 75 percent.
20.   Under section 501(d), the requirement of a "common treasury" or "communitytreasury" is satisfied when all of the income generated from property owned by the organization isplaced into a common fund that is maintained by such organization and is used for themaintenance and support of its members, with all members having equal, undivided interests inthis common fund, but no right to claim title to any part thereof.  See Twin Oaks Community, Inc.v. Commissioner, 87 T.C. 1233, at 1254 (1986).  See also Rev. Rul. 78-100, 1978-1 C.B. 162(sec. 501(d) entity must be supported by internally operated business activities rather than merelybeing supported by wages of members who are engaged in outside employment).
21.   The "Tax Technical Corrections Act of 1997" was added as an amendment to H.R.2676 (Title VI) on the House floor.  The provisions were previously reported by the HouseCommittee on Ways and Means in H.R. 2645 (H. Rept. 105-356, October 29, 1997).
22.   See, S. Rept. 105-164.****************************************************************************************