Item

Present Law

House Bill

Senate Amendment

D. Treatment of
Accelerated Death
Benefits Under Life
Insurance
Contracts (secs.
331-332 of the
House bill and secs.
431-432 of the
Senate amendment)

Exclusion from income.--Any
amount paid under a life
insurance contract by reason of
the death of the insured is
excludable from the recipient's
income. Proposed Treasury
regulations on accelerated death
benefits (proposed in 1992 but
not effective until they become
final, which they have not)
would provide an exclusion, in
addition to what the statute
provides, for amounts paid
before the death of the insured
under a life insurance contract,
if the insured is terminally ill.

Exclusion from income.--
Provides an exclusion from

gross income as an amount paid
by reason of the death of an
insured for (1) amounts received
under a life insurance contract
and (2) amounts received for the
sale or assignment of a life
insurance contract to a qualified
viatical settlement provider,
provided that the insured under
the life insurance contract is
either terminally ill or
chronically ill, and provided that
any amount received by a
chronically ill individual is
received under a contract or
rider that is treated as a long-
term care contract and the
amount is treated as a payment
for long-term care services.

The exclusion does not apply in
the case of an amount paid to
any taxpayer other than the
insured, if such taxpayer has an
insurable interest by reason of
the insured being a director,
officer, employee, or financially
interested in the taxpayer.

Exclusion from income.--Same
as House bill, except that an
amount received by a
chronically ill individual must
be received under a contract or
rider that is treated as a long-
term care contract (and the
provision does not make a
specific reference to long-term
care services).


Item

Present Law

House Bill

Senate Amendment

Imposition of tax.--A covered
expatriate is subject to tax on his

U.S. source income at the rates
applicable to U.S. citizens rather
than the rates applicable to other
non-resident aliens for 10 years
after expatriation. In addition,
the scope of items treated as
U.S. source income for this
purpose is broader than those
items generally considered to be
U.S. source income (e.g., gains
on the sale of personal property
located in the United States and
gains on the sale or exchange of
stock or securities issued by
U.S. persons are treated as U.S.
source income). This
alternative method of income
taxation applies only if it results
in a higher U.S. tax liability.

determination that tax avoidance
was not a principal purpose for
the expatriation. The foregoing
exceptions are not applicable to
long-term residents, but
Treasury is authorized to
prescribe regulations providing
exemptions applicable to long-
term residents.

Imposition of tax.--The House
bill expands the reach of the

expatriation income tax. An
expatriate who exchanges U.S.
source property for foreign
source property in a transaction
that would otherwise qualify for
nonrecognition treatment is
required to recognize
immediately as U.S. source
income any gain on such
exchange. However, this gain
recognition rule does not apply
if the expatriate enters into an
agreement to treat income or
gains derived from the property
received in the exchange during
the 10 years after the
expatriation date as U.S. source
income. Such an agreement
terminates if the property

38

Imposition of tax.--Under the

Senate amendment, a covered
expatriate is subject to tax on
the unrealized gain in property
held on the expatriation date.
Property is deemed to be sold
upon expatriation, and any net
gain or loss on such deemed sale
is recognized for tax purposes,
subject to an exclusion for the
first $600,000 of net gain.

The expatriation income tax
applies to all property interests
held by the expatriate on the
expatriation date, provided that
any gain on such an interest
would be includible in the
expatriate's gross income if such
interest were sold. The
expatriation income tax also



Item

Present Law

House Bill

Senate Amendment

notice of deficiency and giving
the taxpayer an opportunity to
petition the Tax Court. Where
the IRS uses the summary
assessment procedure for
mathematical or clerical errors,
the taxpayer must be given an
explanation of the asserted error
and a period of 60 days to
request that the IRS abate its
assessment. A request for
abatement of the assessment is
the only procedure a taxpayer
may use prior to paying the
assessed amount in order to
contest an assessment arising
out of a mathematical or clerical
error, Once the assessment is
satisfied, however, the taxpayer
may file a claim for refund if he
believes the assessment was
made in error.

34

clerical error, If an individual
who claims the credit with
respect to net earnings from
self-employment fails to pay the
proper amount of self-
employment tax on such net
earnings, the failure is treated as
a mathematical or clerical error
for purposes of the amount of
credit allowed.

Effective date.--Taxable years
beginning after December 31,
1995,



Item

Present Law

House Bill

Senate Amendment

43

Election to be tax
citizen.--No provision.

US.

expatriation income tax is
imposed on the gain in the trust
interest determined as if the
trust assets were sold for fair
market value on the expatriation
date. Payment of the
expatriation income tax that is
imposed with respect to a
nonqualified trust interest could
be deferred under the rules
described above.

Election to be taxed as a U.S.
citizen.--Instead of beiny subject
to the expatriation tax on
unrealized gain in his property
at the time of expatriation, the
expatriate may elect to continue
to be taxed as a U.S. citizen
with respect to all property that
would otherwise be subject to
the expatriation tax. This
election covers all such property
(and any property the basis of
which is determined by
reference to such property). The
income, gift, estate, and
generation-skipping transfer
taxes continue to apply to such
property; however, the transfer
taxes imposed under this



Item

Present Law

House Bill

Senate Amendment

Deduction for
medical insurance
of self-employed
individual

Definition of long-
term care services

Self-employed individuals are
allowed to deduct 30 percent of
their expenses for medical
insurance for the individual and
his or her spouse or dependents.
This deduction is not available
if the individual is eligible to
participate in an employer-
subsidized health plan.
Amounts that cannot be
deducted under this provision
may be taken into account for
purposes of the itemized
deduction for medical expenses.

No definition.

may not be provided by a
relative (including the
individual's spouse) or a related
corporation. These medical
expense deductions are subject
to the present-law floor of 7.5
percent of AGI.

Because long-term care
premiums are treated as medical
insurance under the House bill,
the deduction for medical
expenses of self-employed
individuals, which is phased up
to 50 percent under another
provision of the bill, applies to
long-term care insurance
premiums.

Long-term care services means
specified types of services that
are required by a chronically ill
individual and that are provided
pursuant to a plan of care
prescribed by a licensed health
care practitioner.

Same as the House bill, except
that the deduction for self-
employed health insurance is
phased up to 80 percent.

Same as House bill.


Item

Present Law

House Bill

Senate Amendment

53

any amount included in income
during 1996, 1997, or 1998, that
is received under a contract
described in the provision on the
complete surrender, redemption
or maturity of the contract or in
full discharge of the obligation
under the contract that is in the
nature of a refund of the
consideration paid for the
contract.

Li isition expenses. --In
the case of an insurance
company, the unamortized
balance of policy expenses
attributable to a contract with
respect to which the 4-year
income-spreading treatment is
allowed to the policyholder is
deductible in the year in which
the transaction giving rise to
income-spreading occurs.



Item Present Law House Bill Senate Amendment
vote of 98 - 0.)
Effective date No provision. In general.--The proposal

51

generally is effective with
respect to interest paid or
accrued after December 31,
1995 (subject to a phase-in
tule).

Phase-in rule.--The phase-in
tule provides that with respect
to debt incurred before January
1, 1996, any otherwise
deductible interest paid or
accrued after October 13, 1995,
and before January 1, 1999,
would be allowed to the extent
the rate of interest does not
exceed the lesser of (1) the
borrowing rate specified in the
contract as of October 13, 1995,
or (2) a percentage of Moody's
Corporate Bond Yield Average -
Monthly Average Corporates
for each month the interest is
paid or accrued. For interest
paid or accrued after October
13, 1995, and before January 1,
1996, the percentage of the
Moody's rate is 100 percent; for
1996, 90 percent; for 1997, 80



Item

Present Law

House Bill

Senate Amendment

tules, a U.S. person who
transfers property to a foreign
trust generally is treated as the
owner of the portion of the trust
comprising that property for any
taxable year in which there is a
US. beneficiary of any portion
of the trust. This treatment
generally does not apply,
however, to transfers by reason
of death, to transfers made
before the transferor became a
USS. person, or to sales or
exchanges of property at fair
market value where gain is
recognized to the transferor.

Residence of estates and trusts.-

Residence of estates and trusts.-

-An estate or trust is treated as
foreign if it is not subject to
U.S. income taxation on its
income that is neither derived
from U.S. sources nor

57

-No provision.

treats a nonresident alien
individual who transfers
property to a foreign trust and
then becomes a U.S. resident
within 5 years after the transfer
as making a transfer to the
foreign trust on his residency
starting date. Under the Senate
amendment, in determining
whether a foreign trust paid fair
market value to the transferor
for property transferred to the
trust, obligations issued by the
trust, by any grantor or
beneficiary of the trust, or by
any person related to any
grantor or beneficiary generally
are not taken into account
except as provided in Treasury
regulations.

Effective date.--The provision
applies to transfers of property
after February 6, 1995.

Residence of estates and trusts.-

-The Senate amendment
establishes a two-part objective
test for determining whether a
trust is foreign or domestic for
tax purposes. If both parts of the



Item

Present Law

House Bill

Senate Amendment

Any person who fails to file a
required report with respect to
the creation of, or a transfer to, a
foreign trust may be subject to a
penalty of 5 percent of the
amount transferred to the
foreign trust. Similarly, any
person who fails to file a
required annual report with
respect to a foreign trust with
U.S. beneficiaries may be
subject to a penalty of 5 percent
of the value of the corpus of the
trust at the close of the taxable
year. The maximum amount of
the penalty imposed under either
case may not exceed $1,000. A
reasonable cause exception is
available.

61

No provision.

divided by 2) for purposes of
computing the interest charge
applicable to such distribution.
Treasury regulations may
provide that this rule does not
apply if the foreign trust elects
to have a U.S. agent for the
limited purpose of accepting
service of process (as described
above).

Under the Senate amendment, a
person who fails to provide the
required notice in cases
involving a transfer of property
to any foreign trust or a
distribution by a foreign trust to
a US. person is subject to an
initial penalty equal to 35
percent of the "gross reportable
amount" (generally the value of
the property involved in the
transaction). A failure to
provide an annual reporting of
trust activities will subject a
U.S. owner of such trust to an
initial penalty equal to 5 percent
of the value of the trust's assets
treated as owned by such
person. An additional $10,000
penalty is imposed for continued



Item

Present Law

House Bill

Senate Amendment

49

CLN. Such individual is not
subject retroactively to U.S.
income taxes on his worldwide
income. In order to qualify for
one of the exceptions from the
expatriation tax provisions, such
individual must submit a ruling
request within one year after the
date of enactment.

of such later date. Such
individual is not subject
retroactively to tax as a U.S.
citizen from the date of the
expatriating act. The prior law
expatriation income tax
provisions of section 877
continue to apply to such
individual through the date the
new expatriation tax provisions
are applicable.

(Floor amendment by Senators
Dole and Roth, adopted by a
vote of 98-0.)


Item

Present Law

House Bill

Senate Amendment

E. Health Insurance
Organizations
Eligible for Benefits
of Section 833 (sec.
351 of the House
bill)

Section 833 provides a special
deduction for eligible
organizations, equal to 25
percent of the claims and
expenses incurred during the
year, less the adjusted surplus at
the beginning of the year. In
addition, section 833 eliminates
the 20 percent reduction in
unearned premium reserves that
applies generally to all property
and casualty insurance
companies. Eligible health
insurance organizations are (1)
Blue Cross and Blue Shield
organizations existing on
August 16, 1986, which have
not experienced a material
change in structure or operations
since that date, and (2) other
organizations that meet certain
community-service-related
requirements and substantially
all of whose activities involve
the providing of health
insurance.

21

The bill applies the special rules
under section 833 to the same
extent they are provided to
certain existing Blue Cross or
Blue Shield organizations, in the
case of any organization that (1)
is not a Blue Cross or Blue
Shield organization existing on
August 16, 1986, and (2)
otherwise meets the requirments
of section 833(c)(2) (including
the requirement of no material
change in operations or structure
since August 16, 1986). Under
the provision, an organization
qualifies for this treatment only
if (1) it is not a health
maintenance organization and
(2) it is organized under and
governed by State laws which
are specifically and exclusively
applicable to not-for-profit
health insurance or health
service type organizations

Effective date.--Taxable years
ending after December 31,
1996.

No provision.



Item

Present Law

House Bill

Senate Amendment

39

transferred in the exchange is
disposed of by the acquirer, and
any gain not recognized by
reason of the agreement is
recognized as U.S. source on
such date.

Treasury is authorized to issue
regulations providing similar
treatment for nonrecognition
transactions within 5 years
before the expatriation date. In
addition, Treasury is authorized
to issue regulations treating the
removal of tangible personal
property from the United States,
and other circumstances that
result in the conversion of U.S.
source income to foreign source
income without recognition of
unrealized gain, as exchanges to
which the foregoing rules would

apply.

The House bill treats as U.S.
source any income or gains
derived from stock in a foreign
corporation if the expatriate
owns (directly or indirectly)
more than 50 percent (by vote or
by value) of the stock of such

applies to trust interests under
rules described below.
Exclusions are provided for U.S.
real property, qualified
retirement plans and certain
foreign pension plans. Treasury
is authorized to issue regulations
exempting other property
interests as appropriate.

The expatriate is required to pay
a tentative tax within 90 days
after the expatriation date,
which tax reflects the gain on
the deemed sale as well as other
items for the portion of the year
that precedes the expatriation
date.

An expatriate may elect to defer
payment of the expatriation
income tax with respect to any
property. This election is made
on an asset-by-asset basis.
Under this election, the deferred
tax accrues interest through the
payment date. The deferred tax
is payable when the asset is
disposed of (or immediately
before death if the asset is held
at such time). The expatriate


Item Present Law House Bill Senate Amendment
COMPARISON OF
REVENUE PROVISIONS
I. HEALTH-RELATED
PROVISIONS
A. Medical Savings The tax treatment of health In general The Senate amendment does not

Accounts (sec. 301
of the House bill)

expenses depends on whether
the individual is an employee or
self employed, and whether the
individual is covered under an

employer-sponsored health plan.

Employer contributions to a
health plan for coverage for the
employee and the employee's
spouse and dependents is
excludable from the employee's
income and wages for social
security tax purposes. Self-
employed individuals are
entitled to deduct 30 percent of
the amount paid for health
insurance for a self-employed
individual and his or her spouse
or dependents. Any individual
who itemizes tax deductions
may deduct unreimbursed
medical expenses (including
expenses for medical insurance)
paid during the year to the

Within limits, contributions
to a medical savings account
("MSA") are deductible if made
by an eligible individual and are
excludable from income (and
wages for social security
purposes) if made by the
employer of an eligible
individual. Earnings on
amounts in an MSA are not
currently taxable. Distributions
from an MSA for medical
expenses are not taxable.

Eligible in uals

An individual is eligible to
make a deductible contribution
to an MSA (or to have employer
contributions made on his or her
behalf) if the individual is
covered under a high deductible

contain provisions providing
favorable tax treatment for
MSAs. However, the Senate
amendment amends the Public
Health Services Act to permit
health maintenance
organizations to charge
deductibles to individuals with
an MSA. In addition, the Senate
amendment provides that it is
the sense of the Committee on
Labor and Human Resources
that the establishment of MSAs
should be encouraged as part of
any health insurance legislation
passed by the Senate through
the use of tax incentives relating
to contributions to, the income
growth of, and the qualified use
of,-MSAs. The Senate
amendment also provides that it
is the sense of the Senate that
the Congress should take


Item

Present Law

House Bill

Senate Amendment

(sec. 593(e)). In addition, a
thrift institution that fails to be
qualified thrift institution must
change its method of accounting
for bad debts and recapture its
bad debt reserve.

32

made within a specified period
of time.

applies to certain distributions
with respect to preferred stock
made within a specified period
of time.



Item

Present Law

House Bill

Senate Amendment

Terminally ill --A terminally ill
individual is defined as one who
has been certified by a physician
as having an illness or physical
condition that reasonably can be
expected to result in death
within 24 months of the date of
certification.

Chronically ill.--A chronically

ill individual is defined the same
as under the House bill
provisions on long-term care
insurance, i.e., as an individual
who has been certified with the
previous 12 months by a
licensed health care practitioner
as (1) being unable to perform
(without substantial assistance)
at least 2 activities of daily
living for at least 90 days due to
a loss of functional capacity, (2)
having a similar level of
disability as determined in
regulations or (3) requiring
substantial supervision to
protect such individual from
threats to health and safety due
to severe cognitive impairment.

Viatical settlements.-- A
18

Terminally ill. --Same as House
bill.

Chronically ill. -Same as House
bill.

Viatical settlements.--Same as


Item

Present Law

House Bill

Senate Amendment

G. Organ and Tissue
Donation
Information
Included with
Income Tax Refund
Payments (sec.
of the Senate
amendment)

There is no statutory
requirement that Treasury
include organ and tissue
donation information with any
payment of a refund of
individual income taxes.

24

No provision.

Requires Treasury to include
organ and tissue donation
information with any payment
of a refund of individual income
taxes made on or after February
1, 1997, through June 30, 1997.
(Floor amendment by Sen.
Kennedy for Senators Dorgan
and Frist, adopted by voice
vote.)

Effective date.--Refunds made
on or after February 1, 1997,
through June 30, 1997.



Item

Present Law

House Bill

Senate Amendment

20

received after December 31,

1996.



Item

Present Law

House Bill

Senate Amendment

B. Earned Income
Credit (sec. 411 of
the House bill)

Taxpayer identification

number.-- In order to claim the
earned income credit, a taxpayer
must either have a qualifying
child or meet other
requirements. A qualifying
child must meet an
identification test.

To satisfy the identification test,
taxpayers must include on their
tax return the name, age and
taxpayer identification number
of each qualifying child. A
taxpayer's TIN is generally that
taxpayer's social security
number.

Mathematical errors.--The IRS

may summarily assess
additional tax due as a result of
a mathematical or clerical error
without sending the taxpayer a

Taxpayer identification
number.--Under the House bill,
individuals are not eligible for
the earned income credit if they
do not include their taxpayer
identification number (and, if
married, their spouse's taxpayer
identification number) on their
tax return. Solely for these
purposes and for purposes of the
present-law identification test
for a qualifying child, a taxpayer
identification number is defined
as a social security number
issued to an individual by the
Social Security Administration
other than a number issued
under section 205(c)(2)(B)(i)(I1)
(or that portion of sec.
205(c)(2)(B)(i)(II1) relating to
it) of the Social Security Act
(regarding the issuance of a
number to an individual
applying for or receiving
Federally funded benefits).

Mathematical errors.--If an

individual fails to provide a
correct taxpayer identification
number, such omission is
treated as a mathematical or

33

Taxpayer identification
number.--No provision.

Mathematical errors.--No
provision.



Item

Present Law

House Bill

Senate Amendment

years beginning after
December 31, 1997.

No provision.

No provision.

No provision.

The provision relating to
reporting of long-term care
benefits is effective for benefits
paid after December 31, 1996.

The provisions relating to

taxable years beginning after
December 31, 1996.

The change in treatment of
reserves for long-term care
insurance contracts is effective
for contracts issued after
December 31, 1996.

The provision relating to tax-
free exchanges of life insurance,
endowment and annuity
contracts for long-term care
insurance contracts is effective
for taxable years beginning after
December 31, 1997.

The provision relating to certain
distributions from IRAs and
elective deferrals used to pay
long-term care insurance
premiums is effective for
payments and distributions after
December 31, 1996.

Same as House bill.

Same as House bill.


Item

Present Law

House Bill

Senate Amendment

Information reporting
requirements and associated
penalties --Any U.S. person who
creates a foreign trust or
transfers money or property to a
foreign trust is required to report
that event to the Treasury
Department without regard to
whether the trust is a grantor or
nongrantor trust. Similarly, any
US. person who transfers
property to a foreign trust that
has one or more U.S.
beneficiaries is required to
report annually to the Treasury
Department. In addition, if the
transfer of any appreciated
property by a U.S. person is
subject to section 1491, the
transferor is required to report
the transfer to the Treasury
Department.

59

Information reporting
requirements and associated
penalties --No provision.

years ending after the date of
enactment. The amendment to
section 1491 is effective on the
date of enactment.

Information reporting

requirements and associated
penalties. --Under the Senate

amendment, the grantor,
transferor or executor (the
“responsible party") is required
to notify the Treasury
Department upon the occurrence
of certain reportable events,
including the death of a U.S.
citizen or resident if any portion
of a foreign trust was included
in the gross estate of the
decedent. In addition, a U.S.
owner of any portion of a
foreign trust is required to
ensure that the trust files an
annual report with the Treasury
Department to provide full
accounting of all the trust
activities for the taxable year.
Finally, any U.S. person who
receives any distribution from a
foreign trust is required to file a
notice with the Treasury
Department to report the



Item

Present Law

House Bill

Senate Amendment

her own. Otherwise, the
beneficiary must include the
MSA balance in income in the
year of death. If there is no
beneficiary, the MSA balance is
includible on the final return of
the decedent. In any case, no
estate tax applies.

Definition of MSA

In general, an MSA is a trust
or custodial account created
exclusively for the benefit of the
account holder and is subject to
rules similar to those applicable
to individual retirement
arrangements.

Effective date

Taxable years beginning
after December 31, 1996.



Item

Present Law

House Bill

Senate Amendment

notify each qualified beneficiary
of their COBRA rights within
14 days after notification of the
occurrence of a qualifying
event.

30

Effective date.--The provision
generally is effective with
respect to plan years beginning
on or after January 1, 1998.

days prior to the date the
changes become effective.

Effective date.--The provision
applies to qualifying events
occurring on or after the date of
enactment for plan years
beginning after December 31,
1997,



Item

Present Law

House Bill

Senate Amendment

trust funding the plan in the case
of a multiemployer plan), or (2)
$500,000. If the tax is imposed
on another person responsible
for administering or providing
benefits under the plan, the
maximum penalty for failures
during the year is $2 million.
The Secretary may waive all or
part of the tax to the extent that
payment of the tax would be
excessive relative to the failure
involved.

COBRA cover:
for disability.--The 18-month

maximum COBRA coverage
period is extended to 29 months
if the qualified beneficiary is
determined under the Social
Security Act to have been
disabled at the time of the
qualifying event and the
qualified beneficiary provides
notice of such determination to
the employer before the end of
the 18-month period. A
qualified beneficiary has 60
days to notify the employer of a
disability determination. During
the 11-month period of extended

product offered by the insurer or
HMO under such contract. In
addition, no tax is imposed if
there has been enforcement by
the Secretary of Labor or the
Secretary of Health and Human
Services.

Extension of COBRA coverage
for disability.--No provision.

27

ion of COB) e
for disability --The Senate

amendment modifies the
COBRA tules by clarifying that
the extended maximum COBRA
coverage period of 29 months in
cases of disability also applies

to the disabled qualified
beneficiary of the covered
employee. In addition, the
Senate amendment provides the
extended COBRA coverage if
the onset of the disability occurs
at any time during the initial 18-
month COBRA coverage period
as opposed to requiring the
disability to exist at the time of



Item

Present Law

House Bill

Senate Amendment

not eligible to make deductible
contributions to an MSA for a
year if any employer
contributions are made to an
MSA on behalf of the individual
for the year.

Tax treatment of and limits on
contributions

Individual contributions to
an MSA are deductible (within
limits) in determining AGI.
Employer contributions are
excludable (within the same
limits) from gross income and
wages for employment tax
purposes, except that this
exclusion does not apply to
contributions made through a
cafeteria plan. The maximum
amount of contributions that can
be deducted or excluded for a
year is equal to the lesser of (1)
the deductible under the high
deductible health plan or (2)
$2,000 in the case of single
coverage and $4,000 if the high
deductible plan covers the
individual and a spouse or
dependent. The annual limit is



Item

Present Law

House Bill

Senate Amendment

extent that the total of such
expenses exceeds 7.5 percent of
the individual's adjusted gross
income ("AGI"). Present law
does not contain any special
tules for medical savings
accounts.

health plan and is not covered
under another health plan (other
than a plan that provides certain
permitted coverage). An
individual with other coverage
in addition to a high deductible
plan is still eligible for an MSA
if such other coverage is certain
permitted insurance or is
coverage (whether provided
through insurance to otherwise)
for accidents, disability, dental
care, vision care, or long-term
care. Permitted insurance is (1)
Medicare supplemental
insurance; (2) insurance if
substantially all of the coverage
provided under such insurance
relates to (a) liabilities incurred
under worker's compensation
law, (b) tort liabilities, (c)
liabilities relating to ownership
or use of property (e.g., auto
insurance), or (d) such other
similar liabilities as the
Secretary may prescribe by
regulations, (3) insurance for a
specified disease or illness, and
(4) insurance that provides a
fixed payment for
hospitalization. An individual is

measures to further the purposes
of the Senate amendment,
including any necessary changes
to the Internal Revenue Code to
encourage groups and
individuals to obtain health
coverage, and to promote
access, equity, portability,
affordability, and security of
health benefits.


Item

Present Law

House Bilt

Senate Amendment

consumer protections apply to
contracts issued after
December 31, 1996 and actions
taken after December 31, 1996.



item

Present Law

House Bill

Senate Amendment

includible in income.

Taxation of distributions

Distributions from an MSA
for the medical expenses of the
individual and his or her spouse
or dependents are excludable
from income. For this purpose,
medical expenses do not include
expenses for insurance other
than long-term care insurance,
premiums for health care
continuation coverage, and
premiums for health care
coverage while an individual is
receiving unemployment
compensation under Federal or
State law.

Distributions that are not for
medical expenses are includible
in income. Such distributions
are also subject to an additional
10-percent tax unless made after
age 59-1/2, death, or disability.

Upon death, if the
beneficiary is the individual's
surviving spouse, the spouse
may continue the MSA as his or



Item

Present Law

House Bill

Senate Amendment

F. Penalty-Free
Withdrawals From
Individual
Retirement
Arrangements for
Medical Expenses
(sec. 461 of the
Senate amendment)

Under present law, a 10-percent
early withdrawal tax applies to
distributions from individual
retirement arrangements
("IRAs") and employer-
sponsored retirement plans
made before age 59-1/2, unless
the distribution is on account of
death or disability or is made in
the form of periodic payments.
In the case of employer-
sponsored retirement plans, the
10-percent additional tax also
does not apply to distributions
used to pay medical expenses of
the individual (or the
individual's spouse or
dependents) that exceed 7.5
percent of adjusted gross
income ("AGI").

22

Penalty-free withdrawals from
IRAs for medical expenses.--No

provision.

Penalty-free withdrawals from
IRAs for medical insurance for
unemployed individuals .--No

provision.

Penalty-free withdrawals from
IRAs for medical expenses.--

Under the Senate amendment,
distributions from an IRA for
medical expenses of the
individual (or the individual's
spouse or dependents) that
exceed 7.5 percent of AGI are
not subject to the 10-percent
additional tax.

Penalty-free withdrawals from
IRAs for medical insurance for

unemployed individuals.--Under
the Senate amendment, the 10-

percent additional tax does not
apply to distributions from an
IRA for the cost of medical
insurance (without regard to the
7.5 percent of AGI floor) for the
individual (or the individual's



COMPARISON OF REVENUE PROVISIONS OF H.R. 3103
(THE "HEALTH COVERAGE AVAILABILITY AND AFFORDABILITY ACT OF 1996")
AS PASSED BY THE HOUSE AND THE SENATE

Prepared for Use of the House and Senate Conferees
By the Staff
of the
JOINT COMMITTEE ON TAXATION
July 26, 1996

ICX-41-96


Item

Present Law

House Bill

Senate Amendment

expand the categories of items
that are subject to the gift and
estate taxes in the case of a U.S.
citizen who relinquished
citizenship with a principal
purpose of avoiding U.S. taxes
within the 10-year period ending
on the date of the transfer (e.g.,
US. property held through a
foreign corporation controlled
by the expatriate and related
persons is included in his estate
and gifts of U.S.-situs intangible
property by the expatriate are
subject to the gift tax).

45

estate and gift tax provisions are
applicable to the covered
individuals described above.

Special tax credit provisions. --

The House bill provides a credit
against the tax imposed under
the expatriation tax provisions
for any foreign income, gift,
estate or similar taxes paid with
respect to the items subject to
such taxation.

While it is believed that the
expatriation tax provisions of
the House bill are generally
consistent with income tax
treaties, it is intended that the
expatriation tax provisions not

and gift tax provisions with
respect to citizens who
expatriate with a principal
purpose of avoiding U.S. taxes
continue to apply as under
present law.

Special tax credit provisions.--

A credit against the tax imposed
solely by reason of the special
estate and gift tax provisions is
allowed for the expatriation
income tax imposed with
respect to the same property.



Item

Present Law

House Bill

Senate Amendment

C. Treatment of Long-
Term Care
Insurance and
Services (secs. 321-
328 of the House
bill and secs. 411-
415 and 421-424 of
the Senate
amendment)

Tax treatment of
long-term care

insurance

Excludable amount

The Federal income tax
treatment of long-term care
insurance contracts and services
is not clear under present law.

Amounts received by a taxpayer
under accident and health
insurance generally are
excludable from income.

A long-term care insurance
contract generally is treated as
an accident and health insurance
contract.

Amounts received under a long-
term care insurance contract
generally are excludable, subject
to a cap on per diem type
contracts of $175 per day, or
$63,875 annually, indexed by
the medical care cost component
of the Consumer Price Index
("CPI"). Payments under a per
diem type contract that exceed
the dollar cap are excludable
only to the extent actual long-
term care costs exceed the cap
amount. The dollar cap does
not apply to amounts received
under a reimbursement type

Same as House bill.

Same as House bill.


Item

Present Law

House Bill

Senate Amendment

B. Increase in
Deduction for
Health Insurance
Expenses of Self-
Employed
Individuals (sec.
311 of the House
bill and sec. 401 of
the Senate
amendment)

Under present law, self-
employed individuals are
entitled to deduct up to 30
percent of the amount paid for
health insurance for the self-
employed individual and the
individual's spouse and
dependents. The deduction is
not available for any month if
the taxpayer was eligible to
participate in a subsidized health
plan maintained by the
employer of the taxpayer or the
taxpayer's spouse. The
deduction is limited to the
amount of earned income from
the individual's trade or
business.

The House bill phases up the
present-law 30-percent
deduction for health insurance
expenses of self-employed
individuals to 50 percent as
follows:

1998..
1999..
2000..

35 percent
40 percent
40 percent
200 40 percent
2002., 45 percent
2003 and thereafter....50 percent

Effective date.--Taxable years
beginning after December 31,
1997.

The Senate amendment phases
up the present-law 30-percent
deduction for health insurance
expenses of self-employed
individuals to 80 percent as
follows:

1997,
1998,
1999.
2000.
2001.
2002.
2003.
2004.
2005.
2006 and thereafter....80 percent

Effective date.--Taxable years
beginning after December 31,
1996.


Item

Present Law

House Bill

Senate Amendment

effectively connected with the
conduct of a U.S. trade or
business. Thus, if a trust is
taxed in a manner similar to a
nonresident alien individual, it

is considered to be a foreign
trust. Any other estate or trust is
treated as domestic.

Section 1491 generally imposes
a 35-percent excise tax ona
U.S. person that transfers
appreciated property to certain
foreign entities, including a
foreign trust. In the case of a
domestic trust that changes its
situs and becomes a foreign
trust, it is unclear whether
property has been transferred
from a U.S. person to a foreign
entity, and, thus, whether the
transfer is subject to the excise
tax.

58

test are satisfied, the trust is
treated as domestic. Only the
first part of the test applies to
estates. First, if a U.S. court
exercises primary supervision
over the administration of the
estate or trust, the estate or trust
is treated as domestic. Second,
if one or more U.S. fiduciaries
have the authority to control all
substantial decisions of the trust,
the trust is treated as domestic.

Under the Senate amendment, if
a domestic trust changes its situs
and becomes a foreign trust, the
trust is treated as having made a
transfer of its assets to the
foreign trust and is subject to the
35-percent excise tax imposed
by present-law section 1491
unless one of the exceptions to
this excise tax is applicable.

Effective date.--The provision
modifying the rules to determine
the residence of a trust or estate
is effective for taxable years
beginning after December 31,
1996. A trustee may elect to
apply the provision to taxable



Item

Present Law

House Bill

Senate Amendment

41

required at all times to have a
US. trustee.

The expatriation income tax
with respect to a qualified trust
interest is imposed only when a
distribution is received. The
amount of the expatriation
income tax is calculated as of
the expatriation date based on
the gain in the maximum assets
that could be allocable to the
trust interest (determined by
resolving contingencies and
discretionary powers in the
expatriate's favor). The amount
so calculated plus interest is
collected from subsequent
distributions as received.

If a qualified trust interest is
disposed of, the expatriate dies,
or the trust ceases to be
qualified, the expatriation
income tax is imposed at such
time in an amount equal to the
lesser of the remainder of the
expatriation income tax
calculated as of the expatriation
date (and not yet collected) or
the amount of tax calculated


Item

Present Law

House Bill

Senate Amendment

Definition of qualified
beneficiary.--Under present law,
the term qualified beneficiary
only includes individuals who
were either the spouse or the
dependent of the covered
employee at the time of the
qualifying event.

Notice requirements.--A group
health plan is required to notify

each covered employee and the
covered employee's spouse of
their COBRA rights upon
commencement of participation
in the plan. Further, the group
health plan administrator must

provision.

29

Notice requirements.--No

Definition of qualifi
beneficiary.--The Senate
amendment also modifies the
definition of qualified
beneficiary to include a child
born to or placed for adoption
with the covered employee
during the period of COBRA
coverage. Consequently, since
the health care availability
provisions in the Senate
amendment require group health
plans to allow participants to
change their coverage status
(i.e., to change from individual
coverage to family coverage, or
to add on the new child) upon
the birth or adoption of a new
child, COBRA participants
would also be allowed to change
their coverage status upon the
birth or adoption of a new child.

Notice requirements.--The
Senate amendment requires a

group health plan to notify each
qualified beneficiary who has
elected COBRA coverage of the
changes to the COBRA rules
contained in the Senate
amendment no later than 60



Item

Present Law

House Bill

Senate Amendment

Information reporting.--There is
no special information reporting

requirement with respect to U.S.

citizens who lose U.S.
citizenship or long-term
residents who terminate U.S.
residency.

be defeated by any treaty
provision. However, beginning
on the 10th anniversary of
enactment, any conflicting
treaty provision that remains in
force takes precedence over the
expatriation tax provisions.

Treatment of gifts and
inheritances from an expatriate.-

Treatment of gifts and
inheritances from an expatriate.-

-No provision.

Information reporting --The
House bill imposes an
information reporting
requirement on an individual
who renounces citizenship or
terminates residency.
Statements are required to be
provided to the State
Department in the case of a
former U.S. citizen and filed
with the U.S. tax return for the
year in which the termination of
residency occurs in the case of a
former long-term resident.

46

-Under the Senate amendment,
the section 102 exclusion is not
applicable to property received
by gift or inheritance from an
expatriate who was subject to
the expatriation tax.

Information reporting.--Same as
the House bill.


Item

Present Law

House Bill

Senate Amendment

COBRA coverage, the qualified
beneficiary may be charged 150
percent of the applicable
premium.

Termination of COBRA
coverage.--COBRA coverage
may be terminated before the
18-month maximum coverage
period in the case of certain
events. These include: the
employer ceases to maintain any
group health plan, the qualified
beneficiary fails to pay the
premium, the qualified
beneficiary becomes covered
under another group health plan
with no preexisting condition
limitation or exclusion, or the
qualified beneficiary becomes
entitled to Medicare.

28

Termination of COBRA
coverage.--No provision.

the qualifying event. As under
present law, the disability
determination still has to be
made, and the notice of the
disability still has to be given,
before the end of the initial
COBRA coverage period.

Termination of COBRA
coverage.--The Senate
amendment coordinates the
COBRA coverage rules with the
new requirements regarding
limitations on exclusion of
preexisting conditions so that
COBRA coverage can be
terminated if a qualified
beneficiary becomes covered
under another group health plan,
even if such group health plan
contains a preexisting condition
limitation or exclusion, provided
the preexisting condition
limitation or exclusion does not
apply to the qualified
beneficiary by reason of the new
requirements restricting the
application of preexisting
condition limitations and
exclusions.



Item

Present Law

House Bill

Senate Amendment

the sum of the limits determined
separately for each month,
based on the individual's status
as of the first day of the month.
The maximum contribution limit
to an MSA is determined
separately for each spouse in a
married couple. In no event can
the maximum contribution limit
exceed $4,000 for a family. The
dollar limits are indexed for
medical inflation and rounded to
the nearest multiple of $50.

finition of high ictible
health plan

A high deductible health
plan is a health plan with a
deductible of at least $1,500 in
the case of single coverage and
$3,000 in the case of coverage
of more than one individual.
These dollar limits are indexed
for medical inflation, rounded to
the nearest multiple of $50

Tax treatment of MSAs

Earnings on amounts in an
MSA are not currently



Item

Present Law

House Bill

Senate Amendment

qualified viatical settlement
provider is any person that
regularly purchases or takes
assignments of life insurance
contracts on the lives of
terminally ill or chronically ill
individuals and either (1) is
licensed for such purposes in the
State in which the insured
resides, or (2) if the person is
not required to be licensed by
that State, meets the
requirements of sections 8 and 9
of the Viatical Settlements
Model Act issued by the
National Association of
Insurance Commissioners
(relating to disclosure
requirements and general rules
for a viatical settlement
contract), and also meets the
requirements of the section of
the Viatical Settlements Model
Regulation issued by the NAIC
relating to standards for
evaluation of reasonable
payments, including discount
Tates.

Effective date.--Amounts

House bill.

(Floor amendment by Senators
Dole and Roth, adopted by a
vote of 98 - 0.)

Effective date.--Same as House
bill.


Item

Present Law

House Bill

Senate Amendment

from a trust, the distribution is
treated as an accumulation
distribution out of income
earned during the first year of
the trust.

Ifa foreign nongrantor trust
makes a loan to one of its
beneficiaries, the principal of
such a loan generally is not
taxable as income to the
beneficiary.

Outbound foreign grantor trust

No provision.

Outbound foreign grantor trust

allocated proportionately to
prior trust years in which the
trust has undistributed net
income (and the beneficiary
receiving the distribution was a
USS. citizen or resident), rather
than to the earliest of such
years.

Effective date.--The provision
applies to distributions after the
date of enactment.

Under the Senate amendment,
except as provided in Treasury
regulations, the full amount of a
loan of cash or marketable
securities by the foreign
nongrantor trust to a U.S.
grantor or a U.S. beneficiary (or
a U.S. person related to such a
grantor or beneficiary) is treated
as distributed to the grantor or
beneficiary.

Effective date.--The provision
applies to loans made after
September 19, 1995.

Outbound foreign grantor trust

rules.--Under the grantor trust

56

tules.--No provision.

tules.--The Senate amendment



Item

Present Law

House Bill

Senate Amendment

63

them to the Secretary of the
Treasury. The $10,000
threshold is indexed for
inflation. If the U.S. person
fails, without reasonable cause,
to report foreign gifts as
required, the U.S. person will be
subject to a penalty equal to 5
percent of the amount of the gift
for each month that the failure
continues, with the total penalty
not to exceed 25 percent of such
amount. In addition, certain
sanctions also may apply.

(Floor amendment by Senators
Domenici and Wellstone; the
Senate failed to table

the amendment by a vote of
30-68.)

Effective date.--This provision
applies to amounts received
after the date of enactment.



Item

Present Law

House Bill

Senate Amendment

Individuals covered.-- The

expatriation income tax applies
to any U.S. citizen who
relinquishes citizenship with a
principal purpose of avoiding
U.S. taxes.

Individuals covered.--Under the
House bill, the expatriation
income tax applies to U.S.
citizens who relinquish
citizenship with a principal
purpose of avoiding U.S. taxes.
The expatriation tax provisions
also apply to long-term residents
who terminate residency with a
principal purpose of avoiding
USS. taxes; a long-term resident
is an individual who was a
lawful permanent resident for at
least 8 of the 15 taxable years
ending with the year in which
the termination occurs.

USS. citizens and long-term
residents are deemed to have
relinquished citizenship or
terminated residency for a
principal purpose of tax
avoidance if (1) the individual's
average U.S. income tax
liability for the 5 years before
the expatriation date exceeds
$100,000 or (2) the individual's
net worth as of the expatriation
date is $500,000 or more (with

36

purposes.

Individuals covered.--Under the

Senate amendment, the
expatriation income tax applies
to U.S. citizens who relinquish
citizenship and long-term
residents whose residency is
terminated if they meet certain
income or net worth thresholds.
A long-term resident is an
individual who was a lawful
permanent resident for at least 8
of the 15 taxable years ending
with the year in which the
termination occurs.

USS. citizens who relinquish
citizenship and long-term
residents who terminate
residency are subject to the
expatriation income tax if:

(1) the individual's average U.S.
income tax liability for the 5
years before the expatriation
date exceeds $100,000 or (2) the
individual's net worth as of the
expatriation date is $500,000 or
more (with indexing for these
dollar thresholds).


Item

Present Law

House Bill

Senate Amendment

indexing for these dollar
thresholds).

AUS. citizen who satisfies the
tax liability test or the net worth
test is not subject to the
expatriation tax provisions if he
can demonstrate that he did not
have a principal purpose of tax
avoidance and he is in one of
the following categories: (1) the
individual was born with dual
citizenship and retains only the
non-U.S. citizenship; (2) the
individual becomes a citizen of
the country in which the
individual, his spouse, or one of
his parents was born; (3) the
individual was present in the
US. for no more than 30 days in
any year of the 10 years
preceding the expatriation date;
(4) the individual relinquishes
citizenship before age 18-1/2; or
(5) the individual is in any other
category prescribed by
regulations. In order to qualify
for one of these exceptions, the
former U.S. citizen must submit
within | year of the expatriation
date a ruling request for a

37

An exception is provided for an
individual born with dual
citizenship who retains the non-
USS. citizenship and who is
resident in the other country as
of the expatriation date,
provided that he was resident in
U.S. for no more than 8 of the
15 years before the expatriation
date.

Another exception is provided
for a citizen who renounces U.S.
citizenship before age 18-1/2,
provided that he was a U.S.
resident for no more than 5
years before the expatriation
date.


Item

Present Law

House Bill

Senate Amendment

52

percent; for 1998, 70 percent;
for 1999 and thereafter, 0
percent. Under the phase-in, a
deduction is allowed for interest
on borrowings with respect to
the lives of more than 20,000
insured individuals, effective for
interest paid or accrued after
December 31, 1995.

1994 and 1995 contracts.--
Under a special rule for any life

insurance contract entered into
during 1994 or 1995, the
provision does not apply to debt
incurred before January 1, 1997,
except as provided under the
phase-in rule.

Pre-1986 Act contracts.--The
proposal generally does not
apply to interest on debt with
respect to contracts purchased
on or before June 20, 1986 (thus
generally continuing the
effective date provision of the
$50,000 limitation enacted in
the 1986 Act).

4-year spread.--A 4-year
income-spreading rule applies to



Item

Present Law

House Bill

Senate Amendment

H. Modifications to the
COBRA Health
Care Continuation
Rules (sec. 104(b) of
the House bill and
sec. 121 of the
Senate amendment)

In general --The health care
continuation rules (referred to as
"COBRA" rules, after the
Consolidated Omnibus Budget
Reconciliation Act of 1985 in
which they were enacted)
require that most employer-
sponsored group health plans
must offer certain employees
and their dependents ("qualified
beneficiaries") the option of
purchasing continued health
coverage in the case of certain
qualifying events. These
qualifying events include:
termination or reduction in
hours of employment, death,
divorce or legal separation,
enrollment in Medicare, or the
end of a child's dependency
under a parent's health plan. In
general, the maximum period of
COBRA coverage is 18 months.
An employer is permitted to
charge qualified beneficiaries
102 percent of the applicable
premium for COBRA coverage.

COBRA sanctions.--A tax is
imposed on the failure of a

group health plan to satisfy the

25

Application of COBRA
sanctions to health coverage
availability and portability

Application of COBRA
sanctions to health coverage
availability and portability



Item

Present Law

House Bill

Senate Amendment

Foreign nongrantor trust rules.--

Under the accumulation
distribution rules (which
generally apply to distributions
from a trust in excess of the
trust's distributable net income
for the taxable year), a
distribution by a foreign
nongrantor trust of previously
accumulated income generally
is taxed at the U.S. beneficiary's
average marginal rate for the
prior 5 years, plus interest.
Interest is computed at a fixed
annual rate of 6 percent, with no
compounding. If adequate
records of the trust are not
available to determine the
proper application of the rules
relating to accumulation
distributions to any distribution

55

Foreign or i

No provision.

grantor trust rules apply in
determining whether a foreign
corporation is characterized as a
passive foreign investment
company.

Effective date.--The provision
is effective on the date of
enactment.

Foreign nongrantor trust rules. --

Under the Senate amendment,
the interest rate applicable to
accumulation distributions from
foreign nongrantor trusts is the
interest rate for underpayments
of tax under section 6621(a)(2),
with compounding. Simple
interest continues to accrue at
the rate of 6 percent through
1995. Beginning on January 1,
1996, compound interest based
on the underpayment rate is
imposed on tax amounts
determined under the
accumulation distribution rules
and the total simple interest for
pre-1996 periods, if any. For
purposes of computing the
interest charge, the
accumulation distribution is


IDENTICAL PROVISION

Exemption from Income Tax for State-Sponsored Organizations Providing Health Coverage for High-Risk Individuals (sec.
341 of the House bill and sec. of the Senate amendment)


Item

Present Law

House Bill

Senate Amendment

ecial estate and gift tax
provisions.--Rules applicable in
the estate and gift tax contexts

44

Speci: is rul long-term
residents.--The House bill
provides that a long-term
resident may elect to use the fair
market value basis of property
on the date the individual
became a U.S. resident to
determine the amount of gain
subject to the expatriation tax
provisions if the property is sold
within the 10-year period after
expatriation.

Special estate and gift tax
provisions.--Under the House
bill, the special expatriation

provision are limited to the
amount of income tax that
would be due if the property
were sold for its fair market
value at the time of the transfer.
The $600,000 exclusion is
available to reduce taxes
imposed by reason of this
election. In order to make the
election, the expatriate is
required to provide security and
waive any treaty rights that
would preclude collection of the
tax.

Special basis rule for long-term

residents.--No provision.

Special estate and gift tax
provisions.--Under the Senate
amendment, the special estate


Item

Present Law

House Bill

Senate Amendment

42

with respect to the gain in trust
assets allocable to the interest at
the time of such event.

The tax with respect to qualified
trust interests generally is
imposed on distributions and is
collected through withholding,
provided that the expatriate
waives any treaty rights that
would preclude collection of the
tax. If the expatriate does not
agree to a waiver of such treaty
rights (and in the case of tax
imposed in connection with the
expatriates disposition of a trust
interest, the expatriate's death
while holding the trust interest,
or the expatriate's holding of a
trust interest that ceases to be
qualified), the tax is imposed on
the trust with a right of
contribution for other
beneficiaries.

In the case of a nonqualified
trust interest, the expatriate's
interest in the trust is
determined based on the facts
and circumstances on the
expatriation date. The


Item Present Law House Bill Senate Amendment
Chronically A chronically ill individual is Same as House bill.

Life insurance
company reserves

Exchanges of life
insurance and other
contracts for long-

rm contracts

Long-term care insurance
reserves are treated like
noncancellable accident and
health reserves, and are
determined under the two-year
full preliminary term method.

The exchange of a life
insurance, endowment or
annuity contract for a long-term
care insurance contract is not
specified as a tax-free exchange.

one who has been certified
within the previous 12 months
by a licensed health care
practitioner as (1) unable to
perform (without substantial
assistance) at least 2 activities of
daily living for a period of 90
days due to a loss of functional
capacity, (2) having a similar
level of disability as determined
in regulations, or (3) requiring
substantial supervision to
protect such individual from
threats to health and safety due
to severe cognitive impairment.

No provision.

No provision.

Long-term care insurance
reserves are determined under
the method prescribed by the
National Association of
Insurance Commissioners
(NAIC), which is currently the
one-year full preliminary term
method.

The exchange of a life
insurance, endowment or
annuity contract for a long-term
care insurance contract is
included as a tax-free exchange


Item

Present Law

House Bill

Senate Amendment

E. Modify Treatment
of Foreign Trusts
(secs. of
the Senate
amendment)

Inbound foreign grantor trust

Inbound foreign grantor trust

Inbound foreign grantor trust

tules.--Under the grantor trust
tules, a grantor generally is
treated as the owner of the
trust's assets without regard to
whether the grantor is a
domestic or foreign person.
Under these rules, U.S. trust
beneficiaries can avoid U.S. tax
on distributions from a trust
where a foreign grantor is
treated as owner of the trust,
even though no tax may be
imposed on the trust income by
any jurisdiction.

54

tules.--No provision.

tules.--The Senate amendment
generally applies the grantor
trust rules only to the extent that
they result, directly or
indirectly, in amounts being
currently taken into account in
computing the income of a U.S.
citizen or resident or a domestic
corporation. Certain exceptions
apply to this general rule.

Under the exceptions, the
general rule does not apply in
the case of revocable trusts and
trusts where the only amounts
distributable during the lifetime
of the grantor are to the grantor
or the grantor's spouse. These
exceptions do not apply to the
extent of gifts made by a U.S.
beneficiary of the trust to the
foreign grantor. The Senate
amendment does not apply to
trusts established to pay
compensation, and certain trusts
in existence as of September 19,
1995. In addition, the
amendment generally does not
apply where the grantor is a
controlled foreign corporation.
Under the amendment, the



Item

Present Law

House Bill

Senate Amendment

60

aggregate amount of the
distributions received during the
taxable year.

The Senate amendment provides
that if a U.S. owner of any
portion of a foreign trust fails to
appoint a limited U.S. agent to
accept service of process with
respect to requests and
summons by the Secretary of the
Treasury in connection with the
tax treatment of items related to
the trust, the Secretary of the
Treasury may determine the
amount to be taken into account
by a U.S. person under the
grantor trust rules

In cases where adequate records
are not provided to the Secretary
to determine the proper
treatment of any distributions
from a foreign trust, the
distribution includible in the
gross income of the U.S.
distributee is treated as an
accumulation distribution from
the mid year of a foreign trust
(ie, the number of years that
the trust has been in existence



Item

Present Law

House Bill

Senate Amendment

The provisions defining long-
term care insurance contracts
and long-term care services
apply to contracts issued after
December 31, 1996, with a
grandfather rule for contracts
issued before January 1, 1997
that met the long-term care
insurance requirements in the
State in which the policy was
sitused.

A contract providing for long-
term care insurance may be
exchanged for a long-term care
insurance contract that meets the
House bill requirements, tax-
free, between the date of
enactment and January 1, 1998.

The provision relating to
treatment of long-term care
insurance premiums as a
medical expense is effective for
taxable years beginning after
December 31, 1996.

The provision treating expenses
for long-term care services as a
medical expense is effective for
services furnished in taxable

Same as House bill.

Same as House bill.

The provision treating expenses
for long-term care services as a
medical expense is effective for


INTRODUCTION

This document,' prepared by the staff of the Joint Committee on Taxation, provides a comparison of the revenue provisions of
H.R. 3103 (the "Health Coverage Availability and Affordability Act of 1996") as passed by the House of Representatives on
March 28, 1996, and by the Senate on April 23, 1996.

The first portion of this document is a listing of the identical revenue provisions. This is followed by a comparative
description of the differing revenue provisions.

'This document may be cited as follows: Joint Committee on Taxation, Comparison of Revenue Provisions of H.R. 3103 (the
"Health Coverage Availability and Affordability Act of 1996") as Passed by the House and the Senate (SCX-41-96), July 26, 1996.

ii


Item

Present Law

House Bill

Senate Amendment

C. Expatriation Tax
Provisions (secs.
421-423 of the
House bill and secs.
471-473 of the
Senate amendment)

In general.--Individuals who
relinquish U.S. citizenship with
a principal purpose of avoiding
US. taxes are subject to special
tax provisions for 10 years after
expatriation.

Date of loss of citizenship.--The

determination of who is a U.S.
citizen for tax purposes, and
when such citizenship is lost, is
governed by the provisions of
the Immigration and Nationality
Act, 8 U.S.C. section 1401, et.
seq.

35

In general.--Certain U.S.

citizens who relinquish
citizenship and certain long-
term residents who terminate
residency are subject to special
tax provisions for 10 years after
expatriation.

Date of loss of citizenship.--No

provision.

In general.--Certain U.S.
citizens who relinquish
citizenship and certain long-
term residents who terminate
residency generally are subject
to tax on the unrealized gain in
their property upon expatriation.

Date of loss of citizenship.--

Under the Senate amendment,
for tax purposes, a U.S. citizen
who formally renounces his
citizenship before a U.S.
consular officer is treated as
losing citizenship as of that date.
A citizen who provides the
State Department with a
statement confirming
performance of an expatriating
act is treated as losing
citizenship as of the date the
statement is provided (and not
as of the date of the expatriating
act). If neither of these rules
apply, the citizen is treated as
losing citizenship as of date the
State Department issues a CLN
or a court cancels his certificate
of naturalization. The date the
citizen is treated as losing
citizenship applies for all tax


Item

Present Law

House Bill

Senate Amendment

23

spouse or dependents) if the
individual has received
unemployment compensation
under Federal or State law for at
least 12 consecutive weeks and |
the distributions are made
during a taxable year in which
such unemployment
compensation is received or the
succeeding taxable year. For
purposes of this rule, to the
extent provided in Treasury
regulations, a self-employed
individual is treated as having
received unemployment
compensation for at least 12
consecutive weeks if, under
Federal or State law, the
individual would have received
unemployment compensation
but for the fact the individual
was self-employed.

Effective date.--Taxable years
beginning after December 31,
1996.



TABLE OF CONTENTS

INTRODUCTION . «20.0.2 n bebe eb bb ecb eeetebtbtetbenenes ii
IDENTICAL PROVISION .... 100.00 e bebe t bebe eee tbrbbtbttbeceerees 1
COMPARISON OF REVENUE PROVISIONS |... 2000000000006 0 occ ccc cece cece ee ceeeeecesseeeeeees 2
I. Health-Related Provisions 2.0.6... 0 ccc cece tee ete eee tetevtebeererecs 2
A. Medical Savings Accounts «02.0.0 e tect ee v ett e tv tvereeeeee 2
B. _ Increase in Deduction for Health Insurance Expenses of Self-Employed Individuals .....................0-..- 8
C. Treatment of Long-Term Care Insurance and Services ..... 20.0000 ccc cv cece tee ve ececeeeee. 9
D. Treatment of Accelerated Death Benefits Under Life Insurance Contracts : 2.17
E. Health Insurance Organizations Eligible for Benefits of Section 833... 2.2.00... cece cece eee e cece 21
F. _ Penalty-Free Withdrawals from Individual Retirement Arrangements for Medical Expenses ................... 22
G. Organ and Tissue Donation Information Included with Income Tax Refund Payments
H. Modifications to the COBRA Health Care Continuation Rules... 20.0000 0.00 ccc cece cece
Th Revenue Offsets 202 ccc eben ecb b ebb b bbb bebe teenies es 31
A. Treatment of Bad Debt Reserves of Thrift Institutions
B. Earned Income Credit ......................
C. Expatriation Tax Provisions ...........00.00 00 0c cece eee eee eee
D. _ Disallow Interest Deduction for Corporate-Owned Life Insurance Policy Loans
E. Modify Treatment of Foreign Trusts............0.0..0 000000000 eee



Item

Present Law

House Bill

Senate Amendment

Failure to provide the required
statement results in a penalty for
each year the failure continues
equal to the greater of (1) 5
percent of the individual's
expatriation tax liability for such
year or (2) $1,000.

The State Department is
required to provide Treasury
with all statements received
from former citizens and the
names of those who refuse to
provide the statement. The
State Department is also
required to provide Treasury
with a copy of each CLN
approved. The agency
administering the immigration
laws is required to provide
Treasury with the names of
individuals whose residency
status is revoked or determined
to have been abandoned.

Treasury is required to publish
in the Federal Register the
names of all former citizens
from whom it receives
statements or whose names it
receives under the information-



Item

Present Law

House Bill

Senate Amendment

Il, REVENUE OFFSETS

A. Treatment of Bad
Debt Reserves of
Thrift Institutions
(sec. 401 of the
House bill and sec.
__ of the Senate
amendment)

A qualified thrift institution is
allowed deductions for bad
debts pursuant to a reserve
method provided in section 593.
Under section 593, a qualified
thrift institution generally is
allowed a deduction equal to the
greater of: (1) eight percent of
its taxable income or (2) the
amount necessary to increase its
bad debt reserve to a level that
reflects the institution's actual
experience for losses relative to
its average outstanding loan
balance for the last six years. A
qualified thrift institution is a
building and loan association,
mutual savings bank, or
cooperative bank that maintains
at least 60 percent of its assets
in qualifying assets (generally
cash, government securities, and
mortgage loans).

A qualified thrift institution that
makes certain excessive
distributions to shareholders
may be required to recapture at
least part of its bad debt reserve

The House bill repeals the bad
debt reserve method of thrift
institutions of section 593.

The portion of the bad debt
reserves that arose after 1987
will be recaptured and restored
to income over 6 years. This
recapture will be suspended for
two years if the institution
continues to make qualifying
residential loans during this
period. The portion of the bad
debt reserves that arose before
1988 will be recaptured under
section 593(e) only if the
institution makes certain
distributions to shareholders.
Certain internal reorganizations
of a group of thrift institutions
will not be treated as
distributions to shareholders for
purposes of section 593(e).

Effective date.--Effective for
taxable years beginning after
1995. The provision will not
apply to certain distributions
with respect to preferred stock

31

The Senate amendment
generally is the same as the
House bill. The Senate
amendment does not contain the
tule that applies to certain
internal reorganizations of a
group of thrift institutions.
(Floor amendment by Senators
Domenici and Wellstone; the
Senate failed to table the
amendment by a vote of 30-68.)

Effective date.--Effective for
taxable years beginning after
1995. The Senate amendment
does not contain the rule that



Item

Present Law

House Bill

Senate Amendment

corporation on the expatriation
date or at any time during the
preceding 2 years. Such
recharacterization applies only
to the extent of the earnings and
profits attributable to such stock
earned or accumulated prior to
the expatriation date (and while
the ownership requirement is
satisfied).

The House bill also suspends
the running of the 10-year
period for imposition of the
expatriation income tax with
respect to a property during any
period in which the individual's
tisk of loss with respect to such
property is substantially
diminished.

Special rules for trust interests.--
No provision.

40

must provide adequate security
and must waive any treaty rights
that would preclude collection
of the tax in order to elect to
defer payment.

Special rules for trust interests. --
The Senate amendment provides

special rules with respect to the
application of the expatriation
income tax in the case of trust
interests. The rules applicable
to trust interests depend on
whether the trust is a qualified
trust. A qualified trust is a trust
governed by U.S. law which is


Item

Present Law

House Bill

Senate Amendment

COBRA rules. The tax may be
imposed on the employer
sponsoring the plan in the case
of a plan other than a
multiemployer plan, on the plan
in the case of a multiemployer
plan, or on each person who is
responsible for administering or
providing benefits under the
plan if such person has, by
written agreement, assumed
responsibility for performing the
act pursuant to which the
violation occurs.

The amount of the tax is
generally equal to $100 per day
for each day on which there is a
violation. The tax applies
separately with respect to each
qualified beneficiary for whom
a failure occurs. In general, a
tax will not be imposed if the
violation was unintentional and
is corrected within 30 days. The
maximum tax for unintentional
violations that can be imposed
for a taxable year generally is
the lesser of (1) 10 percent of
the employer's payments under
group health plans (or under the

requirements.--Under the House
bill, group health plans,

insurers, and health maintenance
organizations ("HMOs") are
subject to certain requirements
regarding portability, limitations
on exclusion of preexisting
conditions, and prohibitions on
excluding individuals from
coverage based on health status.
The House bill extends the tax
for failures to satisfy the
COBRA tules to failures to
comply with these requirements.

No tax is imposed on an
insurer or HMO that is governed
under a State law that the
Secretary of Health and Human
Services has determined to
provide enforcement of similar
requirements. In addition, no
tax may be imposed on a small
employer (defined as an
employer who employs at least
2, but fewer than 51 employees
on a typical business day) that
provides health care benefits
through a contract with an
insurer or HMO and the
violation is solely because of the

26

requirements.--No provision.



Item

Present Law

House Bill

Senate Amendment

Employer-provided
coverage

Itemized deduction
for medical
expenses

Contributions by an employer,
and amounts received by an
employee, under an accident or
health plan, are excludable from
the employee's income. A
cafeteria plan is an employer-
sponsored arrangement under
which employees can elect
among cash and certain
employer-provided qualified
benefits. A flexible spending
account ("FSA") is an
arrangement under which an
employee is reimbursed for
medical expenses.

An itemized deduction is
allowed for unreimbursed
medical expenses of the
taxpayer, his or her spouse or
dependent, to the extent that the
medical expenses exceed 7.5
percent of the taxpayer's
adjusted gross income ("AGI")
for the year.

contract. A payor of long-term
care benefits is required to
report the amount of such
benefits.

A plan of an employer providing
coverage under a long-term care
insurance contract generally is
treated as an accident or health
plan, but coverage under a long-
term care insurance contract is
not excludable by an employee
if provided through a cafeteria
plan, and expenses for a long-
term care services cannot be
reimbursed under an FSA.

Within annual dollar limits that
vary with the insured person's
age, premiums for long-term
care insurance are treated as
deductible medical expenses.
Unreimbursed expenses for
qualified long-term care
services are treated as medical
expenses without reference to
the dollar limits. The services

Same as House bill.

Same as House bill.


Item

Present Law

House Bill

Senate Amendment

Reporting of certain foreign

gifts.--There is no requirement
to report gifts or bequests from
foreign sources.

62

Reporting of certain foreign
gifts.--No provision.

failure for each 30-day period
beginning 90 days after the
Secretary of the Treasury
notifies the responsible party of
such failure. Such penalties are
subject to a reasonable cause
exception. In no event will the
total amount of penalties exceed
the gross reportable amount.

Effective date.--The reporting
requirements and applicable

penalties generally apply to
reportable events occurring, or
distributions received, after the
date of enactment. The annual
reporting requirement and
penalties applicable to U.S.
grantors apply to taxable years
of such persons beginning after
the date of enactment.

Reporting of certain foreign
gifts.--The Senate amendment

generally requires any U.S.
person (other than certain tax-
exempt organizations) that
receives purported gifts or
bequests from foreign sources
totaling more than $10,000
during the taxable year to report



Item

Present Law

House Bill

Senate Amendment

sharing provisions.

Treasury Department study.--
Treasury is directed to

undertake a study on the tax
compliance of U.S. citizens and
green-card holders residing
abroad and to make
recommendations regarding the
improvement of such
compliance.

Effective date.--The

expatriation tax provisions of
the House bill apply to
individuals who terminate
residency or who relinquish
citizenship on or after February
6, 1995. The required
information statement is not due
earlier than 90 days after date of
enactment.

An individual who committed
an expatriating act within one
year prior to February 6, 1995,
but who had not applied for a
CLN as of February 6, 1995, is
subject to the expatriation tax
provisions of the House bill as
of the date of application for

48

Treasury Department study.--

Same as the House bill.

Effective date.--The Senate

amendment applies to
individuals who terminate
residency or who are treated as
losing citizenship on or after
February 6, 1995. The tentative
tax and the required information
statement are due not earlier
than 90 days after date of
enactment.

An individual who committed
an expatriating act before
February 6, 1995 but who
provided the confirming
statement or had a CLN issued
on or after such date is subject
to the expatriation tax imposed
under the Senate amendment as



Item

Present Law

House Bill

Senate Amendment

D. Disallow Interest
Deduction for
Corporate-Owned
Life Insurance
Policy Loans (sec.
___ of the Senate
amendment)

Deduction disallowance
rule

Key person exception

No deduction is allowed for any
interest paid or accrued on any
indebtedness with respect to one
or more life insurance policies
owned by the taxpayer covering
the life of any individual who
(1) is an officer or employee of,
or (2) is financially interested in,
any trade or business carried on
by the taxpayer to the extent that
the aggregate amount of such
debt with respect to policies
covering the individual exceeds
$50,000.

No provision.

50

No provision.

No provision.

No deduction is allowed for
interest paid or accrued on any
indebtedness with respect to one
or more life insurance policies
or annuity or endowment
contracts owned by the taxpayer
covering any individual who is
(1) an officer or employee of, or
(2) financially interested in any
trade or business carried on by
the taxpayer, regardless of the
aggregate amount of debt with
respect to policies or contracts
covering the individual.

An exception is provided
retaining present law for interest
on indebtedness with respect to
life insurance policies covering
up to 10 key persons.

(Floor amendment by Senators
Dole and Roth, adopted by a



Item

Present Law

House Bill

Senate Amendment

Penalty-free
withdrawals from
TRAs an i
deferrals for long-
term care insurance

Consumer
protection
provisions

A 10-percent early withdrawal
tax applies to distributions from
individual retirement
arrangements ("IRAs") and
qualified retirement plans. The
tax does not apply to
distributions from a qualified
plan for medical expenses in
excess of 7.5 percent of AGI. In
addition, certain plans are
generally prohibited from
making distributions prior to age
59-1/2, termination of
employment, or certain other
limited circumstances.

No provision.

13

No provision.

Long-term care insurance
contracts, and issuers of
contracts, are required to satisfy
certain provisions of the long-
term care insurance model Act
and model regulations
promulgated by the NAIC (as
adopted as of January 1993)

Effective dates.--

The Senate amendment permits
distributions for long-term care
insurance premiums from IRAs
and amounts attributable to
elective deferrals under 401(k)
plans, tax-sheltered annuities,
non-qualified deferred
compensation plans of
governmental or tax-exempt
employers, and section
501(c)(18) plans, without
imposition of the 10-percent
early withdrawal tax. Such
distributions are includable in
income (as under present law).

Same as House bill.

(Floor amendment by Senators
Dole and Roth, adopted by a
vote of 98 - 0.)

Effective dates.--

Same as House bill.