17

F. Require Taxpayer Identification Numbers for All Children
Regardless of Age

Present Law

A taxpayer claiming an exemption for a dependent is required
to provide a taxpayer identification number (TIN) on the tax
return for any dependent who has attained the age of 1 as of the
close of that taxable year (sec. 6109(e)). A parallel
requirement applies to taxpayers with qualifying children
claiming the earned income tax credit (EITC) (sec. 32(c) (3) (D)).
An individual's TIN is, in general, that individual's social
security number.

Description of Chairman's Mark

The proposal would require that taxpayers claiming
dependents provide a TIN for each dependent, regardless of the
Gependent's age. A parallel requirement would apply to taxpayers
with qualifying children claiming the EITC.

Effective Date

For returns filed with respect to tax year 1995, taxpayers
would be required to provide TINs for all dependents and
qualifying children for EITC purposes who were born on or before
October 31, 1995. For returns filed with respect to tax year
1996, taxpayers would be required to provide TINs for all
dependents and qualifying children born on or before November 30,
1996. For returns filed with respect to tax year 1997, and all
subsequent years, taxpayers would be required to provide TINs for
all dependents and qualifying children, regardless of their age.



11
c. Partnership Distributions of Marketable Securities
Present Law

Neither a partnership nor its partners generally recognize
gain upon a distribution of partnership property to a partner,°
except that a partner recognizes gain to the extent that the
amount of money distributed exceeds the partner's basis in its
partnership interest immediately before the distribution.

A partner's basis in property distributed in a non-
liquidating distribution is the lesser of the partnership's
adjusted basis in the distributed property or the partner's
adjusted basis in the partnership interest (reduced by money
distributed in the transaction). A partner's adjusted basis in
its partnership interest is reduced by the amount of money and
the basis of property distributed to him in a non-liquidating
distribution.

In a liquidating distribution, the partner's basis in the
distributed property equals the partner's basis in the
partnership interest (reduced by money distributed in the
transaction).

In general, then, if a partnership distributes cash to a
partner in an amount that exceeds the adjusted basis of its
partnership interest, the partner must recognize gain; but if the
partnership distributes marketable securities to the partner in
lieu of cash, the partner can defer recognizing gain.

Description of Chaizman's Mark

Under the proposal, a partner would recognize gain on the
distribution by a partnership of marketable securities to the
extent the fair market value of the marketable securities exceeds
the partner's adjusted basis in its partnership interest
immediately before the distribution. The partner's basis in the
distributed securities would be increased by the amount of gain
recognized under the proposal.

The proposal would provide exceptions. The proposal would
not apply to a partnership distribution (1) of marketable
securities that the distributee partner contributed, (2) that
does not exceed the distributee partner's proportionate share of

Exceptions to this general nonrecognition rule for asset
distributions include certain distributions of property
contributed by a partner or of other property when the
partnership holds contributed property; disguised sale
transactions; and certain disproportionate distributions that are
treated as sales or exchanges.



21
J. Rounding Rules for Cost-Of-Living Adjustments
Present Law

Under present law, the dollar limit on benefits under a
defined benefit pension plan ($118,800 for 1994), the limit on
elective deferrals under a qualified cash or deferred arrangement
($9,240 for 1994), and the minimum compensation limit for
determining eligibility for participation in a simplified
employee pension (SEP) ($396 for 1994) are adjusted annually for
inflation. The dollar limit on annual additions to a defined
contribution plan is the greater of $30,000 or 1/4 of the dollar
limit for benefits under defined benefit pension plans. Thus, the
dollar limit will be $30,000 until the defined benefit pension
plan dollar limit exceeds $120,000. The dollar limit on
compensation that generally may be taken into account for
qualified plan purposes is $150,000. The $150,000 limit is
indexed in $10,000 increments.

Description of Chairman's Mark

The proposal would provide that (1) the dollar limit on
benefits under a defined benefit pension plan is indexed in
$5,000 increments, (2) the dollar limit on annual additions under
a defined contribution plan is indexed in $5,000 increments, (3)
the limit on elective deferrals is indexed in $500 increments,

(4) as under present law, the compensation limit is indexed in
$10,000 increments, and (5) the minimum compensation limit for
SEP participation is indexed in $50 increments. In each case,
the limits would be rounded to the next lowest multiple of the
increment. In addition, the proposal would provide that the
cost-of-living adjustment with respect to any calendar year is
based on the increase in the applicable index as of the close of
the calendar quarter ending September 30 of the preceding
calendar year so that the adjusted dollar limits would be
available before the beginning of the calendar year to which they

apply.
Effective Date

The proposal would be effective for years beginning after
December 31, 1994.



2

I. OFFSETTING THE COSTS OF THE URUGUAY ROUND AGREEMENT OF THE
GENERAL AGREEMENT ON TARIFFS AND TRADE

The CBO estimates that for the period 1995-1999, the
implementation of the Uruguay Round of GATT will increase the
deficit by approximately $11.5 billion.

The Chairman's mark adopts the recommendations of the
Administration to offset these costs through a combination of
outlay reductions, revenue provisions and previously enacted
legislation (pay-go balances). Proposed outlay reductions, when
added to reductions proposed by the Administration for other
Committees, total approximately $4.5 billion over the five-year
window. Previously enacted legislation contributes an additional
$2 billion in offsets over the same period. Together, these two
components total about $6.5 billion. In addition, the Chairman's
mark proposes compliance and timing changes with respect to
revenues that yield between $4 and $4.5 billion over the period.
The mark also includes three other revenue proposals, primarily
extensions of current law, that yield approximately $500 million
more in offsets.

Part II of this document describes the revenue proposals in
greater detail.


32
0. Use of Excess Pension Assets for Retiree Health Benefits

Present Law

Under present law, defined benefit pension pian assets
generally may not revert to an employer prior to the termination
of the plan and the satisfaction of all plan liabilities.

Certain procedural requirements also must be met. Any assets
that revert to the employer upon such termination are includible
in the gross income of the employer and subject to an excise tax.
The rate of the excise tax varies depending upon whether or not
the employer maintains a replacement plan or makes certain
benefit increases, and can be as high as 50 percent of the amount
of the reversion. Upon plan termination, the accrued benefits of
all plan participants are required to be 100-percent vested.

Under present law, a pension plan may provide medical
benefits to retirees through a section 401(h) account that is
part of such plan. Present law permits certain qualified
transfers of excess assets from the pension assets in a defined
benefit pension plan (other than a multiemployer plan) to the
section 401(h) account that is a part of such plan. The assets
transferred are not includible in the gross income of the
employer and are not subject to the excise tax on reversions.

Assets transferred in a qualified transfer cannot exceed
certain limits. The transferred assets (and any income thereon)
are required to be used to pay qualified current retiree health
liabilities (either directly or through reimbursement) for the
taxable year of the transfer. Transferred amounts are generally
required to benefit all participants in the pension plan who are
entitled upon retirement to receive retiree medical benefits
(other than key employees) through the section 401(h) account.
Retiree health benefits of key employees may not be paid
(directly or indirectly) out of transferred assets. In order for
the transfer to be qualified, accrued retirement benefits under
the pension plan must be nonforfeitable as if the plan terminated
on the date of transfer.

Amounts not used to pay qualified current retiree health
liabilities for the taxable year of the transfer are to be
returned at the end of the taxable year to the general assets of
the plan.

An employer that makes a transfer to a section 401(h)
account from the defined benefit plan assets is required to
maintain employer-provided retiree health expenditures for
covered retirees at a minimum dollar level for the taxable year
of the transfer and the following 4 taxable years.

The provision permitting the transfer of excess pension
assets to pay current retiree health benefits expires for taxable



18
G. Voluntary Withholding on Taxable Federal Government Payments
Present Law

Taxpayers may choose to have income taxes withheld from
pension distributions, annuity payments, or other types of
. Payments (secs. 3405 and 3402(p)). Taxpayers may not, however,
have income taxes voluntarily withheld from Social Security
payments or other taxable Federal payments (e.g., Trade
Adjustment Assistance, crop disaster payments, Commodity Credit
Corporation loans, agricultural price supports) .

Description of Chairman's Mark

Taxpayers who receive specified Federal payments would be
given the option of requesting that the Federal agency making the
payments withhold Federal income taxes from the payments.
Specified Federal payments subject to the withholding option
would include (1) Social Security benefits; (2) Trade Adjustment
Assistance; (3) crop disaster payments; (4). Commodity Credit
Corporation loans; (5) agricultural price supports; and (6) other
Federal payments specified by the Secretary of the Treasury.

Where a taxpayer requests that the Federal agency making the
payments withhold Federal income taxes, the taxpayer would also
select the percentage of the payment that is to be withheld. The
taxpayer may select withholding at 7 percent, 15 percent, 28
percent, or 31 percent. Treasury regulations may also specify
additional percentage rates for withholding.

Federal agencies making the payments would not receive any
additional information regarding the taxpayer's income as a
consequence of this proposal.

Effective Date

The proposal would be effective for payments made after
December 31, 1996.



24

Act")) and continuing until the Omnibus Budget Reconciliation Act
of 1993 (the "1993 Act"), in all cases where provisional income
was over the base amount, the amounts included were limited by
the lesser of 50 percent of the taxpayer's benefits, or 50
percent of the excess of provisional income over the base

amount .

Treatment of nonresident alien individuals

Tf a nonresident alien individual is engaged in a trade or
business within the United States during the taxable year, the
individual is subject to tax under the Code, at the normal
graduated rates, on net taxable income that is effectively
connected with the conduct of the trade or business. U.S. source
fixed or determinable annual or periodical income of a
nonresident alien individual (for example, salary, wages,
annuities, compensation, remuneration, and emoluments) that is
not effectively connected with the conduct of a U.S. trade or
business generally is subject to tax under the Code at a rate of
30 percent of the gross amount paid. This latter tax generally
is collected by means of withholding (hence this tax is often
called a "withholding tax"). Withholding taxes are often reduced
or eliminated in the case of payments to residents of countries
with which the United States has an income tax treaty.

Under rules that have been in the Code since the 1983 Act,
for purposes of taxing the income of nonresident alien
individuals, the income thresholds for including Social Security
and Railroad Retirement Tier 1 benefits do not apply. Instead,
50 percent of any such benefit is included in gross income.

Thus, a nonresident alien individual typically may be subject to
U.S. withholding tax under the Code at an effective rate of 15
percent on the gross amount of U.S. social security benefits.
This tax may be reduced or eliminated under some treaties.
Although the 1993 Act increased the inclusion of benefits in some
cases, for taxpayers other than nonresident aliens, to up to 85
percent of the benefits, the 1993 Act did not amend the rule that
a nonresident alien individual is required to include 50 percent
(and only 50 percent) of these benefits in gross income.

Description of Chairman's Mark

The proposal would increase from 50 percent to 85 percent
the amount of Social Security or Railroad Retirement Tier 1
benefits included in the gross income of a nonresident alien
individual. Thus, under the proposal a nonresident alien
individual may be subject to U.S. withholding tax under the Code
at an effective rate of 25.5 percent on the gross amount of U.S.
Social Security or Railroad Retirement Tier 1 benefits.

The proposal would not impose tax contrary to any treaty
obligation of the United States. Thus, in cases where taxation



20
I. Decrease Rate of Interest Paid on Overpayments of Tax

Present Law

The rate of interest that IRS pays to taxpayers on
overpayments of tax is the sum of the Federal short-term rate
plus 2 percentage points (sec. 6621(a) (1)).

Description of Chairman's Mark

In general, the overpayment rate would be reduced to the sum
of the Federal short-term rate plus one-half percentage point. A
special rule would apply to income taxes only. Under this
special rule, the overpayment rate would be the same as under
present law for the first $2,000 of the overpayment, and would be
the proposed lower rate for any portion of an overpayment that
exceeds $2,000.

Effective Date

The proposal would be effective for purposes of determining
interest for periods after December 31, 1994, regardless of the
taxable period (if any) to which the underlying tax may relate.



33
years beginning after December 31, 1995.
Description of Chairman's Mark

The present-law provision permitting excess defined benefit
pension plan assets to be used to provide retiree health benefits
under a section 401(h) account would be extended for 5 years.

Effective Date

The proposal would be effective with respect to taxable
years beginning after December 31, 1995, and before January 1,
2001.



15

E. Acceleration of Deposits of Payments for Certain Excise
Taxes

Present Law

The Code imposes excise taxes on certain communications
services (sec. 4251 et seq.), air transportation, (sec. 4261 et
seq., tobacco products and cigarette papers and tubes (sec. 5701
et seq.), and alcoholic beverages (distilled spirits, wine, and
beer) (sec. 5001 et seq.). The excise taxes on communications
services and air transportation are paid by the person receiving
the services (the customer), but are collected by the service
provider. The excise taxes on tobacco products and alcoholic
beverages are paid by manufacturers or importers of such
products.

All of these taxes are generally required to be deposited or
paid on a semi-monthly basis. With respect to communications
services and air transportation excise taxes, service providers
May make semi-monthly deposits on the basis of amounts actually
collected during the period; such deposits must be made by the
9th day of the following period. Alternatively, deposits may be
made on the basis of amounts considered collected during the
first week of the period, in which case the deposit must be made
by the third banking day after the end of that week. Section
7503 of the Code provides that, if the day for deposit of a tax
would otherwise fall on a Saturday, Sunday, or legal holiday, the
due date is the next succeeding day which is not a Saturday,
Sunday, or legal holiday.

Payments of the tobacco products and alcoholic beverage
excise taxes for a semi-monthly period generally must be made by
the 14th day after the last day of the period. If the date for
payment of these taxes would otherwise fall on a Saturday,
Sunday, or legal holiday, the due date is the immediately
preceding day which is not a Saturday, Sunday, or legal holiday.
Small wine producers (generally, producers who paid less than
$1,000 of wine excise tax during the preceding calendar year) may
pay the wine excise tax on an annual basis by remitting the tax
for the calendar year within 30 days after its end.

Description of Chairman's Mark

The proposal would accelerate the due date for deposit (or
payment) of communications services, air transportation, tobacco
products and alcoholic beverage excise taxes for the period
September 16 through September 22 to September 27th (rather than
in the subsequent fiscal year).° This provision would not apply

° This proposal genérally would conform the communications

services, air transportation, tobacco products,



7

changes of style, broken lots, or other similar causes
("subnormal goods") may be valued at bona fide selling prices,
less direct costs of disposition (Treas. reg. sec. 1.471-2(c)).

Components of cost method under the LIFO method

Taxpayers using the LIFO method to account for inventories
May use the "dollar-value" LIFO method. Under the dollar-value
LIFO method, inventory items are expressed in terms of "base-
year" costs and are grouped in inventory pools. Total base-year
costs by pool, rather than the quantity of specific goods, are
used to measure inventory increases and decreases. If ending
inventory at base-year costs is greater than beginning inventory
at base-year costs (i.e., there has been an increase in
inventory), such increase is valued at current-year costs.
Taxpayers define items in the pool under the "total product cost"
(TPC) method or the "components of cost" (COC) method. Under the
TPC method, ending inventory is determined by valuing the items
in ending inventory by the base-year cost of producing such
items. Under the COC method, taxpayers measure ending inventory
not with reference to the total product cost of producing the
items in ending inventory, but rather treat the units of
production (i.e., the amount of material, labor, and overhead)
that were used to produce the inventory as separate items.

The application of the COC method to labor and overhead is
unclear under present law.* Accordingly, the COC method as
applied by some taxpayers may produce different results than the
TPC method whenever a taxpayer's production processes change
between the base year and the current year. For example, assume
that in the base year the taxpayer can produce an item by
applying 5 units of material at $8 a unit, 10 hours of labor at
$10 an hour, and 10 hours of overhead at $5 an hour.‘ Thus, it
costs $190 to produce an item in the base year (5 times $8, plus
10 times $10, plus 10 times $5). Further assume that: (1) the

> The use of the COC method as applied by some taxpayers with

respect to labor and overhead costs is not specifically provided
for in the Code or regulations, but such method may be used for
financial accounting purposes. Treasury regulations allow
taxpayers to treat raw materials (and the raw material content of
work-in-process and finished goods) as a separate item under the
LIFO method (Treas. reg. sec. 1.472-1(c)). The Internal Revenue
Service has ruled under the particular facts and circumstances of
one taxpayer that the application of the COC method by that
taxpayer did not clearly reflect income (Technical Advice
Memorandum 9405005).

‘In this example, overhead is allocated to inventory
pursuant to a burden rate based on labor hours. Such allocations
are common.


30

One qualifying Two or more No qualifying
child-- qualifying children--
children- -

Credit Phaseout Credit Phaseout Credit Phaseout

Year rate rate rate rate rate rate
1994 26.30 15.98 30.00 17.68 7.65 7.65
1995 34.00 15.98 36.00 20.22 7.65 7.65
1996 34.00 15.98 40.00 21.06 7.65 7.65
and after

In order to claim the EITC, a taxpayer must either have a
qualifying child or must meet other requirements. A qualifying
child must meet a relationship test, an age test, and a residence
test. Part of 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.

In order to claim the EITC without a qualifying child, a
taxpayer must not be a dependent and must be over age 25 and
below age 65. In addition, the taxpayer's principal place of
abode must be located in the United States for more than one-half
of the taxable year.

Description of Chairman's Mark

For any period during which a member of the Armed Forces is
stationed outside the United States while serving on extended
active duty, the member would not be subject to the present-law
requirements to claim the EITC that the principal place of abode
for a qualifying child or the member be in the United States.
Thus the proposal would extend the BITC to United States military
personnel stationed overseas.

The proposal also would require that members of the Armed
Forces receive annual reports from the Department of Defense of
earned income (which includes nontaxable earned income such as
amounts received as basic allowances for housing and
subsistence). This increased information reporting is intended
to allow members of the Armed Forces claiming the EITC to
determine more accurately the actual amount of EITC to which they
are entitled.



27

One qualifying

Two or more

No qualifying

child-- qualifying children--
children--
Credit Phaseout Credit Phaseout Credit Phaseout

Year rate rate rate rate rate rate

1994 26.30 15.98 30.00 17.68 7.65 7.65

1995 34.00 15.98 36.00 20.22 7.65 7.65

1996 34.00 15.98 40.00 21.06 7.65 7.65
and after

In order to claim the EITC, a taxpayer must either have a
qualifying child or must meet other requirements. A qualifying
child must meet a relationship test, an age test, and a residence
test. Part of 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.

In order to claim the EITC without a qualifying child, a
taxpayer must not be a dependent and must be over age 25 and
below age 65. In addition, the taxpayer's principal place of
abode must be located in the United States for more than one-half
of the taxable year.

Nonresidents and the EITC

The EITC may be claimed by a taxpayer meeting the above
requirements regardless of whether the taxpayer is a U.S.
citizen, a resident alien, or a nonresident alien.

Section 7701(b) defines a resident alien for income tax
purposes. Aliens who do not meet this definition are nonresident
aliens. For income tax purposes, an individual is generally
considered a resident if the individual:

(1) has entered the United States as a lawful permanent U.S.
resident (the "green card test"); or

(2) is present in the United States for 31 or more days
during the current calendar year and has been present in the
United States for 183: or more days during a 3-year period
weighted toward the present year (the "substantial presence



4

under the annualization method, the IRS has ruled that a taxpayer
may treat certain income inclusions under subpart F as income
actually earned by the U.S. shareholder on the last day of the
controlled foreign corporation's taxable year.* The ruling
involved a U.S. corporation that owned all of the stock of a
number of controlled foreign corporations. All of the
corporations involved used the calendar year as their taxable
years. As a result, the U.S. taxpayer was not required to take
its pro-rata share of subpart F income into account in
determining its estimated tax installments based on the
annualization method.

Inclusions pursuant to section 936 (h)

Certain domestic corporations with business operations in
the U.S. possessions elect the use of the section 936 credit.
This credit generally eliminates some or all of the U.S. tax on
certain income related to their operations in the possessions.
If such a corporation (a "936 corporation") is to receive the
full benefit of the section 936 credit, and the business
operations in the possession relate to certain types of
intangible property, then certain shareholders and affiliates of
the 936 corporation generally must include in their taxable
incomes certain amounts relating to income from the intangible
property, either under a general rule that requires all
intangible property income to be allocated to the corporation's
U.S. shareholders, or under either a profit split or cost sharing
approach.

For estimated tax purposes, intangible property income
inclusions of a 936 corporation's shareholders or amounts
allocated to shareholders or affiliates under either the profit
split or cost sharing rules may be deemed to occur either at the
close of the 936 corporation's taxable year, or on the last day
of the taxable year of the shareholder or affiliate in which or
with which the taxable year of the 936 corporation ends. Thus, in
some cases, a shareholder or affiliate of a 936 corporation may
utilize the annualization method to avoid penalties for
underpayment of estimated tax, yet delay paying tax on intangible
property income inclusions until as late as the due date of its
annual tax return.

Description of Chairman's Mark

If a taxpayer pays estimated tax installments based on
annualized amounts of actual income earned prior to the due date
of the installment, then the taxpayer would be required under the
proposal to treat amounts includible under subpart F as having
been earned by the taxpayer throughout the taxable year.

? PLR 9233001 (April 28, 1992).


3

II. DESCRIPTION OF FINANCING OPTIONS

A. Estimated Tax Treatment of Subpart F Inclusions and
Inclusions of Certain Amounts Under Section 936

Present Law
Estimated tax rules--in general

Taxpayers are subject to an addition to tax for any
underpayment of estimated tax. A corporation does not have an
underpayment of estimated tax if it makes four equal, timely
estimated tax payments that total at least 100 percent of the tax
liability shown on its return for the current taxable year. A
corporation that is not a "large corporation" (i.e., one that did
not have taxable income of $1 million or more for any of the
three preceding taxable years) generally may avoid the addition
to tax if it makes four timely estimated tax payments each equal
to at least 25 percent of the tax liability shown on its return
for the preceding taxable year. In addition, any corporation may
base its first quarterly installment on its prior-year tax
liability in order to avoid the addition to tax.

Individuals generally do not have an underpayment of
estimated tax if timely estimated tax payments are made that are
at least equal to (1) 100 percent of the tax shown on the
individual's return for the preceding year, or (2) 90 percent of
the tax shown on the return for the current year. A safe harbor
of 110 percent of last year's liability applies, in lieu of the
general 100 percent safe harbor, if the taxpayer had adjusted
gross income of more than $150,000 for the prior taxable year.

If estimated tax installments fall short under the foregoing
rules, a taxpayer may nevertheless be treated as not having made
an underpayment of estimated tax if the installments are based on
a fraction of the "annualized" amount of actual income earned
over a specified period (within the current taxable year) that
ends before the due date of the installment. For corporations,
these annualization periods exclude the last month of the
corporation's taxable year.

Subpart F inclusions

Under the rules of subpart F (Code secs. 951-964), if a U.S.
shareholder owns the stock of a controlled foreign corporation on
the last day of the corporation's taxable year, then the U.S.
shareholder may be required to include in its own income certain
income or earnings of the controlled foreign corporation. For
purposes of computing required installments of estimated tax


16

to wine excise taxes that are remitted on an annual basis.

As under the present-law rules applicable to tobacco
products and alcoholic beverages, if September 27 is a Saturday,
Sunday, or legal holiday, deposits and payments of taxes
otherwise due on that date would be due on or before the

immediately preceding day which is not a Saturday, Sunday, or
legal holiday.

Effective Date

The proposal would be effective on January 1, 1995, for the
communications services, tobacco products and alcoholic beverages
excise taxes and on January 1, 1997, for the air transportation
excise taxes.

and alcohol

excise tax deposit (or payment) requirements to those applicable
under present law to gasoline and diesel fuel excise taxes.



6
B. Modify Inventory Accounting Rules

Present Law
iIn_general

When, in the opinion of the Secretary of the Treasury, the
use of inventories is necessary to clearly determine the income
of a taxpayer, inventories are to be taken by the taxpayer in a
manner prescribed by the Secretary, conforming as nearly as
possible to the best accounting practices in the taxpayer's trade
or business and as most clearly reflects income. A taxpayer that
sells goods in the active conduct of its trade or business
generally must maintain inventory records in order to determine
the cost of goods it sold during the taxable period. Cost of
goods sold generally is determined by adding the taxpayer's
inventory at the beginning of the period to purchases made during
the period and subtracting from that sum the taxpayer's inventory
at the end of the period.

Because of the difficulty of accounting for inventory on a
specific item-by-item basis, taxpayers often use conventions that
assume certain item or cost flows. Among the conventions that a
taxpayer may choose are the "first-in-first-out" (FIFO) method
which assumes that the items in ending inventory are those most
recently acquired by the taxpayer, and the "last-in-first-out"
(LIFO) method which assumes that the items in ending inventory
are those earliest acquired by the taxpayer. Accounting for
inventory under the LIFO method tends to decrease taxable income
during periods of inventory price inflation. Taxpayers are
required to use a LIFO inventory method for financial accounting
purposes in order to use the method for Federal income tax
purposes. The FIFO and LIFO methods are general methods of
accounting for inventory that may be specifically applied by
different taxpayers in different ways.

Lower of cost or market under the FIFO method

Treasury regulations provide that taxpayers that maintain
inventories under the FIFO method may determine the value of
ending inventory under the (1) cost or (2) "lower of cost or
market" (LCM) method (Treas. reg. sec. 1.471-2{c)). Under the
LCM method, the value of ending inventory is written down if its
market value is less than its cost. For manufacturers and
processors, market value generally is the taxpayer's reproduction
cost for the goods. With respect to normal goods, the LCM method
is not available to taxpayers using the LIFO method for inventory
(Treas. reg. sec. 1.471-2(d)). The LIFO method requires goods to
be inventoried at cost (sec. 472(b)).

Any goods that are unsalable at normal prices or unusable in
the normal way because of damage, imperfections, shop wear,


22
K. Extend IRS User Fees

Present Law

The Internal Revenue Service (IRS) provides written
responses to questions of individuals, corporations, and
organizations relating to their tax status or the effects of
particular transactions for tax purposes. The IRS responds to
these inquiries through the issuance of letter rulings,
determination letters, and opinion letters. The IRS generally
charges a fee for requests for a letter ruling, determination
letter opinion letter, or other similar ruling or determination.
The legislation that requires the establishment of this fee
program provides that it is not to apply to requests made after
September 30, 1995.

Description of Chaizman's Mark
The IRS user fee program would be extended for five years.

Effective Date

The proposal would apply to requests made after September
30, 1995, and before October 1, 2000.



DESCRIPTION OF CHAIRMAN'S MARK
RELATING TO FINANCING OPTIONS
FOR IMPLEMENTING THE
URUGUAY ROUND AGREEMENT
OF THE
GENERAL AGREEMENT ON TARIFFS AND TRADE

(GATT)

Scheduled for Consideration
by the
Senate Committee on Finance

on July 28, 1994

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION

July 28, 1994

JCX-11-94


9

average annual gross receipts for the preceding three taxable
years of $5 million or less. Any change in a taxpayer's method
of accounting required by the proposal would be treated as
initiated by the taxpayer with the consent of the Secretary of
the Treasury and any adjustment required by section 481(a) as a
result of the change would be taken into account ratably over a
four-year period. Similar changes would be made to section
312(n) (4) (relating to the calculation of earnings and profits)
and section 1363(d)(3) (relating to the recapture of LIFO
benefits upon election to be treated as a subchapter S
corporation) .

Repeal of the COC method

The proposal would disallow the use of the COC method.
Taxpayers using the dollar-value LIFO method generally would be
allowed to use a TPC method for valuing inventory. For this
purpose, the simplified LIFO method provided by the proposal
would be considered to be a TPC method. For taxpayers continuing
to use a LIFO method of valuing inventory, the proposal would be
applied on a cut-off basis. Thus, taxpayers would not be
required to make a section 481(a) adjustment to reflect the
change from the COC method to a TPC method.

As an alternative to a TPC method, taxpayers would be
allowed to apply a LIFO method to raw materials and the raw
material content of work-in-process and finished goods
inventories as long as a method other than LIFO (generally, FIFO)
is separately used for labor and overhead content. Taxpayers
that terminate their LIFO election for labor and overhead would
be required to determine a section 481(a) adjustment to reflect
such change and the adjustment would be taken into account
ratably over a four-year period.

Simplified dollar-value LIFO method

The proposal would provide an election to use a simplified
dollar-value method for pricing LIFO inventories. The election
would be available to all taxpayers eligible to use LIFO and
would be similar to the indexing methods described in Code
section 474 and Treasury regulation section 1.472-8(e) (3). The
simplified method would allow all taxpayers to use 100 percent of
the percent change in the appropriate BLS index and would provide
simplified rules for purposes of determining the appropriate
indexes. Adoptions of the simplified method would be made ona
cut-off basis (i.e., no section 481(a) adjustment would be
required). As under present law, taxpayers would be allowed to
change from a FIFO method to the simplified dollar-value LIFO
method. Taxpayers electing the simplified method in the first
year it becomes available would be allowed to do so without
obtaining the permission of the Secretary of the Treasury.



taxpayer's production processes change such that in the current
year it now takes 5 units of materials, 5 hours of labor, and 5
hours of overhead to produce the same item; (2) the prices for
materials, labor, and overhead have remained constant from the
base year to the current year; and (3) one item of inventory
remains at the end of the current year. Under the TPC method,
because prices have remained constant, ending inventory would be
valued at $190 (the total product cost of producing one item in
the base year). Under the way COC has been applied by some
taxpayers, ending inventory could be valued at $115 (5 units of
materials times $8, plus 5 hours of labor times $10, plus 5 hours
of overhead $5). Thus, in this example, application of the Coc
method in this manner would reduce taxable income by $75 ($190
less $115) in the current year as compared to the TPC method.

Indexing under the LIFO method

The use of a dollar-value LIFO method involves the
comparison of base-year costs and current-year costs. In
applying the method, a taxpayer may use its actual inventory
costs (i.e., by using internally-generated price indexes).
Alternatively, the Code and regulations allow taxpayers to use
indexes constructed from tables of price changes published by the
Bureau of Labor Statistics (BLS). Eligible small businesses may
elect to use a simplified dollar-value method for pricing LIFO
inventories (Code sec. 474). This simplified method utilizes 100
percent of the price changes in the appropriate BLS index and is
available to taxpayers with average annual gross receipts for the
preceding three taxable years of $5 million or less. Regulations
also allow the use of BLS indexes for retailers that qualify as
department stores (Treas. reg. sec. 1.472-1(k)). Finally, under
regulations, other taxpayers may use certain BLS consumer or
producer price indexes in their LIFO calculations, but are
limited to 80 percent of the price changes indicated by the
indexes (Treas. reg. sec. 1.472-8(e)).

Description of Chairman's Mark
iIn_general

The proposal would: (1) disallow the use of the LCM method
and write-downs of subnormal goods; (2) disallow the use of the
COC method; and (3) provide an elective simplified dollar-value
LIFO method available for all taxpayers.

LCM method and treatment of subnormal goods

The proposal would repeal the provisions in the regulations
that allow taxpayers to use the LCM method and to write down the
value of subnormal goods. Appropriate anti-abuse rules would
apply such that taxpayers could not avoid the proposal through
wash sales. The proposal would not apply to taxpayers with


29

N. Extension of the Earned Income Tax Credit to Military
Personnel Stationed Overseas

Present Law
Eligible low-income workers are able to claim a refundable
earned income tax credit (EITC). The amount of the credit

depends upon whether the taxpayer has one, more than one, or no
qualifying children. Taxpayers with one qualifying child may
claim a credit of up to 26.3 percent of the first $7,750 of
earned income for 1994. The maximum amount of credit for 1994
for these taxpayers is $2,038. This maximum credit is reduced by
15.98 percent of earned income (or adjusted gross income, if
greater) in excess of $11,000. The EITC is totally phased out
for these workers with earned income (or adjusted gross income,
if greater) over $23,753.

Taxpayers with more than one qualifying child may claim a
credit of up to 30 percent of the first $8,425 of earned income
for 1994. The maximum amount of credit for 1994 for these
taxpayers is $2,528. This maximum credit is reduced by 17.68
percent of earned income (or adjusted gross income, if greater)
in excess of $11,000. The EITC is totally phased out for these
workers with earned income (or adjusted gross income, if greater)
over $25,299.

Taxpayers with no qualifying child may claim a credit of up
to 7.65 percent of the first $4,000 of earned income for 1994.
The maximum amount of credit for 1994 for these taxpayers is
$306. This maximum credit is reduced by 7.65 percent of earned
income (or adjusted gross income, if greater) in excess of
$5,000. The BITC is totally phased out for these workers with
earned income (or adjusted gross income, if greater) over $9,000.

The maximum amount of earned income on which the EITC may be
claimed and the income threshold for the phaseout of the EITC are
indexed for inflation. Earned income consists of wages,
salaries, other employee compensation, and net self-employment
income.

The credit rates for the EITC change over time under present
law, as shown in the following table.



28

test"). (An individual who is present in the United States
for fewer than 183 days and establishes that he or she has a
closer connection with a foreign country than with the
United States is generally not subject to tax as a resident
alien on account of the substantial presence test.)

A nonresident alien may elect to be taxed as a resident
alien if one of several elections is made:

{1) Under section 6013(g), a nonresident alien who is
married to an individual who is either a citizen or resident
alien of the United States at year end may elect to be
treated as a resident for the entire year. The election
applies to the year for which it is made and all subsequent
years until terminated. However, the election will be
suspended if neither spouse is a U.S. citizen or resident at
any time during a taxable year.

(2) An election under section 6013(h) to be taxed as a
resident alien for the entire taxable year may be made by an
individual who is a nonresident alien at the beginning of
the year and a resident alien at the end of the year and who
is married to an individual who is either a citizen or
resident of the United States at year end. Thus, this
election can be made by a foreign married couple who arrive
in the United States during the taxable year and who are
resident aliens at year end.

Description of Chairman's Mark

The proposal would make nonresident aliens ineligible to
claim the EITC unless an election under Code section 6013(g) or
(h) is in effect for the taxable year with respect to the
nonresident alien.

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1994.



5

Similarly, if a taxpayer uses the annualization method of
computing estimated tax liability, then for estimated tax
purposes, the proposal would require that taxpayer to take into
account throughout the taxable year the intangible property
income, profit split amount, or cost sharing amount includible in
its taxable income under section 936. As a result, estimated tax
payments generally would be required to be made throughout the
year for subpart F inclusions and certain amounts includible
under section 936 for the year.

In certain cases, the proposal would permit the use of a
safe harbor, for purposes of the annualization method, based on
amounts included in taxable income under subpart F or section 936
in the taxpayer's preceding taxable year. This safe harbor would
be available to all individual taxpayers and to corporations that
do not directly, indirectly, or constructively control the
controlled foreign corporation or section 936 corporation.

Effective Date

The proposal would be effective for estimated tax payments
relating to taxable years beginning after December 31, 1994.


19
H. Repeal of Same Condition Substitution Drawback

Present Law

Section 313 of the Tariff Act of 1930, as amended,
establishes the duty drawback program, where 99 percent of the
duty amount paid on imported goods can be rebated when certain
exports are made. Drawbacks are intended to provide an incentive
for exports. Under current law, there are several types of
drawback. Drawbacks can be transferred among companies under
certain circumstances.

The key types of drawback include a

under sections 313(a), (b), and (p) that applies to imported
material (i.e., components) used in the manufacture or production
in the U.S. of finished articles which are then exported.
Another drawback is the same condition drawback under section
313(j) (1) that applies to imported goods which are then re-
exported without alteration (i.e., pass-through or in transit
items). A third type of drawback is the i i

; under section 313(j) (2) that allows a rebate
of duties paid on imported goods which are matched with similar,
imported or domestic goods ("commercially interchangeable"
merchandise) that are exported within 3 years of the importation
of the imported goods.

The substitution same condition drawback, which was added in
1984, was intended to, inter alia, ease the burdens of inventory
management and recordkeeping for claims under same condition
drawback. In 1993, however, the Customs Service issued
regulations introducing more flexible methods of qualifying for
the same condition drawback.

The North American Free Trade Agreement disallows the
substitution same condition drawback for goods traded among the
U.S., Canada, and Mexico.

Description of Chairman's Mark

The substitution same condition drawback under section
313(j) (2) would be repealed. Other forms of drawback would not
be affected.

Effective Date

The proposal would be effective for goods exported after
December 31, 1994.



25

of such a benefit would conflict with an existing treaty, the
treaty would continue to prevail.

Effective Date

The proposal would be effective for benefits paid after
December 31, 1994.



INTRODUCTION

This document,’ prepared by the staff of the Joint Committee
on Taxation, provides a description of the Chairman's mark for
financing the implementation of the Uruguay Round Agreement of
the General Agreement on Tariffs and Trade (GATT), based on
recommendations made by the Administration. The Senate Committee
on Finance is scheduled to consider these financing options on
July 28, 1994.

Part I of the document provides a brief discussion of the
major components for offsetting the costs of the Uruguay Round
Agreement of the General Agreement on Tariffs and Trade. Part II
contains detailed descriptions of the items in the revenue
component of the mark.

* This document may be cited as follows: Joint Committee on
Taxation, i ! i i

Options for Implementing the Uruguay Round Agreement of the
General Agreement on Tariffs and Trade (GATT) (JCX-11-94), July

28, 1994.


12

the securities (taking into account all the facts and
circumstances, including the terms of the partnership agreement),
or (3) by an investment partnership to a partner who contributed
no property other than cash or securities. An investment
partnership would mean any partnership (1) that has never been
engaged in the active conduct of a trade or business, and (2) in
which substantially all of the assets have always consisted of
money and securities and other financial instruments such as debt
instruments, notional principal contracts and derivative
financial instruments. In determining whether a partnership has
been engaged in a trade or business, activities undertaken as an
investor, trader, or dealer in securities are not taken into
account.

A marketable security would mean any security for which
there is a market on an established securities market or
otherwise. Rules would be provided to treat as a marketable
security a distributed interest in an entity if, e.g., at the
time of the distribution substantially all the assets of the
entity directly or indirectly consist of marketable securities
and money.

Regulatory authority would be provided, including authority
to prevent avoidance of the rules, to address tiered partnership
arrangements, and to apply the rules to distributions of other
readily tradeable property (e.g., commodities and foreign
currency).

Effective Date

The proposal generally would apply to partnership
distributions after the date of enactment, except that the
proposal would not apply to partnership distributions before
January 1, 1995, of marketable securities held by the partnership
on or before July 27, 1994. A transition rule would provide that
the proposal does not apply to a partnership distribution of
marketable securities in liquidation of a partner's interest
pursuant to a written contract that is binding on July 15, 1994
and at all times thereafter (and subject to no material
contingencies) to purchase the partner's interest in the
partnership by a date certain for a fixed dollar amount of
marketable securities specified in the contract or for other
property; provided that this transition rule does not apply if
the partner has the right to choose to receive payment in money
or other property in lieu of marketable securities.



14

which the zero percent withholding rate applies under (1)
but does not exceed the sum of that amount and the amount of
taxable income to which, in the case of a single person, the
15 percent tax rate would apply for the calendar year in
which the payment is made.

(3) The withholding rate would be 28 percent to the extent
the payment, when annualized, exceeds the highest amount to
which the 15 percent withholding rate applies under (2) but
does not exceed the sum of that amount and the amount of
taxable income to which, in the case of a single person, the
28 percent tax rate would apply for the calendar year in
which the payment is made.

{4} The withholding rate would be 31 percent to the extent
the payment, when annualized, exceeds the highest amount to
which the 28 percent withholding rate applies under (3).

Alternatively, the tribe would be allowed to withhold on
such payments in accordance with such tables or computational
procedures as the Secretary may prescribe.

Effective Date

The proposal would be effective for payments made after
December 31, 1994.



Extension of the Earned Income Tax Credit to
Military Personnel Stationed Overseas . .

Use of Excess Pension Assets for Retiree Health
Benefits... 2... ee ee

29

32


23

L. Increase in Inclusion of Social Security and Railroad
Retirement Tier 1 Benefits Paid to Nonresident Alien
Individuals

Present Law
Treatment of taxpayers generally

A portion of Social Security and Railroad Retirement Tier 1
benefits is includible in gross income for taxpayers whose
provisional incomes exceed a threshold amount (the "base
amount"). For taxpayers whose provisional incomes exceed a
second threshold amount (the "adjusted base amount"), a larger
portion of such benefits is includible in gross income. For
purposes of these computations, a taxpayer's provisional income
includes modified adjusted gross income (adjusted gross income
plus tax-exempt interest plus certain foreign source income) plus
one-half of the taxpayer's Social Security or Railroad Retirement
Tier 1 benefit. The base amount is $32,000 for married taxpayers
filing joint returns, $25,000 for unmarried taxpayers, and $0 for
married taxpayers filing separate returns. The adjusted base
amount is $44,000 for married taxpayers filing joint returns,
$34,000 for unmarried taxpayers, and $0 for married taxpayers
filing separate returns.

If the amount of provisional income exceeds the base amount
but does not exceed the adjusted base amount, then the amount of
the inclusion is the lesser of (1) 50 percent of the taxpayer's
Social Security or Railroad Retirement Tier 1 benefit, or (2) 50
percent of the excess of the taxpayer's provisional income over
the base amount.

If the amount of provisional income exceeds the adjusted
base amount, then the amount of the inclusion is the lesser of:

(1) 85 percent of the taxpayer's Social Security or
Railroad Retirement Tier 1 benefit or

(2) the sum of:

(a) 85 percent of the excess of the taxpayer's
provisional income over the adjusted base amount,
plus

(b) the smaller of (i) the amount of benefits that
would have been included if the 50-percent inclusion
rule (the rule in the previous paragraph) were applied,
or (ii) one-half of the difference between the adjusted
base amount and the base amount of the taxpayer.

Beginning in 1983 (when benefits were included in income
pursuant to the Social Security Amendments of 1983 (the "1983



INTRODUCTION . . 2. ee ee ee

I.

Ir.

OFFSETTING THE COSTS OF THE URUGUAY ROUND OF THE GENERAL
AGREEMENT ON TARIFFS AND TRADE ........ coe ee

DESCRIPTION OF FINANCING OPTIONS .........4...

A. Estimated Tax Treatment of Subpart F Inclusions
and Inclusions of Certain Amounts Under Section
936. ee

B. Modify Inventory Accounting Rules .........
Cc. Partnership Distributions of Marketable Securities

D. Withholding on Distributions of Indian Casino
Profits to Tribal Members .............

E. Acceleration of Deposits of Payments for Certain
Excise Taxes 2... 2... wee eee ee eee

F. Require Taxpayer Identification Numbers for All
Children Regardless of Age ............

G. Voluntary Withholding on Taxable Federal Government
Payments . 2. 6... ee eee ee eee ee ee

H. Repeal of Same Condition Substitution Drawback . .

I. Decrease Rate of Interest Paid on Overpayments of
Tax. . ee ee ee
J. Rounding Rules for Cost-of-Living Adjustments .. .

K. Extend IRS User Fees .............2.-.

L. Increase in Inclusion of Social Security and
Railroad Retirement Tier 1 Benefits Paid to
Nonresident Alien Individuals ...........

M. Denial of the Earned Income Tax Credit to
Certain Nonresident Aliens ..........4..

11

13

15

17

18
19

20

21

22

23

26


31
Effective Date

Extension of the EITC to members of the Armed Forces
stationed overseas would be effective for taxable years beginning
after December 31, 1994. The increased information reporting
would be effective for remuneration paid after December 31, 1994.



26

M. Denial of the Earned Income Tax Credit to Certain
Nonresident Aliens

Present Law
in_general

Eligible low-income workers are able to claim a refundable
earned income tax credit (EITC). The amount of the credit
depends upon whether the taxpayer has one, more than one, or no
qualifying children. Taxpayers with one qualifying child may
claim a credit of up to 26.3 percent of the first $7,750 of
earned income for 1994. The maximum amount of credit for 1994
for these taxpayers is $2,038. This maximum credit is reduced by
15.98 percent of earned income (or adjusted gross income, if
greater) in excess of $11,000. The EITC is totally phased out
for these workers with earned income (or adjusted gross income,
if greater) over $23,753.

Taxpayers with more than one qualifying child may claima
credit of up to 30 percent of the first $8,425 of earned income
for 1994. The maximum amount of credit for 1994 for these
taxpayers is $2,528. This maximum credit is reduced by 17.68
percent of earned income (or adjusted gross income, if greater)
in excess of $11,000. The EITC is totally phased out for these
workers with earned income (or adjusted gross income, if greater)
over $25,299.

Taxpayers with no qualifying child may claim a credit of up
to 7.65 percent of the first $4,000 of earned income for 1994.
The maximum amount of credit for 1994 for these taxpayers is
$306. This maximum credit is reduced by 7.65 percent of earned
income (or adjusted gross income, if greater) in excess of
$5,000. The EITC is totally phased out for these workers with
earned income (or adjusted gross income, if greater) over $9,000.

The maximum amount of earned income on which the EITC may be
claimed and the income threshold for the phaseout of the EITC are
indexed for inflation. Earned income consists of wages,

Salaries, other employee compensation, and net self-employment
income.

The credit rates for the EITC change over time under present
law, as shown in the following table.



10

Effective Date

The proposal would be effective for taxable years beginning
after December 31, 1994.



13

D. Withholding on Distributions of Indian Casino Profits to
Tribal Members

Present Law

In ordinary matters not governed by treaties or remedial
legislation, Indians are subject to the payment of Federal income
tax as are other citizens. Income received by Indian tribal
governments, and by tribal corporations established under Federal
law, from activities conducted on or off reservations generally
is exempt from Federal income tax (Rev. Rul. 94-16, IRB No. 1994-
12).

Gaming activities conducted by Indian tribes are classified
in 25 U.S.C. 2703. Class I gaming activities are social games
solely for prizes of minimal value or traditional forms of Indian
gaming engaged in as part of tribal ceremonies. Class II gaming
activities generally are bingo, games similar to bingo (e.g.,
pull tabs, punchboards, tip jars, and instant bingo) and card
games either (1) explicitly authorized by the State or (2) not
explicitly prohibited by the State, played at any location in the
State, and conducted in conformity with any State regulations
regarding periods of operation or wagering limitations. Class II
gaming activities do not include any banking card games (e.g.,
baccarat, chemin de fer, or blackjack), slot machines or any
electronic or electromagnetical facsimiles of games of chance.
Class III gaming activities are all forms of gaming that are not
classified as Class I or Class II.

Net revenues from certain gaming activities conducted or
licensed by an Indian tribe may be used to make taxable
distributions to members of the Indian tribe. The tribe must
notify its members of the tax liability at the time the payments
are made. 25 U.S.C. 2710(b) (3) and (d)(1). The tribe is not
required to withhold on such payments except to the extent backup
withholding rules apply under Code section 3406.

Description of Chaizman's Mark

An Indian tribe that uses net revenues from gaming
activities (except for class I gaming activities as defined in 25
U.S.C. 2703(6) as in effect on July 28, 1994) to make taxable
distributions to its members would be required to withhold on
such payments in accordance with the following schedule:

(1) The withholding rate would be zero to the extent the
payment, when annualized, does not exceed the sum of one
personal exemption and the standard deduction for a single
person for the calendar year in which the payment is made.

(2) The withholding rate would be 15 percent to the extent
the payment, when annualized, exceeds the highest amount to